Quarterly Report (10-q)

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 September 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 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 preceding 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 every Interactive Data File required to be submitted 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 registrant was required to submit such files).

Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐	Accelerated filer ☐	Non-accelerated filer ☒	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 October 30, 2018.

ON TRACK INNOVATIONS LTD.

TABLE OF CONTENTS


Part I - Financial Information		1

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		14

Item 1.	Legal Proceedings	14

Item 6.	Exhibits	15

	Signatures	16

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

ON TRACK INNOVATIONS LTD. AND ITS SUBSIDIARIES

INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

As of September 30, 2018

(Unaudited)

On Track Innovations Ltd.

and its Subsidiaries

Interim Unaudited Condensed Consolidated Financial Statements as of September 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 - F-8

Notes to the Interim Unaudited Condensed Consolidated Financial Statements	F-9 - F-24

F- 1

On Track Innovations Ltd.

and its Subsidiaries

Interim Unaudited Condensed Consolidated Balance Sheets

US dollars in thousands except share and per share data

	September 30,		December 31,
	2018		2017
Assets

Current assets
Cash and cash equivalents	$	4,514	$	6,742
Short-term investments		1,391		3,331
Trade receivables (net of allowance for doubtful accounts of $619 and $568 as of September 30, 2018 and December 31, 2017, respectively)		4,026		5,827
Other receivables and prepaid expenses		2,676		1,563
Inventories		3,356		3,009
Total current assets		15,963		20,472

Long-term restricted deposit for employees benefit		468		498

Severance pay deposits		358		405

Property, plant and equipment, net		5,246		5,859

Intangible assets, net		264		336

Total Assets	$	22,299	$	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 and per share data

	September 30,			December 31,
	2018			2017
Liabilities and Equity

Current Liabilities
Short-term bank credit and current maturities of long-term bank loans	$	504		$	4,181
Trade payables		6,670			6,264
Other current liabilities		2,133			2,421
Total current liabilities		9,307			12,866

Long-Term Liabilities
Long-term loans, net of current maturities		8			814
Accrued severance pay		874			939
Deferred tax liability		452			500
Total long-term liabilities		1,334			2,253

Total Liabilities		10,641			15,119

Commitments and Contingencies

Equity
Shareholders’ Equity
Ordinary shares of NIS 0.1 par value: Authorized: 50,000,000 shares as of September 30, 2018 and December 31, 2017; issued: 42,473,076 and 42,353,077 shares as of September 30, 2018 and December 31, 2017, respectively; outstanding: 41,294,377 and 41,174,378 shares as of September 30, 2018 and December 31, 2017, respectively		1,068			1,064
Additional paid-in capital		224,968			224,758
Treasury shares at cost - 1,178,699 shares as of September 30, 2018 and December 31, 2017		(2,000	)		(2,000	)
Accumulated other comprehensive loss		(901	)		(691	)
Accumulated deficit		(211,477	)		(210,680	)
Total Equity		11,658			12,451

Total Liabilities and Equity	$	22,299		$	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 September 30,						Nine months ended September 30,
	2018			2017			2018			2017

Revenues
Sales	$	5,020		$	3,445		$	14,157		$	11,871
Licensing and transaction fees		1,453			1,225			4,332			3,765

Total revenues		6,473			4,670			18,489			15,636

Cost of revenues
Cost of sales		3,051			2,192			8,778			7,468
Total cost of revenues		3,051			2,192			8,778			7,468

Gross profit		3,422			2,478			9,711			8,168
Operating expenses
Research and development		777			823			2,422			2,414
Selling and marketing		1,592			1,332			4,700			4,166
General and administrative		1,098			758			3,070			2,553

Total operating expenses		3,467			2,913			10,192			9,133

Operating loss from continuing operations		(45	)		(435	)		(481	)		(965	)
Financial expenses, net		(2	)		(126	)		(129	)		(236	)

Loss from continuing operations before taxes on income		(47	)		(561	)		(610	)		(1,201	)
Income tax		(111	)		(12	)		(73	)		(68	)

Net loss from continuing operations		(158	)		(573	)		(683	)		(1,269	)
Net (loss) income from discontinued operations		(26	)		1,441			(114	)		1,365

Net (loss) income		(184	)		868			(797	)		96

Basic and diluted net gain (loss) attributable to shareholders per ordinary share
From continuing operations		(*	)		(0.01	)		(0.02	)		(0.03	)
From discontinued operations		(*	)		0.03			(*)			0.03

	$	(*	)	$	0.02		$	(0.02	)	$	(*	)

Weighted average number of ordinary shares used in computing basic and diluted net (loss) income per ordinary share		41,294,377			41,122,965			41,260,426			41,099,603

(*) 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 September 30,					Nine months ended September 30,
	2018			2017		2018			2017

Total comprehensive (loss) income:
Net (loss) income	$	(184	)	$	868	$	(797	)	$	96
Foreign currency translation adjustments		44			28		(210	)		360

Total comprehensive (loss) income	$	(140	)	$	896	$	(1,007	)	$	456

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			Total
	Shares 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 nine month period ended September 30, 2017:

Stock-based compensation		45,000	(**)		2		236		-			-			-			238
Exercise of options		25,002			(*)		25		-			-			-			25
Foreign currency translation adjustments		-			-		-		-			360			-			360
Net income		-			-		-		-			-			96			96
Balance as of September 30, 2017		42,313,077		$	1,063	$	224,676	$	(2,000	)	$	(876	)	$	(209,986	)	$	12,877


Balance as of December 31, 2017		42,353,077		$	1,064	$	224,758	$	(2,000	)	$	(691	)	$	(210,680	)	$	12,451

Changes during the nine month period ended September 30, 2018:
Stock-based compensation		80,000	(**)		3		177		-			-			-			180
Exercise of options		39,999			1		33		-			-			-			34
Foreign currency translation adjustments		-			-		-		-			(210	)		-			(210	)
Net loss		-			-		-		-			-			(797	)		(797	)
Balance as of September 30, 2018		42,473,076		$	1,068	$	224,968	$	(2,000	)	$	(901	)	$	(211,477	)	$	11,658

(*)

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

	Nine months ended September 30,
	2018			2017
Cash flows from continuing operating activities
Net loss from continuing operations	$	(683	)	$	(1,269	)
Adjustments required to reconcile net loss to
net cash used in continuing operating activities:
Stock-based compensation related to options and shares issued to employees and others		180			238
Depreciation and amortization		978			878
Deferred tax, net		(20	)		37
Gain on sale of property and equipment		(25	)		(9	)
Accrued interest and linkage differences, net		-			(41	)

Changes in operating assets and liabilities:
Accrued severance pay, net		(19	)		72
Decrease in trade receivables, net		1,744			187
Increase in other receivables and prepaid expenses		(1,162	)		(435	)
Increase in inventories		(381	)		(710	)
Increase (decrease) in trade payables		668			(611	)
Decrease in other current liabilities		(273	)		(777	)
Net cash provided by (used in) continuing operating activities		1,007			(2,440	)

Cash flows from continuing investing activities

Purchase of property and equipment		(467	)		(160	)
Proceeds from sale of property and equipment		52			14
Change in short-term investments, net		1,195			2,917
Investment in capitalized certification costs		(92	)		(185	)
Proceeds from restricted deposit for employees benefit		8			44
Net cash provided by continuing investing activities		696			2,630

Cash flows from continuing financing activities
Decrease in short-term bank credit, net		(3,449	)		(72	)
Repayment of long-term bank loans		(979	)		(469	)
Proceeds from exercise of options and warrants		34			25
Net cash used in continuing financing activities		(4,394	)		(516	)

Cash flows from discontinued operations
Net cash used in discontinued operating activities		(115	)		(86	)
Total net cash used in discontinued operations		(115	)		(86	)

Effect of exchange rate changes on cash and cash equivalents		(187	)		460

(Decrease) increase in cash, cash equivalents and restricted cash		(2,993	)		48

Cash, cash equivalents and restricted cash - beginning of the period		7,799			(*)7,500

Cash, cash equivalents and restricted cash - end of the period	$	4,806		$	(*)7,548

(*)

Reclassified to conform with the current period presentation, see Note 2A(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

	Nine months ended September 30,
	2018		2017
Supplementary cash flows activities:

Cash paid during the period for:
Interest paid	$	112	$	140
Income taxes paid	$	43	$	31

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

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.

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 nine-month period ended September 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.

Divestiture of operations

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- 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)

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 raised issues against the Company during the arbitration for material damages. The evidence in the arbitration were heard on March 6, 2018, and in the coming weeks the parties are expected to complete the submission of their written summaries, after which a decision 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 and the chances that the Company will be required to compensate SuperCom are low. 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 nine months ended September 30, 2018 and 2017.

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.

Event in the reporting period

In accordance with management’s intention to reduce the size of the Company’s external loans and accompanying credit costs, during the third quarter of 2018, the Company significantly reduced the volume of the Company’s loans from banks.

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.

Recently Adopted Accounting Pronouncements

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- 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)

Recently Adopted Accounting Pronouncements (cont’d)

Restricted Cash and Cash Equivalents in Statement of Cash Flows (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:

	September 30,				December 31,
	2018		2017		2017		2016

Cash and cash equivalents	$	4,514	$	6,000	$	6,742	$	5,952
Restricted cash and cash equivalents (*)		292		1,548		1,057		1,548

Total cash, cash equivalents, and restricted cash and cash equivalents presented in the statements of cash flows	$	4,806	$	7,548	$	7,799	$	7,500

(*)

The restricted cash and cash equivalents are included in short-term investments in the accompanying consolidated balance sheets.

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.

F- 11

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

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.

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- 12

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

	September 30,		December 31,
	2018		2017
Government institutions	$	399	$	263
Prepaid expenses		181		381
Supplier advances		1,519		122
Receivables under contractual obligations to be transferred to others (*)		361		446
Other receivables		216		351
	$	2,676	$	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

	September 30,		December 31,
	2018		2017
Employees and related expenses	$	1,119	$	1,073
Accrued expenses		804		1,054
Customer advances		58		178
Other current liabilities		152		116
	$	2,133	$	2,421

F- 13

On Track Innovations Ltd.

and Subsidiaries

Notes to the Interim Unaudited Condensed Consolidated Financial Statements

US dollars in thousands

Note 5 - Commitments and Contingencies

Legal claims

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 was appealed and the appeal was denied, and currently the awarded amount is approximately $1,050. To date SuperCom has failed to make the payment. However, as mentioned above, based on the agreement with SuperCom (which was granted an effect of a court judgement), SuperCom is liable for all the costs and liabilities arising out of this claim. Therefore, the financial statements do not include any provision for this claim.

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 ($1,743) 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 ($58) plus interest in damages plus another approximately €5 ($6) 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 and filed an appeal against Parx France and the Company claiming the sum of €503 ($584) plus interest and expenses. Based on the assessment of the Company’s external legal counsel, the Company’s management is of the opinion that the chances of the appeal being approved against the Company are low.

Guarantees

As of September 30, 2018, the Company has granted performance guarantees and guarantees to secure customer advances in the sum of $365. The expiration dates of the guarantees range from October 2018 to June 2019.

F- 14

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 nine months and the three months ended September 30, 2018 :

	Nine months ended September 30 , 2018
	Retail and Mass Transit Ticketing		Petroleum		Other		Total
Cashless payment products (A)	$	6,668	$	-	$	-	$	6,668

Complete cashless payment solutions (B):
Sales of products (B1)		2,820		2,881		-		5,701
Licensing fees, transaction fees and services (B2)		3,818		1,061		-		4,879
		6,638		3,942		-		10,580

Medical and access control smart cards (C):
Sales of products (C1)		-		-		906		906
Licensing fees, transaction fees and services (C2)		-		-		335		335
		-		-		1,241		1,241

Total revenues	$	13,306	$	3,942	$	1,241	$	18,489

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)

Disaggregation of revenue (cont’d)

	Three months ended September 30, 2018
	Retail and Mass Transit Ticketing		Petroleum		Other		Total
Cashless payment products (A)	$	2,031	$	-	$	-	$	2,031

Complete cashless payment solutions (B):
Sales of products (B1)		1,460		934		-		2,394
Licensing fees, transaction fees and services (B2)		1,249		383		-		1,632
		2,709		1,317		-		4,026

Medical and access control smart cards (C):
Sales of products (C1)		-		-		302		302
Licensing fees, transaction fees and services (C2)		-		-		114		114
		-		-		416		416

Total revenues	$	4,740	$	1,317	$	416	$	6,473

Performance obligations

Below is a listing of performance obligations for our main revenue streams:

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.

F- 16

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):

Complete cashless payment solutions –

The complete solution includes selling of products and complementary services, as follows:

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.

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- 17

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):

Medical and access control smart cards –

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.

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

	September 30,		December 31,
	2018		2017
Trade receivables, net of allowance for doubtful accounts	$	4,026	$	5,827
Customer advances	$	58	$	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- 18

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 September 30,						Nine months ended September 30,
	2018			2017			2018			2017
Expenses		(26	)		(11	)		(127	)		(94	)
Other income, net		-			(*) 1,452			13			(*) 1,459
Net profit (loss) from discontinued operations		(26	)		1,441			(114	)		1,365

(*) On August 23, 2017, a judgment was issued by the Israeli Central District Court regarding the Company’s lawsuit against Harel Insurance Company Ltd. (“Harel”) for damages incurred by the Company due to flooding in a subcontractor’s manufacturing site. The judgment determined that an amount of $1,600, net be awarded to cover the Company’s damages. On October 10, 2017, Harel submitted its appeal of the judgment to the Israeli Supreme Court as well as a request for stay of judgment. On October 30, 2017, the Court denied the requested stay. Based on the advice of counsel, the Company currently believes that there are sufficient grounds on which to uphold the District Court’s ruling and, as such, Harel’s appeal will be denied. The appeal hearing is scheduled for May 29, 2019.

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- 19

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 September 30, 2018, the Company held approximately $1,391 of short-term bank deposits (as of December 31, 2017, $3,331). As of September 30, 2018 and December 31, 2017, short-term deposits in the amount of $292 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

Stock option plans

During each of the nine-month periods ended September 30, 2018 and September 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 nine months ended September 30, 2018 and September 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 nine months ended September 30, 2018 and September 30, 2017 was estimated on the date of grant, using the Black-Scholes model and the following assumptions:

	Nine months ended September 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- 20

On Track Innovations Ltd.

and Subsidiaries

Notes to the Interim Unaudited Condensed Consolidated Financial Statements

US dollars in thousands

Note 9 – Equity (cont’d)

Stock option plans (cont’d)

Dividend yield of zero percent for all periods.

Expected average volatility represents a weighted average standard deviation rate for the price of the Company’s ordinary shares on Nasdaq.

Risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant.

For options granted during the nine months ended September 30, 2018 - estimated expected lives are based on historical grants data. For the nine months ended September 30, 2017 estimated expected lives are according to the simplified method.

The Company’s options activity (including options to non-employees) during the nine months ended September 30, 2018 and options outstanding and options exercisable as of December 31, 2017 and September 30, 2018, are summarized in the following table:

	Number of			Weighted
	options			average exercise
	outstanding			price per share
Outstanding – December 31, 2017		1,495,000		$	1.27

Options granted		100,000			1.33
Options expired or forfeited		(196,335	)		1.25
Options exercised		(39,999	)		0.86
Outstanding – September 30, 2018		1,358,666			1.29

Exercisable as of:
December 31, 2017		681,321		$	1.45
September 30, 2018		696,655		$	1.39

The weighted average fair value of options granted during the nine months ended September 30, 2018 and during the nine months ended September 30, 2017 is $0.65 and $0.93, respectively, per option. The aggregate intrinsic value of outstanding options as of September 30, 2018 and December 31, 2017 is approximately $105 and $448, respectively. The aggregate intrinsic value of exercisable options as of September 30, 2018 and December 31, 2017 is approximately $85 and $206, respectively.

F- 21

On Track Innovations Ltd.

and Subsidiaries

Notes to the Interim Unaudited Condensed Consolidated Financial Statements

US dollars in thousands

Note 9 – Equity (cont’d)

Stock option plans (cont’d)

The following table summarizes information about options outstanding and exercisable (including options to non-employees) as of September 30, 2018:

	Options outstanding						Options exercisable
	Number		Weighted				Number		Weighted
	Outstanding		average		Weighted		Outstanding		average		Weighted
	as of		remaining		Average		As of		remaining		Average
Range of	September 30,		contractual		Exercise		September 30,		contractual		Exercise
exercise price ($)	2018		life (years)		Price		2018		life (years)		Price
0.44- 0.90		420,000		2.23	$	0.74		343,333		2.21	$	0.74
1.07-1.68		713,666		3.65		1.23		128,322		2.99		1.23
2.32-2.36		185,000		0.59		2.35		185,000		0.59		2.35
3.03		40,000		0.98	$	3.03		40,000		0.98	$	3.03
		1,358,666		2.72				696,655		1.85

As of September 30, 2018, there was approximately $247 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 1.2 years.

During the nine months ended September 30, 2018 and September 30, 2017, the Company recorded stock-based compensation expenses in the amount of $180 and $238, respectively, in accordance with ASC 718, “Compensation-Stock Compensation.”

Warrants

During the nine months ended September 30, 2018, no warrants expired or were exercised into ordinary shares.

As of September 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.

Stock options and warrants in the amounts of 1,398,666 and 1,433,500 outstanding as of the nine months ended September 30, 2018 and 2017, respectively, have been excluded from the calculation of the diluted net loss from continuing operations per ordinary share because all such securities have an anti-dilutive effect for all periods presented.

Shares to non-employees

During the nine months ended September 30, 2018 and September 30, 2017, the Company issued 80,000 and 45,000 ordinary shares, respectively, to its consultants. The expenses that are recognized due to those grants are immaterial and are presented within ’stock-based compensation’ in the statement of changes in equity for the nine months ended September 30, 2018 and September 30, 2017.

F- 22

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 September 30, 2018
	Petroleum		Retail and Mass Transit Ticketing		Other		Consolidated

Revenues	$	1,317	$	4,740	$	416	$	6,473

Reportable segment gross profit (*)		682		2,706		237		3,625

Reconciliation of reportable segment gross profit to gross profit for the period

Depreciation								(202	)
Stock-based compensation								(1	)

Gross profit for the period							$	3,422

	Three months ended September 30, 2017
	Petroleum		Retail and Mass Transit Ticketing		Other		Consolidated

Revenues	$	917	$	3,231	$	522	$	4,670

Reportable segment gross profit (*)		493		1,859		325		2,677

Reconciliation of reportable segment gross profit to gross profit for the period

Depreciation								(199	)
Stock-based compensation								-

Gross profit for the period							$	2,478

F- 23

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)

	Nine months ended September 30, 2018
	Petroleum		Retail and Mass Transit Ticketing		Other		Consolidated

Revenues	$	3,942	$	13,306	$	1,241	$	18,489

Reportable segment gross profit (*)		2,000		7,455		885		10,340

Reconciliation of reportable segment gross profit to profit for the period

Depreciation								(626	)
Stock-based compensation								(3	)

Gross profit for the period							$	9,711

	Nine months ended September 30, 2017
	Petroleum		Retail and Mass Transit Ticketing		Other		Consolidated

Revenues	$	3,645	$	10,654	$	1,337	$	15,636

Reportable segment gross profit (*)		1,889		6,068		794		8,751

Reconciliation of reportable segment gross profit to profit for the period

Depreciation								(582	)
Stock-based compensation								(1	)

Gross profit for the period							$	8,168

(*) Gross profit as reviewed by the CODM, represents gross profit, adjusted to exclude depreciation and stock-based compensation.

F- 24

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.

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.

Three months ended September 30, 2018, compared to the three months ended September 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. In addition, we generate revenues from licensing and transaction fees, and also, less significantly, from engineering services, customer services and technical support. During the three months ended September 30, 2018 and September 30, 2017, the revenues that we derived from sales and licensing and transaction fees were as follows (in thousands):

	Three months ended September 30,
	2018		2017
Sales	$	5,020	$	3,445
Licensing and transaction fees	$	1,453	$	1,225
Total revenues	$	6,473	$	4,670

Sales. Sales increased by $1.6 million, or 46%, in the three months ended September 30, 2018, compared to the three months ended September 30, 2017. The increase is mainly attributed to an increase in Retail and Mass Transit Ticketing segment sales in Japan and Europe and to an increase in Petroleum products in the United States, partially offset by a decrease in sales of readers in the United States.

Licensing and transaction fees . Licensing and transaction fees include single and periodic payments for distribution rights for our products. 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 September 30, 2018, compared to the three months ended September 30, 2017, increased by $228,000, or 19%. This increase is mainly attributed to an increase in licensing and transaction fees related to our otiMetry solution in Europe and Japan and to our Mass Transit Ticketing operation in Europe.

We have historically derived revenues from different geographical areas. The following table sets forth our revenues (in thousands) and as a percentage of revenues in different geographical areas, in the three months ended September 30, 2018 and September 30, 2017:

Three months ended September 30,	Africa				Europe				APAC				Americas
2018	$	992	15	%	$	2,517	39	%	$	1,548	24	%	$	1,416	22	%
2017	$	999	21	%	$	1,421	30	%	$	73	2	%	$	2,177	47	%

Our revenues from sales in Africa in the three months ended September 30, 2018, compared to the three months ended September 30, 2017, remained consistent.

Our revenues from sales in Europe increased by $1.1 million, or 77%, in the three months ended September 30, 2018, compared to the three months ended September 30, 2017, mainly due to an increase of sales of readers and licensing and transaction fees.

Our revenues from sales in Asia-Pacific region, or APAC, increased by $1.5 million, or 2,020%, in the three months ended September 30, 2018, compared to the three months ended September 30, 2017, mainly due to an increase in sales of our Uno Plus and GoBox products in Japan.

Our revenues from sales in Americas decreased by $761,000, or 35%, in the three months ended September 30, 2018, compared to the three months ended September 30, 2017, mainly due to a decrease in sales of readers, partially offset by an increase in Petroleum products.

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 (in thousands) and as a percentage of revenues by segments, during the three months ended September 30, 2018 and September 30, 2017:

Three months ended September 30,	Petroleum				Retail and Mass Transit Ticketing				Other
2018	$	1,317	20	%	$	4,740	73	%	$	416	7	%
2017	$	917	20	%	$	3,231	69	%	$	522	11	%

Our revenues in the three months ended September 30, 2018, from Petroleum increased by $400,000, or 44%, compared to the three months ended September 30, 2017, mainly due to an increase in sales of products to the U.S. market.

Our revenues from Retail and Mass Transit Ticketing in the three months ended September 30, 2018, increased by $1.5 million, or 47%, compared to the three months ended September 30, 2017, mainly due to an increase in sales in Japan and an increase in sales of readers in Europe, partially offset by a decrease in sales of readers in the United States.

Our revenues in the three months ended September 30, 2018, from our Other segment decreased by $106,000, or 20%, compared to the three months ended September 30, 2017, mainly due to a decrease in sales of our 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 September 30, 2018 and September 30, 2017, were as follows (in thousands):

Cost of revenues	Three months ended September 30,
	2018			2017

Cost of sales	$	3,051		$	2,192
Gross profit	$	3,422		$	2,478
Gross margin percentage		53	%		53	%

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 increase of $859,000, or 39%, in the three months ended September 30, 2018, compared to the three months ended September 30, 2017, resulted primarily from an increase in revenues.

Gross margin. Gross margin in the three months ended September 30, 2018, compared to the three months ended September 30, 2017, remained consistent.

Operating expenses

Our operating expenses in the three months ended September 30, 2018 and September 30, 2017, were as follows (in thousands):

Operating expenses	Three months ended September 30,
	2018		2017
Research and development	$	777	$	823
Selling and marketing	$	1,592	$	1,332
General and administrative	$	1,098	$	758
Total operating expenses	$	3,467	$	2,913

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 $46,000, or 6%, in the three months ended September 30, 2018, compared to the three months ended September 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. The increase of $260,000, or 20%, in the three months ended September 30, 2018, compared to the three months ended September 30, 2017, is primarily attributed to an increase in the number of selling and marketing employees and to a lesser extent to an increase in marketing and advertising expenses.

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, general and administrative expenses. The increase of $340,000, or 45%, in the three months ended September 30, 2018, compared to the three months ended September 30, 2017, is primarily attributed to income that we derived in 2017 from our lawsuit against Harel Insurance Company Ltd., or Harel for damages incurred by us due to flooding in a subcontractor’s manufacturing site, and to an increase in general and administrative employment expenses, partially offset by a decrease in professional expenses.

Financing expenses, net

Our financing expenses, net, in the three months ended September 30, 2018 and September 30, 2017, were as follows (in thousands):

	Three months ended September 30,
	2018			2017
Financing expenses, net	$	(2	)	$	(126	)

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 decrease in financing expenses, net in the three months ended September 30, 2018, compared to the three months ended September 30, 2017, of $124,000, or 98%, is mainly attributed to exchange rate differentials and to a decrease in interest expenses due to reduction of our short-term and long-term bank loans.

Net loss from continuing operations

Our net loss from continuing operations in the three months ended September 30, 2018 and September 30, 2017, was as follows (in thousands):

	Three months ended September 30,
	2018			2017
Net loss from continuing operations	$	(158	)	$	(573	)

The decrease in net loss from continuing operations of $415,000, in the three months ended September 30, 2018, compared to the three months ended September 30, 2017 is due to an increase in our sales and an increase in our gross profit and decrease in financial expenses, net, partially offset by an increase in our operating expenses.

Net (loss) income from discontinued operations

Our net (loss) income from discontinued operations in the three months ended September 30, 2018 and September 30, 2017, was as follows (in thousands):

	Three months ended September 30,
	2018			2017
Net (loss) income from discontinued operations	$	(26	)	$	1,441

The results from these operations for the reporting periods are presented in the statements of operations as discontinued operations separately from continuing operations.

The change of $1.5 million in net (loss) income from discontinued operations in the three months ended September 30, 2018, compared to the three months ended September 30, 2017, is mainly attributed to $1.6 million net, recovered by us in 2017 pursuant to the August 23, 2017 judgment of the Israeli Central District Court in a lawsuit against Harel for damages incurred by us due to flooding in a subcontractor’s manufacturing site.

Net (loss) income

Our net (loss) income in the three months ended September 30, 2018 and September 30, 2017, was as follows (in thousands):

	Three months ended September 30,
	2018			2017
Net (loss) income	$	(184	)	$	868

The change in net (loss) income of $1.1 million in the three months ended September 30, 2018, compared to the three months ended September 30, 2017, is due to a decrease in our loss from continuing operations, offset by net income from discontinued operations in 2017, as described above.

Nine months ended September 30, 2018, compared to the nine months ended September 30, 2017

Sources of Revenue

During the nine months ended September 30, 2018 and September 30, 2017, the revenues that we derived from sales and licensing and transaction fees were as follows (in thousands):

	Nine months ended September 30,
	2018		2017
Sales	$	14,157	$	11,871
Licensing and transaction fees	$	4,332	$	3,765
Total revenues	$	18,489	$	15,636

Sales . Sales increased by $2.3 million, or 19%, in the nine months ended September 30, 2018, compared to the nine months ended September 30, 2017. The increase is mainly attributed to an increase in Retail and Mass Transit Ticketing segment sales in Japan, Europe and in the United States and to an increase in Petroleum products in the United States, partially offset by a decrease in Petroleum product sales in Africa.

Licensing and transaction fees . Our licensing and transaction fees in the nine months ended September 30, 2018, compared to the nine months ended September 30, 2017, increased by $567,000, or 15%. This increase is mainly attributed to an increase in licensing and transaction fees related to our otiMetry solution in Europe and Japan and to our Mass Transit Ticketing operation in Europe.

We have historically derived revenues from different geographical areas. The following table sets forth our revenues (in thousands) and as a percentage of revenues in different geographical areas, in the nine months ended September 30, 2018 and September 30, 2017:

Nine months ended September 30,	Africa				Europe				APAC				Americas
2018	$	2,998	16	%	$	6,313	34	%	$	2,794	15	%	$	6,384	35	%
2017	$	3,352	21	%	$	5,355	34	%	$	1,807	12	%	$	5,122	33	%

Our revenues from sales in Africa decreased by $354,000, or 11%, in the nine months ended September 30, 2018, compared to the nine months ended September 30, 2017, mainly due to a decrease in sales of Petroleum products.

Our revenues from sales in Europe increased by $958,000, or 18%, in the nine months ended September 30, 2018, compared to the nine months ended September 30, 2017, mainly due to an increase of sales of readers and licensing and transaction fees.

Our revenues from sales in APAC increased by $987,000, or 55%, in the nine months ended September 30, 2018, compared to the nine months ended September 30, 2017, mainly due to an increase in sales in the Japanese market.

Our revenues from sales in Americas increased by $1.3 million, or 25%, in the nine months ended September 30, 2018, compared to the nine months ended September 30, 2017, mainly due to an increase in sales of Petroleum products and an increase in sales of readers to the U.S. market.

The following table sets forth our revenues (in thousands) and as a percentage of revenues by segments, during the nine months ended September 30, 2018 and September 30, 2017:

Nine months ended September 30,	Petroleum				Retail and Mass Transit Ticketing				Other
2018	$	3,942	21	%	$	13,306	72	%	$	1,241	7	%
2017	$	3,645	23	%	$	10,654	68	%	$	1,337	9	%

Our revenues in the nine months ended September 30, 2018, from Petroleum increased by $297,000, or 8%, compared to the nine months ended September 30, 2017, mainly due to an increase in sales of Petroleum products in the United States, partially offset by a decrease in sales of Petroleum products in Africa.

Our revenues from Retail and Mass Transit Ticketing in the nine months ended September 30, 2018, increased by $2.7 million, or 25%, compared to the nine months ended September 30, 2017, mainly due to an increase in sales in Japan and an increase in sales of readers in the United States and Europe.

Our revenues in the nine months ended September 30, 2018, from our Other segment decreased by $96,000, or 7%, compared to the nine months ended September 30, 2017, mainly due to a decrease in sales of access control products sales in Asia, partially offset by an increase in sales of MediSmart products in Africa.

Cost of Revenues and Gross Margin

Our cost of revenues, presented by gross profit and gross margin percentage, in the nine months ended September 30, 2018 and September 30, 2017, were as follows (in thousands):

Cost of revenues	Nine months ended September 30,
	2018			2017

Cost of sales	$	8,778		$	7,468
Gross profit	$	9,711		$	8,168
Gross margin percentage		53	%		52	%

Cost of sales. The increase of $1,310,000, or 18%, in the nine months ended September 30, 2018, compared to the nine months ended September 30, 2017, resulted primarily from an increase in our revenues.

Gross margin. Our increase in gross margin, in the nine months ended September 30, 2018, compared to the nine months ended September 30, 2017, is mainly attributed to a change in our revenue mix and an increase in sales.

Operating expenses

Our operating expenses in the nine months ended September 30, 2018 and September 30, 2017, were as follows (in thousands):

Operating expenses	Nine months ended September 30,
	2018		2017
Research and development	$	2,422	$	2,414
Selling and marketing	$	4,700	$	4,166
General and administrative	$	3,070	$	2,553
Total operating expenses	$	10,192	$	9,133

Research and development. Our research and development expenses in the nine months ended September 30, 2018, compared to the nine months ended September 30, 2017, remained consistent.

Selling and marketing. The increase of $534,000, or 13%, in the nine months ended September 30, 2018, compared to the nine months ended September 30, 2017, is primarily attributed to an increase in the number of selling and marketing employees and to a lesser extent to an increase in marketing and advertising expenses.

General and administrative. The increase of $517,000, or 20%, in the nine months ended September 30, 2018, compared to the nine months ended September 30, 2017, is primarily attributed to income that we derived in 2017 from our lawsuit against Harel for damages incurred by us due to flooding in a subcontractor’s manufacturing site, and to an increase in general and administrative employment expenses, partially offset by a decrease in professional expenses.

Financing expenses, net

Our financing expenses, net, in the nine months ended September 30, 2018 and September 30, 2017, were as follows (in thousands):

	Nine months ended September 30,
	2018			2017
Financing expenses, net	$	(129	)	$	(236	)

The decrease of financing expenses, net in the nine months ended September 30, 2018, compared to the nine months ended September 30, 2017, of $107,000, or 45%, is mainly attributed to exchange rate differentials and to a decrease in interest expenses due to reduction of our short-term and long-term bank loans.

Net loss from continuing operations

Our net loss from continuing operations in the nine months ended September 30, 2018 and September 30, 2017, was as follows (in thousands):

	Nine months ended September 30,
	2018			2017
Net loss from continuing operations	$	(683	)	$	(1,269	)

The decrease in net loss from continuing operations of $586,000, or 46%, in the nine months ended September 30, 2018, compared to the nine months ended September 30, 2017, is primarily due to an increase in our sales and an increase in our gross profit and a decrease in financial expenses, net, partially offset by an increase in our operating expenses.

Net (loss) income from discontinued operations

Our net (loss) income from discontinued operations in the nine months ended September 30, 2018 and September 30, 2017, was as follows (in thousands):

	Nine months ended September 30,
	2018			2017
Net income from discontinued operations	$	(114	)	$	1,365

The change of $1.5 million in net (loss) income from discontinued operations in the nine months ended September 30, 2018, compared to the nine months ended September 30, 2017 is mainly attributed to $1.6 million net, recovered by us in 2017 pursuant to the judgment of the Israeli Central District Court in a lawsuit against Harel.

Net (loss) income

Our net (loss) income in the nine months ended September 30, 2018 and September 30, 2017, was as follows (in thousands):

Nine months ended

September 30,

2018

2017

Net (loss) income

(797

)

The change in net (loss) income of $893,000 in the nine months ended September 30, 2018, compared to the nine months ended September 30, 2017, is due to a decrease in our loss from continuing operations, offset by net income from discontinued operations in 2017, 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 divestitures of parts of our businesses. We had cash, cash equivalents and short-term investments representing bank deposits of $5.9 million as of September 30, 2018 (of which an amount of $0.3 million has been pledged to secure performance guarantees granted to third parties and guarantees to secure customer advances, 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 to secure 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 September 30, 2018, our long-term bank loans are denominated in the following currencies: Polish Zloty ($377,000, with maturity dates ranging from 2018 through 2019) and South African Rand ($14,000, with maturity dates ranging from 2018 through 2019). As of September 30, 2018, these loans bear interest at average rate of 3.62% per annum.

Our composition of long-term loans as of September 30, 2018, was as follows (in thousands):

	September 30, 2018
Long-term loans	$	391
Less - current maturities		383
	$	8

Our composition of short-term loans, bank credit and current maturities of long-term loans as of September 30, 2018, were as follows (in thousands):

	September 30, 2018
	Interest rate
In U.S. dollars		4.73	%	$	101
In NIS		4.7	%		20
					121
Current maturities of long-term loans					383
				$	504

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. As of September 30, 2018, our short-term deposits in the amount of $292,000 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 September 30, 2018, we granted guarantees to third parties including performance guarantees and guarantees to secure customer advances in the sum of $365,000. The expiration dates of the guarantees range from October 2018 to June 2019.

Operating activities related to continuing operations

For the nine months ended September 30, 2018, net cash provided by continuing operating activities was $1.0 million, primarily due to a $1.7 million decrease in trade receivables, $978,000 of depreciation expenses, a $668,000 increase in trade payables and a $180,000 expense due to stock-based compensation issued to employees, partially offset by a $1.2 million increase in other receivables and prepaid expenses, a $683,000 net loss from continuing operations, a $381,000 increase in inventory, a $273,000 decrease in other current liabilities, a $25,000 gain on sale of property and equipment, a $20,000 decrease in deferred tax liability and a $19,000 change in accrued severance pay, net.

For the nine months ended September 30, 2017, net cash used in continuing operating activities was $2.4 million, primarily due to a $1.3 million net loss from continuing operations, a $777,000 decrease in other current liabilities, a $710,000 increase in inventory, a $611,000 decrease in trade payables, a $435,000 increase in other receivables and prepaid expenses, a $41,000 decrease in accrued interest and a $9,000 gain on sale of property and equipment, partially offset by depreciation expenses of $878,000, a $238,000 expense due to stock-based compensation issued to employees, a $187,000 decrease in trade receivables, a $72,000 increase in accrued severance pay and a $37,000 deferred tax expense.

Operating activities related to discontinued operations

For the nine months ended September 30, 2018, net cash used in discontinued operating activities was $115,000, related to the SmartID division and previous parking business.

For the nine months ended September 30, 2017, net cash used in discontinued operating activities was $86,000, related to the SmartID division and previous parking business.

Investing and financing activities related to continuing operations

For the nine months ended September 30, 2018, net cash provided by continuing investing activities was $696,000, mainly due to $1.2 million in proceeds of short-term investments, $52,000 in proceeds from the sale of property and equipment and $8,000 in proceeds from restricted deposits for employee benefits partially offset by $467,000 of purchases of property and equipment and $92,000 investment in capitalized product costs.

For the nine months ended September 30, 2017, net cash provided by continuing investing activities was $2.6 million, mainly due to $2.9 million in proceeds of short-term investments, $44,000 in proceeds from restricted deposits for employee benefits and $14,000 in proceeds from the sale of property and equipment, partially offset by $185,000 investment in capitalized product costs and $160,000 purchases of property and equipment.

For the nine months ended September 30, 2018, net cash used in continuing financing activities was $4.4 million, mainly due to $3.4 million decrease in short-term bank credit and a repayment of $979,000 of long-term bank loans, partially offset by proceeds of $34,000 from the exercise of options.

For the nine months ended September 30, 2017, net cash used in continuing financing activities was $516,000, mainly due to a repayment of $469,000 of long-term bank loans and a $72,000 decrease in short-term bank credit, partially offset by proceeds of $25,000 from the exercise of options.

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 nine months ended September 30, 2018 and September 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 September 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 September 30, 2018 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.

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 and the chances that we will be required to compensate SuperCom are low. The arbitration hearing took place on March 6, 2018, and in the coming weeks the parties are expected to complete the submission of their written summaries, after which a decision will be given by the arbitrator.

In June 2013, prior to the divestiture of our SmartID division, Merwell Inc., or 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 us 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 $855,000 for outstanding commissions. The arbitration decision was appealed and the appeal was denied, and currently the awarded amount is approximately $1,050,000. To date SuperCom has failed to make the payment. However, as mentioned above, based on the agreement with SuperCom (which was granted an effect of a court judgement), SuperCom is liable for all the costs and liabilities arising out of this claim.

On October 3, 2013, a financial claim was filed against us and our 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 €1,500,000 ($1,743,000) 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 us but ordering Parx France to pay the plaintiff €50,000 ($58,000) plus interest in damages plus another approximately €5,000 ($6,000) in other fees and penalties. We offered to pay the amounts mentioned above to the plaintiff in consideration for not filing future appeals. The plaintiff rejected this offer and filed an appeal against Parx France and us claiming the sum of €503,000 ($584,000) plus interest and expenses. Based on the assessment of the Company’s external legal counsel, the Company’s management is of the opinion that the chances of the appeal being approved against the Company are low.

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 September 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 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.

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: November 14, 2018

By:	/s/ Assaf Cohen
Assaf Cohen, Chief Financial Officer
(Principal Financial and Accounting Officer)
Dated: November 14, 2018