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, 2016
 
☐  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   1200001
(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, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer  ☐
Accelerated filer  ☐
Non-accelerated filer o
(do not check if a smaller
reporting company)
Smaller reporting company  ☒   
 
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: 40,905,376 Ordinary Shares outstanding as of August 11, 2016 .
 
2
 
ON TRACK INNOVATIONS LTD.

TABLE OF CONTENTS
 
 
 
 
 
 
Part I - Financial Information
 
 
 
 
 
 
 
 
 
4
 
 
 
 
 
 
 
5
 
 
 
 
 
 
 
17
 
 
 
 
 
Part II - Other Information
 
 
         
   
18
         
 
 
18
         
    Signatures    19
 
 
3
 
PART I - FINANCIAL INFORMATION
 
Item 1.   Financial Statements.
 
ON TRACK INNOVATIONS LTD. AND ITS SUBSIDIARIES

INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

As of June 30, 2016

(Unaudited)
 
4

 
On Track Innovations Ltd.
and its Subsidiaries
 
Interim Condensed   Consolidated
Financial Statements
As of June 30, 2016
(Unaudited)


On Track Innovations Ltd.
and its Subsidiaries

Interim Unaudited Condensed Consolidated Financial Statements as of June 30, 2016
 
Contents
 
On Track Innovations Ltd.
and its Subsidiaries

Interim Unaudited Condensed Consolidated Balance Sheets

US dollars in thousands except share data

   
June 30,
   
December 31,
 
   
2016
   
2015
 
Assets
           
             
Current assets
           
Cash and cash equivalents
 
$
4,816
   
$
5,450
 
Short-term investments
   
6,342
     
5,454
 
Trade receivables (net of allowance for doubtful
               
 accounts of $633 and $778 as of June 30, 2016
               
 and December 31, 2015, respectively)
   
3,613
     
2,418
 
Other receivables and prepaid expenses
   
1,971
     
2,183
 
Inventories
   
2,637
     
3,330
 
                 
Total current assets
   
19,379
     
18,835
 
                 
Long-term restricted deposit for employees benefit
   
465
     
524
 
                 
Severance pay deposits
   
328
     
455
 
                 
Property, plant and equipment, net
   
8,153
     
8,668
 
                 
Intangible assets, net
   
239
     
180
 
                 
Total Assets
 
$
28,564
   
$
28,662
 

 
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,
 
   
2016
   
2015
 
Liabilities and  Equity
           
             
Current Liabilities
           
Short-term bank credit and current maturities
           
  of long-term bank loans
 
$
3,854
   
$
3,815
 
Trade payables
   
5,607
     
5,441
 
Other current liabilities
   
2,643
     
2,724
 
                 
Total current liabilities
   
12,104
     
11,980
 
                 
Long-Term Liabilities
               
Long-term loans, net of current maturities
   
1,859
     
2,359
 
Accrued severance pay
   
904
     
1,148
 
Deferred tax liability
   
370
     
352
 
Total long-term liabilities
   
3,133
     
3,859
 
                 
Total Liabilities
   
15,237
     
15,839
 
                 
Commitments and Contingencies
               
                 
Equity
               
Shareholders' Equity
               
Ordinary shares of NIS 0.1 par value: Authorized –
               
50,000,000 shares as of June 30, 2016 and
               
December 31, 2015; issued: 42,084,075 and 42,014,673 shares as
               
of June 30, 2016 and December 31, 2015, respectively;
               
outstanding: 40,905,376   and 40,835,974 shares
               
as of June 30, 2016 and December 31, 2015, respectively
   
1,055
     
1,055
 
Additional paid-in capital
   
226,030
     
225,925
 
Treasury shares at cost - 1,178,699 shares as of June 30,
               
   2016 and December 31, 2015
   
(2,000
)
   
(2,000
)
Accumulated other comprehensive loss
   
(1,106
)
   
(1,084
)
Accumulated deficit
   
(208,806
)
   
(209,254
)
Total Shareholder’s equity
   
15,173
     
14,642
 
Non-controlling interest
   
(1,846
)
   
(1,819
)
                 
Total Equity
   
13,327
     
12,823
 
                 
Total Liabilities and Equity
 
$
28,564
   
$
28,662
 
 
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 dollar in thousands except share and per share data
 
   
Three months ended June 30,
   
Six months ended June 30,
 
   
2016
   
2015
   
2016
   
2015
 
Revenues
                       
Sales
 
$
3,708
   
$
4,057
   
$
7,201
   
$
7,654
 
Licensing and transaction fees
   
1,381
     
1,359
     
2,765
     
2,737
 
                                 
Total revenues
   
5,089
     
5,416
     
9,966
     
10,391
 
                                 
Cost of revenues
                               
Cost of sales
   
2,434
     
2,718
     
4,766
     
5,223
 
Total cost of revenues
   
2,434
     
2,718
     
4,766
     
5,223
 
                                 
Gross profit
   
2,655
     
2,698
     
5,200
     
5,168
 
Operating expenses
                               
Research and development
   
784
     
937
     
1,535
     
1,905
 
Selling and marketing
   
1,504
     
1,772
     
3,090
     
3,658
 
General and administrative
   
912
     
1,143
     
1,850
     
2,384
 
Patent litigation and maintenance
   
11
     
283
     
28
     
459
 
Other expenses
   
-
     
433
     
-
     
510
 
Total operating expenses
   
3,211
     
4,568
     
6,503
     
8,916
 
                                 
Operating loss from continuing operations
   
(556
)
   
(1,870
)
   
(1,303
)
   
(3,748
)
Financial expenses, net
   
(67
)
   
(195
)
   
(171
)
   
(420
)
                                 
Loss from continuing operations
                               
 before taxes on income
   
(623
)
   
(2,065
)
   
(1,474
)
   
(4,168
)
                                 
Income tax
   
(16
)
   
16
     
(32
)
   
(3
)
                                 
Net loss from continuing operations
   
(639
)
   
(2,049
)
   
(1,506
)
   
(4,171
)
Net income from discontinued operations
   
1,988
     
-
     
1,927
     
362
 
                                 
Net income (loss)
   
1,349
     
(2,049
)
   
421
     
(3,809
)
                                 
Net (income) loss attributable to non-controlling interest
   
(36
)
   
35
     
27
     
26
 
                                 
Net income (loss) attributable to shareholders
 
$
1,313
   
$
(2,014
)
 
$
448
   
$
(3,783
)
                                 
Basic and diluted net gain (loss) attributable to shareholders per ordinary share
                               
From continuing operations
   
(0.02
)
   
(0.05
)
   
(0.04
)
   
(0.10
)
From discontinued operations
   
0.05
     
-
     
0.05
     
0.01
 
   
$
0.03
   
$
(0.05
)
 
$
0.01
   
$
(0.09
)
                                 
Weighted average number of ordinary shares used in computing basic and diluted net
(loss) income per ordinary share
   
40,896,863
     
40,873,680
     
40,885,668
     
40,865,089
 


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,
 
   
2016
   
2015
   
2016
   
2015
 
Total comprehensive income (loss):
                       
Net income (loss)
 
$
1,349
   
$
(2,049
)
 
$
421
   
$
(3,809
)
Foreign currency translation adjustments
   
(190
)
   
30
     
(22
)
   
(194
)
                                 
Total comprehensive income (loss)
 
$
1,159
   
$
(2,019
)
 
$
399
   
$
(4,003
)
Comprehensive loss (income) attributable to the non-controlling interest
   
(36
)
   
35
     
27
     
26
 
                                 
Total comprehensive income (loss) attributable to shareholders
 
$
1,123
   
$
(1,984
)
 
$
426
   
$
(3,977
)

 
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 number of shares
 
                           
Accumulated
                   
               
Additional
   
Treasury
   
other
               
 
 
   
Number of
   
Share
   
paid-in
   
Shares
   
comprehensive
   
Accumulated
   
Noncontrolling
    Total  
   
Shares issued
   
capital
   
capital
   
(at cost)
   
Income (loss)
   
deficit
   
interest
   
equity
 
Balance as of December  31, 2014
   
41,996,602
   
$
1,055
   
$
224,234
   
$
(2,000
)
 
$
(800
)
 
$
(202,103
)
 
$
(503
)
 
$
19,883
 
                                                                 
Changes during the six month
 period ended June 30, 2015:
                                                               
                                                               
                                                                 
Stock-based compensation
 related to options and shares
 issued to employees
                                                               
   
-
     
-
     
332
     
-
     
-
     
-
     
-
     
332
 
Exercise of  warrants
   
18,071
     
-
     
-
     
-
     
-
     
-
     
-
     
-
 
Foreign currency translation
 adjustments
   
-
     
-
     
-
     
-
     
(194
)
   
-
     
-
     
(194
)
Net loss
   
-
     
-
     
-
     
-
     
-
     
(3,783
)
   
(26
)
   
(3,809
)
Balance as of June 30, 2015
   
42,014,673
   
$
1,055
   
$
224,566
   
$
(2,000
)
 
$
(994
)
 
$
(205,886
)
 
$
(529
)
 
$
16,212
 
                                                                 
Balance as of December  31, 2015
   
42,014,673
   
$
1,055
   
$
225,925
   
$
(2,000
)
 
$
(1,084
)
 
$
(209,254
)
 
$
(1,819
)
 
$
12,823
 
                                                                 
Changes during the six month
 period ended June 30, 2016:
                                                               
                                                               
                                                                 
Stock-based compensation
 related to options issued
 to employees
                                                               
   
-
     
-
     
105
     
-
     
-
     
-
     
-
     
105
 
Foreign currency translation
 adjustments
   
-
     
-
     
-
     
-
     
(22
)
   
-
     
-
     
(22
)
Exercise of options and warrants
   
69,402
     
(*
)
   
-
     
-
     
-
     
-
     
-
     
(*
)
Net income (loss)
   
-
     
-
     
-
     
-
     
-
     
448
     
(27
)
   
421
 
Balance as of June 30, 2016
   
42,084,075
   
$
1,055
   
$
226,030
   
$
(2,000
)
 
$
(1,106
)
 
$
(208,806
)
 
$
(1,846
)
 
$
13,327
 

 
(*)            Less than $1.

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,
 
   
2016
   
2015
 
Cash flows from continuing operating activities
           
Net loss from continuing operations
 
$
(1,506
)
 
$
(4,171
)
Adjustments required to reconcile net loss to
               
net cash used in continuing operating activities:
               
Stock-based compensation related to options issued
               
  to employees
   
105
     
332
 
Accrued interest and linkage differences, net
   
55
     
(42
)
Depreciation
   
620
     
617
 
                 
Changes in operating assets and liabilities:
               
Accrued severance pay, net
   
(117
)
   
(20
)
Deferred tax, net
   
32
     
1
 
(Increase) decrease in trade receivables, net
   
(1,097
)
   
482
 
Decrease in other receivables and prepaid expenses
   
210
     
374
 
Decrease in inventories
   
691
     
290
 
Increase (decrease) in trade payables
   
190
     
(274
)
(Decrease) increase in other current liabilities
   
(489
)
   
119
 
Net cash used in continuing operating activities
   
(1,306
)
   
(2,292
)
                 
Cash flows from continuing investing activities
               
                 
Purchase of property and equipment, net
   
(139
)
   
(463
)
Change in short-term investments, net
   
(884
)
   
2,163
 
Investment in capitalized product costs
   
(98
)
   
(67
)
Advance payment from sale of property, see Note 11(1)
   
396
     
-
 
Investment in restricted deposit for employees benefit
   
-
     
(281
)
                 
Net cash (used in) provided by continuing investing activities
   
(725
)
   
1,352
 
                 
Cash flows from continuing financing activities
               
Increase in short-term bank credit, net
   
81
     
809
 
Proceeds from long-term bank loans
   
27
     
446
 
Repayment of long-term bank loans
   
(538
)
   
(404
)
Proceeds from exercise of options and warrants
   
(*
)
   
-
 
                 
Net cash (used in) provided by continuing financing activities
   
(430
)
   
851
 
                 
Cash flows from discontinued operations
               
Net cash used in discontinued operating activities
   
(105
)
   
(25
)
Net cash provided by discontinued investing activities
   
1,949
     
387
 
Total net cash provided by discontinued operations
   
1,844
     
362
 
                 
Effect of exchange rate changes on cash and cash equivalents
   
(17
)
   
(164
)
                 
(Decrease) increase in cash and cash equivalents
   
(634
)
   
109
 
Cash and cash equivalents at the beginning of the period
   
5,450
     
5,351
 
                 
Cash and cash equivalents at the end of the period
 
$
4,816
   
$
5,460
 

 
(*)            Less than $1.

The accompanying notes are an integral part of these interim unaudited condensed consolidated financial statements.

F - 7

On Track Innovations Ltd.
and its Subsidiaries

Interim Unaudited Condensed Consolidated Statements of Cash Flows (cont’d)

US dollars in thousands
 
   
Six months ended June 30,
 
   
2016
   
2015
 
Supplementary cash flows activities:            
              Cash paid during the period for:            
   
             Interest paid
 
$
118
   
$
146
 

The accompanying notes are an integral part of these interim unaudited condensed consolidated financial statements.

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

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 (formerly listed on the NASDAQ Global Market until April 13, 2016).

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, 2015.
 
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, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016.

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

In December 2013, the Company completed the sale of certain assets, subsidiaries and intellectual property ("IP") relating to its SmartID division to SuperCom Ltd. (“SuperCom”). 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 - 9
 
                                    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)

During the six month period ended June 30 2016 and 2015, the Company recorded profit from contingent consideration that derived from the SmartID division divesture (see also Note 7).

D.              Other expenses

Other operating expenses presented in the statement of operations for the six and three months ended June 30, 2015 consist of compensation expenses related to the termination of employment of the Company’s former Chief Executive Office (“CEO”), Mr. Ofer Tziperman, according to his employment terms, following his resignation from the Company and its subsidiaries on February 10, 2015, and also consist of non-recurring consulting fees as part of the Company’s strategic review.
 
Note 2 – Significant Accounting Policies

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, 2015.

Additional significant accounting policies

1
In accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (hereinafter – “ASC”) Topic 260 “Earnings per Share”, including potential common shares in the denominator of a diluted per-share computation for continuing operations always will result in an antidilutive per-share amount when an entity has a loss from continuing operations or a loss from continuing operations available to common stockholders (that is, after any preferred dividend deductions). Although including those potential common shares in the other diluted per-share computations may be dilutive to their comparable basic per-share amounts, no potential common shares shall be included in the computation of any diluted per-share amount when a loss from continuing operations exists, even if the entity reports net income.
 
2
As mentioned in Note 11(1), the Company entered into an agreement pursuant to which the Company will sell its headquarters building in Israel and will lease back the portion of the building necessary for its current operations. In accordance with ASC Topic 360 “Property, Plant and Equipment” and ASC Topic 840 “Leases”, if the minimum lease payments for the leaseback is more than 10% of the fair value of the asset sold, the entity will continue to classify it as held and used, and not as held for sale.

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)

Recent accounting pronouncements
 
1
On March 30, 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-09, “Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting”. This ASU simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. The ASU, among others, allows an entity to elect as an accounting policy either to continue to estimate the total number of awards for which the requisite service period will not be rendered (as currently required) or to account for forfeitures when they occur. This entity-wide accounting policy election only applies to service conditions. For performance conditions, the entity continues to assess the probability that such conditions will be achieved. An entity must also disclose its policy election for forfeitures. The new standard is effective for annual reporting periods beginning after December 15, 2016, including interim periods within those annual reporting periods, with early adoption permitted. The Company is currently evaluating the effect ASU 2016-09 will have on its consolidated financial statements and related disclosures. The Company has not yet selected an accounting policy for forfeitures under this new ASU.

2 In connection with other recent accounting pronouncements and the Company’s assessment of the impacts they will have on the ongoing financial reporting, see Note 2Z in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.
 
Note 3 - Other Receivables and Prepaid Expenses
 
   
June 30,
   
December 31,
 
   
2016
   
2015
 
             
Government institutions
 
$
446
   
$
463
 
Prepaid expenses
   
652
     
624
 
Receivables under contractual obligations to be transferred to others *
   
262
     
533
 
Other receivables
   
611
     
563
 
                 
   
$
1,971
   
$
2,183
 

* The Company’s subsidiary in Poland is required to collect certain fees that are to be transferred to local authorities.


F - 11

On Track Innovations Ltd.
and Subsidiaries
 
Notes to the Interim Unaudited Condensed Consolidated Financial Statements

US dollars in thousands

Note 4 - Inventories

Inventories consist of the following:
 
   
June 30,
   
December 31,
 
   
2016
   
2015
 
Raw materials
 
$
805
   
$
944
 
Work in progress
   
209
     
174
 
Finished products
   
1,623
     
2,212
 
                 
   
$
2,637
   
$
3,330
 

 
Note 5 - Other Current Liabilities

   
June 30,
   
December 31,
 
   
2016
   
2015
 
Employees and related expenses           
 
$
697
   
$
1,065
 
Accrued expenses
   
1,161
     
1,101
 
Customer advances
   
153
     
283
 
Advance payment from sale of property (1)
   
396
     
-
 
Other current liabilities
   
236
     
275
 
                 
   
$
2,643
   
$
2,724
 

(1) In connection with selling property subsequent to the balance sheet date see Note 11.
 
Note 6 - 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, subject to further evaluation. The arbitration decision is being appealed and is thus not yet ripe for enforcement.  Regardless, as mentioned above, SuperCom is liable for all costs and liabilities arising out of this claim. Therefore, the financial statements do not include any provision for this claim.
 
F - 12
 
On Track Innovations Ltd.
and Subsidiaries
 
Notes to the Interim Unaudited Condensed Consolidated Financial Statements

US dollars in thousands
 
Note 6 - Commitments and Contingencies (cont’d)

A.  Legal claims (cont’d)
 
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 Euro 1,500 (approximately $1,671), 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. The Company filed an initial memorandum of defense rejecting the plaintiff’s allegations and claims. A technical hearing regarding this matter is scheduled for September 27, 2016. Based on the advice of counsel, the Company currently believes that it has no material obligations to the plaintiff and that there is no need for a provision for the claim.
 
B. Guarantees
 
As of June 30, 2016, the Company has granted performance guarantees and guarantees to secure customer advances in the sum of $782. The expiration dates of the guarantees range from August 2016 to July 2017.
 
Note 7 – Discontinued operations

As described in Note 1C, the Company divested the SmartID division and presented these activities as discontinued operations.

During the six month periods ended June 30, 2016 and June 30, 2015, the Company recorded profit from contingent consideration in the amount of $2,139 and $387, respectively, derived from the Smart ID division divesture. This profit is presented below as ‘other income, net’ within income from discontinued operations for the six months ended June 30, 2016 and June 30, 2015.
 
The Company is entitled to additional contingent consideration up to approximately $1,400 in accordance with and subject to a certain earn-out mechanism previously stipulated in the Asset Purchase Agreement relating to the SmartID division divesture.
 
Set forth below are the results of the discontinued operations:
 
   
Three months ended June 30,
   
Six months ended June 30,
 
   
2016
   
2015
   
2016
   
2015
 
Expenses
   
(151
)
   
-
     
(212
)
   
(25
)
Other income, net
   
2,139
     
-
     
2,139
     
387
 
Net profit from discontinued operations
   
1,988
     
-
     
1,927
     
362
 


F - 13
 
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

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.
 
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, used the following methods and assumptions:

The carrying amounts of cash and cash equivalents, short-term interest bearing investments, 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, 2016, the fair value of bank loans with fixed interest rates did not differ materially from the carrying amount.

As of June 30, 2016, the Company held approximately $6,342 of short-term bank deposits (as of December 31, 2015, $5,454). Short-term deposits in the amount of $2,2 42 have been pledged as security in respect of guarantees granted in respect of  performance guarantees, loans and credit lines received from a bank (as of December 31, 2015, $2,254) and cannot be pledged to others or withdrawn without the consent of the bank.

F - 14
On Track Innovations Ltd.
and Subsidiaries
 
Notes to the Interim Unaudited Condensed Consolidated Financial Statements

US dollars in thousands

Note 9 – Equity

A.   Stock option plans
 
During the six months ended June 30, 2016 and June 30, 2015, 270,000 and 125,000 options were granted, respectively. The vesting period for the options ranges from one year to four years. The exercise prices for the options range from $0.44 to $1.68. Those options expire up to five years after the date of the 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 and non-employees during the six months ended June 30, 2016 and June 30, 2015, for which the exercise price was greater than par value, was estimated on the date of grant, using the Black-Scholes model and the following assumptions:
 
1. Dividend yield of zero percent for all periods.
 
2. Risk-free interest rate of 1.18% and 1.21% for grants during the six months ended June 30, 2016 and June 30, 2015, respectively, based on U.S. Treasury yield curve in effect at the time of grant.

3. Estimated expected lives of 3.56 and 3.5 years for grants during the six months ended June 30, 2016 and June 30, 2015, respectively, using the simplified method.

4. Expected average volatility of 72% and 69% for grants during the six months ended June 30, 2016 and June 30, 2015, respectively, which represent a weighted average standard deviation rate for the price of the Company's Ordinary Shares on the NASDAQ Global Market and NASDAQ Capital Market.

The Company’s options activity (including options to non-employees) during the six months ended June 30, 2016 and options outstanding and options exercisable as of December 31, 2015 and June 30, 2016, are summarized in the following table:

   
Number of
   
Weighted
 
   
options
   
average exercise
 
   
outstanding
   
price per share
 
Outstanding – December 31, 2015
   
1,601,379
   
$
1.71
 
                 
Options granted
   
270,000
     
0.76
 
Options expired or forfeited
   
(365,675
)
   
2.09
 
Options exercised
   
(33,260
)
   
0.45
 
Outstanding – June 30, 2016
   
1,472,444
     
1.47
 
                 
Exercisable as of:
               
   December 31, 2015
   
799,473
   
$
1.85
 
   June 30, 2016
   
696,795
   
$
1.88
 


F - 15
 
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 weighted average fair value of options granted during the six months ended June 30, 2016 and during the six months ended June 30, 2015 is $0.41 and $0.8, respectively, per option. The aggregate intrinsic value of outstanding options as of June 30, 2016 and December 31, 2015 is approximately $ 101 and $8, respectively. The aggregate intrinsic value of exercisable options as of June 30, 2016 and December 31, 2015 is approximately $ 2 and $8, respectively.

The following table summarizes information about options outstanding and exercisable (including options to non-employees) as of June 30, 2016:

     
Options outstanding
   
Options Exercisable
 
     
Number
   
Weighted
         
Number
   
Weighted
       
     
outstanding
   
average
   
Weighted
   
Outstanding
   
average
   
Weighted
 
     
as of
   
remaining
   
Average
   
As of
   
remaining
   
Average
 
Range of
   
June 30,
   
contractual
   
Exercise
   
June 30,
   
contractual
   
Exercise
 
exercise price
   
2016
   
life (years)
   
Price
   
2016
   
life (years)
   
Price
 
$
0.03
     
1,000
     
0.42
   
$
0.03
     
1,000
     
0.42
   
$
0.03
 
 
0.44-0.90
     
666,888
     
4.16
     
0.77
     
71,888
     
1.33
     
0.90
 
 
1.08-1.2
     
133,000
     
0.7
     
1.09
     
133,000
     
0.7
     
1.09
 
 
1.46
     
50,000
     
2.05
     
1.46
     
30,000
     
2.05
     
1.46
 
 
1.67-1.76
     
105,000
     
1.74
     
1.68
     
75,000
     
1.04
     
1.69
 
 
2.32-2.36
     
454,334
     
2.87
     
2.34
     
353,685
     
2.87
     
2.34
 
 
3.03-3.18
     
62,222
     
2.08
   
$
3.08
     
32,222
     
1
   
$
3.13
 
         
1,472,444
     
3.11
             
696,795
     
1.97
         
 
As of June 30, 2016, there was approximately $350 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 1.25 years.

During the six months ended June 30, 2016 and June 30, 2015, the Company recorded stock-based compensation expenses in the amount of $105 and $332, respectively, in accordance with ASC 718 “Compensation-Stock Compensation.”
 
B. Warrants

During the six months ended June 30, 2016, 281,369 warrants expired and 36,142 warrants were converted to ordinary shares.

As of June 30, 2016 there are no remaining outstanding warrants.

F - 16
 
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 three segments which are the Company's strategic business units: Retail and Mass Transit Ticketing, Petroleum and Parking. In addition to its three reportable segments, certain products for the medical industry and other secure smart card solutions are classified under the Company’s "Other" segment.

The strategic business unit's allocation of resources and evaluation of performance are managed separately. The CODM does not examine assets or liabilities for those segments and therefore they are not presented.

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, 2016
 
   
Petroleum
   
Retail and
Mass Transit
Ticketing
   
Parking
   
Other
   
Consolidated
 
                               
Revenues
 
$
831
   
$
3,239
   
$
279
   
$
740
   
$
5,089
 
                                         
Reportable segment gross profit *
   
497
     
1,806
     
194
     
350
     
2,847
 
                                         
Reconciliation of reportable segment
                                       
gross  profit to gross profit for the period
                                       
                                         
Depreciation
                                   
(188
)
Stock-based compensation
                                   
(4
)
                                         
Gross profit for the period
                                 
$
2,655
 

   
Three months ended June 30, 2015
 
   
Petroleum
   
Retail and
Mass Transit
Ticketing
   
Parking
   
Other
   
Consolidated
 
                               
Revenues
 
$
955
   
$
3,608
   
$
409
   
$
444
   
$
5,416
 
                                         
Reportable segment gross profit *
   
560
     
1,866
     
256
     
222
     
2,904
 
                                         
Reconciliation of reportable segment
                                       
gross  profit to gross profit for the period
                                       
                                         
Depreciation
                                   
(191
)
Stock-based compensation
                                   
(15
)
                                         
Gross profit for the period
                                 
$
2,698
 
 
* Gross profit as reviewed by the CODM, represents gross profit, adjusted to exclude depreciation and stock-based compensation.

F - 17
 
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, 2016
 
   
Petroleum
   
Retail and
Mass Transit Ticketing
   
Parking
   
Other
   
Consolidated
 
                               
Revenues
 
$
1,940
   
$
6,138
   
$
584
   
$
1,304
   
$
9,966
 
                                         
Reportable segment gross profit *
   
1,198
     
3,330
     
407
     
642
     
5,577
 
                                         
Reconciliation of reportable segment
                                       
gross  profit to profit for the period
                                       
                                         
Depreciation
                                   
(377
)
Stock-based compensation
                                   
-
 
                                         
Gross profit for the period
                                 
$
5,200
 

   
Six months ended June 30, 2015
 
   
Petroleum
   
Retail and
Mass Transit Ticketing
   
Parking
   
Other
   
Consolidated
 
                               
Revenues
 
$
2,095
   
$
6,715
   
$
750
   
$
831
   
$
10,391
 
                                         
Reportable segment gross profit *
   
1,202
     
3,464
     
474
     
419
     
5,559
 
                                         
Reconciliation of reportable segment
                                       
gross  profit to profit for the period
                                       
                                         
Depreciation
                                   
(363
)
Stock-based compensation
                                   
(28
)
                                         
Gross profit for the period
                                 
$
5,168
 
 
* Gross profit as reviewed by the CODM, represents gross profit, adjusted to exclude depreciation and stock-based compensation.

F - 18
 
On Track Innovations Ltd.
and Subsidiaries
 
Notes to the Interim Unaudited Condensed Consolidated Financial Statements

US dollars in thousands

Note 11 – Significant events during the reporting period and subsequent events
 
1.
On May 7, 2016, the Company entered into an agreement pursuant to which the Company will sell its headquarters building in Rosh Pina, Israel, to a third party for a consideration of NIS 7,000 (approximately $1,820   that is similar to the building’s book value as of June 30, 2016) and will lease back the portion of the building necessary for its current operations. As of June 30, 2016, the Company received an advance payment in the amount of $396 from the purchaser. The leaseback period is two years and the annual rent is approximately $130. The Company has the right to extend the lease by two additional periods on the same terms. Each optional extension period is for one year. Subject to the fulfillment of certain conditions, the sale is expected to be completed and the   operating lease is expected to commence in the third quarter of 2016. The present value of the minimum lease payments for the leaseback is more than 10% of the fair value of the asset sold. Therefore, the Company will retain more than a minor portion of the use of the building and continue to classify it as held and used within ‘property, plant and equipment, net’ as of June 30, 2016, and not as held for sale.

2.
On July 20, 2016, the Company entered into an Asset Purchase Agreement with Atrinet Ltd. and certain subsidiaries thereof (collectively, “Atrinet”), pursuant to which the Company will sell and Atrinet will purchase, subject to the completion of certain closing conditions, the ongoing operations, including transfer of related employees, as well as intellectual property directly related to the parking business for a non-material amount. The transaction is expected to close in the third quarter of 2016.   As of June 30, 2016, the parking operating has not met the criteria to be classified as discontinued operation.

3.
On July 25, 2016, the Company and AT&T Mobility LLC ("AT&T") entered into a settlement agreement resolving the litigation. As a result of this settlement, the lawsuit was dismissed on August 8, 2016.   The amount of the revenues from the settlement will be recognized in the third quarter of 2016.
 
F - 19
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:
 
 
·
the expected development and potential benefits from our existing or future products or our intellectual property, or IP;
 
           
  
·
generation of revenues from licensing, transaction fees and/or other arrangements;
 
 
  
·
future sources of revenue, ongoing relationships with current and future suppliers, customers, end-user customers and resellers;
 
           
 
·
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 plans to increase our cash resources, such as by capitalizing on our patent portfolio, sales of assets or parts of our business or raising funds;
 
         
  
·
our plans to reduce our financial expenses;
 
   
  
·
our expectations regarding our short-term and long-term capital requirements;
 
     
  
·
our intention to continue to invest in research and development;
 
         
 
·
the expected settlement of pending litigation;
 
         
 
·
our expected sales of our parking business and our headquarters building;
 
         
 
·
our outlook for the coming months; and
 
               
  
·
information with respect to any other plans and strategies for our business.
       
 
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.
 
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, 2015 filed with SEC. Readers are also urged to carefully review and consider the various disclosures we have made in that report.

5
  As used in this Quarterly Report, the terms "we", "us", "our", “the Company”, and "OTI" mean On Track Innovations Ltd. and our subsidiaries and affiliates, 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 in.
 
Overview
 
We are a pioneer and leading developer of cutting-edge secure cashless payment solutions, providing global enterprises with innovative technology for over two decades. We currently operate in three main segments: Petroleum, Retail and Mass Transit Ticketing and Parking. In addition to our three reportable segments, products of our MediSmart solutions and other secure smart card solutions are classified under “Other” in segment analyses appearing in this Quarterly Report.

Our field-proven suite of cashless payment solutions is based on an extensive IP portfolio, including registered patents and patent applications worldwide. Since our incorporation in 1990, we have built an international reputation for reliability and innovation, deploying hundreds of solutions for banking, mobile network operators, vending, mass transit, petroleum and parking.
 
We operate a global network of regional offices, franchisees, distributors and partners to support various solutions deployed across the globe.
 
We focus our efforts on our core business of providing innovative cashless payment solutions based among other things on our contactless near field communications, or NFC, technology. We have increased our efforts to further develop existing and new products and solutions, including among others by the introduction of our new telemetry and Internet of Things, or IoT, technology, and increased our sales and marketing activities and taskforce. We also focus on developing strategic channel partnerships around the globe to increase our revenues and on maximizing the value of our IP through licensing, customized technology solutions, strategic partnerships and enforcing our patent portfolio.

Recently, we have significantly cut costs and reduced operating expenses, in part by outsourcing part of our manufacturing activities. We have also continued our efforts to focus on our core business by entering into an agreement for the sale of our parking business, which transaction is expected to close in the third quarter of 2016. Additionally, we have recently regained compliance with The Nasdaq Stock Market’s minimum listing requirements.
 
RESULTS OF OPERATIONS – THREE MONTHS ENDED JUNE 30, 2016 COMPARED TO THREE MONTHS ENDED JUNE 30, 2015 ,  AND SIX MONTHS ENDED JUNE 30, 2016 COMPARED TO SIX MONTHS ENDED JUNE 30, 2015

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 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 flow, 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.

6
Three months ended June 30, 2016, compared to the three months ended June 30, 2015

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, 2016 and June 30, 2015, the revenues that we derived from sales and licensing and transaction fees were as follows (in thousands):
 
 
Three months ended
June 30,
 
 
2016
 
2015
 
Sales
$
3,708
 
$
4,057
 
Licensing and transaction fees
$ 
1,381
 
$ 
1,359
 
 Total revenues
$ 
5,089
 
$ 
5,416
 
 
Sales. Sales decreased by $349,000, or 9%, in the three months ended June 30, 2016, compared to the three months ended June 30, 2015. The decrease is mainly attributed to a decrease in Retail and Mass Transit Ticketing segment sales in the United States , partially offset by an increase in sales of MediSmart products.
 
 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, 2016, compared to the three months ended June 30, 2015, remained consistent.
 
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, 2016 and June 30, 2015:

Three months ended   June 30,
 
Africa
   
Europe
   
Asia
   
Americas
 
2016
 
$
1,131
   
22
%
 
$
1,566
   
31
%
 
$
279
   
5
%
 
$
2,113
   
42
%
2015
 
$
855
   
16
%
 
$
1,518
   
28
%
 
$
335
   
6
%
 
$
2,708
   
50
%
 
Our revenues from sales in Africa increased by $276,000, or 32%, in the three months ended June 30, 2016, compared to the three months ended June 30, 2015, mainly due to an increase in sales of our MediSmart products.

Our revenues from sales in Europe increased by $48,000, or 3%, in the three months ended June 30, 2016, compared to the three months ended June 30, 2015, mainly due to an increase in sales of our otiMetry solution, partially offset by a decrease in Petroleum and Parking products sales.

Our revenues from sales in Asia decreased by $56,000, or 17%, in the three months ended June 30, 2016, compared to the three months ended June 30, 2015, mainly due to a decrease in sales of our Petroleum products.

Our revenues from sales in Americas decreased by $595,000, or 22%, in the three months ended June 30, 2016, compared to the three months ended June 30, 2015, mainly due to a decrease in sales of NFC readers to the U.S. market .
 
7
Our revenues derived from outside the United States, which are primarily received in currencies other than the U.S. dollar, will have a varying impact upon our total revenues, as a result of fluctuations in such currencies’ exchange rates versus the U.S. dollar.

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, 2016 and June 30, 2015:
 
Three months ended June 30,
 
Petroleum
   
Parking
   
Retail and Mass Transit Ticketing
   
Other
 
2016
 
$
831
   
16
%
 
$
279
   
5
%
 
$
3,239
   
64
%
 
$
740
   
15
%
2015
 
$
955
   
17
%
 
$
409
   
8
%
 
$
3,608
   
67
%
 
$
444
   
8
%
 
Our revenues in the three months ended June 30, 2016 from Petroleum decreased by $124,000, or 13%, compared to the three months ended June 30, 2015, mainly due to a decrease in sales in Europe and South America, partially offset by an increase in sales of Petroleum products in Africa .

Our revenues in the three months ended June 30, 2016 from the Parking segment decreased by $130,000, or 32%, compared to the three months ended June 30, 2015, mainly due to a decrease in sales generated in Europe.

Our revenues from Retail and Mass Transit Ticketing in the three months ended June 30, 2016 decreased by $369,000, or 10%, compared to the three months ended June 30, 2015, mainly due to a decrease in sales of NFC readers in the United States , partially offset by an increase in sales of our otiMetry solution in Europe.

Our revenues in the three months ended June 30, 2016, from our other segment increased by $296,000, or 67%, compared to the three months ended June 30, 2015, 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, 2016 and June 30, 2015, were as follows ( dollar amounts in thousands ):
 
 
Three months ended June 30,
 
 
2016
 
2015
 
Cost of sales
$
2,434
   
$
2,718
 
Gross profit
$
2,655
   
$
2,698
 
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 $284,000, or 10%, in the three months ended June 30, 2016, compared to the three months ended June 30, 2015, resulted primarily from our strategic decision to cease in-house manufacturing activities and from a decrease in our revenues.
 
Gross margin. The increase in gross margin in the three months ended June 30, 2016, compared to the three months ended June 30, 2015, is primarily attributed to a decrease in employment expenses due to our strategic decision to outsource all of our manufacturing and product assembly to third-party vendors.

8
 
Operating expenses
 
Our operating expenses in the three months ended June 30, 2016 and June 30, 2015, were as follows (in thousands):
 
Operating expenses
 
Three months ended June 30,
 
   
2016
   
2015
 
Research and development
 
$
784
   
$
937
 
Selling and marketing
 
$
1,504
   
$
1,772
 
General and administrative
 
$
912
   
$
1,143
 
Patent litigation and maintenance
 
$
11
   
$
283
 
Other expenses
 
$
-
   
$
433
 
Total operating expenses
 
$
3,211
   
$
4,568
 
 
 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 $153,000, or 16%, in the three months ended June 30, 2016, compared to the three months ended June 30, 2015, is primarily attributed to a decrease in the number of research and development employees due to our cost cutting plan.
 
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.  The decrease of $268,000, or 15%, in the three months ended June 30, 2016, compared to the three months ended June 30, 2015, is primarily attributed to a decrease in employment expenses of selling and marketing employees who left the Company by the end of 2015, and to a lesser extent to a decrease in exhibition and advertising expenses. Our selling and marketing expenses may increase in the future as we continue to expand our local sales and marketing efforts, open new offices and in the event that we hire additional personnel.
 
 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 lawyers and accountants), office expenses, insurance and provision for doubtful accounts . The decrease of $231,000, or 20%, in the three months ended June 30, 2016, compared to the three months ended June 30, 2015, is primarily attributed to a decrease in employment expenses, to a decrease in stock-based compensation related to options granted to employees and to a decrease in office expenses.

 Patent litigation and maintenance expenses . Our patent litigation and maintenance expenses consist primarily of professional advisors related to our patents and other IP, such as lawyers or other consultants, as part of the Company's plan to maximize the value of our IP, and also consist of salaries and related expenses of our team of employees executing this strategy. The decrease of $272,000, or 96%, in the three months ended June 30, 2016, compared to the three months ended June 30, 2015 , is primarily attributed to a decrease in employment expenses related to the termination of employment of one of our former directors as chief executive officer of our U.S. subsidiary, who led the Company's efforts to maximize the value of our patents portfolio until August 2015.

 Other expenses. Our other expenses in the three months ended June 30, 2015 consist of partial compensation expenses provision related to the termination of employment of our former Chief Executive Officer, Mr. Ofer Tziperman, according to his employment terms, following his resignation from the Company and its subsidiaries on February 10, 2015. No other expenses were recorded in the three months ended June 30, 2016.

9
 
Financing expenses, net
 
Our financing expenses, net, in the three months ended June 30, 2016 and June 30, 2015 were as follows (in thousands):
 
 
Three months ended June 30,
 
 
2016
 
2015
 
Financing income
$
30
  $
31
 
Financing expenses
$
(97
)
$
(226
)
Financing expenses, net
$
(67
)
$
(195
)
 
 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. Our financing income in the three months ended June 30, 2016, compared to the three months ended June 30, 2015, remained consistent. The decrease in financing expenses in the three months ended June 30, 2016, compared to the three months ended June 30, 2015, of $129,000, or 57%, is mainly due to decreased foreign exchange losses from exchange rate differentials of the U.S. dollar against the South African Rand.

Net loss from continuing operations

Our net loss   from continuing operations in the three months ended June 30, 2016 and June 30, 2015, was as follows (in thousands):
 
 
Three months ended June 30,
 
 
2016
 
2015
 
Net loss from continuing operations
$
(639
)
$
(2,049
)

The decrease of $1.4 million, or 69%, in the three months ended June 30, 2016, compared to the three months ended June 30, 2015, is primarily due a decrease in our operating expenses and a decrease in financing expenses, net partially offset by a decrease in our gross profit, as described above.
 
Net profit from discontinued operations

Our net   profit from discontinued operations in the three months ended June 30, 2016 and June 30, 2015, was as follows (in thousands):
 
 
Three months ended June 30,
 
 
2016
 
2015
 
Net profit from discontinued operations
$
1,988
  $
-
 

The net profit from discontinued operations of $2 million in the three months ended June 30, 2016, is attributed mainly to the $2.1 million settlement fee related to litigation with SuperCom Ltd.   relating to the sale of certain assets, subsidiaries and IP directly related to our SmartID division . No profit from discontinued operations was recorded in the three months ended June 30, 2015.


10
 
Net income (loss)

Our net income (loss) in the three months ended June 30, 2016 and June 30, 2015, was as follows (in thousands):
 
 
Three months ended June 30,
 
 
2016
 
2015
 
Net income (loss)
$
 
1,349
  $
 
(2,049
)
 
The increase in net income of $3.4 million, in the three months ended June 30, 2016, compared to the three months ended June 30, 2015, is primarily due to a decrease in our operating expenses , an increase in net profit from discontinued operations and a decrease in financing expenses, net partially offset by a decrease in our gross profit as described above.
 
Six months ended June 30, 2016, compared to the six months ended June 30, 2015

Sources of Revenue
 
During the six months ended June 30, 2016 and June 30, 2015, the revenues that we derived from sales and licensing and transaction fees were as follows (in thousands):
 
 
Six months ended
June 30,
 
 
2016
 
2015
 
Sales
$
 
7,201
  $
 
7,654
 
Licensing and transaction fees
$
 
2,765
  $
 
2,737
 
 Total revenues
$
 
9,966
  $
 
10,391
 
 
Sales. Sales decreased by $453,000, or 6%, in the six months ended June 30, 2016, compared to the six months ended June 30, 2015. The decrease is mainly attributed to a decrease in Retail and Mass Transit Ticketing segment sales in the United States , partially offset by an increase in sales of MediSmart products.
 
  Licensing and transaction fees. Our licensing and transaction fees in the six months ended June 30, 2016, compared to the six months ended June 30, 2015, remained consistent.
 
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, 2016 and June 30, 2015:

Six months ended   June 30,
 
Africa
   
Europe
   
Asia
   
Americas
 
2016
 
$
1,967
   
20
%
 
$
3,100
   
31
%
 
$
550
   
5
%
 
$
4,349
   
44
%
2015
 
$
1,724
   
16
%
 
$
2,998
   
29
%
 
$
712
   
7
%
 
$
4,957
   
48
%
 
Our revenues from sales in Africa increased by $243,000, or 14%, in the six months ended June 30, 2016, compared to the six months ended June 30, 2015, mainly due to an increase in sales of our MediSmart products, partially offset due to fluctuation in the currency exchange rate for South African Rand versus the U.S. dollar .

Our revenues from sales in Europe increased by $102,000, or 3%, in the six months ended June 30, 2016, compared to the six months ended June 30, 2015, mainly due to an increase in sales of our otiMetry solution and from an increase in our Mass Transit Ticketing sales in Poland, partially offset by a decrease in Petroleum and Parking products sales.

11
Our revenues from sales in Asia decreased by $162,000, or 23%, in the six months ended June 30, 2016, compared to the six months ended June 30, 2015, mainly due to a decrease in sales of Petroleum and Parking products.

Our revenues from sales in Americas decreased by $608,000, or 12%, in the six months ended June 30, 2016, compared to the six months ended June 30, 2015, mainly due to a decrease in sales of NFC readers to the U.S. market , partially offset by an increase in sales of Petroleum products to the South American market .

Our revenues derived from outside the United States, which are primarily received in currencies other than the U.S. dollar, will have a varying impact upon our total revenues, as a result of fluctuations in such currencies’ exchange rates versus the U.S. dollar.

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, 2016 and June 30, 2015:
 
Six months ended June 30,
 
Petroleum
   
Parking
   
Retail and Mass Transit Ticketing
   
Other
 
2016
 
$
1,940
   
19
%
 
$
584
   
6
%
 
$
6,138
   
62
%
 
$
1,304
   
13
%
2015
 
$
2,095
   
20
%
 
$
750
   
7
%
 
$
6,715
   
65
%
 
$
831
   
8
%
 
Our revenues in the six months ended June 30, 2016 from Petroleum decreased by $155,000, or 7%, compared to the six months ended June 30, 2015, mainly due to a decrease in sales in Europe and Asia and unfavorable exchange rates in South Africa , partially offset by an increase in sales of Petroleum products in South America .

Our revenues in the six months ended June 30, 2016 from the Parking segment decreased by $166,000, or 22%, compared to the six months ended June 30, 2015, mainly due to a decrease in sales generated in Europe.

Our revenues from Retail and Mass Transit Ticketing in the six months ended June 30, 2016 decreased by $577,000, or 9%, compared to the six months ended June 30, 2015, mainly due to a decrease in sales of NFC readers in the United States , partially offset by an increase in sales of our otiMetry solution in Europe and an increase in our Mass Transit Ticketing sales in Poland.

Our revenues in the six months ended June 30, 2016, from our Other segment increased by $473,000, or 57%, compared to the six months ended June 30, 2015, 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 six months ended June 30, 2016 and June 30, 2015, were as follows ( dollar amounts in thousands ):
 
 
Six months ended June 30,
 
 
2016
 
2015
 
Cost of sales
$
 
4,766
   
$
5,223
 
Gross profit
$
 
5,200
   
$
5,168
 
Gross margin percentage
   
52
%
   
50
%
 
Cost of sales.   The decrease of $457,000, or 9%, in the six months ended June 30, 2016, compared to the six months ended June 30, 2015, resulted primarily from our strategic decision to cease in-house manufacturing activities and from a decrease in our revenues.
 
12
Gross margin. The increase in gross margin in the six months ended June 30, 2016, compared to the six months ended June 30, 2015, is primarily attributed to a decrease in employment expenses due to our strategic decision to outsource all of our manufacturing and product assembly to third-party vendors.

Operating expenses
 
Our operating expenses in the six months ended June 30, 2016 and June 30, 2015, were as follows (in thousands):
 
Operating expenses
 
Six months ended June 30,
 
   
2016
   
2015
 
Research and development
 
$
1,535
   
$
1,905
 
Selling and marketing
 
$
3,090
   
$
3,658
 
General and administrative
 
$
1,850
   
$
2,384
 
Patent litigation and maintenance
 
$
28
   
$
459
 
Other expenses
 
$
-
   
$
510
 
Total operating expenses
 
$
6,503
   
$
8,916
 
 
 Research and development.   The decrease of $370,000, or 19%, in the six months ended June 30, 2016, compared to the six months ended June 30, 2015, is primarily attributed to a decrease in the number of research and development employees due to our cost cutting plan.
 
Selling and marketing.    The decrease of $568,000, or 16%, in the six months ended June 30, 2016, compared to the six months ended June 30, 2015, is primarily attributed to a decrease in employment expenses of selling and marketing employees who left the Company by the end of 2015, and to a lesser extent to a decrease in exhibitions and traveling expenses. Our selling and marketing expenses may increase in the future as we continue to expand our local sales and marketing efforts, open new offices and in the event that we hire additional personnel.
 
 General and administrative.   The decrease of $534,000, or 22%, in the six months ended June 30, 2016, compared to the six months ended June 30, 2015, is primarily attributed to a decrease in employment expenses, a decrease in stock-based compensation related to options granted to employees, a decrease in professional expenses and a decrease in office expenses.

 Patent litigation and maintenance expenses .   The decrease of $431,000, or 94%, in the six months ended June 30, 2016, compared to the six months ended June 30, 2015 , is primarily attributed to a decrease in employment expenses related to the termination of employment of one of our former directors as chief executive officer of our U.S. subsidiary, who led the Company's efforts to maximize the value of our patents portfolio until August 2015.

 Other expenses. Our other expenses in the six months ended June 30, 2015, consist of partial compensation expenses provision related to the termination of employment of our former Chief Executive Officer, Mr. Ofer Tziperman, according to his employment terms, following his resignation from the Company and its subsidiaries on February 10, 2015. No other expenses were recorded in the six months ended June 30, 2016.

Financing expenses, net
 
Our financing expenses, net, in the six months ended June 30, 2016 and June 30, 2015, were as follows (in thousands):
 
 
Six months ended June 30,
 
 
2016
 
2015
 
Financing income
$
 
54
  $
 
79
 
Financing expenses
$
 
(225
)
$
 
(499
)
Financing expenses, net
$
 
(171
)
$
 
(420
)
 
13
 The decrease of financing income in the six months ended June 30, 2016, compared to the six months ended June 30, 2015, of $25,000, or 32%, is mainly due to decrease in foreign exchange gains, partially offset by an increase interest income earned on investments in short-term deposits . The decrease in financing expenses in the six months ended June 30, 2016, compared to the six months ended June 30, 2015, of $274,000, or 55%, is mainly due to decreased foreign exchange losses from exchange rate differentials of the U.S. dollar against the South African Rand.

Net loss from continuing operations

Our net loss   from continuing operations in the six months ended June 30, 2016 and June 30, 2015, was as follows (in thousands):
 
 
Six months ended June 30,
 
 
2016
 
2015
 
Net loss from continuing operations
$
 
(1,506
)
$
 
(4,171
)

The decrease of $2.7 million, or 64%, in the six months ended June 30, 2016, compared to the six months ended June 30, 2015, is primarily due to an increase in our gross profit, a decrease in our operating expenses and a decrease in financing expenses, net, as described above.
 
Net profit from discontinued operations

Our net   profit from discontinued operations in the six months ended June 30, 2016 and June 30, 2015, was as follows (in thousands):
 
 
Six months ended June 30,
 
 
2016
 
2015
 
Net profit from discontinued operations
$
 
1,927
  $
 
362
 

The increase in net profit from discontinued operations of $1.6 million in the six months ended June 30, 2016, compared to the six months ended June 30, 2015, is attributed to the $2.1 million settlement fee related to litigation with SuperCom Ltd. relating to the sale of certain assets, certain subsidiaries and IP assets directly relate to our SmartID division .
 
Net income (loss)

Our net   income loss in the six months ended June 30, 2016 and June 30, 2015, was as follows (in thousands):
 
 
Six months ended June 30,
 
 
2016
 
2015
 
Net income (loss)
$
 
421
  $
 
(3,809
)
 
The increase in net income of $4.2 million, in the six months ended June 30, 2016, compared to the six months ended June 30, 2015, is due to an increase in our gross profit, a decrease in our operating expenses, an increase in net profit from discontinued operations and to a decrease in financing expenses, net.

14
 
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 divestitures of parts of our businesses. We had cash, cash equivalents and short-term investments representing bank deposits of $11.2 million as of June 30 , 2016, and $10.9 million as of December 31, 2015 (of which amounts of $2.2 million and $2.3 million, respectively, had then been pledged as a security in respect of performance guarantees granted to third parties and guarantees to secure customer advances, loans and credit lines received from a bank). We believe that we have sufficient capital resources to fund our operations in 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 U.S. 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, 2016, the balance of bank loans that we borrowed are denominated in the following currencies: U.S. dollars ($305,000, with maturity dates ranging from 2016 through 2019), NIS ($301,000, with maturity dates ranging from 2016 through 2019), South African Rand ($632,000, with maturity dates ranging from 2016 through 2023) and Polish Zloty ($1.6 million, with maturity dates ranging from 2016 through 2019). As of June 30 , 2016 these loans bear interest at rates ranging from 3.15%-10.5% per annum. Our composition of long-term loans as of June 30, 2016, was as follows (in thousands):
 
 
 
June 30, 2016
 
Long-term loans
 
$
2,867
 
Less - current maturities
   
1,008
 
   
$
1,859
 
 
Our composition of short-term loans, bank credit and current maturities of long-term loans as of June 30, 2016 was as follows (in thousands):
 
   
June 30, 2016
 
 
 
Interest rate
       
In NIS
   
4.35
%
 
$
703
 
In U.S. dollars
   
4.23
%
   
1,766
 
In Polish Zloty
   
3.15
%
   
377
 
             
2,846
 
Current maturities of long-term loans
           
1,008
 
           
$
3,854
 
 
On November 4, 2014, the Company signed a financial and restrictive covenant with Bank Leumi in order to secure bank services and obtain bank credit and loans. Under the covenant, we are obligated to meet the following: (i) our total liquid deposits will not be less than $6.0 million at any time; (ii) beginning January 1, 2015, our annual operational profit on an Earnings Before Interest, Taxes, Depreciation and Amortization, or EBITDA, basis will not be less than $1.0 million; (iii) our annual revenues will not be less than $20.0 million; and (iv) for 2015, equity is required to be at a level of 28% of the total assets and equity sum of no less than $10.5 million; for 2016 and onwards, equity is required to be at a level of 30% of the total assets and equity sum of no less than $11.0 million. As of December 31, 2015, the Company had not been in compliance with the covenants regarding annual operational profit on an EBITDA basis and annual revenues. On December 31, 2015, the bank issued a waiver waiving its right to demand prepayment of the Company’s liabilities. The bank’s waiver was conditioned on our compliance with the covenants in our 2016 annual financial statements to be submitted to the bank by March 31, 2017. We believe it is reasonably possible that no covenant violation will occur that will require prepayment of our liabilities.

15
For the six months ended June 30, 2016, we had a negative cash flow from continuing operations of $1.3 million.  We may continue to suffer from negative cash flow from operations. We are looking for ways to increase our cash resources, such as capitalizing on our patent portfolio, sales of assets or parts of our business or raising funds. In addition, we are looking for ways to reduce our financial expenses, including repayment of debt instruments and reduction in operating expenses.

We have an effective Form S-3 registration statement, filed under the Securities Act of 1933, as amended, with the SEC using a “shelf” registration process. Under this shelf registration process, we may, from time to time, sell ordinary shares, warrants to purchase ordinary shares, and units of such securities in one or more offerings up to a total dollar amount of $50,000,000.

On May 7, 2016, we entered into an agreement pursuant to which we will sell our headquarters building in Rosh Pina, Israel, to a third party for a consideration of NIS 7 million (approximately $1.8 million) and will lease back the portion of the building necessary for our current operations. As of June 30, 2016, we received an advance in the amount of approximately $400,000 from the purchaser. The leaseback period is two years and the annual rent is approximately $130,000. We have the right to extend the lease by two additional periods on the same terms. Each optional extension period is for one year. Subject to the fulfillment of certain conditions, the sale is expected to be completed and the lease is expected to commence in the third quarter of 2016.
 
On July 20, 2016 we entered into an Asset Purchase Agreement with Atrinet Ltd. and certain subsidiaries thereof (collectively, “Atrinet”), pursuant to which we will sell and Atrinet will purchase, subject to the completion of certain closing conditions, the ongoing operations, including transfer of related employees, as well as intellectual property directly related to our parking business for a non- material amount . The transaction is expected to close in the third quarter of 2016.
 
Operating activities related to continuing operations  
 
For the six months ended June 30, 2016, net cash used in continuing operating activities was $1.3 million, primarily due to a $1.5 million net loss from continuing operations, a $1.1 million increase in trade receivables, , a $489,000 decrease in other current liabilities, and a $117,000 decrease in accrued severance pay, partially offset by a $691,000 decrease in inventory, $620,000 of depreciation, a $210,000 decrease in other receivables and prepaid expenses, a $190,000 increase in trade payables, a $105,000 expense due to stock based compensation issued to employees,  a $55,000 decrease in accrued interest and a $32,000 increase in deferred tax liability.
 
For the six months ended June 30, 2015, net cash used in continuing operating activites was $2.3 million, primarily due to a $4.2 million net loss from continuing operations, a $274,000 decrease in trade payables, a $42,000 decrease in accrued interest, and a $20,000 decrease in accrued severance pay, partially  offset by depreciation expenses of $617,000, a $482,000 decrease in trade receivables, a $374,000 decrease in other receivables and prepaid expenses, a $332,000 expense due to stock based compensation issued to employees and others, a $290,000 decrease in inventory, a $119,000 increase in other current liabilities and a $1,000 increase in deferred tax liability.
 
Operating activities related to discontinued operations
 
For the six months ended June 30, 2016, net cash used in discontinued operating   activities was $105,000, related to the SmartID division.
 
For the six months ended June 30, 2015, net cash used in discontinued operating activities was $25,000, related to the SmartID division.

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Investing and financing activities related to continuing operations
 
For the six months ended June 30, 2016, net cash used in continuing investing activities was $725,000, mainly due to a $884,000 change in short-term investments, net, $139,000 of purchases of property and equipment, a $98,000 investment in capitalized product costs, partially offset by $396,000 of advance payment from sale of property .
 
For the six months ended June 30, 2015, net cash provided by continuing investing activities was $1.4 million, mainly due to $2.2 million proceeds from the maturity and sale of short-term investments, partially offset by $463,000 of purchases of property and equipment, $67,000 investment in capitalized product costs and $281,000 investment in restricted deposit for employees benefit .

For the six months ended June 30, 2016, net cash used in continuing financing activities was $430,000, mainly due to a $538,000 repayment of long-term bank loans, partially offset by a $81,000 increase in short-term bank credit, net and $27,000 of proceeds from long-term bank loans.

For the six months ended June 30, 2015, net cash provided by continuing financing activities was $851,000, mainly due to an $809,000 increase in short-term bank credit, net and $446,000 of proceeds from long-term bank loans, partially offset by a $404,000 repayment of long-term bank loans.
 
Investing and financing activities related to discontinued operations

For the six months ended June 30, 2016, net cash provided by discontinued investing   activities was $1.9 million, is attributed to the $2.1 million paid by SuperCom Ltd. under the terms of its settlement agreement with us.

 For the six months ended June 30, 2015, net cash provided by discontinued investing activities was $387,000 due to contingent consideration received related to the Smart ID division divesture.

 We had no cash flows provided by or used in discontinued financing activities in the six months ended June 30, 2016 and June 30, 2015.
 
Off Balance Sheet Arrangements

 As of June 30 , 2016, we had no off balance sheet arrangements that have had or that we expect would be reasonably likely to have a future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
 
Item 4.   Controls and Procedures.
 
 Evaluation of Disclosure Controls and Procedures - We maintain a system of disclosure controls and procedures that are designed for the purposes of ensuring that information required to be disclosed in our SEC reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our CEO and our Chief Financial Officer, or CFO, as appropriate to allow timely decisions regarding required disclosures.
 
 As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our CEO and our CFO, of the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended.  Based on that evaluation, our CEO and CFO concluded that our disclosure controls and procedures are effective.
 
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Changes in Internal Control Over Financial Reporting - There has been no change in our internal control over financial reporting during the second  quarter of fiscal 2016 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 
PART II - OTHER INFORMATION

Item 1. Legal Proceedings.

As previously reported in our Form 10-Q and on Form 10-K filed with the SEC on November 16, 2015 and March 28, 2016, respectively, on September 30, 2015, we filed a patent infringement lawsuit in the United States District Court for the Southern District of New York against AT&T Mobility LLC (“AT&T”) alleging and seeking monetary damages for direct infringement of U.S. Patent No. 6,045,043.  On July 25, 2016, we and AT&T entered into a settlement agreement resolving the litigation. As a result of this settlement, the lawsuit was dismissed on August 8, 2016. The amount of the revenues will derive from the settlement will be recognized in the third quarter of 2016.
 
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, 2016 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 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.

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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, 2016
 
By: /s/ Yishay Curelaru
Yishay Curelaru, Chief Financial Officer
(Principal Financial and Accounting Officer)
Dated:  August 15, 2016
 
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