UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
☒ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2018
☐ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from __________ to __________
Commission file number 000-49877
ON TRACK INNOVATIONS LTD. |
(Exact name of registrant as specified in its charter) |
Israel | N/A | |
(State
or other jurisdiction of incorporation or organization) |
(IRS
Employer Identification No.) |
Z.H.R. Industrial Zone, P.O. Box 32, Rosh Pina, Israel 1210001 |
(Address of principal executive offices) |
+ 972-4-6868000 |
(Registrant’s telephone number) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registration was required to submit and post such files).
Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ☐ | Accelerated filer ☐ | Non-accelerated filer ☐ |
Smaller reporting company ☒ |
(do not check if a smaller reporting company) |
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
State the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date: 41,294,377 Ordinary Shares outstanding as of July 31, 2018.
ON TRACK INNOVATIONS LTD.
TABLE OF CONTENTS
Part I - Financial Information | ||||
Item 1. | Financial Statements | 1 | ||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 2 | ||
Item 4. | Controls and Procedures | 13 | ||
Part II - Other Information | ||||
Item 1. | Legal Proceedings | 14 | ||
Item 6. | Exhibits | 14 | ||
Signatures | 15 |
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
ON TRACK INNOVATIONS LTD. AND ITS SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
As of June 30, 2018
(Unaudited)
1
On Track Innovations Ltd.
and its Subsidiaries
Interim Unaudited Condensed Consolidated Financial Statements as of June 30, 2018
Contents
Page | |
Interim Unaudited Condensed Consolidated Balance Sheets | F-2 - F-3 |
Interim Unaudited Condensed Consolidated Statements of Operations | F-4 |
Interim Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss) | F-5 |
Interim Unaudited Condensed Consolidated Statements of Changes in Equity | F-6 |
Interim Unaudited Condensed Consolidated Statements of Cash Flows | F-7 |
Notes to the Interim Unaudited Condensed Consolidated Financial Statements | F-8 - F-22 |
F-1 |
On Track Innovations Ltd.
and its Subsidiaries
Interim Unaudited Condensed Consolidated Balance Sheets
US dollars in thousands except share data
June 30, | December 31, | |||||||
2018 | 2017 | |||||||
Assets | ||||||||
Current assets | ||||||||
Cash and cash equivalents | $ | 6,592 | $ | 6,742 | ||||
Short-term investments | 2,161 | 3,331 | ||||||
Trade receivables (net of allowance for doubtful accounts of $550 and $568 as of June 30, 2018 and December 31, 2017, respectively) | 5,536 | 5,827 | ||||||
Other receivables and prepaid expenses | 2,168 | 1,563 | ||||||
Inventories | 3,313 | 3,009 | ||||||
Total current assets | 19,770 | 20,472 | ||||||
Long-term restricted deposit for employees benefit | 473 | 498 | ||||||
Severance pay deposits | 384 | 405 | ||||||
Property, plant and equipment, net | 5,401 | 5,859 | ||||||
Intangible assets, net | 313 | 336 | ||||||
Total Assets | $ | 26,341 | $ | 27,570 |
The accompanying notes are an integral part of these interim unaudited condensed consolidated financial statements.
F-2 |
On Track Innovations Ltd.
and its Subsidiaries
Interim Unaudited Condensed Consolidated Balance Sheets
US dollars in thousands except share data
June 30, | December 31, | |||||||
2018 | 2017 | |||||||
Liabilities and Equity | ||||||||
Current Liabilities | ||||||||
Short-term bank credit and current maturities of long-term bank loans | $ | 3,974 | $ | 4,181 | ||||
Trade payables | 6,418 | 6,264 | ||||||
Other current liabilities | 2,441 | 2,421 | ||||||
Total current liabilities | 12,833 | 12,866 | ||||||
Long-Term Liabilities | ||||||||
Long-term loans, net of current maturities | 477 | 814 | ||||||
Accrued severance pay | 890 | 939 | ||||||
Deferred tax liability | 408 | 500 | ||||||
Total long-term liabilities | 1,775 | 2,253 | ||||||
Total Liabilities | 14,608 | 15,119 | ||||||
Commitments and Contingencies | ||||||||
Equity | ||||||||
Ordinary shares of NIS 0.1 par value; Authorized: 50,000,000 shares as of June 30, 2018 and December 31, 2017; issued: 42,473,076 and 42,353,077 shares as of June 30, 2018 and December 31, 2017, respectively; outstanding: 41,294,377 and 41,174,378 shares as of June 30, 2018, and December 31, 2017, respectively | 1,068 | 1,064 | ||||||
Additional paid-in capital | 224,903 | 224,758 | ||||||
Treasury shares at cost - 1,178,699 shares as of June 30, 2018 and December 31, 2017 | (2,000 | ) | (2,000 | ) | ||||
Accumulated other comprehensive loss | (945 | ) | (691 | ) | ||||
Accumulated deficit | (211,293 | ) | (210,680 | ) | ||||
Total Equity | 11,733 | 12,451 | ||||||
Total Liabilities and Equity | $ | 26,341 | $ | 27,570 |
The accompanying notes are an integral part of these interim unaudited condensed consolidated financial statements.
F-3 |
On Track Innovations Ltd.
and its Subsidiaries
Interim Unaudited Condensed Consolidated Statements of Operations
US dollars in thousands except share and per share data
Three months ended June 30, | Six months ended June 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Revenues | ||||||||||||||||
Sales | $ | 4,656 | $ | 5,646 | $ | 9,137 | $ | 8,426 | ||||||||
Licensing and transaction fees | 1,498 | 1,300 | 2,879 | 2,540 | ||||||||||||
Total revenues | 6,154 | 6,946 | 12,016 | 10,966 | ||||||||||||
Cost of revenues | ||||||||||||||||
Cost of sales | 2,973 | 3,476 | 5,727 | 5,276 | ||||||||||||
Total cost of revenues | 2,973 | 3,476 | 5,727 | 5,276 | ||||||||||||
Gross profit | 3,181 | 3,470 | 6,289 | 5,690 | ||||||||||||
Operating expenses | ||||||||||||||||
Research and development | 815 | 889 | 1,645 | 1,591 | ||||||||||||
Selling and marketing | 1,463 | 1,492 | 3,108 | 2,834 | ||||||||||||
General and administrative | 1,065 | 939 | 1,972 | 1,795 | ||||||||||||
Total operating expenses | 3,343 | 3,320 | 6,725 | 6,220 | ||||||||||||
Operating (loss) income from continuing operations | (162 | ) | 150 | (436 | ) | (530 | ) | |||||||||
Financial expenses, net | (95 | ) | (39 | ) | (127 | ) | (110 | ) | ||||||||
(Loss) income from continuing operations before taxes on income | (257 | ) | 111 | (563 | ) | (640 | ) | |||||||||
Income tax | 27 | (25 | ) | 38 | (56 | ) | ||||||||||
Net (loss) income from continuing operations | (230 | ) | 86 | (525 | ) | (696 | ) | |||||||||
Net (loss) income from discontinued operations | (50 | ) | 7 | (88 | ) | (76 | ) | |||||||||
Net (loss) income | $ | (280 | ) | $ | 93 | $ | (613 | ) | $ | (772 | ) | |||||
Basic and diluted net loss attributable to shareholders per ordinary share | ||||||||||||||||
From continuing operations | (0.01 | ) | * | (0.01 | ) | (0.02 | ) | |||||||||
From discontinued operations | * | * | * | * | ||||||||||||
$ | (0.01 | ) | $ | * | $ | (0.01 | ) | $ | (0.02 | ) | ||||||
Weighted average number of ordinary shares used in computing basic and diluted net income (loss) per ordinary share | 41,271,644 | 41,095,788 | 41,243,169 | 41,087,729 |
* | Less than $0.01 per ordinary share. |
The accompanying notes are an integral part of these interim unaudited condensed consolidated financial statements.
F-4 |
On Track Innovations Ltd.
and its Subsidiaries
Interim Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss)
US dollars in thousands
Three months ended June 30, | Six months ended June 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Total comprehensive (loss) income: | ||||||||||||||||
Net (loss) income | $ | (280 | ) | $ | 93 | $ | (613 | ) | $ | (772 | ) | |||||
Foreign currency translation adjustments | (312 | ) | 177 | (254 | ) | 332 | ||||||||||
Total comprehensive (loss) income | $ | (592 | ) | $ | 270 | $ | (867 | ) | $ | (440 | ) |
The accompanying notes are an integral part of these interim unaudited condensed consolidated financial statements.
F-5 |
On Track Innovations Ltd.
and its Subsidiaries
Interim Unaudited Condensed Consolidated Statements of Changes in Equity
US dollars in thousands except for number of shares
Accumulated | ||||||||||||||||||||||||||||
Number of | Additional | Treasury | other | |||||||||||||||||||||||||
Shares | Share | paid-in | Shares | comprehensive | Accumulated | Total | ||||||||||||||||||||||
issued | capital | capital | (at cost) | Income (loss) | deficit | equity | ||||||||||||||||||||||
Balance as of December 31, 2016 | 42,243,075 | $ | 1,061 | $ | 224,415 | $ | (2,000 | ) | $ | (1,236 | ) | $ | (210,082 | ) | $ | 12,158 | ||||||||||||
Changes during the six month period ended June 30, 2017: | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation | 30,000 | (**) | 1 | 173 | - | - | - | 174 | ||||||||||||||||||||
Foreign currency translation adjustments | - | - | - | - | 332 | - | 332 | |||||||||||||||||||||
Exercise of options | 15,002 | (*) | 15 | - | - | - | 15 | |||||||||||||||||||||
Net loss | - | - | - | - | - | (772 | ) | (772 | ) | |||||||||||||||||||
Balance as of June 30, 2017 | 42,288,077 | $ | 1,062 | $ | 224,603 | $ | (2,000 | ) | $ | (904 | ) | $ | (210,854 | ) | $ | 11,907 | ||||||||||||
Balance as of December 31, 2017 | 42,353,077 | $ | 1,064 | $ | 224,758 | $ | (2,000 | ) | $ | (691 | ) | $ | (210,680 | ) | $ | 12,451 | ||||||||||||
Changes during the six month period ended June 30, 2018: | ||||||||||||||||||||||||||||
Stock-based compensation | 80,000 | (**) | 3 | 112 | - | - | - | 115 | ||||||||||||||||||||
Foreign currency translation adjustments | - | - | - | - | (254 | ) | - | (254 | ) | |||||||||||||||||||
Exercise of options | 39,999 | 1 | 33 | - | - | - | 34 | |||||||||||||||||||||
Net loss | - | - | - | - | - | (613 | ) | (613 | ) | |||||||||||||||||||
Balance as of June 30, 2018 | 42,473,076 | $ | 1,068 | $ | 224,903 | $ | (2,000 | ) | $ | (945 | ) | $ | (211,293 | ) | $ | 11,733 |
(*) | Less than $1. |
(**) | See Note 9D. |
The accompanying notes are an integral part of these interim unaudited condensed consolidated financial statements.
F-6 |
On Track Innovations Ltd.
and its Subsidiaries
Interim Unaudited Condensed Consolidated Statements of Cash Flows
US dollars in thousands
Six months ended June 30, | ||||||||
2018 | 2017 | |||||||
Cash flows from continuing operating activities | ||||||||
Net loss from continuing operations | $ | (525 | ) | $ | (696 | ) | ||
Adjustments required to reconcile net loss to net cash used in continuing operating activities: | ||||||||
Stock-based compensation related to options issued to employees and others | 115 | 174 | ||||||
Accrued interest and linkage differences, net | 7 | (47 | ) | |||||
Depreciation and amortization | 680 | 583 | ||||||
Deferred tax, net | (54 | ) | 21 | |||||
Gain on sale of fixed assets | (17 | ) | (7 | ) | ||||
Changes in operating assets and liabilities: | ||||||||
Accrued severance pay, net | (28 | ) | 74 | |||||
Decrease (increase) in trade receivables, net | 963 | (1,151 | ) | |||||
(Increase) decrease in other receivables and prepaid expenses | (658 | ) | 90 | |||||
Increase in inventories | (344 | ) | (47 | ) | ||||
Increase (decrease) in trade payables | 445 | (396 | ) | |||||
Decrease in other current liabilities | (650 | ) | (855 | ) | ||||
Net cash used in continuing operating activities | (66 | ) | (2,257 | ) | ||||
Cash flows from continuing investing activities | ||||||||
Purchase of property and equipment, net | (414 | ) | (98 | ) | ||||
Change in short-term investments, net | 1,173 | 2,500 | ||||||
Investment in capitalized product costs | (87 | ) | (157 | ) | ||||
Proceeds from restricted deposit for employee benefits | - | 44 | ||||||
Proceeds from sale of fixed assets | 17 | 12 | ||||||
Net cash provided by continuing investing activities | 689 | 2,301 | ||||||
Cash flows from continuing financing activities | ||||||||
(Decrease) increase in short-term bank credit, net | (80 | ) | 213 | |||||
Repayment of long-term bank loans | (348 | ) | (374 | ) | ||||
Proceeds from exercise of options | 34 | 15 | ||||||
Net cash used in continuing financing activities | (394 | ) | (146 | ) | ||||
Cash flows from discontinued operations | ||||||||
Net cash used in discontinued operating activities | (107 | ) | (71 | ) | ||||
Total net cash used in discontinued operations | (107 | ) | (71 | ) | ||||
Effect of exchange rate changes on cash and cash equivalents | (288 | ) | 463 | |||||
(Decrease) increase in cash, cash equivalents and restricted cash | (166 | ) | 290 | |||||
Cash, cash equivalents and restricted cash-beginning of the period | 7,799 | (*)7,500 | ||||||
Cash, cash equivalents and restricted cash-end of the period | $ | 7,633 | $ | (*)7,790 |
(*) Reclassified to conform with the current period presentation, see Note 2A.
Supplementary cash flows activities: | ||||||||
Cash paid during the period for: | ||||||||
Interest paid | $ | 82 | $ | 74 | ||||
Income taxes paid | $ | - | $ | 30 |
The accompanying notes are an integral part of these interim unaudited condensed consolidated financial statements.
F-7 |
On Track Innovations Ltd.
and Subsidiaries
Notes to the Interim Unaudited Condensed Consolidated Financial Statements
US dollars in thousands
Note 1 – Organization and Basis of Presentation
A. | Description of business |
On Track Innovations Ltd. (the “Company”) was founded in 1990, in Israel. The Company and its subsidiaries (together the “Group”) are principally engaged in the field of design and development of cashless payment solutions. The Company’s shares are listed for trading on the Nasdaq Capital Market.
The Company operates in two operating segments: (a) Retail and Mass Transit Ticketing, and (b) Petroleum. In addition to the two operating segments, certain products for the medical industry and other secure smart card solutions are classified under “Other” in segment analysis appearing in Note 10.
B. | Interim Unaudited Financial Information |
The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements and therefore should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.
In the opinion of management, all adjustments considered necessary for a fair presentation, consisting of normal recurring adjustments, have been included. Operating results for the six month period ended June 30, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018.
Use of Estimates:
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the assets, liabilities, revenue, costs, expenses and accumulated other comprehensive income/(loss) that are reported in the Interim Consolidated Financial Statements and accompanying disclosures. These estimates are based on management’s best knowledge of current events, historical experience, actions that the Company may undertake in the future and on various other assumptions that are believed to be reasonable under the circumstances. As a result, actual results may be different from these estimates.
C. | Divestiture of operations |
1. | In December 2013, the Company completed the sale of certain assets, subsidiaries and intellectual property (“IP”) relating to its Smart ID division, for a total purchase price of $10,000 in cash and an additional $12,500 subject to performance-based milestones. Accordingly, the results and the cash flows of this operation for all reporting periods are presented in the statements of operations and in the statements of cash flows, respectively, as discontinued operations separately from continuing operations. |
F-8 |
On Track Innovations Ltd.
and Subsidiaries
Notes to the Interim Unaudited Condensed Consolidated Financial Statements
US dollars in thousands
Note 1 – Organization and Basis of Presentation (cont’d)
C. | Divestiture of operations (cont’d) |
On April 20, 2016, the purchaser of the Smart ID division, SuperCom Ltd. (“SuperCom”), and the Company entered into a settlement agreement resolving certain litigation between SuperCom and the Company pursuant to which SuperCom paid the Company $2,050 and agreed to pay the Company up to $1,500 in accordance with and subject to a certain earn-out mechanism. In November 2017, the Company commenced an arbitration procedure with SuperCom, in which the Company claims that additional earn-out payments have not been paid to the Company. SuperCom has raised issues against the Company during the arbitration for material damages. The evidence in the arbitration were heard on March 6, 2018, and by the end of September 2018 the parties are expected to complete the submission of their written summaries, after which a verdict will be given by the arbitrator. According to legal advice, the Company has good claims with respect to the issues that are included in the arbitration. The Company records the earn-out payments only when the consideration is determined to be realizable. The Company did not record or receive any contingent consideration during the six months ended June 30, 2018 and 2017.
2. | On September 14, 2016, the Company completed the sale of certain assets and IP related to its former parking segment to Atrinet Ltd. and its affiliated entities for a non-material amount. The Company has determined that the sale of the parking business qualifies as a discontinued operation. Accordingly, the results and the cash flows of these operations for all reporting periods are presented in the statements of operations and in the statements of cash flows, respectively, as discontinued operations separately from continuing operations. |
Note 2 – Significant Accounting Policies
Except as described below, these interim unaudited condensed consolidated financial statements have been prepared according to the same accounting policies as those discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.
A. | Recently Adopted Accounting Pronouncements |
1. | Restricted Cash and Cash Equivalents in Statement of Cash Flows |
In December 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, which requires amounts generally described as restricted cash and restricted cash equivalents to be included within cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown in the statement of cash flows.
The Company has adopted ASU 2016-18 commencing from January 1, 2018. The Company has applied the guidance retrospectively to all periods presented.
F-9 |
On Track Innovations Ltd.
and Subsidiaries
Notes to the Interim Unaudited Condensed Consolidated Financial Statements
US dollars in thousands
Note 2 – Significant Accounting Policies (cont’d)
A. | Recently Adopted Accounting Pronouncements (cont’d) |
The following table provides a reconciliation of cash, cash equivalents, and restricted cash and cash equivalents reported within the accompanying consolidated balance sheets that sum to the total of the same such amounts presented in the accompanying consolidated statements of cash flows:
June 30 | December 31 | |||||||||||||||
2018 | 2017 | 2017 | 2016 | |||||||||||||
Cash and cash equivalents | $ | 6,592 | $ | 6,242 | $ | 6,742 | $ | 5,952 | ||||||||
Restricted cash and cash equivalents (*) | 1,041 | 1,548 | 1,057 | 1,548 | ||||||||||||
Total cash, cash equivalents, and restricted cash and cash equivalents presented in the statements of cash flows | $ | 7,633 | $ | 7,790 | $ | 7,799 | $ | 7,500 |
(*) | The restricted cash and cash equivalents are included in short-term investments in the accompanying consolidated balance sheets. |
2. | Revenue Recognition |
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. The standard provides companies with a single model for use in accounting for revenue arising from contracts with customers and supersedes previous revenue recognition guidance, including industry-specific revenue guidance. The standard requires entities to follow a five step process: (1) identify the contract(s) with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when (or as) the entity satisfies a performance obligation. Revenues are recognized when control of the promised goods or services is transferred to the customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services.
The Company has adopted ASU 2014-09 commencing from January 1, 2018 on a modified retrospective basis.
The Company did not have a cumulative adjustment to retained earnings or an impact on its revenue recognition policies or on its consolidated financial statements as a result of the adoption of the new standard. The new standard requires the Company to provide more robust disclosures than required by previous guidance – see also Note 6. In addition, when the Company has an unconditional right to receive proceeds before the performance obligation was fulfilled, it is now required to record receivables against contract liabilities – See Note 6 and Note 4.
F-10 |
On Track Innovations Ltd.
and Subsidiaries
Notes to the Interim Unaudited Condensed Consolidated Financial Statements
US dollars in thousands
Note 2 – Significant Accounting Policies (cont’d)
B. | Recent Accounting Pronouncements |
1. | In June 2018, the FASB issued ASU 2018-07, Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. ASU 2018-07 expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. The guidance is intended to align the accounting for such payments to nonemployees with the existing requirements for share-based payments granted to employees. ASU 2018-07 is effective for fiscal years beginning after December 15, 2018 and is to be adopted through a cumulative-effect adjustment to retained earnings as of January 1, 2019 for then outstanding share-based payments to nonemployees. The Company does not expect that the adoption of ASU 2018-07 will have a material impact on the Company’s results of operations and financial condition. |
2. | In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which supersedes ASC 840, Leases. This ASU requires lessees to recognize a right-of-use asset and lease liability on the balance sheet for most leases, whereas currently only financing-type lease liabilities (capital leases) are recognized on the balance sheet. In addition, the definition of a lease has been revised with respect to when an arrangement conveys the right to control the use of the identified asset under the arrangement, which may result in changes to the classification of an arrangement as a lease. The ASU does not significantly change the lessees’ recognition, measurement and presentation of expenses and cash flows from the previous accounting standard. Lessors’ accounting under the ASU is largely unchanged from the previous accounting standard. The ASU expands the disclosure requirements of lease arrangements. Under current guidance, lessees and lessors will use a modified retrospective transition approach, which requires application of the new guidance at the beginning of the earliest comparative period presented in the year of adoption. The guidance is effective for interim and annual reporting periods beginning after December 15, 2018, with early adoption permitted. The Company currently expects to adopt this standard on January 1, 2019 and continues to evaluate the impact of this new standard on its financial position, results of operations and cash flows. The Company continues the process of identifying and categorizing its lease contracts and evaluating its current business processes and systems. |
In connection with other recent accounting pronouncements that the Company has not yet implemented and the Company’s assessment of the impacts they will have on the ongoing financial reporting, see Note 2W(4) in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.
F-11 |
On Track Innovations Ltd.
and Subsidiaries
Notes to the Interim Unaudited Condensed Consolidated Financial Statements
US dollars in thousands
Note 3 – Other Receivables and Prepaid Expenses
June 30, | December 31, | |||||||
2018 | 2017 | |||||||
Government institutions | $ | 296 | $ | 263 | ||||
Prepaid expenses | 171 | 381 | ||||||
Supplier advances | 1,280 | 122 | ||||||
Receivables under contractual obligations to be transferred to others * | 240 | 446 | ||||||
Other receivables | 181 | 351 | ||||||
$ | 2,168 | $ | 1,563 |
* | The Company’s subsidiary in Poland is required to collect certain fees that are to be transferred to local authorities. |
Note 4 – Other Current Liabilities
June 30, | December 31, | |||||||
2018 | 2017 | |||||||
Employees and related expenses | $ | 749 | $ | 1,073 | ||||
Accrued expenses | 775 | 1,054 | ||||||
Customer advances | - | 178 | ||||||
Contract liability | 833 | - | ||||||
Other current liabilities | 84 | 116 | ||||||
$ | 2,441 | $ | 2,421 |
F-12 |
On Track Innovations Ltd.
and Subsidiaries
Notes to the Interim Unaudited Condensed Consolidated Financial Statements
US dollars in thousands
Note 5 – Commitments and Contingencies
A. | Legal claims |
1. | In June 2013, prior to the Company’s divestiture of its SmartID division, Merwell Inc. (“Merwell”) filed a claim against the Company before an agreed-upon arbitrator alleging breach of contract in connection with certain commissions claimed to be owed to Merwell with respect to the division’s activities in Tanzania. These activities, along with all other activities of the SmartID division, were later assigned to and assumed by SuperCom in its purchase of the division. SuperCom undertook to indemnify the Company and hold it harmless against any liabilities the Company may incur in connection with Merwell’s consulting agreement and the arbitration. An arbitration decision was issued on February 21, 2016, awarding Merwell approximately $855 for outstanding commissions. The arbitration decision had been appealed and the appeal was denied. As mentioned above, based on the agreement with SuperCom, SuperCom is liable for the costs and liabilities arising out of this claim. Therefore, the financial statements do not include any provision for this claim. |
2. | On October 3, 2013, a financial claim was filed against the Company and its then French subsidiary, Parx France (in this paragraph, together, the “Defendants”), in the Commercial Court of Paris, France (in this paragraph, the “Court”). The sum of the claim is €1,500 and is based on the allegation that the plaintiff sustained certain losses in connection with Defendants not granting the plaintiff exclusive marketing rights to distribute and operate the Defendants’ PIAF Parking System in Paris and the Ile of France. On October 25, 2017, the Court issued its ruling in this matter dismissing all claims against the Company but ordering Parx France to pay the plaintiff €50 plus interest in damages plus another approximately €5 in other fees and penalties. The Company offered to pay the amounts mentioned above to the plaintiff in consideration for not filing future appeals. The plaintiff rejected this offer. The plaintiff filed an appeal against Parx France but not against the Company. |
B. | Guarantees |
As of June 30, 2018, the Company has granted performance guarantees and guarantees to secure customer advances in the sum of $325. The expiration dates of these guarantees range from October 2018 to June 2019.
F-13 |
On Track Innovations Ltd.
and Subsidiaries
Notes to the Interim Unaudited Condensed Consolidated Financial Statements
US dollars in thousands
Note 6 – Revenues
Disaggregation of revenue
The following tables disaggregates the Company’s revenue by major source based on categories that depict its nature and timing as reviewed by management for the six months and the three months ended June 30, 2018:
Six months ended June 30, 2018 | ||||||||||||||||
Retail and Mass Transit Ticketing | Petroleum | Other | Total | |||||||||||||
Cashless payment products (A) | $ | 4,637 | $ | - | $ | - | $ | 4,637 | ||||||||
Complete cashless payment solutions (B): | ||||||||||||||||
Sales of products (B1) | 1,360 | 1,947 | - | 3,307 | ||||||||||||
Licensing fees, transaction fees and services (B2) | 2,569 | 678 | - | 3,247 | ||||||||||||
3,929 | 2,625 | - | 6,554 | |||||||||||||
Medical and access control smart cards (C): | ||||||||||||||||
Sales of products (C1) | - | - | 604 | 604 | ||||||||||||
Licensing fees, transaction fees and services (C2) | - | - | 221 | 221 | ||||||||||||
- | - | 825 | 825 | |||||||||||||
Total revenues | $ | 8,566 | $ | 2,625 | $ | 825 | $ | 12,016 |
Three months ended June 30, 2018 | ||||||||||||||||
Retail and Mass Transit Ticketing | Petroleum | Other | Total | |||||||||||||
Cashless payment products (A) | $ | 2,372 | $ | - | $ | - | $ | 2,372 | ||||||||
Complete cashless payment solutions (B): | ||||||||||||||||
Sales of products (B1) | 333 | 1,353 | - | 1,686 | ||||||||||||
Licensing fees, transaction fees and services (B2) | 1,330 | 330 | - | 1,660 | ||||||||||||
1,663 | 1,683 | - | 3,346 | |||||||||||||
Medical and access control smart cards (C): | ||||||||||||||||
Sales of products (C1) | - | - | 325 | 325 | ||||||||||||
Licensing fees, transaction fees and services (C2) | - | - | 111 | 111 | ||||||||||||
- | - | 436 | 436 | |||||||||||||
Total revenues | $ | 4,035 | $ | 1,683 | $ | 436 | $ | 6,154 |
F-14 |
On Track Innovations Ltd.
and Subsidiaries
Notes to the Interim Unaudited Condensed Consolidated Financial Statements
US dollars in thousands
Note 6 – Revenues (cont’d)
Performance obligations
Below is a listing of performance obligations for our main revenue streams:
A. | Cashless payment products – |
The performance obligation is the selling of contactless payment products. Most of those products are Near Field Communication (NFC) readers. For such sales the performance obligation, transfer of control and revenue recognition occurs when the products are delivered.
B. | Complete cashless payment solutions – |
The complete solution includes selling of products and complementary services, as follows:
1. | Sales of products – |
● | Selling of contactless payment products (see A above) together with payment gateways and machine-to-machine controllers. |
● | Selling of petroleum payment solutions including site and vehicle equipment. |
For such sales, the performance obligation, transfer of control and revenue recognition occurs when the products are delivered.
2. | Licensing fees, transaction fees and services - |
The types of arrangements and their main performance obligations are as follows:
● | To provide terminal management system licensing for software that is responsible for remote terminal management and cloud-based software licensing which provide data insights. For such services, the revenue recognition occurs as the services are rendered since the performance obligation is satisfied over time. |
● | To enable loading and sale of electronic contactless and paper cards. For such transaction fees the revenue recognition occurs on the transaction date. |
● | To provide technical and customer services for products. For such services, the performance obligation is satisfied over time and therefore revenue recognition occurs as the services are rendered. |
F-15 |
On Track Innovations Ltd.
and Subsidiaries
Notes to the Interim Unaudited Condensed Consolidated Financial Statements
US dollars in thousands
Note 6 – Revenues (cont’d)
Performance obligations (cont’d)
Below is a listing of performance obligations for our main revenue streams (cont’d):
C. | Medical and access control smart cards – |
1. | Sales of products – |
The performance obligation is the selling of readers and smart electronic cards for the purposes of human identifying. For such sales the performance obligation, transfer of control and revenue recognition occurs when the products are delivered.
2. | Licensing fees, transaction fees and services – |
The main performance obligation is to provide technical support. For such transaction fees that are based on actual usage, revenue recognition occurs only when usage occurs.
The Company includes a warranty in connection with certain contracts with customers, which are not considered to be separate performance obligations. The cost to the Company of this warranty is insignificant.
Contract balances
June 30, | December 31, | |||||||
2018 | 2017 | |||||||
Trade receivables, net of allowance for doubtful accounts | $ | 5,536 | $ | 5,827 | ||||
Contract liability | $ | 833 | - | |||||
Customer advances | $ | - | $ | 178 |
Accounts receivable are recognized when the right to consideration becomes unconditional based upon contractual billing schedules.
Transaction price and variable consideration
The transaction price is the amount of consideration to which the Company expects to be entitled in exchange for transferring goods or services to a customer, excluding amounts collected on behalf of third parties. In certain arrangements with variable consideration, revenue is recognized over time as it mainly is attributed to ongoing services provided. An immaterial amount which is related to the product is not recognized upon delivery since it is not probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved.
F-16 |
On Track Innovations Ltd.
and Subsidiaries
Notes to the Interim Unaudited Condensed Consolidated Financial Statements
US dollars in thousands
Note 7 – Discontinued operations
As described in Note 1C, the Company divested its interest in the SmartID division and its parking segment, and presented these activities as discontinued operations.
Set forth below are the results of the discontinued operations:
Three months ended June 30, | Six months ended June 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Expenses | (50 | ) | - | (101 | ) | (83 | ) | |||||||||
Other income, net | - | 7 | 13 | 7 | ||||||||||||
Net (loss) income from discontinued operations | (50 | ) | 7 | (88 | ) | (76 | ) |
Note 8 – Fair Value of Financial Instruments
The Company’s financial instruments consist mainly of cash and cash equivalents, short-term interest bearing investments, accounts receivable, restricted deposits for employee benefits, accounts payable and short-term and long-term loans.
Fair value for the measurement of financial assets and liabilities is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. The Company utilizes a valuation hierarchy for disclosure of the inputs for fair value measurement. This hierarchy prioritizes the inputs into three broad levels as follows:
● | Level 1 Inputs: Unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date. |
● | Level 2 Inputs: Other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability. |
● | Level 3 Inputs: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at measurement date. |
F-17 |
On Track Innovations Ltd.
and Subsidiaries
Notes to the Interim Unaudited Condensed Consolidated Financial Statements
US dollars in thousands
Note 8 – Fair Value of Financial Instruments (cont’d)
By distinguishing between inputs that are observable in the market place, and therefore more objective, and those that are unobservable and therefore more subjective, the hierarchy is designed to indicate the relative reliability of the fair value measurements. A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.
The Company, in estimating fair value for financial instruments, determined that the carrying amounts of cash and cash equivalents, trade receivables, short-term bank credit and trade payables are equivalent to, or approximate their fair value due to the short-term maturity of these instruments.
The carrying amounts of variable interest rate long-term loans are equivalent or approximate to their fair value as they bear interest at approximate market rates.
As of June 30, 2018, the Company held approximately $2,161 of short-term bank deposits (as of December 31, 2017, $3,331). As of June 30, 2018 and December 31, 2017, short-term deposits in the amount of $1,041 and $1,057, respectively, have been pledged as security in respect of guarantees granted in respect of performance guarantees, loans and credit lines received from a bank and cannot be pledged to others or withdrawn without the consent of the bank.
Note 9 – Equity
A. | Stock option plans |
During each of the six-month periods ended June 30, 2018 and June 30, 2017, 100,000 options were granted. The vesting period for the options is three years. The exercise prices for the options that were granted during the six months ended June 30, 2018 and June 30, 2017, are $1.33 and $1.58, respectively. Those options expire up to five years after the date of grant. Any options which are forfeited or cancelled before expiration become available for future grants under the Company’s option plan. The fair value of each option granted to employees during the six months ended June 30, 2018 and June 30, 2017 was estimated on the date of grant, using the Black-Scholes model and the following assumptions:
Six months ended June 30, | ||||||||
2018 | 2017 | |||||||
Expected dividend yield | 0 | % | 0 | % | ||||
Expected volatility | 80 | % | 74 | % | ||||
Risk-free interest rate | 1.92 | % | 1.35 | % | ||||
Expected life - in years | 2.33 | 3.5 |
F-18 |
On Track Innovations Ltd.
and Subsidiaries
Notes to the Interim Unaudited Condensed Consolidated Financial Statements
US dollars in thousands
Note 9 – Equity (cont’d)
A. | Stock option plans (cont’d) |
1. | Dividend yield of zero percent for all periods. | |
2. | Expected average volatility represents a weighted average standard deviation rate for the price of the Company’s ordinary shares on Nasdaq. | |
3. | Risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. | |
4. | For options granted during the six months ended June 30, 2018- estimated expected lives are based on historical grants data. For the six months ended June 30, 2017 estimated expected lives are according to the simplified method. |
The Company’s options activity (including options to non-employees) during the six months ended June 30, 2018 and options outstanding and options exercisable as of December 31, 2017 and June 30, 2018, are summarized in the following table:
Weighted | ||||||||
average | ||||||||
Number of | exercise | |||||||
options | price per | |||||||
outstanding | share | |||||||
Outstanding – December 31, 2017 | 1,495,000 | $ | 1.27 | |||||
Options granted | 100,000 | 1.33 | ||||||
Options expired or forfeited | (139,668 | ) | 1.2 | |||||
Options exercised | (39,999 | ) | 0.86 | |||||
Outstanding – June 30, 2018 | 1,415,333 | 1.29 | ||||||
Exercisable as of: | ||||||||
December 31, 2017 | 681,321 | $ | 1.45 | |||||
June 30, 2018 | 659,988 | $ | 1.44 |
The weighted average fair value of options granted during the six months ended June 30, 2018 and during the six months ended June 30, 2017 is $0.65 and $0.93, respectively, per option. The aggregate intrinsic value of outstanding options as of June 30, 2018 and December 31, 2017 is approximately $208 and $448, respectively. The aggregate intrinsic value of exercisable options as of June 30, 2018 and December 31, 2017 is approximately $128 and $206, respectively.
F-19 |
On Track Innovations Ltd.
and Subsidiaries
Notes to the Interim Unaudited Condensed Consolidated Financial Statements
US dollars in thousands
Note 9 – Equity (cont’d)
A. | Stock option plans (cont’d) |
The following table summarizes information about options outstanding and exercisable (including options to non-employees) as of June 30, 2018:
Options outstanding | Options exercisable | |||||||||||||||||||||||
Number | Weighted | Number | Weighted | |||||||||||||||||||||
Outstanding | average | Weighted | Outstanding | average | Weighted | |||||||||||||||||||
as of | remaining | Average | As of | remaining | Average | |||||||||||||||||||
June 30, | contractual | Exercise | June 30, | contractual | Exercise | |||||||||||||||||||
Range of exercise price ($) | 2018 | life (years) | Price | 2018 | life (years) | Price | ||||||||||||||||||
0.44- 0.90 | 420,000 | 2.48 | $ | 0.74 | 276,667 | 2.49 | $ | 0.74 | ||||||||||||||||
1.07-1.68 | 765,333 | 3.75 | 1.24 | 163,321 | 2.68 | 1.26 | ||||||||||||||||||
2.32-2.36 | 190,000 | 0.86 | 2.35 | 190,000 | 0.86 | 2.35 | ||||||||||||||||||
3.03 | 40,000 | 1.23 | $ | 3.03 | 30,000 | 1.23 | $ | 3.03 | ||||||||||||||||
1,415,333 | 2.91 | 659,988 | 2.01 |
As of June 30, 2018, there was approximately $299 of total unrecognized compensation cost related to non-vested stock-based compensation arrangements. That cost is expected to be recognized over a weighted-average period of approximately 1.26 years.
During the six months ended June 30, 2018 and June 30, 2017, the Company recorded stock-based compensation expenses in the amount of $115 and $174, respectively, in accordance with ASC 718, “Compensation-Stock Compensation.”
B. | Warrants |
1. | During the six months ended June 30, 2018, no warrants expired or were exercised into ordinary shares. | |
2. | As of June 30, 2018, there are remaining 40,000 outstanding warrants issued to one of the Company’s consultants during 2016 with a per share exercise price of $0.95. The warrants expire during 2019. |
C. | Stock options and warrants in the amounts of 1,455,333 and 1,448,500 outstanding as of the six months ended June 30, 2018 and 2017, respectively, have been excluded from the calculation of the diluted net loss per ordinary share because all such securities have an anti-dilutive effect for all periods presented. |
D. | Shares to non-employees |
During the six months ended June 30, 2018 and June 30, 2017, the Company granted 80,000 and 30,000 ordinary shares, respectively, to its consultants. The expenses that are recognized due to this grant are immaterial and are presented within ’stock-based compensation’ in the statement of changes in equity for the six months ended June 30, 2018 and June 30, 2017.
F-20 |
On Track Innovations Ltd.
and Subsidiaries
Notes to the Interim Unaudited Condensed Consolidated Financial Statements
US dollars in thousands
Note 10 – Operating segments
For the purposes of allocating resources and assessing performance in order to improve profitability, the Company’s chief operating decision maker (“CODM”) examines two segments which are the Company’s strategic business units: (1) Retail and Mass Transit Ticketing; and (2) Petroleum. In addition to its two reportable segments, certain products for the medical industry and other secure smart card solutions are classified under the Company’s “Other” segment.
Information regarding the results of each reportable segment is included below based on the internal management reports that are reviewed by the CODM.
Three months ended June 30, 2018 | ||||||||||||||||
Retail and Mass Transit Ticketing | Petroleum | Other | Consolidated | |||||||||||||
Revenues | $ | 4,035 | $ | 1,683 | $ | 436 | $ | 6,154 | ||||||||
Reportable segment gross profit * | 2,211 | 766 | 415 | 3,392 | ||||||||||||
Reconciliation of reportable segment gross profit to gross profit for the period | ||||||||||||||||
Depreciation | (210 | ) | ||||||||||||||
Stock-based compensation | (1 | ) | ||||||||||||||
Gross profit for the period | $ | 3,181 |
Three months ended June 30, 2017 | ||||||||||||||||
Retail and Mass Transit Ticketing | Petroleum | Other | Consolidated | |||||||||||||
Revenues | $ | 4,682 | $ | 1,910 | $ | 354 | $ | 6,946 | ||||||||
Reportable segment gross profit * | 2,568 | 889 | 211 | 3,668 | ||||||||||||
Reconciliation of reportable segment gross profit to gross profit for the period | ||||||||||||||||
Depreciation | (199 | ) | ||||||||||||||
Stock-based compensation | 1 | |||||||||||||||
Gross profit for the period | $ | 3,470 |
F-21 |
On Track Innovations Ltd.
and Subsidiaries
Notes to the Interim Unaudited Condensed Consolidated Financial Statements
US dollars in thousands
Note 10 – Operating segments (cont’d)
Six months ended June 30, 2018 | ||||||||||||||||
Retail and Mass Transit Ticketing | Petroleum | Other | Consolidated | |||||||||||||
Revenues | $ | 8,566 | $ | 2,625 | $ | 825 | $ | 12,016 | ||||||||
Reportable segment gross profit * | 4,749 | 1,318 | 648 | 6,715 | ||||||||||||
Reconciliation of reportable segment gross profit to gross profit for the period | ||||||||||||||||
Depreciation | (424 | ) | ||||||||||||||
Stock-based compensation | (2 | ) | ||||||||||||||
Gross profit for the period | $ | 6,289 |
Six months ended June 30, 2017 | ||||||||||||||||
Retail and Mass Transit Ticketing | Petroleum | Other | Consolidated | |||||||||||||
Revenues | $ | 7,423 | $ | 2,728 | $ | 815 | $ | 10,966 | ||||||||
Reportable segment gross profit * | 4,209 | 1,396 | 469 | 6,074 | ||||||||||||
Reconciliation of reportable segment gross profit to gross profit for the period | ||||||||||||||||
Depreciation | (383 | ) | ||||||||||||||
Stock-based compensation | (1 | ) | ||||||||||||||
Gross profit for the period | $ | 5,690 |
* Gross profit as reviewed by the CODM, represents gross profit, adjusted to exclude depreciation and stock-based compensation.
F-22 |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Forward - Looking Statements
The statements contained in this Quarterly Report on Form 10-Q, or Quarterly Report, that are not historical facts are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and other federal securities laws. Such forward-looking statements may be identified by, among other things, the use of forward-looking terminology such as “believes,” “intends,” “plans”, “expects,” “may,” “will,” “should,” or “anticipates” or the negative thereof or other variations thereon or comparable terminology, and similar expressions are intended to identify forward-looking statements. We remind readers that forward-looking statements are merely predictions and therefore are inherently subject to uncertainties and other factors and involve known and unknown risks that could cause the actual results, performance, levels of activity, or our achievements, or industry results, to be materially different from any actual future results, performance, levels of activity, or our achievements, or industry results, expressed or implied by such forward-looking statements. Such forward-looking statements may appear in this Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” as well as elsewhere in this Quarterly Report and include, among other statements, statements regarding the following:
● | our expectations regarding the growth of the near-field communication, or NFC, market; |
● | the expected development and potential benefits from our existing or future products or our intellectual property, or IP; |
● | increased generation of revenues from licensing, transaction fees and/or other arrangements; |
● | future sources of revenue, ongoing relationships with current and future business partners, distributors, suppliers, customers, end-user customers and resellers; |
● | our intention to generate additional recurring revenues, licensing and transaction fees; |
● | future costs and expenses and adequacy of capital resources; |
● | our intention to continue to expand our market presence via strategic partnerships around the globe; |
● | our expectations that revenues from our business will grow in the next years, and the expected reasons for that growth; |
● | our expectations regarding our short-term and long-term capital requirements; |
● | our intention to continue to invest in research and development; |
● | our outlook for the coming months; |
● | information with respect to any other plans and strategies for our business; and |
● | our development of capabilities to implement Bitcoin acceptance and other cryptocurrency and our intention to become Bitcoin and other cryptocurrency acceptable in transactions via NFC, Bluetooth or QR code. |
The factors discussed herein, including those risk factors expressed from time to time in our press releases or filings with the Securities and Exchange Commission, or the SEC, could cause actual results and developments to be materially different from those expressed in or implied by such statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak and are made only as of the date of this filing.
2 |
Our business and operations are subject to substantial risks, which increase the uncertainty inherent in the forward-looking statements contained in this Quarterly Report. Except as required by law, we undertake no obligation to release publicly the result of any revision to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Further information on potential factors that could affect our business is described among others under the heading “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2017 filed with the SEC. Readers are also urged to carefully review and consider the various disclosures we have made in that report.
As used in this Quarterly Report, the terms “we”, “us”, “our”, “the Company”, and “OTI” mean On Track Innovations Ltd. and our subsidiaries, unless otherwise indicated or as otherwise required by the context.
All figures in this Quarterly Report are stated in United States dollars, unless otherwise specified herein.
Overview
We are a fintech pioneer and a leading developer of cutting-edge secure cashless payment solutions providing global enterprises with innovative technology for over two decades. We operate in two main segments: (1) Retail and Mass Transit Ticketing; and (2) Petroleum. In addition to our two reportable segments, certain products for the medical industry and other secure smart card solutions are classified under “Other” in segment analysis appearing in this Quarterly Report.
Our vision is to strengthen our global presence with innovative solutions and provide our customers with the best possible support in superior service and reliable advanced products.
OTI continually strives to discover the technology of the future and keep abreast of new developments in the fintech marketplace. At this time, we are trying to develop Bitcoin capability in the crypto-currency marketplace and we intend to become Bitcoin acceptable in transactions via NFC, Bluetooth or QR code.
Our IP portfolio includes registered patents and patent applications worldwide. Since our incorporation in 1990, we have built an international reputation for reliability and innovation, deploying many solutions for unattended retail, mass transit, banking, medical smart card, Internet of Payment Things, or IoPT, and the petroleum management industries.
We operate a global network of regional offices, distributors and partners to support various solutions deployed across the globe. We focus on our core business of providing innovative cashless payment solutions based, among other things, on our contactless NFC technology. We continue to focus our efforts to further develop new and unique product solutions, including by the introduction of our new products and solutions for the unattended payment market and IoPT technology.
This discussion and analysis should be read in conjunction with our interim condensed consolidated financial statements and notes thereto contained in “Item 1. Financial Statements” of this Quarterly Report.
Results of Operations
Discontinued operations. In September 2016 we completed the sale of certain assets and IP related to our parking business. In December 2013, we completed the sale of certain assets, certain subsidiaries and IP directly related to our SmartID division. The results from such operations and the cash flows for the reporting periods are presented in the statements of operations and in the statements of cash flows, respectively, as discontinued operations separately from continuing operations. All the data in this Quarterly Report that are derived from our financial statements, unless otherwise specified, exclude the results of those discontinued operations.
3 |
Three months ended June 30, 2018, compared to the three months ended June 30, 2017
Sources of Revenue
We have historically derived a substantial majority of our revenues from the sale of our products, including both complete systems and original equipment manufacturer components and also less significantly, from engineering services, customer services and technical support. In addition, we generate revenues from licensing and transaction fees. During the three months ended June 30, 2018 and June 30, 2017, the revenues that we derived from sales and licensing and transaction fees were as follows (in thousands):
Three months ended June 30, | ||||||||
2018 | 2017 | |||||||
Sales | $ | 4,656 | $ | 5,646 | ||||
Licensing and transaction fees | $ | 1,498 | $ | 1,300 | ||||
Total revenues | $ | 6,154 | $ | 6,946 |
Sales. Sales decreased by $990,000, or 18%, in the three months ended June 30, 2018, compared to the three months ended June 30, 2017. The decrease is mainly attributed to a decrease in Retail and Mass Transit Ticketing segment sales in the Japanese market and a decrease in Petroleum segment sales in Africa, partially offset by an increase in sales of readers in United States.
Licensing and transaction fees. Licensing and transaction fees include single and periodic payments for distribution rights for our products as well as licensing our IP rights to third parties. Transaction fees are paid by customers based on the volume of transactions processed by systems that contain our products. Our licensing and transaction fees in the three months ended June 30, 2018, compared to the three months ended June 30, 2017, increased by $198,000, or 15%. The increase is mainly attributed to an increase in licensing and transaction fees related to our otiMetry solution in Europe and Japan.
We have historically derived revenues from different geographical areas. The following table sets forth our revenues, by dollar amount (in thousands) and as a percentage of quarterly revenues in different geographical areas, in the three months ended June 30, 2018 and June 30, 2017:
Three months ended June 30, | Africa | Europe | APAC | Americas | ||||||||||||||||||||||||||||
2018 | $ | 1,120 | 18 | % | $ | 2,122 | 35 | % | $ | 182 | 3 | % | $ | 2,730 | 44 | % | ||||||||||||||||
2017 | $ | 1,567 | 22 | % | $ | 1,706 | 25 | % | $ | 1,399 | 20 | % | $ | 2,274 | 33 | % |
Our revenues from sales in Africa decreased by $447,000, or 29%, in the three months ended June 30, 2018, compared to the three months ended June 30, 2017, mainly due to a decrease in sales of petroleum products, partially offset by an increase of our MediSmart products.
Our revenues from sales in Europe increased by $416,000, or 24%, in the three months ended June 30, 2018, compared to the three months ended June 30, 2017, mainly due to an increase in our sales of readers and by an increase of our otiMetry solution.
Our revenues from sales in the Asia-Pacific region, or APAC, decreased by $1.2 million, or 87%, in the three months ended June 30, 2018, compared to the three months ended June 30, 2017, mainly due to a decrease in sales to the Japanese market.
Our revenues from sales in Americas increased by $456,000, or 20%, in the three months ended June 30, 2018, compared to the three months ended June 30, 2017, mainly due to an increase in sales of Petroleum products to the North American market.
4 |
Our revenues derived from outside the United States are primarily received in currencies other than the U.S. dollar and accordingly have a varying impact upon our total revenues as a result of fluctuations in exchange rates.
The following table sets forth our revenues by dollar amount (in thousands) and as a percentage of revenues by segments, during the three months ended June 30, 2018 and June 30, 2017:
Three months ended June 30, | Retail and Mass Transit Ticketing | Petroleum | Other | |||||||||||||||||||||
2018 | $ | 4,035 | 66 | % | $ | 1,683 | 27 | % | $ | 436 | 7 | % | ||||||||||||
2017 | $ | 4,682 | 67 | % | $ | 1,910 | 28 | % | $ | 354 | 5 | % |
Our revenues from Retail and Mass Transit Ticketing in the three months ended June 30, 2018 decreased by $647,000, or 14%, compared to the three months ended June 30, 2017, mainly due to a decrease in sales in the Japanese market partially offset by an increase in sales of readers in the United States and Europe.
Our revenues in the three months ended June 30, 2018 from Petroleum decreased by $227,000, or 12%, compared to the three months ended June 30, 2017, mainly due to a decrease in sales of Petroleum products in Africa partially offset by an increase in sales of Petroleum products in North America.
Our revenues in the three months ended June 30, 2018 from our Other segment increased by $82,000, or 23%, compared to the three months ended June 30, 2017, mainly due to an increase in sales of MediSmart products in East Africa.
Cost of Revenues and Gross Margin
Our cost of revenues, presented by gross profit and gross margin percentage, in the three months ended June 30, 2018 and June 30, 2017 were as follows (dollar amounts in thousands):
Three months ended June 30, | ||||||||
2018 | 2017 | |||||||
Cost of sales | $ | 2,973 | $ | 3,476 | ||||
Gross profit | $ | 3,181 | $ | 3,470 | ||||
Gross margin percentage | 52 | % | 50 | % |
Cost of sales. Cost of sales consists primarily of materials, as well as salaries, fees to subcontractors and related costs of our technical staff that assemble our products. The decrease of $503,000, or 14%, in the three months ended June 30, 2018, compared to the three months ended June 30, 2017, resulted primarily from a decrease in our revenues.
Gross margin. The increase in gross margin in the three months ended June 30, 2018, compared to the three months ended June 30, 2017, is mainly attributed to a change in our revenue mix.
5 |
Operating expenses
Our operating expenses in the three months ended June 30, 2018 and June 30, 2017 were as follows (in thousands):
Operating expenses | Three months ended June 30, | |||||||
2018 | 2017 | |||||||
Research and development | $ | 815 | $ | 889 | ||||
Selling and marketing | $ | 1,463 | $ | 1,492 | ||||
General and administrative | $ | 1,065 | $ | 939 | ||||
Total operating expenses | $ | 3,343 | $ | 3,320 |
Research and development. Our research and development expenses consist primarily of the salaries and related expenses of our research and development staff, as well as subcontracting expenses. The decrease of $74,000, or 8%, in the three months ended June 30, 2018, compared to the three months ended June 30, 2017, is primarily attributed to a decrease in research and development employment expenses.
Selling and marketing. Our selling and marketing expenses consist primarily of salaries and substantially all of the expenses of our sales and marketing subsidiaries and offices in the United States, South Africa and Europe, as well as expenses related to advertising, professional expenses and participation in exhibitions and tradeshows. Our selling and marketing expenses, in the three months ended June 30, 2018, compared to the three months ended June 30, 2017, remained consistent.
General and administrative. Our general and administrative expenses consist primarily of salaries and related expenses of our executive management and financial and administrative staff. These expenses also include costs of our professional advisors (such as legal and accounting), office expenses, insurance and provision for doubtful accounts. The increase of $126,000, or 13%, in the three months ended June 30, 2018, compared to the three months ended June 30, 2017, is primarily attributed to an increase in general and administrative employment expenses.
Financing expenses, net
Our financing expenses, net, in the three months ended June 30, 2018 and June 30, 2017 were as follows (in thousands):
Three months ended June 30, | ||||||||
2018 | 2017 | |||||||
Financing expenses, net | $ | (95 | ) | $ | (39 | ) |
Financing expenses consist primarily of interest payable on bank loans, bank commissions and foreign exchange losses. Financing income consists primarily of foreign exchange gains and interest earned on investments in short-term deposits. The increase in financing expenses, net in the three months ended June 30, 2018, compared to the three months ended June 30, 2017, of $56,000, or 145%, is mainly due to an exchange rate differential.
6 |
Net income (loss) from continuing operations
Our net income (loss) from continuing operations in the three months ended June 30, 2018 and June 30, 2017 was as follows (in thousands):
Three months ended June 30, | ||||||||
2018 | 2017 | |||||||
Net income (loss) from continuing operations | $ | (230 | ) | $ | 86 |
The decrease of $316,000, in the three months ended June 30, 2018, compared to the three months ended June 30, 2017, is primarily due a decrease in our sales and a decrease in our gross profit.
Net profit (loss) from discontinued operations
Our net profit (loss) from discontinued operations in the three months ended June 30, 2018 and June 30, 2017 was as follows (in thousands):
Three months ended June 30, | ||||||||
2018 | 2017 | |||||||
Net profit (loss) from discontinued operations | $ | (50 | ) | $ | 7 |
The results from these operations for the reporting periods are presented in the statements of operations as discontinued operations separately from continuing operations.
The decrease of $57,000 in the three months ended June 30, 2018, compared to the three months ended June 30, 2017, is mainly due to an increase in expenses related to the SmartID divestiture.
Net income (loss)
Our net income (loss) in the three months ended June 30, 2018 and June 30, 2017 was as follows (in thousands):
Three months ended June 30, | ||||||||
2018 | 2017 | |||||||
Net income (loss) | $ | (280 | ) | $ | 93 |
The decrease in net income (loss) of $373,000, in the three months ended June 30, 2018, compared to the three months ended June 30, 2017, is primarily due to a decrease in our revenues and gross profit and an increase in net loss from discontinued operations.
7 |
Six months ended June 30, 2018, compared to the six months ended June 30, 2017
Sources of Revenue
During the six months ended June 30, 2018 and June 30, 2017, the revenues that we derived from sales and licensing and transaction fees were as follows (in thousands):
Six months ended June 30, | ||||||||
2018 | 2017 | |||||||
Sales | $ | 9,137 | $ | 8,426 | ||||
Licensing and transaction fees | $ | 2,879 | $ | 2,540 | ||||
Total revenues | $ | 12,016 | $ | 10,966 |
Sales. Sales increased by $711,000 or 8%, in the six months ended June 30, 2018, compared to the six months ended June 30, 2017. The increase is mainly attributed to an increase in Retail and Mass Transit Ticketing segment sales in the United States, partially offset by a decrease in sales in the Japanese market.
Licensing and transaction fees. Our licensing and transaction fees in the six months ended June 30, 2018, compared to the six months ended June 30, 2017, increased by $339,000, or 13%. The increase is mainly attributed to licensing and transaction fees related to our otiMetry solution in Europe and Japan.
The following table sets forth our revenues, by dollar amount (in thousands) and as a percentage of revenues in different geographical areas, in the six months ended June 30, 2018 and June 30, 2017:
Six months ended June 30, | Africa | Europe | APAC | Americas | ||||||||||||||||||||||||||||
2018 | $ | 2,006 | 17 | % | $ | 3,796 | 32 | % | $ | 1,246 | 10 | % | $ | 4,968 | 41 | % | ||||||||||||||||
2017 | $ | 2,353 | 21 | % | $ | 3,934 | 36 | % | $ | 1,734 | 16 | % | $ | 2,945 | 27 | % |
Our revenues from sales in Africa decreased by $347,000, or 15%, in the six months ended June 30, 2018, compared to the six months ended June 30, 2017, mainly due to a decrease in sales of our petroleum products, partially offset by an increase in sales of MediSmart products.
Our revenues from sales in Europe decreased by $138,000, or 3%, in the six months ended June 30, 2018, compared to the six months ended June 30, 2017, mainly due to a decrease in sales of readers.
Our revenues from sales in APAC decreased by $488,000 or 28%, in the six months ended June 30, 2018, compared to the six months ended June 30, 2017, mainly due to a decrease in sales in the Japanese market.
Our revenues from sales in Americas increased by $2 million, or 69%, in the six months ended June 30, 2018, compared to the six months ended June 30, 2017, mainly due to an increase in sales of readers to the U.S. market and an increase in sales of Petroleum products in North America.
Our revenues derived from outside the United States are primarily received in currencies other than the U.S. dollar and accordingly have a varying impact upon our total revenues as a result of fluctuations in exchange rates.
8 |
The following table sets forth our revenues by dollar amount (in thousands) and as a percentage of revenues by segments, during the six months ended June 30, 2018 and June 30, 2017:
Six months ended June 30, | Retail and Mass Transit Ticketing | Petroleum | Other | |||||||||||||||||||||
2018 | $ | 8,566 | 71 | % | $ | 2,625 | 22 | % | $ | 825 | 7 | % | ||||||||||||
2017 | $ | 7,423 | 68 | % | $ | 2,728 | 25 | % | $ | 815 | 7 | % |
Our revenues from Retail and Mass Transit Ticketing in the six months ended June 30, 2018 increased by $1.1 million, or 15%, compared to the six months ended June 30, 2017, mainly due to an increase in sales of readers in the United States, partially offset by a decrease in sales to the Japanese market and a decrease in sales of readers in the European market.
Our revenues in the six months ended June 30, 2018 from Petroleum decreased by $103,000, or 4%, compared to the six months ended June 30, 2017, mainly due to a decrease in sales of Petroleum products in Africa, partially offset by an increase in sales of Petroleum products in North America.
Our revenues in the six months ended June 30, 2018, from our Other segment remained consistent.
Cost of Revenues and Gross Margin
Our cost of revenues, presented by gross profit and gross margin percentage, in the six months ended June 30, 2018 and June 30, 2017 were as follows (dollar amounts in thousands):
Six months ended June 30, | ||||||||
2018 | 2017 | |||||||
Cost of sales | $ | 5,727 | $ | 5,276 | ||||
Gross profit | $ | 6,289 | $ | 5,690 | ||||
Gross margin percentage | 52 | % | 52 | % |
Cost of sales. The increase of $451,000, or 9%, in the six months ended June 30, 2018, compared to the six months ended June 30, 2017, resulted primarily from an increase in our revenues.
Gross margin. Our gross margin in the six months ended June 30, 2018, compared to the six months ended June 30, 2017, remained consistent.
9 |
Operating expenses
Our operating expenses in the six months ended June 30, 2018 and June 30, 2017 were as follows (in thousands):
Operating expenses | Six months ended June 30, | |||||||
2018 | 2017 | |||||||
Research and development | $ | 1,645 | $ | 1,591 | ||||
Selling and marketing | $ | 3,108 | $ | 2,834 | ||||
General and administrative | $ | 1,972 | $ | 1,795 | ||||
Total operating expenses | $ | 6,725 | $ | 6,220 |
Research and development. Our research and development expenses, in the six months ended June 30, 2018, compared to the six months ended June 30, 2017, remained consistent.
Selling and marketing. The increase of $274,000, or 10%, in the six months ended June 30, 2018, compared to the six months ended June 30, 2017, is primarily attributed to an increase in the number of selling and marketing employees.
General and administrative. The increase of $177,000, or 10%, in the six months ended June 30, 2018, compared to the six months ended June 30, 2017, is primarily attributed to an increase in general and administrative employment expenses.
Financing expenses, net
Our financing expenses, net, in the six months ended June 30, 2018 and June 30, 2017 were as follows (in thousands):
Six months ended June 30, | ||||||||
2018 | 2017 | |||||||
Financing expenses, net | $ | (127 | ) | $ | (110 | ) |
Our financing expenses, net in the six months ended June 30, 2018, compared to the six months ended June 30, 2017, remained consistent.
Net loss from continuing operations
Our net loss from continuing operations in the six months ended June 30, 2018 and June 30, 2017 was as follows (in thousands):
Six months ended June 30, | ||||||||
2018 | 2017 | |||||||
Net loss from continuing operations | $ | (525 | ) | $ | (696 | ) |
The decrease of $171,000, or 25%, in the six months ended June 30, 2018, compared to the six months ended June 30, 2017, is primarily due an increase in our sales and an increase in our gross profit partially offset by an increase in our operating expenses, as described above.
Net loss from discontinued operations
Our net loss from discontinued operations in the six months ended June 30, 2018 and June 30, 2017 was as follows (in thousands):
Six months ended June 30, | ||||||||
2018 | 2017 | |||||||
Net loss from discontinued operations | $ | (88 | ) | $ | (76 | ) |
Our net loss from discontinued operations in the six months ended June 30, 2018, compared to the six months ended June 30, 2017, remained consistent.
10 |
Net loss
Our net loss in the six months ended June 30, 2018 and June 30, 2017 was as follows (in thousands):
Six months ended June 30, | ||||||||
2018 | 2017 | |||||||
Net loss | $ | (613 | ) | $ | (772 | ) |
The decrease in net loss of $159,000, in the six months ended June 30, 2018, compared to the six months ended June 30, 2017, is primarily due an increase in our sales and an increase in our gross profit partially offset by an increase in our operating expenses, as described above.
Liquidity and Capital Resources
Our principal sources of liquidity since our inception have been sales of equity securities, borrowings from banks, cash from the exercise of options and warrants and proceeds from divestiture of part of our businesses. As of June 30, 2018, we had cash, cash equivalents and short-term investments representing bank deposits of $8.8 million (of which an amount of $1.0 million has been pledged as security in respect of performance guarantees granted to third parties, loans and credit lines received from a bank), and $10.1 million as of December 31, 2017 (of which an amount of $1.0 million had then been pledged as security in respect of performance guarantees granted to third parties, loans and credit lines received from a bank). We believe that we have sufficient capital resources to fund our operations for at least the next 12 months. We adhere to an investment policy which is intended to enable the Company to avoid being classified as a “passive foreign investment company,” or PFIC, under United States law. That said, we cannot provide complete assurance that PFIC status will be avoided in the future. In addition, our investment policy requires investment in high-quality investment-grade securities. As of June 30, 2018, our long-term bank loans are denominated in the following currencies: Polish Zloty ($484,000, with maturity dates ranging from 2018 through 2019) and South African Rand ($532,000, with maturity dates ranging from 2018 through 2023). As of June 30, 2018, these loans bear interest at rates ranging from 3.14%-10.00% per annum.
Our composition of long-term loans as of June 30, 2018, was as follows (in thousands):
June 30, 2018 | ||||
Long-term loans | $ | 1,016 | ||
Less - current maturities | 539 | |||
$ | 477 |
Our composition of short-term loans, bank credit and current maturities of long-term loans as of June 30, 2018 was as follows (in thousands):
June 30, 2018 | ||||||||
Interest rate | ||||||||
In U.S. dollars | 5.04 | % | $ | 1,629 | ||||
In Polish Zloty | 3.14 | % | 1,064 | |||||
In NIS | 3.60 | % | 742 | |||||
3,435 | ||||||||
Current maturities of long-term loans | 539 | |||||||
$ | 3,974 |
11 |
Our and certain of our subsidiaries’ manufacturing facilities and certain equipment have been pledged as security in respect of a loan received from a bank. Our short term deposits in the amount of $1 million have been pledged as security in respect of guarantees granted to third parties, loans and credit lines received from a bank. Such deposits cannot be pledged to others or withdrawn without the consent of the bank.
As of June 30, 2018, we granted guarantees to third parties including performance guarantees and guarantees to secure customer advances in the sum of $325,000. The expiration dates of the guarantees range from October 2018 to June 2019.
Operating activities related to continuing operations
For the six months ended June 30, 2018, net cash used in continuing operating activities was $66,000 primarily due to a $658,000 increase in other receivables and prepaid expenses, a $650,000 decrease in other current liabilities, a $525,000 net loss from continuing operations, a $344,000 increase in inventories, a $54,000 decrease in deferred tax liability, a $28,000 decrease in accrued severance pay, net and a $17,000 gain on sale of fixed assets, partially offset by $963,000 decrease in trade receivables, $680,000 of depreciation and amortization, a $445,000 increase in trade payables, $115,000 expense due to stock based compensation issued to employees and a $7,000 of accrued interest and linkage differences, net.
For the six months ended June 30, 2017, net cash used in continuing operating activities was $2.3 million primarily due to a $1.2 million increase in trade receivables, a $855,000 decrease in other current liabilities, a $696,000 net loss from continuing operations, a $396,000 decrease in trade payables, a $47,000 increase in inventory, a $47,000 increase in accrued interest and a $7,000 gain on sale of fixed assets, partially offset by $583,000 of depreciation and amortization, a $174,000 expense due to stock based compensation issued to employees, a $90,000 decrease in other receivables and prepaid expenses, a $74,000 increase in accrued severance pay and a $21,000 increase in deferred tax liability.
Operating activities related to discontinued operations
For the six months ended June 30, 2018, net cash used in discontinued operating activities was $107,000, related to our previous parking business and SmartID division.
For the six months ended June 30, 2017, net cash used in discontinued operating activities was $71,000, related to our previous parking business and SmartID division.
Investing and financing activities related to continuing operations
For the six months ended June 30, 2018, net cash provided by continuing investing activities was $689,000, mainly due to a $1.2 million change in short-term investments, net, and $17,000 in proceeds from the sale of fixed assets, partially offset by $414,000 of purchase of property and equipment, net and $87,000 investment in capitalized product costs.
For the six months ended June 30, 2017, net cash provided by continuing investing activities was $2.3 million, mainly due to a $2.5 million change in short-term investments, net, $44,000 in proceeds from restricted deposit for employee benefits and $12,000 in proceeds from the sale of fixed assets, partially offset by a $157,000 investment in capitalized product costs and $98,000 of purchases of property and equipment.
For the six months ended June 30, 2018, net cash used in continuing financing activities was $394,000, mainly due to a $348,000 repayment of long-term bank loans and a $80,000 decrease in short-term bank credit partially offset by $34,000 of proceeds from exercises of options.
For the six months ended June 30, 2017, net cash used in continuing financing activities was $146,000, mainly due to a $374,000 repayment of long-term bank loans, partially offset by a $213,000 increase in short-term bank credit, net and $15,000 of proceeds from exercises of options and warrants.
12 |
Investing and financing activities related to discontinued operations
We had no cash flows provided by or used in discontinued investing or financing activities in the six months ended June 30, 2018 and June 30, 2017
Off Balance Sheet Arrangements
We have no off-balance sheet arrangements.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures - Our management, including our Chief Executive Officer, or CEO, and Chief Financial Officer, or CFO, are responsible for establishing and maintaining our disclosure controls and procedures (within the meaning of Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended, or Exchange Act). These controls and procedures are designed to ensure that information required to be disclosed in the reports that we file under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that such information was made known to our management, including our CEO and CFO, by others within the Company, as appropriate to allow timely decisions regarding required disclosure. We evaluated these disclosure controls and procedures under the supervision of our CEO and CFO as of June 30, 2018. Based upon that evaluation, our management, including our CEO and CFO, concluded that our disclosure controls and procedures are effective as of such date.
Changes in Internal Control Over Financial Reporting - There has been no change in our internal control over financial reporting during the quarter ended June 30, 2018 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
13 |
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
In December 2013, we completed the sale of certain assets, subsidiaries and intellectual property, or IP, relating to our Smart ID division, for a total purchase price of $10,000,000 in cash and an additional $12,500,000 subject to performance-based milestones. On April 20, 2016, the purchaser of the Smart ID division, SuperCom Ltd., or Supercom, and we entered into a settlement agreement resolving certain litigation between SuperCom and us pursuant to which SuperCom paid us $2,050,000 and will agree to pay us up to $1,500,000 in accordance with and subject to a certain earn-out mechanism. In November 2017, we commenced an arbitration procedure with SuperCom, in which we claim that additional earn-out payments have not been paid to us. SuperCom also raised claims against us during the arbitration procedure for material damages. According to legal advice, the Company has good claims in the arbitration. The arbitration hearing took place on March 6, 2018. The parties are expected to complete the submission of their written summaries by the end of September 2018, after which a verdict will be given by the arbitrator.
In June 2013, prior to the divestiture of our SmartID division, Merwell Inc. (“Merwell”) filed a claim against us before an agreed-upon arbitrator alleging breach of contract in connection with certain commissions claimed to be owed to Merwell with respect to the division’s activities in Tanzania. These activities, along with all other activities of the SmartID division, were later assigned to and assumed by SuperCom in its purchase of the division. SuperCom undertook to indemnify us and hold it harmless against any liabilities that we may incur in connection with Merwell’s consulting agreement and the arbitration. An arbitration decision was issued on February 21, 2016, awarding Merwell approximately $855 for outstanding commissions. The arbitration decision had been appealed and the appeal was denied. As mentioned above, based on the agreement with SuperCom, SuperCom is liable for the costs and liabilities arising out of this claim. Therefore, the financial statements do not include any provision for this claim.
Item 6. Exhibits.
3.1 | Amended and Restated Articles of Incorporation (incorporated by reference to the Company’s Report on Form 6-K filed with the SEC on October 31, 2013). |
3.2 | Memorandum of Association, dated February 14, 1990 (incorporated by reference to the Company’s Registration Statement on Form F-1, filed with the SEC on June 14, 2002). |
31.1* | Rule 13a-14(a) Certification of Chief Executive Officer. |
31.2* | Rule 13a-14(a) Certification of Chief Financial Officer. |
32.1** | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350. |
32.2** | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350. |
101 * | The following materials from our Quarterly Report on Form 10-Q for the quarter ended June 30, 2018 formatted in XBRL (eXtensible Business Reporting Language): (i) the Interim Condensed Consolidated Balance Sheets, (ii) the Interim Condensed Consolidated Statements of Operations, (iii) the Interim Condensed Consolidated Statements of Comprehensive Income (Loss), (iv) the Interim Condensed Statements of Changes in Equity, (v) the Interim Condensed Consolidated Statements of Cash Flows, and (vi) the Notes to Interim Condensed Consolidated Financial Statements, tagged as blocks of text and in detail. |
* | Filed herewith. |
** | Furnished herewith. |
14 |
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
ON TRACK INNOVATIONS LTD.
By: | /s/ Shlomi Cohen |
Shlomi Cohen, Chief Executive Officer
(Principal Executive Officer)
Dated: August 15, 2018
By: | /s/ Assaf Cohen |
Assaf Cohen, Chief Financial Officer
(Principal Financial and Accounting Officer)
Dated: August 15, 2018
15
Exhibit 31.1
CERTIFICATION
I, Shlomi Cohen, certify that:
1. I have reviewed this quarterly report on Form 10-Q of On Track Innovations Ltd.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13(a)-15(f) and 15d-15(f)) of the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: August 15, 2018 | /s/ Shlomi Cohen |
Shlomi Cohen Chief Executive Officer (Principal Executive Officer) |
Exhibit 31.2
CERTIFICATION
I, Assaf Cohen, certify that:
1. I have reviewed this quarterly report on Form 10-Q of On Track Innovations Ltd.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13(a)-15(f) and 15d-15(f)) of the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: August 15, 2018 | /s/ Assaf Cohen |
Assaf
Cohen (Principal Financial Officer) |
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
In connection with the Quarterly Report of On Track Innovations Ltd. (the “Company”) on Form 10-Q for the period ended June 30, 2018 (the “Report”), as filed with the Securities and Exchange Commission on the date hereof, I, Shlomi Cohen, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
1. | The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
2. | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
Date: August 15, 2018 | By: | /s/ Shlomi Cohen |
Shlomi Cohen Chief Executive Officer |
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
In connection with the Quarterly Report of On Track Innovations Ltd. (the “Company”) on Form 10-Q for the period ended June 30, 2018 (the “Report”), as filed with the Securities and Exchange Commission on the date hereof, I, Assaf Cohen, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
1. | The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
2. | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
Date: August 15, 2018 | By: | /s/ Assaf Cohen |
Assaf
Cohen Chief Financial Officer |