☒ ANNUAL REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
☐ TRANSITION REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Indicate by check mark if the registrant
is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Indicate by check
mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
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.
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 during the preceding 12 months (or for such shorter period that the registrant was required to submit
such files).
Indicate by check
mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference
in Part III of this Form 10-K or any amendment to this Form 10-K. ☐
Indicate by check
mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or emerging growth company.
See definition of “accelerated filer,” “large accelerated filer,” and “emerging growth company”
in Rule 12b-2 of the Exchange Act. (Check one):
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Act).
State the aggregate market value of the
voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last
sold, or the average bid and asked prices of such common equity, as of the last business day of the registrant’s most recently
completed second fiscal quarter: $53,689,616.
The number of shares of the registrant’s Ordinary Shares
outstanding on March 4, 2019, was 41,294,377.
In this annual report,
unless otherwise specified, all dollar amounts are expressed in United States dollars. In Note 2A to our consolidated financial
statements, we explain the method of exchange rate calculations which we use.
As used in this annual
report, the terms “we”, “us”, “our”, “the Company”, and “OTI” mean
On Track Innovations Ltd. and our subsidiaries and affiliates, unless otherwise indicated.
This Annual Report
on Form 10-K includes the registered and unregistered trademarks of the Company and other persons, which are the property of their
respective owners.
The statements contained
in this Annual Report on Form 10-K, or Annual 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,” “estimate,” “likely,”
“foresee,” 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 Item 1 – “Business”
and Item 7 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as
well as elsewhere in this Annual Report and include, among other statements, statements regarding the following:
The factors discussed
herein, including those risk factors described in Item 1A-“Risk Factors”, and those 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 Annual
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.
PART I
Item 1. Business.
General Overview
We are a fintech pioneer
and a leading developer of cutting-edge secure cashless payment solutions providing global enterprises with innovative technology
for almost three 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 were classified
under “Other” in segment analysis in previous reports. However, on December 3, 2018, we together with our wholly owned
subsidiary, OTI Petrosmart (PTY) Limited, entered into an agreement with Smart Applications International Ltd., or SMART, to sell
all of the assets related to our MediSmart division (for certain products for the medical industry) to SMART for $2.75 million
in cash, or the MediSmart Transaction. The MediSmart Transaction closed on December 31, 2018 and therefore in this Annual Report
we provide information only with respect to our two current segments, Retail and Mass Transit Ticketing; and Petroleum.
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.
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. As described above, upon the closing of the MediSmart Transaction,
we sold our intellectual property related to our medical smart card business.
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 innovative contactless NFC technology.
We were incorporated under the laws of the
State of Israel on February 15, 1990, under the name of De-Bug Innovations Ltd., with unlimited duration. Our name was changed
to On Track Innovations Ltd. on July 8, 1991. We are registered with the Israeli Registrar of Companies, under registration number
52-004286-2 and our Ordinary Shares are traded in the Nasdaq Capital Market, or Nasdaq, under the symbol OTIV.
Our Markets
We provide cashless payment solutions for
three major vertical markets:
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1.
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Retail and Mass Transit Ticketing
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a.
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Self-Service
(Unattended) Retail, Internet of Payment Things (IoPT) and Wearables
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Self-Service
(Unattended) Retail
- NFC and contactless technologies are embraced globally to create cashless retail environments known
as self-service or unattended - a type of retail business where customers help themselves with respect to the products or services
they wish to purchase, using different payment methods such as NFC, contactless, chip cards and magnetic strip (magstripe) to
accept the payment. Examples of business models that permit their customers an aspect of self-service include vending, laundromats,
kiosks, gaming, banking, mass transit, electric vehicle charging points and self-service (self-checkout).
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As one of the pioneers
of cashless payment technology, we have been working closely with companies in diverse industries and markets to design industry-tailored
solutions that enable our customers to achieve their goals more efficiently.
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Internet of Payment
Things (IoPT) and Wearables
– Wearable fintech technologies have become a modern trend. Today, it is common to find wearable
technologies such as wristbands, watches or jewelry that are not only fashion garments but can also be linked to a smartphone and
can measure a person’s heartbeat and footsteps.
We believe that the
next development of wearables will also allow cashless payment. Our expertise in minimizing the foot print of NFC payment devices
allows us to offer manufacturers a way to easily turn their existing product into a pay enabled cashless device. We call this unique
capability “PayEnable” and we intend to market products that include our technology with the “PayEnabled by OTI”
mark.
Our goal is that pay-enabling
a product will be cost-effective and will require no expertise or special tooling from the merchant or the consumer. PayEnabled
devices will support contactless payment similar to pre-paid, debit and credit cards. Additionally, PayEnabled products will also
be able to support mass transit ticketing, e-coupons, loyalty programs and healthcare applications, and could also be used for
proximity marketing (in-store promotions) and product authenticating (brand anti-counterfeiting).
We manage our cashless payment solutions for the retail market
worldwide from our headquarters in Israel.
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b.
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Mass Transit Ticketing
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Mass Transit Ticketing
– The constantly growing need for mass transit ticketing systems and services, together with the migration to contactless
smart cards for mass transit payments, has led to the development of a ticket sales unattended and attended mass transit ticketing
system by our wholly-owned Polish subsidiary ASEC S.A. (which does business under the name OTI Europa), or ASEC, initially for
the market in Poland.
The system is comprised
of attended and unattended point-of-sales, or POS, including ticket vending machines and terminals, and is fully managed by a back-office
solution. ASEC provides system design, installation, management and on-going system maintenance services on a full end-to-end turn-key
service basis.
Our solutions for
the mass transit ticketing market in Europe are managed by ASEC.
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EasyFuel Plus®
is OTI’s scalable automated fuel management and payment solution aimed at ensuring that the right amount of the right type
of fuel is dispensed into the right vehicle. Wireless, cashless, cardless and paperless, EasyFuel Plus® is based on OTI’s
state of the art contactless smart card technology platform, providing customers with maximum flexibility and security.
Escalating fuel costs
demand that customers introduce more stringent controls when refueling at both onroad and home base locations. EasyFuel Plus®
addresses the needs of the Business to Business sector of the market by enabling customers to control and manage the refueling
process against a customizable set of business rules, whilst automatically capturing transaction information, including odometer
and/or engine operating hours.
The EasyFuel Plus®
solution can also be leveraged to address the needs of private motorists by automating the refueling process and serving as a platform
to engender customer loyalty.
In order to expedite
and maintain the most up-to-date integration to EasyFuel Plus®, we utilize our VIS software application, which is hosted on
our VIS Site Controller (a combined hardware and software controller). The VIS application controls all aspects of the Automatic
Vehicle Identification, or AVI, hardware and software, along with implementing support for the pump controller’s third-party
interface specification. Referred to as the “Universal Integration Approach”, this is a differentiating feature of OTI
PetroSmart’s offering.
As a service provider
to leading oil companies in respect of their respective AVI program, OTI PetroSmart has developed a back-office suite over the
years to automate a wide range of processes and to provide tools for management of installation, maintenance, and reporting of
the AVI system.
OTI PetroSmart, a
wholly owned subsidiary of OTI, has operated as OTI’s Global Value Added Reseller, or VAR, for the petroleum product line
since 2013.
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Our Products
Below are the details of our portfolio for each of the above-mentioned
vertical markets.
OTI Readers – UNO + TRIO
We supply NFC and
contactless payment reader products and solutions. Our products and solutions are approved by Underwriters Laboratories, Inc.,
or UL, and the U.S. Federal Communications Commission, or FCC, and certified by MasterCard TQM (Terminal Quality Management). Our
reliability and performance are based on more than a quarter of a century of experience with NFC and contactless solutions.
Our readers are certified
by the leading card associations, including, amongst others, EMVCo, Visa, MasterCard, Amex, Discover and Interac, and are compatible
as well for use with various NFC mobile payments solutions such as Apple Pay™, Google Pay™ (previously known as Android
Pay), Samsung Pay™, MIFARE™, FeliCa™ and others. EMVCo modular meets the requirements of different applications
and platforms and saves certification implementation and reduces the cost and time of any EMVCo project.
Below you can find a description of our
principal OTI Readers:
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OTI UNO Series
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UNO-6, UNO-8, UNO-Plus
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OTI UNO
is a single interface
and contactless reader packed in an ultra-compact form-factor.
Uno
is the ideal solution for meeting the complete range
of NFC cashless payment industry requirements. The reader, which supports the major card associations’ applications as well
as wallets such as Apple Pay™, Google Pay™, Samsung Pay™ and was designed specifically for attended and unattended
retail environments.
Uno
’s unique form-factor and features enable easy integration and installation in unattended
self-service payment stations, including Automatic Teller Machines, or ATMs, Automatic Vending Machines, or AVMs, electric vehicle
charging stations ticket vending machines, toll roads, gaming machines, kiosks, access control, mass transit gates and more.
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The OTI UNO range is currently available in 3 models:
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UNO-6
– EMV
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UNO-8
– EMV modular + FeliCa + P2P
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UNO-Plus
– EMV modular + FeliCa + P2P
+ Display
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OTI Trio
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OTI TRIO
is an NFC and contactless reader built specifically for the unattended machine market, such as vending machines, and provides quick
and easy support for cashless payments.
OTI TRIO
offers convenient three-in-one cashless payment card options: magnetic stripe (swipe), contact (chip) and contactless (tap), in
one small and stylish package. With modular design for easy installation and multiple connection options, the
OTI TRIO
is
ideal for vending, pay-at-the-pump, and unattended payment services.
The
OTI TRIO
is optimized to read data from a variety of sources, including NFC enabled phones, all types of credit cards, contactless key fobs
and smart stickers that comply with ISO/IEC 14443 type A, B and MIFARE™.
The reader’s
LCD display, LEDs and buzzer provide users with on-the-spot transaction confirmation and clear interactive feedback.
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The
OTI TRIO
is also available in partial configurations
including:
● Tap + Swipe
(Contactless + Magstripe)
● Tap only (Contactless)
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OTI Interno
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The
OTI Interno
global original equipment manufacturer, or OEM, reader module with integrated antenna is a compact and cost-effective contactless
card reader board, designed for easy integration into mass transit validators and terminals.
Designed for seamless
and simple OEM integration, the
OTI Interno
includes a full-featured development environment, preloaded on-board
payment applications (MasterCard, PayPass, Visa, PayWave, etc.) and smart or transparent mode options. Delivering price-performance,
the
OTI Interno
supports contactless payments and loyalty programs.
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Payment Gateways and Machine-to-Machine (M2M) Controllers
Controllers and gateways
are hardware devices that manage or direct the flow of data between two machines and are used to “control” a peripheral
device (
e.g.
, a vending machine). OTI has a range of controllers and gateways that provide secured and certified access
to payment service providers which enable cashless payment acceptance, connectivity and cloud-based management for machines.
OTI TeleBox
– M2M Telemetry Controller
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The
OTI TeleBox
is a machine-to-machine, or M2M, controller designed to enable communication between machines, particularly vending machines, kiosks and meters via various optional communication methods, allowing operators to easily remotely manage and be notified about a specific machine or the entire fleet.
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The
OTI TeleBox
serves three main functionalities:
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M2M connectivity using cellular modem, Ethernet or WiFi;
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Host for connected devices such as card readers, PIN pad, camera, barcode reader, etc.; and
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A communication channel to the vending machine controller using the major protocols that are in use by the unattended vending, kiosk and pulse machine industries.
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The
OTI TeleBox
supports a wide range of configurations while supporting optional hardware like backup batteries, external memory extension using SD card, mini USB connection, onboard memory and more.
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OTI GoBox
– Gateway, Payment and Multimedia Services Enabler for Machines
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OTI GoBox
is a highly modular, powerful and scalable M2M cashless payment and telemetry gateway, featuring advanced connectivity, processing power and multimedia functionality.
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OTI GoBox
is designed for
unattended retail machine operators who require a modular and powerful M2M gateway with enough processing power to stream Full-HD
media and run either Linux or Android.
GoBox
is one of the most versatile and easy-to-integrate M2M gateway units available
today.
OTI GoBox
can collect and
transmit inputs from different components of the machine such as sensors, all types of serial payment acceptance devices like readers,
security devices such as PIN pads, inventory events, security and anti-vandalism events, operation transaction events, and data
collection devices like QR-Code scanners and more.
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Payment
and Management Solutions for Vending, Kiosk and Coin-op Pulse Machines
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otiMetry
– Vending
Telemetry Solution
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otiMetry
is a modular and cost-effective telemetry solution for smart vending which also enables cashless payments. It is a complete system
designed for the unattended vending machine market.
otiMetry
incorporates telemetry, sales, operations, and marketing into an affordable all-inclusive solution that makes any vending business
a smart and interactive one, with real-time online management capabilities and alerts.
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OTI’s
otiMetry
solution is a modular telemetry
system which includes:
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Cashless Reader Hardware
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OTI UNO
or
OTI Trio
readers
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M2M Controller/Gateway
– enables connectivity and M2M communications (TeleBox/GoBox)
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TMS
(Terminal Management System) – a pre-integrated cloud service that is responsible for remote terminal management
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Telemetry
– Cloud-based software which provides all the data insights required to turn a vending operation into a smart vending business
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otiMetry
supports the entire business lifecycle management and includes:
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Cashless payment
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Online terminal and vending machine remote management
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Telemetry information such as cash, stock levels, alerts, route planning, and business optimization.
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otiMetry
offers a modular and scalable approach supporting an easy method for adding and removing modules. Another unique feature is that
the system is based on an open platform allowing integrators to add their own modules into the system.
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otiKiosk
– Unattended Self-Checkout Kiosk Payment Solution
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otiKiosk
is
a cashless payment acceptance and remote management solution for kiosks and self-service environments.
otiKiosk
provides
kiosk operators with an easy and affordable way to integrate a pre-certified EMV payment acceptance solution into their system,
which includes remote management of the kiosk’s hardware and software.
otiKiosk
combines the following
components into an integrated solution:
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Cashless Reader Hardware
–
OTI UNO
or
OTI Trio
readers
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otiKiosk
Client
– Windows-based application integrating between kiosk software, gateway, and the cashless reader to support the payment process and the payment functionality for the kiosk system integrator
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otiKiosk
TMS
(Terminal Management System) – a pre-integrated cloud service that is responsible for remote terminal management
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otiPulse
–
Cashless Payment Solution for Coin-Operated Pulse Machine
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otiPulse
is a modular and cost-effective cashless payment solution for pulse operated machines, such as:
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Laundromats
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Game & Prize Machines
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Air and Vacuum machines
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Lockers and restrooms
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Car wash
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Amusement rides
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Massage chairs
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otiPulse
is a complete system for the unattended pulse machine market.
otiPulse
adds cashless payment to coin-operated machines. It turns coin-only machines into smart connected machines capable of accepting cashless payments.
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otiPulse
system components include:
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Cashless Reader Hardware
–
OTI UNO
or
OTI Trio
readers
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Controller
– enables connectivity and communications (
TeleBox
)
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Control Cable
– compatible with pulse machine operational activities
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TMS
(Terminal Management System) – a pre-integrated cloud service that is responsible for remote terminal management
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otiPulse
connectivity supports the entire business lifecycle management and provides real-time online management capabilities and alerts including:
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Logging and reports for both cash and cashless sales
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Payment terminal online management (
e.g.
, price updates)
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Elimination of unnecessary visits and service time
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Optimization of field staff productivity
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Decreasing machine downtime (
i.e.
, power status alerts)
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Remote configuration of system parameters (price, pulse duration, etc.)
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Mass Transit Ticketing Market
Our wholly-owned subsidiary, ASEC, is a
leading provider of contactless ticket selling systems for public transport in Poland. ASEC’s system for public transportation
(metro, tramways, buses, trains) is installed in the city of Warsaw and an additional major city, as well as in one of the largest
passenger railways in Poland – the Mazovia Railway. ASEC is a leading provider of electronic ticketing card systems in Poland
and card management systems for ticketing applications. ASEC is also a provider in Poland of services enabling loading of contactless
prepaid cellular telephone cards based on Global System for Mobile Communications, or GSM, installed on ticket vending machines.
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ASEC’s Ticket Vending Machines, or
TVM, are highly specialized devices, the main functions of which are encoding and loading electronic card tickets for the public
transport and selling paper tickets. The system’s software is provided by
ASEC
and may be adjusted to the customer’s
requirements. The big advantage of our software solution is that the single TVM sells tickets for a few different public transportation
companies - the unique solution allows someone to buy, at the single TVM, tickets for buses and for trains as well.
TVM Functionalities:
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Loading of electronic contactless cards for public transport with seasonal tickets, zone tickets, etc. (local city transport, buses, metro, railway, etc.)
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Selling of paper tickets with QR code and magstripe
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Loading of pre-paid cellular phone cards
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Advertising on TVMs’ screens and machines’ casing
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Other possible functionalities include issuing city resident cards, tourist cards, and social benefit cards
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ASEC also resells
tickets through a sales network of point of sale, or POS, terminals located at kiosks and other retail outlets. The distributor
receives a commission on the sale of each ticket.
The Company delivers,
sets, installs, activates and retains ownership of the devices and of the system.
POS Functionalities:
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Loading of electronic contactless cards for public transport (season tickets, zone tickets, one-time tickets, etc.)
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Servicing city resident cards,
tourist cards, social benefit cards and other
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Petroleum Management Market
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EasyFuel Plus®
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Our petroleum payment
solutions enable large and small customers to effortlessly control and manage refueling operations – including automatic
payments for less gas station downtime, complete remote transaction and fuel usage reporting, and tracking of the odometer and/or
engine operating hours.
Easily deployed and
seamlessly integrated with existing refueling station infrastructure, our
EasyFuel Plus
® solution is a wireless, cashless,
cardless and paperless refueling tracking and payment solution, providing customers with maximum flexibility and security.
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EasyFuel Plus®
is a modular and scalable fuel
management solution, that is perfect for:
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Commercial and Homebase Sites
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Industrial and Mining Sites
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Mobile Refueling Operations
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Corporate Fleet Fuel Management
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MediSmart®
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Our
MediSmart
® solution is an information management and claims submission system for the medical sector. MediSmart cards validate the identity of a patient by using biometric technology, offering faster treatment of patients, access to medical information and reduction in medical errors, adverse events and reduction of fraudulent transactions.
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On December
3, 2018, we together with our wholly owned subsidiary, OTI Petrosmart (PTY) Limited, entered into an agreement with SMART to
sell all of the assets related to our MediSmart division (for certain products for the medical industry) to SMART for $2.75 million
in cash. This transaction closed on December 31, 2018 and as part of the sold assets we sold our
MediSmart
® solution.
Industry Background
Under certain regulations
and credit card anti-fraud legislations, the use of contactless payment technologies has become an essential requirement for both
consumers and retailers. Various market sectors have begun to massively adopt contactless payments and are constantly looking for
ways to make the adoption process as convenient as possible for both merchants and customers. Millions of contactless debit and
credit cards are issued annually by leading financial institutions to various consumers, and merchants are looking to install contactless
payment readers that can be easily integrated into their existing unattended point of sale locations.
The world’s leading
smartphone manufacturers are either including or are expected to include NFC support in their upcoming handset upgrades, which
will enhance the technology adoption lifecycle. Whether it is a standard contactless travel card, or EMV contactless card, or an
NFC mobile phone, the main motive is to provide quick and efficient payment solutions. Leading smartphone manufacturers have also
introduced and are actively pushing the use of their own contactless payment solutions such as Apple Pay™, Android Pay™
and Samsung Pay™, all of which require a contactless reader to be available at the merchant countertop.
Strategy
Our goal is to maintain our status as a
leading developer of NFC and cashless payment technologies and our reputation as a manufacturer of top-quality products carrying
the highest certification standards.
Key elements of our strategy for achieving
this goal include:
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Expanding our global market presence.
We market our products through a global network of subsidiaries in the United States, Europe, Africa and our headquarters in Israel. We are using these entities to strengthen our presence in existing markets, penetrate new markets, provide local customer service and technical support, and adapt our products to our local customers’ specific needs. We continue to expand our market presence via strategic distributors around the globe.
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Increasing our focus on generating high-margin, recurring revenues
. We currently derive most of our revenues from one-time payments for our products and technologies. We intend to generate additional recurring revenues by receiving service fees for ongoing customer services and transaction fees from our customers.
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Enhancing our technological position
. We intend to continue to invest in research and development in order to develop new technologies, extend the functionality of our products and services, and offer innovative products and services to our customers.
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Customer Service and Technical Support
We provide our customers
with training, installation support, ongoing customer service and technical support through our global network of subsidiaries,
distributors and local services providers, including employees located in our corporate headquarters in Rosh Pina, Israel, as well
as employees located in our subsidiaries in Europe, South Africa and the United States. Our customer service teams in Rosh Pina
provide central services to our global network. Our subsidiaries, distributors and local providers, in turn, provide customer service
and technical support by telephone and email.
Sales and Marketing
In addition to selling
our products through our distributors, we sell and market our products directly and through our global network of subsidiaries.
We have also engaged consultants to market and sell our products in the Asia-Pacific region. We market and sell our products in
the Americas through our U.S.-based subsidiary, OTI America. In Africa, our subsidiary in South Africa, OTI PetroSmart, and in
Europe, ASEC, our Polish subsidiary. In Israel and in regions where we do not have local subsidiaries or representatives, we market
and sell through our main headquarters in Rosh Pina, Israel. Our marketing and sales staff implement marketing campaigns to promote
our products and services to enhance our global brand recognition. Our current marketing efforts include participation in trade
shows, conferences, press releases, four multilingual brand websites, social media, client/ distributor meetings and advertising
in local and global industry publications. We also conduct technical seminars to inform sales staff, customers, distributors, business
partners and other industry contributors of our unique products and innovative technologies.
Some customers also
act as distributors for our products and have been granted exclusive distributors rights within a country or region. We generally
guarantee exclusivity only against certain minimum volume commitments or other commercial conditions determined on a per case basis.
Our customer base is
concentrated among a limited number of large customers. Our revenues may continue to depend on a limited number of major customers.
The customers we consider to be our major customers and the percentage of our revenue represented by each major customer vary from
period to period. In 2018, 2017 and 2016, our customer related to mass transit in Poland provided 15%, 16% and 17%, respectively,
of our total revenues for such periods. In addition, another customer in North America accounted for 9%, 12% and 9% of our total
revenues for 2018, 2017 and 2016, respectively. In addition, another customer in Japan accounted for 11% and 11% of our total revenues
for 2018 and 2017, respectively. If we were to lose any one of our major customers, or if any of our customers were to have difficulty
meeting their financial obligations to us for any reason, our financial condition and results of operations would be adversely
affected
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Manufacturing
We outsource all our
manufacturing and product assemblies to third-party vendors. Whenever possible, our policy is to use more than one supplier and
manufacturing subcontractor for each part of our production process in order to limit dependence on any one manufacturer or supplier.
We are ISO 9001:2015
certified. We require that our suppliers and subcontractors be ISO 9001 certified. ISO 9001 is an international standard which
specifies requirements for a quality management system and provides guidance and tools for companies to ensure that their products
and services consistently meet customer and regulatory requirements. This standard is updated from time to time pursuant to the
international authorization requirements.
Government Regulation
Most of our products
are subject to local electromagnetic compliance, or EMC/Radio regulations such as radiation, conducted emission and immunity, and
safety regulations such as fire and electrical hazards, governed by low voltage standards for our regular readers and hazardous
areas standards for our petroleum products, relevant in the countries in which they are used. In the United States, EMC/Radio testing
and certification for such products are governed by Federal Communications Commission, or FCC, Part 15 while safety testing and
certification fall under the standards set by Underwriters Laboratories, LLC, a public safety and testing certification organization,
or UL. In the rest of the world, where FCC and UL rules do not apply, we follow various international and local standards for EMC/Radio
and safety. The compliance with these standards is assured by testing and certifying our products at various accredited labs and/or
notified bodies located both in Israel and other countries (e.g., United States, Germany, South Africa, India, China, Brazil and
more). Our products are in compliance with the foregoing regulations.
Research and Development
We believe that our
future success depends on, among other things, our ability to maintain our technological leadership, enhance our existing products
and develop new products technologies and solutions. Accordingly, we intend to continue devoting substantial resources to research
and development.
Our research and development
activities focus mainly on two major areas:
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developing new innovative technologies related to the cashless payment solutions market; and
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enhancing the functionality of our components and expanding the range of our products to serve new markets.
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Our main research and
development facilities are located at our headquarters in Rosh Pina, Israel. We believe that our success is based on our experienced
team of senior engineers and technicians who have extensive experience in their respective fields. Our research and development
facilities are ISO 9001:2008 certified.
Proprietary Technologies and Intellectual
Property
Our success and ability
to compete depend in large part upon protecting our proprietary technology and IP. We rely on a combination of patent, trademark,
copyright and trade secret law, as well as know-how, confidentiality agreements and other contractual relationships with our employees,
affiliates, agents, consultants, distributors and others.
Our IP portfolio includes
issued patents with respect to our contactless technology, as well as trademarks and designs. While we have continued to seek new
patents and to support pending applications, we have, as part of our efficiency program, reduced our investment in non-core patents
and registrations. The expiration dates for our granted patents range between 2027 to 2033.
We cannot be certain
that patents will be issued with respect to any of our pending or future patent applications. In addition, we do not know whether
any issued patents will be enforceable against alleged infringers or will be upheld if their validity is challenged. We generally
enter into non-disclosure agreements with our customers, partners, employees, consultants, suppliers, subcontractors, and generally
control access to the distribution of our products, documentation and other proprietary information.
Competition
Our competition is
with technology vendors that provide cashless payments solutions products and technologies:
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In the Retail Market,
our competition includes unattended payment solution and technology providers such as ID Tech, Nayax, Ingenico, Televend and Verifone.
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In the Petroleum Market,
we compete with fueling and fleet management end-to-end solution vendors such as Orpak and Hectronic. As this domain has high entrance barriers, competition in this field is limited.
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Employees
Following is the number
of our employees during each of the past three years:
Total Number of employees as of December 31,
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2018
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2017
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2016
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126
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120
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120
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We operate in accordance
with the applicable law and the provisions of the general extension orders applying to labor and employment relations in Israel.
These provisions principally concern the length of the working day, minimum wages for employees, contributions to pension funds
or managers’ insurance, contribution to work disability insurance, convalescence, travel expenses, holidays and other conditions
of employment. We provide our employees with benefits and working conditions above the required minimum and which we believe are
competitive with benefits and working conditions provided by similar companies in our industry in Israel. Our employees are not
represented by a labor union. We have written employment agreements with substantially all of our employees. Competition for qualified
personnel in our industry is intense, and it may be difficult to attract or maintain qualified personnel to our offices. We dedicate
significant resources to employee retention and have never experienced work stoppages, and we believe that our relations with our
employees are good. Our subsidiaries located outside Israel operate in accordance with the local applicable labor laws and have
written employment agreements with substantially all their employees.
Organizational Structure
We have three wholly-owned
subsidiaries:
ASEC
(a Polish corporation d/b/a OTI Europa),
OTI America
(a Delaware corporation), and
OTI PetroSmart
(a South African corporation).
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ASEC S.A. (Spolka Akcyjna)
, our wholly-owned Polish subsidiary, is headquartered in Krakow, Poland. ASEC provides marketing, distribution, and customer support for our products in Europe. We have the right to appoint all of the members of its board of directors.
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OTI America Inc.
, our wholly-owned U.S. subsidiary, is headquartered in Austin, Texas and is incorporated in Delaware. OTI America provides marketing and customer support for our products in the Americas. We have the right to appoint all of the members of its board of directors.
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OTI PetroSmart (Pty) Ltd.
(formerly
named OTI Africa (PTY) Ltd.), our wholly-owned South African subsidiary, is headquartered and incorporated in Cape Town, with a
branch office in Johannesburg. OTI PetroSmart is OTI’s global VAR for the petroleum product line, responsible for all business
development; sales and marketing activities and all technical and support services, such as system integration, installation, commissioning
and tech support and help desk services either directly or in collaboration with in-country partners, distributors and sub-contractors.
We have the right to appoint all of the members of its board of directors.
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Documents on Display
The SEC maintains an
internet website that contains reports and other information regarding issuers that file electronically with the SEC. Our filings
with the SEC are also available to the public through the SEC’s website at www.sec.gov.
We maintain a corporate
website www.otiglobal.com. Information contained on, or that can be accessed through, our website and the other websites referenced
above do not constitute a part of this annual report on Form 10-K. We have included these website addresses in this annual report
on Form 10-K solely as inactive textual references.
Item 1A. Risk Factors.
The following risk
factors, among others, could in the future affect our actual results of operations and could cause our actual results to differ
materially from those expressed in forward-looking statements made by us in this Annual Report, press releases, SEC filings or
elsewhere. Before you decide to buy, hold, or sell our Ordinary Shares, you should carefully consider the risks described below,
in addition to the other information contained elsewhere in this Annual Report. The following risk factors are not the only risk
factors facing our Company. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may
also affect our business. Our business, financial condition and results of operations could be seriously harmed if any of the events
underlying any of these risks or uncertainties actually occurs. In that event, the market price for our Ordinary Shares could decline,
and you may lose all or part of your investment.
Risks Related to
Our Business
We have a history of losses, and
we may continue to incur full-year losses in 2019 and in subsequent years.
We have incurred losses
in each year since we commenced operations in 1990. We reported net losses attributable to shareholders of $860,000 in 2016, $598,000
in 2017 and $263,000 in 2018. We may continue to incur full-year losses in 2019 and afterwards, as we invest in the expansion of
our global sales and marketing network, reduce our product prices in return for future transaction fees based on the volume of
transactions in systems that contain our products, invest in fixed assets that may generate revenues more slowly than expected,
and enhance our research and development capabilities to develop existing and new products.
We depend on a small number of large
customers and the loss of one or more of them would lower our revenues.
Our customer base is
concentrated among a limited number of large customers. Our revenues may continue to depend on a limited number of major customers.
The customers we consider to be our major customers and the percentage of our revenue represented by each major customer vary from
period to period. In 2018, 2017 and 2016, our customer related to mass transit in Poland provided 15%, 16% and 17%, respectively,
of our total revenues for such periods. In addition, another customer in North America accounted for 9%, 12% and 9% of our total
revenues for 2018, 2017 and 2016, respectively. In addition, another customer in Japan accounted for 11% of our total revenues
for 2018 and 2017. If we were to lose any one of our major customers, or if any of our customers were to have difficulty meeting
their financial obligations to us for any reason, our financial condition and results of operations would be adversely affected.
If the markets for our products do
not grow, sales of our products may not grow and may even decline.
The success of our
products depends on the continuing adoption of cashless payment solutions within a broad spectrum of industries including unattended
retail, mass transit, and fueling. Such continuing adoption of cashless payment solutions and technologies also depends on the
enactment and implementation of regulations and industry standards regarding secure cashless payment. Should such industries fail
to adopt cashless payment technologies or solutions or experience any economic downturn, or should regulations fail to support
such solutions, the markets for our products may not grow or actually meet our current predictions.
Additionally, potential
customers in developed countries, such as the United States and others, may already have installed systems that are based on technologies
different from ours and therefore may be less willing to incur the capital expenditures required to install or upgrade to our products.
As a result, we cannot assure that there will be sufficient market opportunities for our products. New technologies for payments
different than ours might also be adopted by the markets and could override the need for our payment solutions.
We face intense competition. If we
are unable to compete successfully, our business prospects will be impaired.
We face intense competition
from developers of contact and contactless payments products that use similar and other technologies than ours. We compete on the
basis of a range of competitive factors including price, compatibility with the products of other manufacturers, and the ability
to support new industry standards and introduce new reliable technologies. Many of our competitors have greater market recognition,
larger customer bases, and substantially greater financial, technical, marketing, distribution, and other resources than we possess.
As a result, they may be able to introduce new products, respond to customer requirements and adapt to evolving industry standards
more quickly than we can.
From time to time,
we or one or more of our present or future competitors may announce new or enhanced products or technologies that have the potential
to replace or shorten the life cycles of our existing products. The announcement of new or enhanced products may cause customers
to delay or alter their purchasing decisions in anticipation of such products, and new products developed by our competitors may
render our products obsolete or achieve greater market acceptance than our products.
If we cannot compete
successfully with our existing and future competitors, we could experience lower sales, price reductions, loss of revenues, reduced
gross margins and reduced market share.
If we fail to develop new products
or adapt our existing products for use in new markets, our revenue growth may be impeded and we may incur significant losses.
Although we are devoting
significant resources to develop new products and adapting our existing products for use in new markets, such as cashless payment
solutions, mass transit ticketing solutions and petroleum solutions, if we fail to develop our new products or adapt our existing
products for existing or new markets, we may not recoup the expenses incurred in our efforts to do so, our revenue growth may be
impeded and we may incur significant losses.
Our revenue
growth may be impaired if we are unable to maintain our current, and establish new, strategic relationships.
The markets for our
products are usually highly specialized and sometimes require us to enter into strategic relationships in order to facilitate or
accelerate our penetration into existing or new markets. We consider a relationship to be strategic when we integrate our technology
into some of the product offerings of a business partner or engage a distributor that has a significant position in a specified
market. Failure of our strategic partners to perform in a satisfactory manner or to meet their undertakings in the penetration
of new markets, or the termination of any of our strategic relationships or our failure to develop additional relationships in
the future may limit our ability to expand the markets in which our products are deployed or to sell particular products.
We may desire to exit certain product
lines or businesses or to restructure our operations, but may not be successful in doing so.
Our Board has been
identifying and assessing possible alternative strategies to maximize value for our shareholders. Such process may result in a
decision to divest certain product lines and businesses or restructure our current corporate structure or current operations, including,
without limitation, through the contribution of assets to joint ventures or sale of some assets to third parties. However, our
ability to successfully exit product lines and businesses, or to close or consolidate operations, or to sell some of our assets
successfully, depends on a number of factors, many of which are outside of our control. For example, if we are seeking a buyer
for a particular business line, none may be available, or we may not be successful in negotiating satisfactory terms with prospective
buyers or a buyer may not meet its obligations under the applicable purchase agreement. If we are unable to exit a product line
or business in a properly or timely manner, or to restructure our current corporate structure or our operations in a manner we
deem to be advantageous, or to enforce that a buyer meets its contractual obligations, this could have a material adverse effect
on our business, financial condition and results of operations. Even if a divestment is successful, among others, we may face indemnity
and other liability claims by the acquirer or other parties.
We may pursue
acquisitions of other companies or new or complementary products, technologies and businesses, which could harm our operating results,
may disrupt our business and could result in unanticipated accounting charges.
We may pursue acquisitions
of other companies or new or complementary products, technologies and businesses in the future. Acquisitions create risks for our
business that could cause our results to differ materially and adversely from our expected or projected results. Such risks include
the effects of possible disruption to the continued expansion of our product lines, potential changes in our customer base and
changes to the total available market for our existing products, reduced demand for our products, the impact of any such acquisition
on our financial results, negative customer reaction to any such acquisition and our ability to successfully integrate an acquired
company’s operations with our operations. Acquisitions create additional risks for our business that could cause our results to
differ materially and adversely from our expected or projected results. Such risks include: difficulties in integrating the operations,
systems, technologies, products and personnel of the acquired companies, particularly companies with large and widespread operations
and/or complex products; the diversion of management’s attention from normal daily operations of the business and the challenges
of managing larger and more widespread operations resulting from acquisitions; possible disruption to the continued expansion of
our product lines; potential changes in our customer base and changes to the total available market for our products; reduced demand
for our existing products; the use of a substantial portion of our cash resources and incurrence of significant amounts of debt;
significant increases to our interest expense, leverage and debt service requirements as a result of incurring debt; the impact
of any such acquisition on our financial results; internal controls may become more complex and may require significantly more
resources to ensure they remain effective; negative customer reaction to any such acquisition; assuming the liabilities of the
acquired company; and dilution to our shareholders if we make these acquisitions in exchange for our shares.
The terms of
certain of our agreements may restrict our ability to take actions that we believe to be desirable.
Certain agreements
that we have entered into with our distributors provide exclusivity for different time periods, ranging from several months to
several years, or with respect to specific regions and/or products. For example, in certain markets, we sell our products through
distributors who, in certain cases, have exclusive distribution rights in that market or certain territories if specified minimum
volume commitments are met. The foregoing could have a material adverse effect on our business, operating results and financial
condition if these partners do not perform in a satisfactory manner.
Our products
may have long development and sales cycles and we may expend significant resources in relation to a specific project without realizing
any revenues.
The development and
sales cycles for our products vary from project to project. Typically, the projects in which we are involved are complex and require
that we customize our products to our customers’ needs and specifications. We then conduct evaluation, testing, implementation
and acceptance procedures and sometimes we are required to perform a long certification process for our products. Only after successful
completion of these procedures and certifications will customers place orders for our products in commercial quantities. In addition,
our sales contracts sometimes do not include minimum purchase commitments. We therefore cannot always ensure that product development
will result in commercial sales. Our average development cycle is typically between six and 18 months from initial contact with
a potential customer until we deliver commercial quantities to the customer and recognize significant revenues. As a result, we
may expend financial, management and other resources to develop customer relationships before we recognize revenues, if any.
Fluctuations
in our quarterly financial performance may create volatility in the market price of our shares and may make it difficult to predict
our future performance.
Our quarterly revenues
and operating results have varied substantially in the past and may continue to vary in the future. These fluctuations may be driven
by various factors which are beyond our control, are difficult to predict and may not meet the expectations of analysts and investors.
As a result, the market price of our Ordinary Shares may drop. In addition, our revenues and operating results in any quarter may
not be indicative of our future performance, and it may be difficult to evaluate our prospects.
Delays or discontinuance
of the supply of components or manufacturing and assembly of our products may hamper our ability to produce our products on a timely
basis and cause short-term adverse effects.
Some of the components
we use in our products are supplied by third-party suppliers and manufacturers. Some of these suppliers are single source manufacturers.
Termination of manufacturing of a certain product, provision of services or support (commonly referred to as “end of life”),
allocations due to high demand, or delays or shortages could interrupt and delay the supply of our products to our customers and
may result in cancellation of orders for our products. Similarly, we do not always have long-term supply contracts under which
our suppliers are committed to supply us with components at fixed or defined prices. Suppliers sometimes may increase component
prices significantly without advance warning or could discontinue the manufacturing or supply of components used in our products.
In addition, third party suppliers may face other challenges in fulfilling their contractual obligations with us which are beyond
our control. Although we make efforts to identify and retain second source manufacturers and vendors, we may not always be able
to develop alternative sources of supply and services. Even if we are able to identify such alternative sources, we may need to
modify our products to render them compatible with other components. This may cause delays in product shipments, increase manufacturing
costs and increase product prices.
Some of our suppliers
and vendors are located in different countries and, therefore, we may experience logistical difficulties in our supply chain, including
long lead times for receipt of products or components and shipping delays. In addition, our subcontractors may, on occasion, feel
the impact of potential economic or political instability in their regions, which could affect their ability to supply us with
components for our products in a timely manner.
If we fail
to hire, train and retain qualified research and development personnel, our ability to enhance our existing products, develop new
products and compete successfully may be materially and adversely affected.
Our success depends,
in part, on our ability to hire and train qualified research and development personnel. Individuals who have expertise in research
and development in our industry are scarce. Competition for such personnel is intense, particularly in Israel. Consequently, hiring,
training and retaining such personnel is time-consuming and expensive. In addition, it may be difficult to attract qualified personnel
to Rosh Pina, which is located in the northern part of Israel. If we fail to hire, train and retain employees with skills in research
and development, we may not be able to enhance our existing products or develop new products.
If we are unable
to protect or assert our intellectual property rights, our business and results of operations may be harmed.
Our success and ability
to compete depend considerably on using our IP and proprietary rights to protect our technology and products. We rely on a combination
of patent, trademark, design, copyright, and trade secret laws, confidentiality agreements and other contractual relationships
with our employees, customers, affiliates, distributors, suppliers and others. While substantially all of our employees are subject
to non-compete agreements, these agreements may be difficult to enforce as a result of Israeli law limiting the scope of employee
non-competition undertakings. We further note that the Israeli Supreme Court noted (in an obiter dictum) in 2012, without making
any decisive ruling, that an employee who contributes to an invention during his employment could be allowed to seek compensation
for it from their employer, even if the employee’s contract of employment specifically states otherwise and the employee
has transferred all intellectual property rights to the employer. The Israeli Supreme Court considered the possibility that a contract
that revokes the employee’s right for royalties and compensation may not necessarily foreclose the right of the employee
to claim a right for royalties. As a result, even if the Company believes that none of its employees has any rights in any of the
Company’s intellectual property, or to receive royalties, it is unclear if, and to what extent, our employees may be able
to claim compensation with respect to our future revenue. As a result, we may receive less revenue from future products if such
claims are successful, or incur additional royalty expenses, which in turn could impact our future profitability.
Our patent portfolio
includes registered patents and pending patents applications worldwide encompassing, among others, product applications, system
and product architecture and product concepts. We cannot be certain that patents will be issued with respect to any of our pending
or future patent applications or that the scope of our existing patents, or any future patents that are issued to us, will provide
us with adequate protection for our technology and products. Others may challenge our patents or patent applications as well as
our registered trademarks and other intellectual property rights. We do not know whether any of them will be upheld as valid or
will be enforceable against alleged infringers. Thus, we do not know whether they will enable us to prevent or hinder the development
of competing products or technologies. Moreover, patents provide legal protection only in the countries where they are registered,
and the extent of the protection granted by patents varies from country to country.
The measures we have
taken to protect our technology and products may not be sufficient to prevent their misappropriation by third parties or their
independent development by others of similar technologies or products. If our patents and other intellectual property rights do
not adequately protect our technology, competitors may be able to offer products similar to our products more easily. Our competitors
may also develop competing technology by designing around our patents and thereafter manufacturing and selling products that compete
directly with ours, which would harm our business, financial position and results of operations.
In order to protect
our technology and products and enforce our patents and other proprietary rights, we may need to initiate, prosecute or defend
litigation and other proceedings before courts and patent and trademark offices in multiple countries. Significant resources may
be required to support such litigation.
Security breaches
and system failures could expose us to liability, harm our business or result in the loss of customers.
We retain sensitive
data, including intellectual property, books of record and personally identifiable information, on our networks. It is critical
to our business strategy that our infrastructure and other infrastructure we use to host our solutions remain secure, do not suffer
system failures and are perceived by customers and partners to be secure and reliable. Despite our security measures, our infrastructure
and the third-party infrastructure we use to host our solutions may be vulnerable to attacks by hackers or other disruptive problems.
Any security breach or system failure may compromise information stored on our networks. Such an occurrence could negatively affect
our reputation as a trusted provider of the affected solutions.
If we fail to adhere to regulations
and security standards imposed by credit card networks, or if our products are not certified or otherwise fail to comply with such
regulations and security standards (such as payment card industry standards, etc.) or if our customers fail to take proper protective
measures and hold OTI liable for the consequences, our results of operations could be adversely affected.
Some of our products
are designed to collect, store, and route certain personal identifiable information from our clients and/or from end-users, as
well as processing such clients’ and/or end-users payments using payment information. In addition, we may store such information
on our servers.
We are required by
some of our customers to meet industry standards imposed by payment systems standards-setting organizations such as EMV, credit
card associations such as Visa, MasterCard, Discover and other credit card associations and standard-setting organizations such
as the Payment Card Industry Security Standards Council, and other local organizations. Furthermore, some of our offerings are
subject to the Payment Card Industry Data Security Standards, which are a set of multifaceted security standards that are designed
to protect credit card and personal information as mandated by payment card industry entities. Even though we attempt to protect
our company through our contracts with our customers, we have limited oversight or control over the actions and practices of our
clients and other third-party service providers.
New standards are continually
being adopted or proposed as a result of worldwide anti-fraud initiatives, encryption of cardholder or personal information, the
increasing need for system compatibility and technology developments such as wireless, optical fiber infrastructure, telecommunication,
virtual private network, or VPN, VPN infrastructure, satellite-based communication and another wireline IP communication. We cannot
ensure that we will be able to design our solutions to comply with future standards or regulations on a timely basis, if at all.
Compliance with these standards could increase the cost of developing or producing our products, while non-compliance may harm
our reputation or result in customer and client claims. New products designed to meet any new standards need to be introduced to
the market and ordinarily need to be certified by the credit card associations and our customers before being purchased. The certification
process is costly and time-consuming and increases the amount of time and resources it takes to sell our products, as well as the
product development cycle time and cost. Selling products that are non-compliant may result in fines against us or our customers,
which we may be liable to pay. After selling and/or installation of a system or a product, the customer is responsible for any
operational aspect of such system or product ensuring them from unexpected crashes.
In addition, even if
our products are designed to be compliant, compliance with certain security standards is determined on the basis of the network
environment in which our customers and service providers install our products. Therefore, such compliance depends upon additional
factors such as the proper installation of the components of the environment (including our systems, compliance of software and
system components provided by other vendors), implementation of compliant security processes and business practices and adherence
to such processes and practices.
Our business and financial
condition could be adversely affected if we do not comply with new or existing industry standards and regulations or obtain or
retain necessary regulatory approval or certifications in a timely fashion, or if compliance results in increasing the cost of
our products.
Our products may infringe on the IP rights of others.
It is not always possible
to know with certainty whether or not the manufacture and sale of our products or the licenses we are granted from third parties
infringe patents or other IP rights owned by third parties. Third parties may, from time to time, claim that our products infringe
on their patent or other IP rights. In addition, if third parties claim that our customers are violating their IP rights, our customers
may seek indemnification from us or may terminate their relationships with us.
IP rights litigation
is complex and costly, and we cannot be sure of the outcome of any litigation. Even if we prevail, the cost of litigation could
harm our results of operations. In addition, litigation is time-consuming and could divert our management’s attention and
resources away from our business. If we do not prevail in such litigation, in addition to any damages we might have to pay, we
might be required to discontinue the use of certain processes, cease the manufacture, use and sale of infringing products and solutions,
and expend significant resources to develop non-infringing technology or obtain licenses on unfavorable terms. In addition, some
licenses are non-exclusive and, therefore, our competitors may have access to the same technology licensed to us.
Changes in international
markets and difficulties with international operations could harm our business.
We derive revenues
from different geographical areas. Our ability to maintain our position in existing markets and/or to penetrate new, regional and
local markets is dependent, in part, on the stability of regional and local economies. Our regional sales may continue to fluctuate
widely and may be adversely impacted by future political or economic instability in these or other foreign countries or regions.
In addition, there
are inherent risks in these international operations which include, among others:
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changes in regulatory requirements and communications standards;
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changes in external political policies, such as embargos based on manufacturing origin;
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political and economic instability;
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required licenses, tariffs and other trade barriers;
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difficulties in enforcing IP rights across, or having to litigate disputes in, various jurisdictions;
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difficulties in staffing and managing international operations;
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potentially adverse tax consequences;
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the burden of complying with a wide variety of complex laws and treaties in various jurisdictions; and
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business interruptions resulting from geopolitical actions, including war and terrorism, or natural disasters including earthquakes, typhoons, floods, and fires.
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If we are unable to
manage the risks associated with our focus on international sales, our business may be harmed.
Currency fluctuations
could adversely affect our results of operations.
We generate a significant
portion of our revenues in U.S. Dollars, but we incur some of our expenses in other currencies. Our principal non-U.S. Dollar expenses
are for Israeli employees’ salaries, which are in New Israeli Shekels, or NIS. Our subsidiary in Poland, ASEC, incurs expenses
in Polish Zloty and our subsidiary in South Africa, OTI PetroSmart, incurs expenses in South African Rand. To the extent that we
and our subsidiaries conduct our business in different currencies, our revenues and expenses and, as a result, our assets and liabilities,
are not necessarily accounted for in the same currency. We are therefore exposed to foreign currency exchange rate fluctuations.
These fluctuations may negatively affect our results of operations. Our operations could also be adversely affected if we are unable
to limit our exposure to currency fluctuations in the future.
To mitigate the risk
of financial exposure to fluctuations in the exchange rate of the U.S. Dollar against the NIS or other currencies, we may enter
into currency hedging transactions. However, these measures may not adequately protect us from material adverse effects resulting
from currency fluctuations. In addition, if we wish to maintain the U.S. Dollar-denominated value of sales made in other currencies,
any devaluation of the other currencies relative to the U.S. Dollar would require us to increase our other currency denominated
selling prices which could negatively affect our sales.
Our international
sales and operations are subject to complex laws relating to foreign corrupt practices and bribery, among many other subjects.
A violation of, or change in, these laws could adversely affect our business, financial condition or results of operations.
Our operations in countries
outside the U.S. are subject, among others, to the Foreign Corrupt Practices Act of 1977 as amended from time to time, or FCPA,
which prohibits U.S. companies or foreign companies which their shares are traded on a U.S. stock exchange, or their agents and
employees from providing anything of value to a foreign public official as defined in the FCPA for the purposes of influencing
any act or decision of these individuals in their official capacity to help obtain or retain business, direct business to any person
or corporate entity, or obtain any unfair advantage. We have internal control policies and procedures with respect to the FCPA.
However, we cannot assure that our policies and procedures will always protect us from reckless or criminal acts that may be committed
by our employees or agents. Violations of the FCPA may result in severe criminal or civil sanctions, and we may be subject to other
liabilities, which could have a material adverse effect on our business, consolidated results of operations and consolidated financial
condition. In addition, investigations by governmental authorities as well as legal, social, economic, and political issues in
countries where we operate could have a material adverse effect on our business and consolidated results of operations. We are
also subject to the risks that our employees or agents outside of the U.S. may fail to comply with other applicable laws. The costs
of complying with these and similar laws may be significant and may require significant management time and focus. Any violation
of these or similar laws, intentional or unintentional, could have a material adverse effect on our business, financial condition
or results of operations.
We are using
third parties’ goods and services from time to time. Although we make efforts to ensure the service quality, we cannot control
the actions of such third parties, and therefore we may be subject to claims and risks.
We depend on third-party
service providers, suppliers, and licensors to supply some of the services, hardware, software and operational support necessary
to provide some of our services. If these vendors experience operating or financial difficulties or are otherwise unable to provide
the equipment or services we need fully or in a timely manner, at our specifications and at reasonable prices, our ability to provide
some services might be materially adversely affected, or the need to procure or develop alternative sources of the affected materials
or services might delay our ability to serve our customers. These events could materially and adversely affect our ability to retain
and attract customers, and have a material negative impact on our operations, business, financial results and financial condition.
We may have
to adapt our products in order to integrate them into our customers’ systems if new government regulations or industry standards
are adopted or current regulations or standards are changed.
Some of our products
and/or future products under development are or may be subject to government or international regulation in the countries in which
they are used. Some of our systems are also required to meet safety regulation standards. In addition, governmental or international
certification for the systems into which our products are integrated may be required. If there is a change in government regulations
or industry standards, we may have to make significant modifications to our products and, as a result, could incur significant
costs and may be unable to deploy our products in a timely manner.
In addition, prior
to purchasing our products, some customers may require us to receive or obtain a third-party certification, or occasionally certify
our products by ourselves, that our products can be integrated successfully into their systems or comply with applicable regulations.
In some cases, in order for our products, or for the system into which they are integrated, to be certified, we may have to make
significant product modifications. Furthermore, receipt of third-party certifications may not occur in a timely manner or at all.
Failure to receive third-party certifications could render us unable to deploy our products in a timely manner or at all, which
may adversely affect our operations, business, financial results and financial condition.
Defects in our
products could harm our reputation, result in loss of customers and revenues or subject us to product liability claims.
Our products are highly
technical and deployed as part of large and complex projects. As a result of the nature of our products, they can only be fully
tested when fully deployed. Any defects in our products could result in harm to our reputation; loss of, or delay in, revenues;
loss of customers and market share; failure to attract new customers or achieve market acceptance for our products; unexpected
expenses to remedy such defects; and/or exposure to potential product liability claims.
While we currently
maintain product liability insurance, we cannot be certain that this insurance will be sufficient to cover any successful product
liability claim. Any product liability claim could result in changes to our insurance policies, including premium increases or
the imposition of a large deductible or co-insurance requirements. Any product liability claim in excess of our insurance coverage
would have to be paid out of our cash reserves. Furthermore, the assertion of product liability claims, regardless of the merits
underlying the claim, could result in substantial costs to us, divert management’s attention away from our operations and
damage our reputation.
We have certain
operations in countries that may be adversely affected by political or economic instability.
We are a global company
with worldwide operations. In addition to being headquartered in Northern Israel, we derive a certain portion of our sales and
future growth from regions such as Latin America, Eastern Europe and Africa, which may be more susceptible to political or economic
instability.
Certain portions of
our operations are conducted outside the markets in which our products are sold, and accordingly, we often import a substantial
number of products into such markets. We may, therefore, be denied access to our customers or suppliers or denied the ability to
ship products from any of our sites as a result of a closing of the borders of the countries in which we sell our products, or
in which our operations are located, due to economic, legislative or political conditions. This could have a material negative
impact on our operations, business, financial results and financial condition.
The general
economic outlook may adversely affect our business.
Our operations and
performance depend on worldwide economic conditions and their impact on levels of business and public spending. Fluctuations or
downturns in global or regional economies may adversely affect the budgeting and purchasing behavior of our customers and our potential
customers, including shifting customers, purchasing patterns to lower-cost options, which could adversely affect our product sales.
In addition, uncertainties
in financial and credit markets may adversely affect the ability of our customers, suppliers, distributors and resellers to obtain
financing for significant purchases and operations and to fulfill their contractual obligations with us. As a result, we could
encounter, among other adverse effects, a decrease in or cancellation of orders for our products, and an increase in additional
reserves for uncollectible accounts receivable being required.
We derive a
portion of our revenues from sales to resellers that are not the end-users of our products. We are dependent, to a certain extent,
on the ability of these resellers to maintain their existing business and secure new business.
Some of our revenues
are derived from sales to customers and distributors that incorporate our products into systems which they supply and install for
use by their end-use customers. While we view such resellers as our final customers, our revenues may decline if the efforts of
these resellers fail in their efforts to sell their products or to resell our products. Further, the faulty or negligent implementation
and installation of our products by our customers or their end-use customers may harm our reputation and dilute our brand name.
We are one step removed from the end-users of our products, and therefore it may be more difficult for us to rectify damage to
our reputation caused by resellers that have direct contact with end-users. In addition, termination of agreements with resellers
or revocation of exclusive distribution rights within certain countries might be difficult. If we are unable to maintain our current
relationships with resellers or develop relationships with new resellers, we may not be able to sell our products, and our results
of operations could be impaired.
While we also sell
directly to end-users, our future success will depend upon the timing and size of future purchases by resellers and the success
of their products and services for which they use our products.
We are exposed
to credit risk with some of our customers and to credit exposures and currency controls, which could result in material losses.
A significant portion
of our net revenues is on an open credit basis that we provide to our customers. While we assess collectability for revenue recognition
purposes on a regular basis, credit risks may be higher and collections may be more difficult to enforce, and future losses due
to inability to collect some or a major part of future revenues, if incurred, could harm our business and have a material adverse
effect on our operating results and financial condition. Additionally, to the extent that any uncertainty in the global economy
makes it more difficult for some customers to obtain financing, our customers’ ability to pay could be adversely impacted,
which in turn could have a material adverse impact on our business, cash flows, operating results, and financial condition.
We may face
SEC enforcement risks with respect to conflict minerals obligations.
The SEC has adopted
disclosure requirements under section 102 of the Dodd-Frank Wall Street Reform and Consumer Protection Act regarding the source
of certain minerals for which such conflict minerals are necessary to the functionality or production of a product manufactured,
or contracted to be manufactured which are mined from the Democratic Republic of Congo, and adjoining countries, including Sudan,
Uganda, Burundi, United Republic of Tanzania, Zambia, Angola, and the Central African Republic. Under these rules we file a conflict
minerals report as an exhibit to a Form SD report with the SEC. The conflict minerals report is required to set out the due diligence
efforts and procedures exercised on the source and chain of custody of such conflict minerals, in accordance with internationally
recognized due diligence framework, and a description of the Company’s products containing such conflict minerals. Although
we expect that we will be able to continue to comply with the requirements of the applicable rules, we have incurred, and expect
to continue to incur costs to conduct a country of origin inquiries and to exercise such due diligence. In addition, in preparing
to do so, the Company is dependent upon the implementation of new systems and processes and information supplied by certain suppliers
of products that contain, or potentially contain conflict minerals. To the extent that the information that it receives from its
suppliers is inaccurate or inadequate or its processes in obtaining that information do not fulfill the SEC’s requirements,
the Company could face SEC enforcement risks.
Risks Related to
Our Ordinary Shares
Our share price
has fluctuated in the past and may continue to fluctuate in the future.
The market price of
our Ordinary Shares has fluctuated significantly and may continue to do so. The market price of our Ordinary Shares may be significantly
affected by factors such as the announcements of new products or product enhancements by us or our competitors, technological innovations
by us or our competitors or periodic variations in our results of operations. In addition, any statements or changes in estimates
by analysts covering our shares or relating to the industries in which we operate could result in an immediate effect that may
be adverse to the market price of our shares.
Trading in shares of
companies listed on Nasdaq in general, and trading in shares of technology companies in particular, has been subject to extreme
price and volume fluctuations that have been unrelated or disproportionate to operating performance. These factors may depress
the market price of our Ordinary Shares, regardless of our actual operating performance.
Securities litigation
has also often been brought against companies following periods of volatility in the market price of its securities. In the future,
we may be the target of similar litigation that could result in substantial costs and diversion of our management’s attention
and resources.
We may not be able to meet Nasdaq
continued listing standards, which require a minimum closing bid price of $1.00 per share, which could result in our delisting
and negatively impact the price of our Ordinary Shares and our ability to access the capital markets.
Our Ordinary Shares
are listed on the Nasdaq Capital Market.
N
asdaq
provides
various continued listing requirements that a company must meet in order for its stock to continue trading on the N
asdaq
Capital Market. Among these requirements is the requirement that the Company’s stock
trades at a minimum bid price of $1.00 per share.
On October 24, 2018
,
we received a written notice from Nasdaq indicating
that we were not in compliance with Nasdaq listing requirements, as our closing bid price for our Ordinary Shares was below $1.00
per share for the previous 30 consecutive trading days. Pursuant to Nasdaq Listing Rule 5810(c)(3)(A), the Company has been granted
a 180-calendar day compliance period, or until April 22, 2019, to regain compliance with the minimum bid price requirement. During
the compliance period, our Ordinary Shares will continue to be listed and traded on the Nasdaq Stock Market. To regain compliance,
the closing bid price of our Ordinary Shares must meet or exceed $1.00 per share for at least 10 consecutive business days during
the 180-calendar day compliance period. If we are not in compliance by April 22, 2019, we may be afforded a second 180-calendar
day compliance period. To qualify for this additional time, we will be required to meet the continued listing requirement for market
value of publicly held shares and all other initial listing standards for Nasdaq with the exception of the minimum bid price requirement.
If we do not regain compliance within the allotted compliance period(s), including any extensions that may be granted by Nasdaq,
Nasdaq will provide notice that our Ordinary Shares will be subject to delisting. Any such delisting could adversely affect our
ability to obtain financing for the continuation of our operations and could result in the loss of confidence by investors, customers
and employees.
We may need
additional funds in the future and our share price could be adversely affected by future sales of our Ordinary Shares.
As of December 31,
2018, we had 41,294,377 outstanding Ordinary Shares, 1,178,699 Ordinary Shares that were repurchased by us and are held as dormant
shares, 40,000 warrants to purchase additional Ordinary Shares at a weighted average exercise price of $0.95 per share and 1,461,000
options to purchase additional Ordinary Shares at a weighted average exercise price of $1.24 per share. On October 20, 2017, we
filed a shelf registration statement on Form S-3 with the SEC, or Shelf Registration, which was declared effective on November
15, 2017, under which we may, from time to time, sell up to an aggregate of $50 million of our securities, subject to limitations,
based on the value of our shares held by non-affiliates. We have implemented certain cost reduction initiatives and have reached
certain arrangements and agreements that we expect will provide additional cash resources and are constantly looking for ways to
increase our cash resources to fund our operating expenses and capital requirements. However, there is no assurance we will not
need additional funds in the future to meet our operating expenses and capital requirements, and we may use the Shelf Registration
in the future to raise funds by additional public offerings or issue additional Ordinary Shares. The market price of our Ordinary
Shares could drop as a result of sales of substantial amounts of our Ordinary Shares in the public market or the perception that
such sales may occur, including sales or perceived sales by our directors, officers or principal shareholders. These factors could
also make it more difficult to raise additional funds through future offerings of our Ordinary Shares or other securities. Also,
if we are unable to obtain additional funds on terms favorable to us, or at all, we may be required to cease or reduce our operating
activities.
Our shareholders
could experience dilution of their ownership interest by reason of our issuing more shares.
Under Israeli law,
shareholders in public companies do not have preemptive rights. This means that our shareholders do not have the legal right to
purchase shares in a new issue before they are offered to third parties. In addition, our Board may approve in the future the use
of the Shelf Registration and the issuance of shares in many instances without shareholder approval. As a result, our shareholders
could experience dilution of their ownership interest by reason of our raising additional funds through the issuance of Ordinary
Shares. In addition, we may choose to acquire companies or businesses in exchange for our shares, resulting in further dilution.
The number of
our authorized and unissued share capital may not be sufficient to allow us to raise additional capital or to otherwise issue equity
securities that our Board may deem are in our best interest.
As of December 31,
2018, we have only 5,408,424 authorized but unissued and unreserved Ordinary Shares. The current number of these unissued and unreserved
shares may not be sufficient to allow us to conduct future offerings of our equity securities to raise capital, to grant options
or to conduct other strategic transactions with our Ordinary Shares. Under Israeli corporate law, any increase in our authorized
share capital requires the approval of our shareholders. Obtaining shareholder approval may delay or otherwise interfere with conducting
transactions of the type mentioned above. Furthermore, there is no assurance that our shareholders will approve a proposal to increase
our share capital.
We do not anticipate
paying cash dividends in the foreseeable future.
We have never declared
or paid cash dividends on our Ordinary Shares, and we do not anticipate paying cash dividends in the foreseeable future. Any return
to investors is expected to come, if at all, only from potential increases in the price of our Ordinary Shares. The payment of
any dividends by the Company is solely at the discretion of our Board and based on the conditions set forth in the Israeli Companies
Law, or the Companies Law.
We may fail
to maintain effective internal control in accordance with Section 404 of the Sarbanes-Oxley Act of 2002.
The Sarbanes-Oxley
Act of 2002 imposes certain duties on us and our executives and directors. Our efforts to comply with the requirements of the Sarbanes-Oxley
Act, and in particular with Section 404, have resulted in increased general and administrative expenses and a diversion of management
time and attention, and we expect these efforts to require the continued commitment of resources. If we fail to maintain the adequacy
of our internal controls, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal
control over financial reporting. Although our management has determined that we had effective internal control over financial
reporting as of December 31, 2018, we may identify material weaknesses or significant deficiencies in our future internal control
over financial reporting. In addition, as a smaller reporting company, our internal control over financial reporting is not required
to be audited by our independent registered public accounting firm. Failure to maintain effective internal control over financial
reporting could result in investigation or sanctions by regulatory authorities and could have a material adverse effect on our
operating results, investor confidence in our reported financial information, and the market price of our Ordinary Shares.
Risks Related to
Conducting Business in Israel
Security, political
and economic instability in the Middle East may harm our business.
We are incorporated
under the laws of the State of Israel, and our principal offices and research and development facilities are located in Northern
Israel. Accordingly, security, political and economic conditions in the Middle East in general, and in Israel in particular, may
directly affect our business.
Over the past several
decades, a number of armed conflicts have taken place between Israel and its Arab neighbors and a state of hostility, varying in
degree and intensity, has led to security and economic problems for Israel. From time to time since late 2000, there has also been
a high level of violence between Israel and the Palestinians. Any armed conflicts or political instability in the region, including
acts of terrorism or any other hostilities involving or threatening Israel, would likely negatively affect business conditions
and could make it more difficult for us to conduct our operations in Israel, which could increase our costs and adversely affect
our financial results.
Furthermore, some countries,
as well as certain companies and organizations, participate in a boycott of Israeli firms and others doing business with Israel
or with Israeli companies. Restrictive laws, policies or practices directed towards Israel or Israeli businesses could have an
adverse impact on the expansion of our business. In addition, we could be adversely affected by the interruption or curtailment
of trade between Israel and its trading partners, a significant increase in the rate of inflation, or a significant downturn in
the economic or financial condition of Israel.
Our operations
could be disrupted as a result of the obligation of key personnel to perform Israeli military service.
Our employees are required
to perform annual military reserve duty in Israel and may be called to active duty at any time under emergency circumstances. Our
operations could be disrupted by the absence for a significant period of one or more of our executive officers or other key employees
due to military service. Any disruption to our operations would harm our business.
The Israeli
government programs in which we currently participate, and the Israeli tax benefits we are currently entitled to, require us to
meet several conditions, and they may be terminated or reduced in the future. This could increase our costs and/or our taxes.
We are entitled to
certain tax benefits under Israeli government programs, largely as a result of the “Approved Enterprise” status granted
to some of our capital investment programs by the Israeli Ministry of Finance, and due to eligibility of tax benefits under the
“Preferred Enterprise” routes. These benefits include tax exemption or reduced tax rates. Without such benefits, our
taxable income would be taxed at the regular corporate tax rate (23% in 2018). To maintain our eligibility for these tax benefits,
we must continue to meet conditions, including making specified investments in property, plant, and equipment and maintaining a
certain minimum level of export sales. We cannot assure that we will continue to be eligible for these tax benefits at the same
rate or at all. The termination or reduction of these programs and tax benefits could increase our taxes, once we become profitable,
and could have a material adverse effect on our business.
Because we received
grants from the Israeli Innovation Authority, we are subject to ongoing restrictions relating to our business.
In the past, we have
received royalty-bearing grants from the Israeli Innovation Authority (formerly the Office of the Chief Scientist of the Israeli
Ministry of Economy), or the IIA, for research and development of certain of our products. We are obligated to pay royalties with
respect to the grants that we received. In addition, the terms of the IIA grants limit our ability to manufacture products or transfer
technologies outside of Israel if such products or technologies were developed using know-how developed with or based upon IIA
grants. Pursuant to the Israeli Encouragement of Research and Development in the Industry Law, we and any non-Israeli who becomes
a holder of 5% or more of our share capital are generally required to notify the IIA and such non-Israeli shareholder is required
to undertake to observe the law governing the grant programs of the IIA, the principal restrictions of which are the transferability
limits described above.
The terms of
grants we received from the Israeli government for certain of our research and development activities may require us, in addition
to the payment of royalties, to satisfy specified conditions in order to manufacture products or transfer technologies outside
of Israel. We may also be required to pay penalties in addition to repayment of the grants.
Our research and development
efforts, during the period between 1999 and 2006, were financed in part through royalty-bearing grants that we received from the
IIA. As of December 31, 2018, we received a total of approximately $7 million from the IIA. The total amount of grants received
as of December 31, 2018, net of royalties paid, was approximately $3.8 million (including accrued interest). With respect to such
grants, we are committed to pay the IIA royalties at a rate of 3%-3.5% from our sales, up to the total amount of grants received,
linked to the dollar and bearing interest at an annual rate of LIBOR applicable to dollar deposits. Even following full repayment
of the IIA grants, we are required to comply with the requirements of the Israeli Encouragement of Industrial Research and Development
Law, 5744-1984, and related regulations, or the Research Law. When a company develops know-how, technology or products using IIA
grants, the terms of these grants and the Research Law restrict the transfer of such know-how, and the transfer of manufacturing
or manufacturing rights of such products, technologies or know-how outside of Israel, without the prior approval of the IIA. Therefore,
if aspects of our technologies are deemed to have been developed with IIA funding, the discretionary approval of an IIA committee
would be required for any transfer to third parties outside of Israel of IIA-supported know-how or manufacturing or manufacturing
rights related to those aspects of such technologies, and may result in payment of increased royalties (both increased royalty
rates and increased royalties ceilings) and/or payment of additional amounts to the IIA. We may not receive such approvals. Furthermore,
the IIA may impose certain conditions on any arrangement under which it permits us to transfer technology or development out of
Israel (including for the purpose of manufacturing). Licensing IIA-supported technologies may, under certain circumstances, be
considered a transfer of know-how and therefore may require approval as aforementioned.
The transfer of IIA-supported
technology, manufacturing or manufacturing rights or know-how outside of Israel may involve the payment of additional amounts depending
upon the value of the transferred technology or know-how, the amount of IIA support, the time of completion of the IIA-supported
research project and other factors up to a maximum of six times the amount of the grants received. These restrictions and requirements
for payment may impair our ability to sell our technology assets outside of Israel or to outsource or transfer development or manufacturing
activities with respect to any product or technology outside of Israel.
Furthermore, the consideration
available to our shareholders in a transaction involving the transfer outside of Israel of technology or know-how developed with
IIA funding (such as a merger or similar transaction) may be reduced by any amounts that we are required to pay to the IIA.
Our obligations and
limitations pursuant to the Research Law are not limited in time and may not be terminated by us at will.
It may be difficult
to enforce a U.S. judgment against us, our officers and directors or to assert U.S. securities law claims in Israel.
We are incorporated
in Israel. Some of our executive officers are not residents of the United States, and a substantial portion of our assets is located
outside of the United States. Therefore, it may be difficult for an investor, or any other person or entity, to enforce a U.S.
court judgment based upon the civil liability provisions of the U.S. federal securities laws in an Israeli court against us or
any of these persons or to affect service of process upon these persons in the United States. Additionally, it may be difficult
for an investor, or any other person or entity, to enforce civil liabilities under U.S. federal securities laws in original actions
instituted in Israel.
Provisions of
Israeli law may delay, prevent or make undesirable an acquisition of all or a significant portion of our shares or assets.
The Companies Law regulates
acquisitions of shares through tender offers, requires special approvals for transactions involving shareholders holding 25% or
more of a company’s capital, and regulates other matters that may be relevant to these types of transactions. These provisions
of Israeli law could have the effect of delaying or preventing a change in control and may make it more difficult for a third party
to acquire us, even if doing so would be beneficial to our shareholders. These provisions may limit the price that investors may
be willing to pay in the future for our Ordinary Shares. Furthermore, Israeli tax considerations may make potential transactions
undesirable to us or to some of our shareholders.
Item 1B. Unresolved Staff Comments.
Not Applicable.
Item 2. Properties.
We lease an aggregate
of 1,620 square meters of office space in Rosh Pina, Israel pursuant to a lease that expired on July 31, 2018, and was extended
until July 31, 2019.
In January 2019, we
signed two new lease agreements for two new locations, one in Yokne’am (for approximately 550 square meter) and one in Rosh Pina
(for approximately 260 square meters).
The term of the Yokne’am
lease, to which our headquarter will relocate, shall commence on June 1, 2019 and will end on May 31, 2024 with an option of a
5-year extension which shall begin on June 1, 2024 and end on May 31, 2029.
The term of the Rosh
Pina lease, to which our research and development functions will relocate, will commence on May 1, 2019 and will end on April 30,
2023 with three one-year options of extension.
The relocation is in
line with our decision to relocate to a more central location in Israel because our current northern location and its distance
from the center make it challenging for us to do business and in particular to hire qualified personnel. The relocation is expected
to take place by the end of June 2019.
OTI
America leases an aggregate of 1,405 square feet of office space in Austin, Texas pursuant to a lease that expires on May 31,
2020.
OTI PetroSmart owns
an aggregate of approximately 800 square meters of office space and 386 square meters of store and parking area in Cape Town, South
Africa and leases 214 square meters of office space in Johannesburg, South Africa, pursuant to a lease agreement that extends until
April 30, 2021.
ASEC leases 532 square
meters of office space and 27 square meters of warehouse space in Krakow, Poland, pursuant to a lease terminable on six months’
prior notice that expires on March 31, 2023 and 28 square meters of office space in Lublin, Poland for an indefinite period, terminable
on three months’ prior notice. ASEC also leases office and warehouse space in three separate locations in Warsaw, Poland: (i) 143
square meters of office space pursuant to a lease that expires on April 29, 2019; (ii) 60 square meters of office space pursuant
to a lease that expires on April 30, 2019; and (iii) 86 square meters as office space pursuant to a lease that expire on May 2,
2019 and 87 square meters of warehouse space pursuant to leases that expire on April 15, 2019 as to the warehouse space.
We believe that the current space we have
is adequate to meet our current and near future needs.
Item 3. Legal Proceedings.
From time to time,
we become involved in various routine legal proceedings incidental to the ordinary course of our business. Other than the payment
of NIS 5,080 (approximately $1,370) made to Merwell, Inc. on January 8, 2019, as specified below, we do not believe that the outcomes
of these legal proceedings have had in the recent past or will have (with respect to any pending proceedings), significant effects
on our financial position or profitability.
On September 2, 2012,
we filed an insurance lawsuit in the Israeli Central District Court against Harel Insurance Company Ltd., or Harel, for damages
incurred by us due to flooding in our subcontractor’s (Smartrac) manufacturing site in Thailand in 2011, in the amount of
approximately $11 million. This caused disruptions to our supply chain and specifically affected our ability to deliver products
to our customers. On August 23, 2017, the District Court in Israel issued judgment in our favor in the amount of approximately
$2.3 million (including $0.7 million specifically set for legal fees, etc.) for insurance coverage for damages incurred in connection
with flooding in Thailand. 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. Following the denial of Harel’s request, a payment
of approximately $1.6 million was received. 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
was scheduled for May 29, 2019.
On October 3, 2013,
a financial claim was filed against us and our then-subsidiary, Parx France (referred to in this paragraph, collectively, as the
Defendants), in the Commercial Court of Paris, France. The sum of the claim was €1.5 million and was 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. We filed an initial memorandum
of defense rejecting all the plaintiff’s allegations and claims. On October 25, 2017, the Paris Commercial Court issued its
ruling in this matter dismissing all claims against us but ordered Parx France to pay the plaintiff €50,000 (plus interest)
in damages plus another approximately €5,000 in other fees and penalties. In order to end the legal uncertainty, 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. Our answer to the appeal is due by November 7, 2019, and the appeal hearing is scheduled for December
5, 2019.
In June 2013, prior
to our 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 Ltd., or SuperCom, in its purchase of the division. SuperCom undertook to indemnify us and hold us harmless against
any liabilities we may incur in connection with Merwell’s consulting agreement and the arbitration. An arbitration decision
was issued on February 21, 2016, awarding Merwell $854,912 for outstanding commissions. The arbitration decision had been appealed
by SuperCom but the appeal was denied. In order to collect the award, Merwell filed a motion against the Company and on January
7, 2019 the Nazareth District Court issued a judgment requiring the Company to pay Merwell an amount of NIS 5,080 (approximately
$1,370). As mentioned above, based on the agreement with SuperCom (which was granted an effect of a court judgment), we deem SuperCom
to be liable for all the costs and liabilities arising out of this claim.
Subsequent to the balance
sheet date, and since SuperCom failed to pay us the amounts due, we initiated an arbitration process to collect from SuperCom,
the amount paid to Merwell. As of December 31, 2018, we recorded a provision for the full amount paid.
In December 2013, we
completed the sale of certain assets, subsidiaries and intellectual property, or IP, relating to its 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, or the SmartID
Division Divesture. On April 20, 2016, the purchaser of the Smart ID division, 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 has also raised claims against
us during the arbitration procedure. An arbitration decision was issued on December 24, 2018 in our favor and denied SuperCom's
claims. The Arbitrator ordered SuperCom to disclose the financial information regarding the earn-out payments that we are entitled
to receive, and to pay us accordingly, or otherwise pay us the maximum earn-out amount, which equals to $1,500,000, minus the earn-out
amounts that were already paid by SuperCom to us. On February 7, 2019, SuperCom filed an application to the District Court in Tel
Aviv to cancel the said arbitration decision and we submitted a response to the application on March 20, 2019.
Item 4. Mine Safety Disclosures.
Not Applicable.
PART III
Item 10. Directors, Executive Officers
and Corporate Governance.
Our Directors and executive officers, as
of the date hereof, together with their ages and business backgrounds are as follows:
Name
|
|
Age
|
|
|
Position(s) Held
|
James Scott Medford (1)
|
|
|
67
|
|
|
Chairman of the Board of Directors
|
Michael Soluri (1)(2)(3)
|
|
|
47
|
|
|
Director
|
William C. Anderson III (1)(2)(3)
|
|
|
48
|
|
|
Director
|
Donna Seidenberg Marks (1)(2)(3)
|
|
|
63
|
|
|
Director
|
Shlomi Cohen
|
|
|
54
|
|
|
Director and Chief Executive Officer
|
Assaf Cohen
|
|
|
34
|
|
|
Chief Financial Officer
|
(1)
|
Independent Director under Nasdaq rules
|
(2)
|
Member of Compensation Committee
|
(3)
|
Member of Audit Committee
|
James Scott Medford
was appointed in January 2017 as a director and as Chairman of the Board of Directors and was reelected on November 21, 2017 to
serve until the general meeting of shareholders that will take place three years following his reelection. Mr. Medford has over
35 years of experience in the fields of AIDC (automatic identification and data capture), encompassing an early introduction to
bar coding, wireless technology, speech recognition and RFID (Radio-Frequency Identification). From 1990 to 2006, Mr. Medford served
as a Vice President at Intermec Technologies, where he developed various departments. During 2006, Mr. Medford was a partner at
Genesta Partnership, which designs and deploys systems in manufacturing and logistics, where he also managed projects for Fortune
100 companies. From 2008 to 2015, Mr. Medford served as a Senior Vice President of Sales at Impinj, a manufacturer of RFID integrated
circuits, devices and software. Most recently, Mr. Medford served as Chief Sales Officer at Invengo International Pte Ltd., a leading
provider of RFID technology and solutions, focused on growing the American and European markets, mainly in the retail segments.
Mr. Medford currently provides consulting services to numerous high-tech solution companies and investment firms and serves as
Chairman of LMC, Ltd, a UK based company providing solutions to the international rail and transportation industry. Mr. Medford
is also a Senior Vice President of Global Sales for Apex Supply Chain Technologies.
The Company believes
Mr. Medford’s operational executive management and board experience with global companies make him suitable to serve as a
director and Chairman of the Board of Directors of the Company.
Michael Soluri
was appointed in January 2017 as a director and was reelected on November 21, 2017 to serve until the general meeting of shareholders
that will take place three years following his reelection. Mr. Soluri is a technology sales executive with expertise in global
direct IT sales within the finance, manufacturing and retail industries and the internet of things field. From 1993 to 1995, Mr.
Soluri served as the Sales Director of Ameriquest Technologies, a company digitizing existing processes. From 1995 to 1997, Mr.
Soluri served as the Executive Sales Director of Siemens Data Communications, where he focused on smart switching technologies
and intelligent data hub markets. From 1998 to 2015, Mr. Soluri served as the Executive Manager, Global Client Services at the
Imaging, Software and Solutions Division of Lexmark International, and he currently serves as the Chief Revenue Officer and Vice
President of EDM Group that focuses on information management for organizations.
The Company believes
Mr. Soluri’s professional and corporate experience make him suitable to serve as a director of the Company.
William C. Anderson
III
was elected in 2014 as a director and was reelected on November 21, 2017 to serve until the general meeting of shareholders
that will take place three years following his reelection. Mr. Anderson is the founder of AmpThink LLC, a wireless solutions company
focused on building large, complex, wireless networks employing different technologies including low and high frequency RFID,
wireless bridging, WiFi, near field communications and Bluetooth. AmpThink has led the delivery of networks for three recent major
American football sporting events. Mr. Anderson has been acting as the President of AmpThink LLC since its incorporation in 2011.
Prior to AmpThink, Mr. Anderson was co-founder of Genesta, a wireless systems integrator specializing in the design and deployment
of warehouse automation systems, where Mr. Anderson from 2000 to 2011 acted as Chief Technology Officer. In this position, Mr.
Anderson helped create solutions for clients such as Con Edison, Frito-Lay, and Sara Lee. Mr. Anderson holds a degree in Economics
and Philosophy from Boston College and a Master’s degree in Management Science from The State University of New York.
The Company believes
Mr. Anderson’s qualifications including his years of experience in the high-tech industry and network solutions business,
as well as his experience as Chief Technology Officer and President of private American companies, make him suitable to serve as
an External Director of the Company.
Donna Seidenberg
Marks
was elected as an External Director under the Companies Law in November 2015, effective January 1, 2016, to hold
office for a three-year term. On November 20, 2018, the term of office of Ms. Seidenberg Marks as an External Director expired
pursuant to the provisions of section 5D of the Israeli Companies Regulations (Relief for Public Companies with Shares Listed for
Trading on a Stock Market Outside of Israel), 5760-2000. In connection with such expiration and the previous adoption by the Company
of the exemption provided in section 5D of the Israeli Companies Regulations (Relief for Public Companies with Shares Listed for
Trading on a Stock Market Outside of Israel), 5760-2000, that allows the Company to follow Nasdaq Stock Market Rules with respect
to appointment of independent directors and composition of audit and compensation committees (and exempts the Company from the
need to elect External Directors and other requirements with respect to audit and compensation committees as more fully specified
below), our Board of Directors appointed Ms. Seidenberg Marks as a director, effective November 21, 2018, to serve until the next
general meeting of shareholders of the Company at which directors are being elected. Ms. Seidenberg Marks is a Certified Public
Accountant with a wide variety of experience serving clients in various industries over her 38 years in the practice of public
accounting. Ms. Seidenberg Marks has served as a director at the Fuoco Group, LLC, a certified public accounting firm that provides
audit, tax and consulting services to its clients throughout its five locations in Florida and New York. Prior to joining the Fuoco
Group, Mrs. Seidenberg Marks was the managing partner of her own firm, Donna Seidenberg, PA and served as a Managing Director at
American Express Tax and Business Services (which merged into the international accounting firm of RSM International). Her practice
includes performing audits, reviews, and compilations of financial statements, preparing tax returns, and rendering consulting
services, including forensic accounting and expert witness testimony in mediations and litigation matters in her areas of specialization.
Her experience also includes consulting on Sarbanes-Oxley implementation. Ms. Seidenberg Marks is a frequent speaker at local and
national meetings of the Community Associations Institute for which she serves on its National Business Partners Council, and is
a past President and Treasurer of its local chapter. Ms. Seidenberg Marks earned a B.A. in Business Administration degree in Accounting
(magna cum laude) from the University of South Florida in 1978 and is a member of the Florida Institute of Certified Public Accountants.
The Company believes
that Ms. Seidenberg Marks’ professional and corporate experience, as well as her knowledge and familiarity with corporate
finance and accounting as an experienced Certified Public Accountant, make her suitable to serve as an External Director of the
Company.
Shlomi Cohen
was elected as a director in December 2016 to hold office until the first general meeting of the shareholders of the Company to
be held following the termination of a 36-month period that commenced as of December 15, 2016. Mr. Cohen currently serves as the
Company’s Chief Executive Officer. Prior to joining the Company, Mr. Cohen, served as president and Chief Executive Officer
of RayV Technologies Ltd. from 2012 until it was acquired by Yahoo! in 2014. Prior to that and from 2010 to 2012, Mr. Cohen served
as president of Europe Middle-East Africa for NICE Systems Ltd (Nasdaq: NICE). Mr. Cohen has also held sales positions with a number
of leading technology companies, including Nokia (2007-2010), Siemens (2003-2007), BATM Advanced Communications (1998-2002) and
Eldor Computers (1990-1995). Mr. Cohen holds an M.B.A. from the Bar Ilan University and a B.Sc. in mechanical engineering from
the Tel-Aviv University.
The Company believes
Mr. Cohen’s professional and corporate experience make him suitable to serve as a director of the Company.
Executive Officers
Shlomi Cohen
was appointed by the Board in August 2015, to serve as the Company’s Chief Executive Officer. For additional information
see the information set forth above.
Assaf Cohen
was appointed as the Company’s Chief Financial Officer effective February 27, 2018. Prior to his appointment, Mr. Cohen served
as the Company’s controller and deputy Chief Financial Officer from July 2015 and oversaw the Company’s finance department
in this capacity. Prior to joining the Company, Mr. Cohen was a controller at a private company, Samgal Ltd., for a year and a
half and prior to that he was a senior accountant at Ernst & Young. Mr. Cohen received a B.A. in economics and accounting from
the Haifa University, and he is a Certified Public Accountant in Israel.
Board Practices
Election of Directors; Appointment of
Officers
Our current Board consists
of five directors. A majority of these directors must be non-executive directors, who are directors that are neither office holders
nor our employees. Our non-External Directors (where currently none of our directors is External Director) are appointed, removed
or replaced by a majority vote of our shareholders present in person or by proxy at a general meeting of our shareholders according
to the Companies Law.
Once elected at a shareholders’
meeting, our directors, except for External Directors (if any), hold office until the first general meeting of shareholders held
at least three years after their election. Incumbent directors may be reelected at that meeting. A director may be elected for
consecutive terms unless prohibited by law.
Under the Companies
Law, neither the Chief Executive Officer of a public company nor a family member thereof or any person directly or indirectly subordinate
to the Chief Executive Officer, may serve as a Chairman of the board of directors, and vice versa unless authorized by a general
meeting of the shareholders according to the required vote pursuant to the Companies Law and then only for a period of time that
does not exceed three years.
Our Board appoints
our Chief Executive Officer and his terms of employment are approved by the general shareholders meeting according to the provisions
of the Companies Law. With the exception of our Chief Executive Officer and our directors, each of our executive officers serves
at the discretion of our Chief Executive Officer, subject to the terms of any employment agreement, and holds office until his
or her successor is elected or until his or her earlier resignation or removal.
Board Leadership Structure
Mr. Cohen is our Chief
Executive Officer, and Mr. Medford is Chairman of our Board. As Chief Executive Officer of the Company, Mr. Cohen reports to the
Company’s Board. None of our independent directors serves as the lead independent director. We believe that this leadership
structure is appropriate given the current size and operations of the Company.
Risk Oversight
Our Board’s role
in risk oversight includes risk analysis and assessment in connection with each financial and business review, update and decision-making
proposal and deliberations.
The Board’s role
in our risk oversight is consistent with our leadership structure, with our Chief Executive Officer, whose performance is assessed
by the Board, and other members of senior management having responsibility for assessing and managing our risk exposure, and the
Board providing oversight in connection with those efforts.
The Board, including
the Audit Committee and Compensation Committee, periodically reviews and assesses the significant risks to the Company. Our management
is responsible for the Company’s risk management process and the day-to-day supervision and mitigation of risks. These risks
include strategic, operational, competitive, financial, legal and regulatory risks. Our Board leadership structure, together with
the frequent interaction between our directors and management, assists in this effort. Communication between our Board and management
regarding long-term strategic planning and short-term operational practices include matters of material risk inherent in our business.
The Board plays an
active role, as a whole and at the committee level in overseeing management of the Company’s risks. Each of our Board committees
is focused on specific risks within their areas of responsibility, but the Board believes that the overall enterprise risk management
process is more properly overseen by all of the members of the Board. The Audit Committee is responsible, among other things, for
overseeing the management of financial and accounting risks, risks related to the Company’s compliance with legal and regulatory
requirements, risks in regard to the independent auditor’s performance of its internal audit function, evaluation of any
inadequacies in the business management of the Company and risks in related-party transactions. The Compensation Committee is responsible,
among other things, for overseeing the management of risks relating to executive and employee compensation plans, incentive awards
and other beneficial arrangements. While each committee is responsible for the evaluation and management of such risks, the entire
Board is regularly informed through committee reports. The Board incorporates the insight provided by these reports into its overall
risk management analysis.
The Board administers
its risk oversight responsibilities through the Chief Executive Officer and the Chief Financial Officer, who, together with management
representatives of the relevant functional areas review and assess the operations of the Company as well as operating management’s
identification, assessment and mitigation of the material risks affecting our operations.
External Directors
Under the Companies
Law, a company incorporated under the laws of the State of Israel with shares listed on an exchange, including Nasdaq, must appoint
at least two External Directors; however, pursuant to an exemption provided under section 5D of the Israeli Companies Regulations
(Relief for Public Companies with Shares Listed for Trading on a Stock Market Outside of Israel), 5760-2000, or the Exemption,
a public company with securities listed on certain foreign exchanges, including Nasdaq, that satisfies the applicable foreign country
laws and regulations that apply to companies organized in that country relating to the appointment of independent directors and
composition of audit and compensation committees and has no controlling shareholder is exempt from the requirement to appoint External
Directors or comply with the audit committee and compensation committee composition requirements under the Companies Law.
On May 25, 2017, in
conjunction with the expiration of Mr. Anderson’s term as External Director the Company adopted the Exemption and appointed
William C. Anderson III as a director (who is not an External Director), effective May 26, 2017, to serve until the next general
meeting of shareholders of the Company at which directors are being elected. At the general meeting of shareholders that took place
on November 21, 2017, Mr. Anderson was elected to serve as director.
Ms. Seidenberg Marks,
the Company’s only then remaining External Director at that time, ceased to act as an External Director on November 20, 2018
and the Board appointed Ms. Seidenberg Marks as a director (who is not an External Director), effective November 21, 2018, to serve
until the next general meeting of shareholders of the Company at which directors are being elected.
Currently, there is
no External Director sitting on the Board of Directors of the Company.
Alternate Directors
Under our current articles
of association as amended and restated on December 6, 2013, each of our directors may appoint, with the agreement of the Board
and subject to the provisions of the Companies Law, by written notice to us, any person to serve as an alternate director. Under
the Companies Law, neither a currently serving director nor a currently-serving alternate director or any person not eligible under
the Companies Law to be appointed as a director may be appointed as an alternate director. An alternate director has all the rights
and duties of the director appointing him, unless the appointment of the alternate provides otherwise, and the right to remuneration.
The alternate director may not act at any meeting at which the appointing director is present. Unless the time period or scope
of the appointment is limited by the appointing director, the appointment is effective for all purposes but expires upon the expiration
of the appointing director’s term. Currently, none of our directors has appointed any alternate directors.
Directors’ Service Contracts
Except for Mr. Cohen,
who serves as the Company’s Chief Executive Officer, none of our directors have any services contracts either with us or
with any of our subsidiaries, which provide for benefits upon termination of employment or service.
Board Committees
Our Board has established an Audit Committee
and a Compensation Committee.
Audit Committee
The current members
of our Audit Committee are William C. Anderson III, Donna Seidenberg Marks and Michael Soluri. Donna Seidenberg Marks serves as
the Chairman of the Audit Committee. Our Board has determined that all of the above are independent Audit Committee members within
the meaning of Nasdaq and SEC rules. Our Board has also determined that Donna Seidenberg Marks is an “Audit Committee Financial
Expert” as defined in Item 407(d)(5)(ii) of Regulation S-K under the Exchange Act and that he has the requisite experience
under Nasdaq rules.
Our Audit Committee
operates under a written charter that is posted on our website at http://investors.otiglobal.com.
Our Audit Committee
provides assistance to our Board in fulfilling its legal and fiduciary obligations in matters involving our accounting, auditing,
financial reporting, internal control and legal compliance functions by pre-approving the services performed by our independent
accountants and reviewing their reports regarding our accounting practices and systems of internal control over financial reporting.
Our Audit Committee also oversees the audit efforts of our independent accountants and takes those actions that it deems necessary
to satisfy itself that the accountants are independent of management.
Under the Companies
Law and Nasdaq rules, our Audit Committee is responsible for (i) determining whether there are deficiencies in the business management
practices of our Company, including in consultation with our internal auditor or the independent auditor, and making recommendations
to the Board to improve such practices, (ii) determining whether to approve certain related party transactions (including transactions
in which an office holder has a personal interest) and whether such transaction should be deemed as material or extraordinary,
(iii) where the Board approves the working plan of the internal auditor, to examine such working plan before its submission to
the Board and propose amendments thereto, (iv) examining our internal controls and internal auditor’s performance, including
whether the internal auditor has sufficient resources and tools to dispose of its responsibilities, (v) examining the scope of
our auditor’s work and compensation and submitting a recommendation with respect thereto to our Board or shareholders, depending
on which of them is considering the appointment of our auditor, and (vi) establishing procedures for the handling of employee complaints
as to the management of our business and the protection to be provided to such employees. In compliance with regulations promulgated
under the Companies Law, our Audit Committee also approves our financial statements, thereby fulfilling the requirement that a
board committee provide such approval.
Our Audit Committee
held four meetings during the fiscal year ended December 31, 2018 (and one written resolution in lieu of a meeting).
Internal Auditor
Under the Companies
Law, the Board must appoint an internal auditor who is recommended by the Audit Committee. The role of the internal auditor is
to examine, among other things, whether the company’s actions comply with the law and orderly business procedure. Under the
Companies Law, the internal auditor may not be an office holder or an interested party, as defined below, or a relative of an office
holder or an interested party, or the company’s independent accountant or the independent accountant’s representative.
The Companies Law defines an “interested party” as a holder of 5% or more of the issued shares or voting rights of
a company, a person or entity who has the right to designate at least one director or the general manager of the company, and a
person who serves as a director or general manager. Since March 5, 2012, Mr. Gali Gana, CPA, of Rosenblum Holzman & Co., has
served as our internal auditor.
Compensation Committee
The current members
of our Compensation Committee are William C. Anderson III, Donna Seidenberg Marks and Michael Soluri. William C. Anderson III is
the Compensation Committee’s Chairman. Our Board has determined that all Compensation Committee members are independent within
the meaning of Nasdaq and SEC rules.
The Compensation Committee
operates under a charter that is posted on our website at http://investors.otiglobal.com.
Under the Companies
Law and Nasdaq rules, our Compensation Committee is responsible for (i) proposing office holder compensation policies to the Board,
(ii) proposing necessary revisions to any compensation policy and examining its implementation, (iii) determining whether to approve
transactions with respect to compensation of office holders, and (iv) determining, in accordance with office holder compensation
policies, whether to exempt an engagement with an unaffiliated nominee for the position of chief executive officer from requiring
shareholder approval.
Subject to the provisions
of the Companies Law, compensation of executive officers is generally determined and approved by our Compensation Committee and
our Board. Shareholder approval is generally required when (i) approval by our Board and our Compensation Committee is not
consistent with our Amended and Restated Executive Officers Compensation Policy which was adopted by the annual meeting of shareholders
on December 15, 2016, or (ii) the compensation is that of our Chief Executive Officer. In special circumstances, our Compensation
Committee and Board may approve the compensation of an executive officer (other than a director, a chief executive officer or a
controlling shareholder) or approve the compensation policy despite shareholder objection. Additionally, under certain circumstances,
our Compensation Committee may exempt an engagement with a nominee for the position of chief executive officer from requiring shareholders’
approval or may otherwise postpone such shareholders’ approval.
A director or executive
officer may not be present when the Board discusses or votes upon the terms of his or her compensation, unless the chairman of
the Board (as applicable) determines that he or she should be present to present the transaction that is subject to approval. The
Chief Executive Officer may not be present during voting or deliberations regarding his or her compensation.
We may from time to
time engage the services of external compensation consultants on a case by case basis, though we did not engage any such compensation
consultant for the fiscal year ended December 31, 2018. All compensation consultants we have engaged are independent for the purposes
of Nasdaq rules.
Our Compensation Committee
held two meetings during the fiscal year ended December 31, 2018 (and adopted certain resolutions by way of two unanimous written
consents).
Nominating Committee; Director Candidates
We do not have a Nominating
Committee or any committees of a similar nature, nor any charter governing the nomination process. Our Board does not believe that
such committees are needed for a company our size. However, our independent directors will consider shareholder suggestions for
additions to our Board.
Director nominees are
recommended for our Board’s selection by a majority of our independent directors in a vote in which only our independent
directors participate. Under the Companies Law, our directors are elected by the general meeting of shareholders, with the
recommendation of the Board. There is no formal process or policy that governs the manner in which we identify potential candidates
for the Board. Historically, however, the Board has considered several factors in evaluating candidates for nomination to the Board,
including the candidate’s knowledge of the Company and its business, the candidate’s business experience and credentials,
and whether the candidate would represent the interests of all the Company’s shareholders as opposed to a specific group
of shareholders. Diversity is not considered material in identifying nominees for directors. We do not have a formal policy with
respect to our consideration of Board nominees recommended by our shareholders because we are a small company. However, our independent
directors will consider shareholders suggestions for additions to our Board. A shareholder who desires to recommend a candidate
for nomination to the Board should do so by writing to us at Board of Directors, c/o Company Secretary, On Track Innovations Ltd.,
Z.H.R. Industrial Zone, Rosh Pina, Israel, 1200000.
Code of Ethics
We have adopted a Code
of Business Conduct and Ethics that applies to our directors, executive officers and all of our employees. The Code of Business
Conduct and Ethics is publicly available on our website at http://investors.otiglobal.com/corporate-governance,
and we will provide, at no charge, persons with a written copy upon written request made to us. The information contained in, or
accessible through, our website does not constitute part of this Annual Report.
Section 16(a) Beneficial
Ownership Reporting Compliance
Based solely upon a
review of Forms 3 and 4, and amendments thereto, submitted to the SEC during the fiscal year ended December 31, 2018, we believe
that during said year, our executive officers, directors and all persons who own more than ten percent of a registered class of
our equity securities complied with all Section 16(a) filing requirements.
Item 11. Executive Compensation.
The following table
sets forth the compensation earned during the years ended December 31, 2018 and 2017 by (i) our Chief Executive Officer; (ii) our
Chief Financial Officer; (iii) our VP of Hardware Engineering; and (iv) our VP, Research & Development; and (v) our General
Counsel and Corporate Secretary. We refer to the persons listed in (i) through (v) collectively as the Named Executive Officers.
Certain of these officers are included solely to comply with Israeli law.
Summary Compensation Table
Name and Principal
|
|
|
|
|
Salary
|
|
|
Bonus
|
|
|
Stock-based Awards
|
|
|
Non-equity Incentive Plan Compensation
|
|
|
All other Compensation
|
|
|
Total
|
|
Position
|
|
Year
|
|
|
($) (1)
|
|
|
($)
|
|
|
($) (2)
|
|
|
($)
|
|
|
($) (3)
|
|
|
($)
|
|
Shlomi Cohen
|
|
2018
|
|
|
419,524
|
|
|
|
36,351
|
|
|
|
65,000
|
|
|
|
259,550
|
|
|
|
71,479
|
|
|
|
851,904
|
|
Chief Executive Officer (4)
|
|
2017
|
|
|
416,917
|
|
|
|
36,302
|
|
|
|
81,000
|
|
|
|
279,526
|
|
|
|
72,548
|
|
|
|
886,293
|
|
Assaf Cohen
|
|
2018
|
|
|
104,754
|
|
|
|
2,643
|
|
|
|
6,000
|
|
|
|
19,861
|
|
|
|
38,385
|
|
|
|
171,643
|
|
Chief Financial Officer (5)
|
|
2017
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Nehemia Itay
|
|
2018
|
|
|
162,629
|
|
|
|
2,033
|
|
|
|
-
|
|
|
|
19,521
|
|
|
|
43,680
|
|
|
|
227,863
|
|
VP of Hardware Engineering (6)
|
|
2017
|
|
|
157,809
|
|
|
|
-
|
|
|
|
-
|
|
|
|
27,251
|
|
|
|
44,575
|
|
|
|
229,635
|
|
Amir Eilam
|
|
2018
|
|
|
143,547
|
|
|
|
-
|
|
|
|
-
|
|
|
|
33,158
|
|
|
|
47,288
|
|
|
|
223,993
|
|
VP, Research & Development (7)
|
|
2017
|
|
|
141,231
|
|
|
|
-
|
|
|
|
-
|
|
|
|
25,350
|
|
|
|
48,390
|
|
|
|
214,971
|
|
Ye’ela Haggai-Levy
|
|
2018
|
|
|
118,029
|
|
|
|
1,752
|
|
|
|
4,500
|
|
|
|
15,889
|
|
|
|
43,046
|
|
|
|
183,216
|
|
General Counsel and Corporate Secretary (8)
|
|
2017
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
(1)
|
Salary payments which were in NIS
were translated into U.S. Dollars according to the annual average exchange rate of NIS 3.59 per U.S. Dollar in 2018 and
NIS 3.60 per U.S. Dollar in 2017.
|
(2)
|
The fair value recognized for the option awards was determined as of the grant date in accordance with FASB ASC Topic 718 (see Note 10B to our consolidated financial statements included elsewhere in this Annual Report).
|
(3)
|
This cost reflects social benefits (as required under applicable Israeli law), car expenses and termination payments.
|
(4)
|
The 2018 “All Other Compensation” of Mr. Cohen, as shown in the table above, is comprised of $20,529 of car expenses and $50,950 of social benefits. The 2017 “All Other Compensation” of Mr. Cohen, as shown in the table above, is comprised of $21,668 of car expenses and $50,880 of social benefits.
|
(5)
|
The 2018 “All Other Compensation” of Mr. Cohen, as shown in the table above, is comprised of $16,579 of car expenses and $21,806 of social benefits. In 2017, Mr. Cohen, was not a Named Executive Officer.
|
(6)
|
The 2018 “All Other Compensation” of Mr. Itay, as shown in the table above, is comprised of $17,024 of car expenses and $26,656 of social benefits. The 2017 “All Other Compensation” of Mr. Itay, as shown in the table above, is comprised of $18,334 of car expenses and $26,241 of social benefits.
|
(7)
|
The 2018 “All Other Compensation” of Mr. Eilam, as shown in the table above, is comprised of $17,024 of car expenses and $30,264 of social benefits. The 2017 “All Other Compensation” of Mr. Eilam, as shown in the table above, is comprised of $18,334 of car expenses and $30,056 of social benefits.
|
(8)
|
The 2018 “All Other Compensation” of Ms. Haggai-Levi, as shown in the table above, is comprised of $17,024 of car expenses and $26,022 of social benefits. In 2017, Ms. Haggai-Levi was not a Named Executive Officer.
|
All of the incumbent Named Executive Officers
mentioned in the table above and our directors are entitled to acceleration of the vesting of any unvested share options and restricted
shares in the event of a change of control of the Company.
Pension, Retirement
or Similar Benefit Plans
Except as required
by applicable law (relating to severance payments to Israeli employees), none of our current officers or employees are entitled
to receive any payments upon termination of employment.
Executive Officers
Compensation Policy
In accordance with
recent requirements and limitations set forth in the Companies Law, we adopted a Compensation Policy in 2013, which was thereafter
amended by our Compensation Committee, approved by our Board and recommended to our shareholders and approved thereby at our annual
general meeting held on December 15, 2016.
The Compensation Policy
sets rules and guidelines with respect to our compensation strategy for executive officers, and is designed to provide for the
retention of, and to attract, highly qualified executives. The Policy is designed to balance competitive compensation of executive
officers with our financial resources, while creating appropriate incentives considering,
inter alia
, risk management factors
arising from our business, executive compensation benchmarks used in the industry, our size (including without limitation, sales
volume and number of employees), the nature of our business and our then-current cash flow situation, in order to promote our long-term
goals, work plan, policies and the interests of our shareholders.
The Compensation Policy
is designed to allow us to create a full compensation package for each of our executives based on common principles. With respect
to variable compensation components, the Compensation Policy is designed to allow us to consider each executive’s contribution
in achieving our short-term and long-term strategic goals and in maximizing its profits from a long-term perspective and in accordance
with the executive’s position.
The Compensation Policy
further provides for an annual performance bonus payable to executive officers. The payment of such bonus is tied to long-term
corporate performance, rather than short-term stock market performance. Bonuses are paid in accordance with specific performance
targets and based, among others, upon the following factors: (i) the Company’s achievement of certain financial performance
metrics, consisting of annual revenue targets, EBITDA target, each based on our annual budget; (ii) achievement by the respective
executive of certain predetermined objectives; and (iii) other discretionary considerations, taking into account tangible and intangible
performance factors, including the executive’s relative contribution to the Company.
Bonus payments shall
not exceed, in the case of a Chief Executive Officer, an aggregate amount equivalent to twelve months’ base salary, and for
other executive officers, an aggregate amount equivalent to nine months’ base salary of the respective executive.
Employment Agreements
We maintain written
employment and related agreements with all of our current executive officers. These agreements provide for monthly salaries and
contributions by us to executive insurance and vocational studies funds. The employment agreements of certain executive officers
provide for the achievement of an annual bonus, as described above. In addition, we may decide to grant our executive officers
share options from time to time. All of our executive officers’ employment and related agreements contain provisions regarding
noncompetition, confidentiality of information and assignment of inventions. The enforceability of covenants not to compete in
Israel is unclear.
We have the following
written agreements and other arrangements concerning compensation with our current executive officers:
|
(1)
|
Agreement with Shlomi Cohen.
We have an employment agreement with Mr. Cohen, which provides that Mr. Cohen will serve as Chief Executive Officer of the Company and our subsidiaries, in consideration of a monthly gross salary (currently NIS 119,790; NIS 108,900 in 2018 and 2017) and other standard benefits. Mr. Cohen also receives grants of options to purchase up to 100,000 ordinary shares on an annual basis to promote retention and as an incentive, subject to vesting requirements. The issuance of such options is subject to the discretion and approval of both the Company’s Compensation Committee and the Board of Directors. According to the employment agreement, Mr. Cohen is eligible to receive an annual bonus in an amount up to 12 months’ gross base salary.
The employment agreement is for an unlimited duration, provided that each party may terminate it without cause upon serving the other party a written notice of six months, prior to termination
.
|
|
(2)
|
Agreement with Assaf Cohen.
We have an employment agreement with Mr. Cohen, which provides that Mr. Cohen will serve as Chief Financial Officer of the Company and our subsidiaries, in consideration of a monthly gross salary (currently NIS 35,000; NIS 30,000 in 2018) and other standard benefits. Mr. Cohen also receives grants of options on an annual basis to promote retention and as an incentive, subject to vesting requirements. The issuance of such options is subject to the discretion and approval of both the Company’s Compensation Committee and the Board of Directors. According to the employment agreement, Mr. Cohen is eligible to receive an annual bonus in an amount up to 4 months’ gross base salary.
The employment agreement is for an unlimited duration, provided that each party may terminate it without cause upon serving the other party a written notice of three months, prior to termination
.
|
Outstanding Equity
Awards at Fiscal Year-End
The following
table shows options to purchase our Ordinary Shares outstanding on December 31, 2018, held by each of our Named Executive Officers.
Number
of Securities Underlying Unexercised
|
|
|
Option
Awards
|
Name
|
|
Number
of securities underlying unexercised options (#) exercisable
|
|
|
Number
of securities underlying unexercised options (#) unexercisable
|
|
|
Option
exercise price($)
|
|
|
Option expiration
date
|
Shlomi Cohen (1)
|
|
|
200,000
|
|
|
|
-
|
|
|
$
|
0.75
|
|
|
11/02/2020
|
|
|
|
26,667
|
|
|
|
13,333
|
|
|
$
|
0.44
|
|
|
02/14/2021
|
|
|
|
66,667
|
|
|
|
33,333
|
|
|
$
|
0.84
|
|
|
03/22/2021
|
|
|
|
33,333
|
|
|
|
66,667
|
|
|
$
|
1.58
|
|
|
02/06/2022
|
|
|
|
-
|
|
|
|
100,000
|
|
|
$
|
1.33
|
|
|
01/01/2023
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assaf Cohen (2)
|
|
|
10,000
|
|
|
|
--
|
|
|
$
|
0.74
|
|
|
11/11/2020
|
|
|
|
10,000
|
|
|
|
5,000
|
|
|
$
|
1.07
|
|
|
11/30/2021
|
|
|
|
5,000
|
|
|
|
10,000
|
|
|
$
|
1.21
|
|
|
11/28/2022
|
|
|
|
-
|
|
|
|
20,000
|
|
|
$
|
0.84
|
|
|
11/27/2023
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nehemia Itay (3)
|
|
|
10,000
|
|
|
|
-
|
|
|
$
|
2.36
|
|
|
05/13/2019
|
|
|
|
10,000
|
|
|
|
5,000
|
|
|
$
|
1.07
|
|
|
11/30/2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amir Eilam (4)
|
|
|
5,000
|
|
|
|
-
|
|
|
$
|
1.68
|
|
|
01/01/2020
|
|
|
|
13,333
|
|
|
|
6,667
|
|
|
$
|
1.07
|
|
|
11/30/2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ye’ela Haggai-Levy (5)
|
|
|
-
|
|
|
|
15,000
|
|
|
$
|
0.84
|
|
|
11/27/2023
|
(1)
|
On November 2, 2015, 200,000 options were granted to Mr. Cohen under the 2001 Stock Option Plan, as amended, or the 2001 Plan. The options vest in three equal annual installments, commencing July 31, 2016. On February 14, 2016, 40,000 options were granted to Mr. Cohen under the 2001 Plan. The options vest in three equal annual installments, commencing February 3, 2017. On March 22, 2016, 100,000 options were granted to Mr. Cohen under the 2001 Plan. The options vest in three equal annual installments, commencing March 22, 2017. On February 6, 2017, 100,000 options were granted to Mr. Cohen under the 2001 Plan. The options vest in three equal annual installments, commencing February 6, 2018. On January 1, 2018, 100,000 options were granted to Mr. Cohen under the 2001 Plan. The options vest in three equal annual installments, commencing January 1, 2019.
|
(2)
|
On November 11, 2015, 10,000 options were granted to Mr. Cohen under the 2001 Plan. The options vest in three equal annual installments, commencing November 11, 2016. On November 30, 2016, 15,000 options were granted to Mr. Cohen under the 2001 Plan. The options vest in three equal annual installments, commencing November 30, 2017. On November 28, 2017, 15,000 options were granted to Mr. Cohen under the 2001 Plan. The options vest in three equal annual installments, commencing November 28, 2018. On November 27, 2018, 20,000 options were granted to Mr. Cohen under the 2001 Plan. The options vest in three equal annual installments, commencing November 27, 2019.
|
(3)
|
On May 13, 2014, 10,000 options were granted to Mr. Itay under the 2001 Plan. The options vest in three equal annual installments, commencing May 13, 2015. On December 15, 2016, 15,000 options were granted to Mr. Itay under the 2001 Plan. The options vest in three equal annual installments, commencing November 30, 2017.
|
(4)
|
On January 1, 2015, 15,000 options were granted to Mr. Eilam under the 2001 Plan, out of which 10,000 options were exercised by Mr. Eilam as of December 31, 2018. The options vest in three equal annual installments, commencing January 1, 2016. On December 15, 2016, 20,000 options were granted to Mr. Eilam under the 2001 Plan. The options vest in three equal annual installments, commencing November 30, 2017.
|
(5)
|
On November 27, 2018, 15,000 options were granted to Ms. Haggai-Levy under the 2001 Plan. The options vest in three equal annual installments, commencing November 27, 2019.
|
Director Compensation for 2018
The following table
provides information regarding compensation earned by, awarded or paid to each person for serving as a director who was not a Named
Executive Officer during the fiscal year ended December 31, 2018:
Name
|
|
Fees Earned or Paid in Cash
($) (1)
|
|
|
Option Awards
($)
|
|
|
Total
($)
|
|
William C. Anderson III
|
|
|
29,879
|
|
|
|
-
|
|
|
|
25,456
|
|
Donna Seidenberg Marks
|
|
|
25,456
|
|
|
|
-
|
|
|
|
25,456
|
|
James Scott Medford
|
|
|
21,786
|
|
|
|
-
|
|
|
|
21,786
|
|
Michael Soluri
|
|
|
25,456
|
|
|
|
-
|
|
|
|
25,456
|
|
(1)
|
This column represents the sums that our non-executive directors received according to the Israeli regulations as an annual fee as well as for attending Board and Board committee meetings.
|
As of December 31,
2018, our directors held options to purchase our Ordinary Shares as follows:
Name
|
|
Aggregate number of shares Underlying stock options
|
|
William C. Anderson III
|
|
|
80,000
|
|
Donna Seidenberg Marks
|
|
|
50,000
|
|
James Scott Medford
|
|
|
30,000
|
|
Michael Soluri
|
|
|
30,000
|
|
We reimburse our directors
for expenses incurred in connection with attending board meetings and committee meetings and provide the following compensation
for directors: annual compensation of $17,692; meeting participation fees of $917 per in-person meeting; meeting participation
by telephone of $550 per meeting; and $458 per written resolution.
Our executive directors
do not receive additional separate compensation for their service on the Board or any committee of the Board. During 2018, our
non-executive directors were reimbursed for their expenses for each board meeting, and committee meeting attended and in addition
received the foregoing compensation with respect to attendance at such meetings. The aggregate amount paid by us to our non-executive
directors for their service during 2018 was $99,904.
See Item 12 “Security
Ownership of Certain Beneficial Owners and Management” for information on beneficial ownership of our shares by our directors
and executive officers. We have no outstanding loans to any of our directors or executive officers.
Under the Companies
Law, External Director is entitled to compensation as provided in regulations adopted under the Companies Law and is otherwise
prohibited from receiving any other compensation, directly or indirectly, in connection with services provided as an External Director.
Item 12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholders Matters.
The following table
sets forth certain information, to the best knowledge and belief of the Company, as of March 4, 2019 (unless provided herein otherwise),
with respect to holdings of our Ordinary Shares by (1) each person known by us to be the beneficial owner of more than 5% of the
total number of shares of our Ordinary Shares outstanding as of such date; (2) each of our directors; (3) each of our Named Executive
Officers; and (4) all of our directors and our executive officers as a group.
All information with
respect to the ownership of any of the below shareholders has been furnished by such shareholder and, unless otherwise indicated
below, we believe that persons named in the table have sole voting and sole investment power with respect to all of the shares
shown as owned, subject to community property laws, where applicable. The shares owned by the directors and executive officers
include the shares owned by their family members to which such directors and executive officers disclaim beneficial ownership,
as provided for below. If a shareholder has the right to acquire shares by exercising options currently exercisable or exercisable
within 60 days of the date of this table, these shares are deemed outstanding for the purpose of computing the percentage owned
by the specific shareholder (that is, they are included in both the numerator and the denominator), but they are disregarded for
the purpose of computing the percentage owned by any other shareholder.
The information in
the table below is based on 41,294,377 Ordinary Shares outstanding as of March 4, 2019. Unless otherwise indicated, the address
of each of the individuals named below is: c/o On Track Innovations Inc., Z.H.R. Industrial Zone, P.O. Box 32, Rosh Pina, Israel.
Name of beneficial owner
|
|
Position
|
|
Number of Shares Beneficially Owned (*)
|
|
|
% of Class of Shares
|
|
William C. Anderson III (1)
|
|
Director
|
|
|
120,000
|
|
|
|
**
|
|
Donna Seidenberg Marks (2)
|
|
Director
|
|
|
50,000
|
|
|
|
**
|
|
James Scott Medford (3)
|
|
Director
|
|
|
20,000
|
|
|
|
**
|
|
Michael Soluri (4)
|
|
Director
|
|
|
10,000
|
|
|
|
**
|
|
Shlomi Cohen (5)
|
|
Chief Executive Officer
|
|
|
440,000
|
|
|
|
1.1
|
%
|
Assaf Cohen (6)
|
|
Chief Financial Officer
|
|
|
25,000
|
|
|
|
**
|
|
Nehemia Itay (7)
|
|
VP of Hardware
|
|
|
20,000
|
|
|
|
**
|
|
Amir Eilam (8)
|
|
VP, Research & Development
|
|
|
18,333
|
|
|
|
**
|
|
Ye’ela Haggai-Levy
|
|
General Counsel and Corporate Secretary
|
|
|
-
|
|
|
|
**
|
|
All executive officers and directors as a group (6 persons)
|
|
|
|
|
665,000
|
|
|
|
1.6
|
%
|
5% Shareholders
|
|
|
|
|
|
|
|
|
|
|
Jerry L. Ivy, Jr. (9)
|
|
Shareholder
|
|
|
4,029,475
|
|
|
|
9.8
|
%
|
|
(*)
|
If
a shareholder has the right to acquire shares by exercising options currently exercisable or exercisable within 60 days of the
date of this table, these shares are deemed outstanding for the purpose of computing the percentage owned by the specific shareholder
(that is, they are included in both the numerator and the denominator), but they are disregarded for the purpose of computing
the percentage owned by any other shareholder.
|
(
**
) Less than 1%
(1)
|
Includes 60,000 Ordinary Shares held by Mr. Anderson and includes options held by Mr. Anderson to purchase 60,000 Ordinary Shares currently exercisable or exercisable within 60 days of this table.
|
|
|
(2)
|
Consists of options held by Ms. Seidenberg
Marks to purchase 50,000 Ordinary Shares currently exercisable or exercisable within 60 days of this table.
|
|
|
(3)
|
Includes 10,000 Ordinary Shares held by
Mr. Medford and includes options held by Mr. Medford to purchase 10,000 Ordinary Shares currently exercisable or exercisable within
60 days of this table.
|
|
|
(4)
|
Includes options held by Mr. Soluri to purchase 10,000 Ordinary Shares currently exercisable or exercisable within 60 days of this table.
|
|
|
(5)
|
Includes options held by Mr. Cohen to purchase
440,000 Ordinary Shares currently exercisable or exercisable within 60 days of this table.
|
(6)
|
Includes options held by Mr. Cohen to purchase 25,000 Ordinary Shares currently exercisable or exercisable within 60 days of this table.
|
(7)
|
Consists of options held by Mr. Itay to
purchase 20,000 Ordinary Shares currently exercisable or exercisable within 60 days of this table.
|
|
|
(8)
|
Consists of options held by Mr. Eilam to
purchase 18,333 Ordinary Shares currently exercisable or exercisable within 60 days of this table.
|
|
|
(9)
|
Information is based solely on Schedule 13G/A filed by Mr. Ivy with the SEC on January 25, 2018. Mr. Ivy’s address is 2125 1
st
Ave., Seattle, WA 98121.
|
The following table summarizes certain information regarding
our equity compensation plan as of December 31, 2018:
Plan Category
|
|
Number of securities to be issued upon exercise of outstanding options
|
|
|
Weighted-average exercise price of outstanding options
|
|
|
Number of securities remaining available for future issuance under equity compensation plans
|
|
Equity compensation plan approved by security holders
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Equity compensation plan not approved by security holders
|
|
|
1,461,000
|
|
|
$
|
1.24
|
|
|
|
617,500
|
|
Total
|
|
|
1,461,000
|
|
|
$
|
1.24
|
|
|
|
617,500
|
|
2001 Stock Option Plan
We established our
2001 Plan in February 2001 (as amended and restated on December November 30, 2011), and have amended it several times up to the
latest amendment on November 21, 2017. The 2001 Plan provides for the grant of options to our employees, directors, and consultants,
and those of our subsidiaries and affiliates until December 31, 2021.
Under the 2001 Plan,
as of March 4, 2019, options for 14,371,500 Ordinary Shares had been exercised, and options for 1,561,000 Ordinary Shares are outstanding,
including vested options with respect to 952,308 Ordinary Shares. Of the options that are outstanding, as of March 4, 2019, 890,000
options are held by our directors and officers and have a weighted average exercise price of $1.05 per share.
Item 13. Certain
Relationships and Related Transactions, and Director Independence.
Our policy is to enter
into transactions with related parties on terms that are on the whole no less favorable to us than those that would be available
from unaffiliated parties at arm’s length.
Agreements with
Directors and Officers
We have entered into
employment agreements with all of our executive officers as mentioned above and indemnification agreements with all of our executive
officers and directors. In addition, we have granted options to purchase our Ordinary Shares to our directors and executive officers,
as mentioned elsewhere in this Annual Report.
Other than described
above, none of our directors, executive officers or shareholders holding more than 5% of our outstanding shares, or members of
any such person’s immediate family, has any relationship with the Company besides serving as directors or executive officers.
Our Board has determined
that Ms. Seidenberg Marks, Mr. Anderson, and Mr. Soluri qualify as independent directors under Nasdaq Rules and as Audit Committee
independent directors under the Nasdaq Rules.
Item 14. Principal
Accounting Fees and Services.
Independent Registered
Public Accounting Firm
The Company has engaged
Somekh Chaikin, a member firm of KPMG International, or Somekh Chaikin, as its principal independent registered public accounting
firm for the fiscal year ended December 31, 2018.
Policy on Pre-Approval of Audit and Permissible Non-Audit
Services of Independent Registered Public Accounting Firm
Our Audit Committee
is generally responsible for the oversight of our independent auditors’ work. The Audit Committee’s policy is to pre-approve
all audit and non-audit services provided by Somekh Chaikin. These services may include audit services, audit-related services,
tax services and other services, as further described below. The Audit Committee sets forth the basis for its preapproval in detail,
listing the particular services which are pre-approved, and setting forth a specific budget for such services. Additional services
may be pre-approved by the Audit Committee on an individual basis. Once services have been pre-approved, Somekh Chaikin and our
management then report to the Audit Committee on a periodic basis regarding the extent of services actually provided in accordance
with the applicable pre-approval, and regarding the fees for the services performed.
Our Audit Committee
pre-approved all audit and non-audit services provided to us and to our subsidiaries during the periods listed below. The Audit
Committee approves discrete projects on a case-by-case basis that may have a material effect on our operations and also considers
whether proposed services are compatible with the independence of the independent auditors.
Pursuant to our pre-approval
policy, the Audit Committee pre-approves and delegates to our Chairman of the Board the authority to approve the retention of ad-hoc
audit and non-audit services from our independent auditors, beyond the scope approved by the Audit Committee as part of the annual
audit plan.
Principal Accountant Fees and Services
The following fees
were billed by Somekh Chaikin, a member firm of KPMG International, and affiliate firms for professional services rendered thereby
for the years ended December 31, 2018 and 2017 (in thousands):
|
|
2018
|
|
|
2017
|
|
Audit Fees (1)
|
|
$
|
171
|
|
|
$
|
179
|
|
Audit-Related Fees (2)
|
|
|
4
|
|
|
|
-
|
|
Tax Fees (3)
|
|
$
|
16
|
|
|
$
|
19
|
|
All Other Fees (4)
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
191
|
|
|
$
|
198
|
|
(1)
|
The audit fees for the years ended December 31, 2018 and 2017, are the aggregate fees billed or billable (for the year) for the professional services rendered for the audits of our 2018 and 2017 annual consolidated financial statements, review of consolidated quarterly financial statements of 2018 and 2017, and services that are normally provided in connection with statutory audits of us and our subsidiaries, consents and assistance with review of documents filed with the SEC.
|
|
|
(2)
|
Audit-related fees for fiscal year 2018 consisted primarily of agreed upon procedures reports.
|
|
|
(3)
|
Tax fees are the aggregate fees billed (in the year) for professional services rendered for tax compliance and tax advice other than in connection with the audit.
|
|
|
(4)
|
No Other Fees were incurred.
|
Notes
to the Consolidated Financial Statements
In
thousands, except share and per share data
Note
1 - General
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 ordinary shares are listed for trading on the Nasdaq Capital Market (formerly listed on the Nasdaq Global Market
until April 13, 2016).
At
December 31, 2018, the Company operates in two operating segments: (a) Retail and Mass Transit Ticketing, and (b) Petroleum. See
Note 14. During 2016 and 2018, the Company sold its parking operating segment and its medical smart cards operation, respectively
- see Note 1B.
As
to the Company’s major customers, see Note 15.
Certain
definitions
$
- United States Dollars
NIS
- New Israeli Shekel
B.
|
Divestiture
of operations
|
|
1.
|
In
December 2013, the Company completed the sale of certain assets, subsidiaries and intellectual
property (“IP”) relating to its Smart ID division, for a total purchase price
of $10,000 in cash and an additional $12,500 subject to performance-based milestones.
Accordingly, the results and the cash flows of this operation for all reporting periods
are presented in the statements of operations and in the statements of cash flows, respectively,
as discontinued operations separately from continuing operations.
|
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 an arbitration decision was issued on December 24, 2018 in the Company’s favor and denied SuperCom's claims.
On February 7, 2019, SuperCom filed an application to the District Court in Tel Aviv to cancel the said arbitration decision and
the Company submitted a response to the application on March 20, 2019.
As
mentioned in Note 2U, the Company records the earn-out payments only when the consideration is determined to be realizable. For
details in connection with contingent considerations recorded and received during the year ended December 31, 2016, see Note 13.
|
2.
|
In
September 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
(see also Note 13).
|
On
Track Innovations Ltd.
and its
Subsidiaries
Notes
to the Consolidated Financial Statements
In
thousands, except share and per share data
Note
1 - General (cont’d)
B.
|
Divestiture
of operations (cont’d)
|
|
3.
|
In
December 2018, the Company completed the sale of its medical smart cards operation (“Medismart”)
(formerly part of the Company’s “Other segment”) to Smart Applications
International Limited (“Smart”) for a total price of $2,750. The Company has
determined that the sale of the Medismart business qualifies as a discontinued operation.
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 (see also Note 13).
All prior periods’ information has been reclassified to conform with the current
period’s presentation.
|
Note
2 - Significant Accounting Policies
The
consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United
States of America (“U.S. GAAP”).
The
significant accounting policies followed in the preparation of the financial statements, applied on a consistent basis, except
as for the mentioned in Note 2W, are as follows:
A.
|
Financial
statements in U.S. dollars
|
Substantially
all of the Company’s and certain of its subsidiaries’ revenues are in U.S. dollars. A significant portion of purchases
of materials and components and most marketing costs are denominated in U.S. dollars. Therefore, both the functional and reporting
currencies of the Company and certain of its subsidiaries are the U.S. dollar.
Transactions
and balances denominated in U.S. dollars are presented at their original amounts.
For
entities with a U.S. dollar functional currency, transactions and balances in other currencies are remeasured into U.S. dollars
in accordance with the principles set forth in Accounting Standards Codification (“ASC”) Topic 830,
Foreign Currency
Matters
, i.e. at the date the transaction is recognized, each asset, liability, or instance of revenue, expense, gain, or
loss arising from the transaction is measured and recorded in the functional currency by use of the exchange rate in effect at
that date. When translation using the exchange rates at the dates that the numerous revenues, expenses, gains and losses are recognized
is impractical, an appropriately weighted average exchange rate for the period is used to translate those elements. At each balance
sheet date, recorded balances of monetary assets and liabilities that are denominated in a currency other than the functional
currency are adjusted to reflect the current exchange rate. Exchange gains and losses from the remeasurement of such items denominated
in non U.S. dollar currencies are reflected in the consolidated statements of operations, among ‘financial expenses, net’,
as appropriate.
The
functional currency of the Company’s subsidiary in South Africa changed in October 2017 from the South African Rand to U.S.
dollar. This change resulted from a change in relevant circumstances whereby sales transactions denominated in U.S. dollars became
the primary source of sales revenue. The functional currency of the Polish subsidiary is its local currency. The financial statements
of companies with a functional currency that is not the U.S. dollar are translated into U.S. dollars using the exchange rate at
the balance sheet date for assets and liabilities, and weighted average exchange rates for revenues and expenses (which approximates
the translation of each transaction). Translation adjustments resulting from the process of the aforesaid translation are included
as a separate component of equity (accumulated other comprehensive gain or loss).
On
Track Innovations Ltd.
and its
Subsidiaries
Notes
to the Consolidated Financial Statements
In
thousands, except share and per share data
Note
2 - Significant Accounting Policies (cont’d)
B.
|
Principles
of consolidation
|
The
consolidated financial statements include the financial statements of the Company, its wholly-owned subsidiaries and its majority
owned subsidiaries. Intercompany transactions and balances have been eliminated in consolidation.
C.
|
Estimates
and assumptions
|
The
preparation of the consolidated financial statements requires management of the Company to make a number of estimates and assumptions
relating to the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenues and expenses during the year. Such estimates include
the valuation of useful lives of long-lived assets, revenue recognition, valuation of accounts receivable and allowance for doubtful
accounts, valuation of inventories, legal contingencies, the assumptions used in the calculation of stock-based compensation,
income taxes and other contingencies. Estimates and assumptions are periodically reviewed by management and the effects of any
material revisions are reflected in the period that they are determined to be necessary. Actual results, however, may vary from
these estimates.
Cash
equivalents are short-term highly liquid investments and debt instruments that are readily convertible to cash with original maturities
of three months or less from the date of purchase. Bank deposits with original maturities of more than three months, or specific
deposits that are intended to be held as bank deposits for more than three months, and which will mature within one year, are
classified as short-term investments.
Trade
receivables are recorded at the invoiced amount and do not bear interest. Collections of trade receivables are included in net
cash provided by operating activities in the consolidated statements of cash flows. The consolidated financial statements include
an allowance for loss from receivables for which collection is in doubt. In determining the adequacy of the allowance consideration
is given to each trade receivable historical experience, aging of the receivable, adjusted to take into account current market
conditions and information available about specific debtors, including their financial condition, current payment patterns, the
volume of their operations, and evaluation of the security received from them or their guarantors.
F.
|
Short-term
investments
|
Short-term
investments consist of:
|
(1)
|
Bank
deposits whose maturities are longer than three months from the date of purchase, but
not longer than one year from the balance sheet date.
|
|
(2)
|
Bank
deposits whose maturities are less than three months from the date of purchase, but are
intended to be held as bank deposits for more than three months.
|
|
(3)
|
Restricted
bank deposits whose maturities are not longer than one year from the balance sheet date
(for further details, see Note 8C).
|
On
Track Innovations Ltd.
and its
Subsidiaries
Notes
to the Consolidated Financial Statements
In
thousands, except share and per share data
Note
2 - Significant Accounting Policies (cont’d)
Inventories
are stated at the lower of cost or net realizable value. Cost is determined by calculating raw materials, work in process and
finished products on a “moving average” basis. Net realizable value is defined as the “estimated selling prices
in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation.” Inventory
write-offs are provided to cover risks arising from slow moving items or technological obsolescence. Such write-offs, which were
not material for the reported years, have been included in cost of revenues.
H.
|
Property, plant and equipment, net
|
Property,
plant and equipment are stated at cost less accumulated depreciation. Depreciation is calculated using the straight-line method
over the estimated useful lives of the assets as follows:
|
|
Years
|
Buildings
|
|
25
|
Computers, software and manufacturing equipment
|
|
3-5
|
Office furniture and equipment
|
|
5-16
|
|
|
(mainly - 10)
|
I.
|
Impairment
of long-lived assets
|
Long-lived
assets, such as property, plant, and equipment, and intangible assets subject to amortization, are evaluated for impairment
whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If
circumstances require a long-lived asset to be tested for possible impairment, the Company first compares undiscounted cash
flows expected to be generated by an asset to the carrying value of the asset. If the carrying value of the long-lived asset
is not recoverable on an undiscounted cash flow basis, impairment is recognized to the extent that the carrying value exceeds
its fair value. Fair value is determined through various valuation techniques including discounted cash flow models, quoted
market values and third-party independent appraisals, as considered necessary.
Accounting
policy applicable before January 1, 2018:
The
Group generates revenues from product sales manufactured based on the Company’s technology. In addition, the Company generates
revenues from the technology it developed through transaction fee arrangements, licensing agreements and patent litigation settlements,
as part of its patent activity. Revenues are also generated from non-recurring engineering, customer services and technical support.
Revenues
from product sales and non-recurring engineering are recognized when delivery has occurred provided there is persuasive evidence
of an agreement, the fee is fixed or determinable, collection of the related receivable is probable and no further obligations
exist. In the case of non-recurring engineering, revenue is recognized upon completion of testing and approval of the customization
of the product by the customer, provided that no further obligation exists. Revenues are recognized net of value added tax.
On
Track Innovations Ltd.
and its
Subsidiaries
Notes
to the Consolidated Financial Statements
In
thousands, except share and per share data
Note
2 - Significant Accounting Policies (cont’d)
|
J.
|
Revenue
recognition (cont’d)
|
License
and transaction fees are recognized as earned based on actual usage. Usage is determined by receiving confirmation from the users.
Patent litigation revenues are recognized upon final settlement of the litigation (see Note 14).
Revenues
relating to customer services and technical support are recognized as the services are rendered ratably over the term of the related
contract.
Licensing
and transaction fees are recognized based on the volume of transactions or monthly licensing fees from systems that contain the
Company’s products and usually bear no cost to the Company.
The
cost to the Company of warranty that the product will perform according to certain specifications and that the Company will repair
or replace the product if it ceases to work properly, is insignificant and is treated according to accounting guidance for contingencies.
Regarding
the accounting policy applicable after January 1, 2018 and the first-time adoption of ASC 606,
Revenues from Contracts with
Customers
, see also Note 2W(2).
K.
|
Research, development costs and certification costs
|
Research
and development costs, which consist mainly of labor costs, materials and subcontractors, are charged to operations as incurred.
According
to ASC Topic 350, “
Intangibles - Goodwill and Other
,” software that is part of a product or process to be sold
to a customer shall be accounted for under ASC Subtopic 985-20. The Company’s products contain embedded software which is
an integral part of these products because it allows the various components of the products to communicate with each other and
the products are clearly unable to function without this coding. The costs of product certification are capitalized once technological
feasibility is determined. The Company determines that technological feasibility for its products is reached after all high-risk
development issues have been resolved. Once the products are available for general release to the Company’s customers, the
Company ceases capitalizing the product certification costs and all additional costs, if any, are expensed. The capitalized product
certification costs are amortized on a product-by-product basis using straight-line amortization, over a period of 3 years. The
amortization begins when the products are available for general release to the Company’s customers. The depreciation is
presented within research and development in the consolidated statements of operations. Amortization expenses amounted to $215,
$181 and $90 for the years ended December 31, 2018, 2017 and 2016, respectively.
L.
|
Stock-based compensation
|
The
Company measures and recognizes compensation expense for all stock-based payment awards made to employees and directors based
on estimated grant date fair values. The estimated fair value of awards is charged to income on a straight-line basis over the
requisite service period, which is generally the vesting period.
ASC
Topic 718,
Compensation – Stock Compensation
, requires estimating the fair value of stock-based payments awards on
the date of the grant using an option pricing model. The Company uses the Black-Scholes option pricing model.
The
Company elected to recognize compensation cost for awards with only service conditions that have a graded vesting schedule using
the straight-line method.
On
Track Innovations Ltd.
and its
Subsidiaries
Notes
to the Consolidated Financial Statements
In
thousands, except share and per share data
Note
2 - Significant Accounting Policies (cont’d)
M.
|
Basic and diluted net loss per share
|
Basic
and diluted net loss per ordinary share is computed based on the weighted average number of ordinary shares outstanding during
each year. Shares issuable for little or no cash consideration, are considered outstanding ordinary shares and included in the
computation of basic net loss per ordinary share as of the date that all necessary conditions have been satisfied. In years that
discontinued operations are presented, the Company uses income from continuing operations (attributable to the parent entity)
as the benchmark to determine whether potential common shares are dilutive or antidilutive. Therefore, when the Company records
a loss from continuing operations and the issuance of option shares would be antidilutive due to the loss, but the Company has
net income from discontinued operations, potential shares are excluded from the diluted calculation even though the effect on
net income from discontinued operations would be dilutive.
Stock
options and warrants in the amounts of 1,501,000, 1,535,000 and 1,644,836 outstanding as of the years ended December 31, 2018,
2017 and 2016, respectively, have been excluded from the calculation of the diluted net loss per ordinary share because all such
securities have an anti-dilutive effect for all periods presented.
N.
|
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, 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.
On
Track Innovations Ltd.
and its
Subsidiaries
Notes
to the Consolidated Financial Statements
In
thousands, except share and per share data
Note
2 - Significant Accounting Policies (cont’d)
The
Company accounts for taxes on income in accordance with ASC Topic 740,
Income Taxes
. Deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases, and operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates
is recognized in the consolidated statement of operations in the period that includes the enactment date. The Company provides
a valuation allowance to reduce deferred tax assets to the amount that is more likely than not to be realized.
The
Company recognizes the effect of income tax positions only if those positions are more likely than not to be sustained. Recognized
income tax positions are measured at the largest amount that is greater than 50 percent likely of being realized.
The
Company accounts for interest and penalties as a component of income tax expense.
P.
|
Non-controlling interest
|
The
Company implements ASC Topic 810,
Consolidation
, which requires net loss (income) attributable to non-controlling interests
to be classified in the consolidated statements of operations as part of consolidated net earnings and to include the accumulated
amount of non-controlling interests in the consolidated balance sheets as part of equity. If a change in ownership of a consolidated
subsidiary results in loss of control and deconsolidation, any retained ownership interests are remeasured with the gain or loss
reported in net earnings.
If
a change in ownership of a consolidated subsidiary does not result in loss of control, or results in an increase of ownership
interests, the Company accounts for such a change as an equity transaction. Therefore, no gain or loss is recognized in consolidated
net earnings or comprehensive income. The carrying amount of the non-controlling interest is adjusted to reflect the change in
its ownership interest in the subsidiary. Any difference between the fair value of the consideration received or paid and the
amount by which the non-controlling interest is adjusted is recognized in equity attributable to the Company.
The
Company’s liability for severance pay for some of its Israeli employees is calculated pursuant to Israeli Severance Pay
Law, 1963 (the “Israeli Severance Pay Law”) based on the most recent salary of the employee multiplied by the number
of years of employment, as of the balance sheet date. Those employees are entitled to one month’s salary for each year of
employment or a portion thereof. Certain senior executives were entitled to receive additional severance pay. The Company records
the liability as if it were payable at each balance sheet date on an undiscounted basis. The liability is classified based on
the expected date of settlement, and therefore is usually classified as a long-term liability, unless the cessation of the employees
is expected during the upcoming year.
The
Company’s liability for those Israeli employees is partially provided for by monthly deposits for insurance policies and
the remainder by an accrual. The value of these policies is recorded as an asset in the Company’s balance sheet.
On
Track Innovations Ltd.
and its
Subsidiaries
Notes
to the Consolidated Financial Statements
In
thousands, except share and per share data
Note
2 - Significant Accounting Policies (cont’d)
Q.
|
Severance pay (cont’d)
|
The
deposited funds include profits and losses accumulated up to the balance sheet date. The deposited funds may be withdrawn only
upon the fulfillment of the obligation pursuant to the Israeli Severance Pay Law or labor agreements. The value of the deposited
funds is based on the cash redemption value of these policies. In addition, the Company has deposited certain amounts with a trustee,
to compensate for any severance pay liability that is not covered by other funds. These deposits are restricted and may be withdrawn
only for payment of severance pay liabilities. The severance pay funds and the restricted deposits for employee benefits are classified
based on the classification of the corresponding liability.
In
respect of other Israeli employees, the Company acts pursuant to the general approval of the Israeli Ministry of Labor and Welfare,
pursuant to the terms of Section 14 of the Israeli Severance Pay Law, according to which the current deposits with the pension
fund and/or with the insurance company exempt the Company from any additional obligation to these employees for whom the said
depository payments are made. These deposits are accounted as defined contribution payments.
Severance
pay expenses for the years ended December 31, 2018, 2017 and 2016 amounted to $212, $242 and $227, respectively. Defined contribution
plan expenses were $232, $231 and $182 in the years ended December 31, 2018, 2017 and 2016, respectively.
Advertising
expenses are charged to the statements of operations as incurred. Advertising expenses for the years ended December 31, 2018,
2017 and 2016 amounted to $1,367, $1,254 and $1,142, respectively.
S.
|
Concentrations of credit or business risk
|
Financial
instruments that potentially subject the Company to concentrations of credit risk consist principally of cash equivalents, bank
deposits and trade receivables.
Cash
equivalents are invested mainly in U.S. dollars with major banks in Israel and Europe. Management believes that the financial
institutions that hold the Group’s investments are financially sound and, accordingly, minimal credit risk exists with respect
to these investments.
Most
of the Company’s trade receivables are derived from sales to large and financially secure organizations. In determining
the adequacy of the allowance, management bases its opinion, inter alia, on the estimated risks, current market conditions and
in reliance on available information with respect to the debtor’s financial position. As for major customers, see Note 15. The
Company acquires certain components of its products from single source manufacturers.
The
activity in the allowance for doubtful accounts for the years ended December 31, 2018, 2017 and 2016 is as follows:
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Allowance for doubtful accounts at beginning of year
|
|
$
|
568
|
|
|
$
|
720
|
|
|
$
|
778
|
|
Additions charged to allowance for doubtful accounts
|
|
|
52
|
|
|
|
73
|
|
|
|
147
|
|
Write-downs charged against the allowance
|
|
|
(45
|
)
|
|
|
(225
|
)
|
|
|
(205
|
)
|
Other
|
|
|
(20
|
)
|
|
|
-
|
|
|
|
-
|
|
Allowance for doubtful accounts at end of year
|
|
$
|
555
|
|
|
$
|
568
|
|
|
$
|
720
|
|
On
Track Innovations Ltd.
and its
Subsidiaries
Notes
to the Consolidated Financial Statements
In
thousands, except share and per share data
Note
2 - Significant Accounting Policies (cont’d)
T.
|
Commitments and contingencies
|
Liabilities
for loss contingencies arising from claims, assessments, litigations, fines and penalties and other sources are recognized when
it is probable that a liability has been incurred and the amount of the assessment can be reasonably estimated. Loss recovery
related to recovery of a loss when the recovery is less than or equal to the amount of the loss recognized in the financial statements
is recognized if collection is probable and estimable. Gain contingencies are recognized only when resolved.
As
described in Note 1B, the Company has sold certain operations. Upon reaching a definitive agreement with an acquirer, the Company
recognizes the consideration received from the divesture, less all assets and liabilities sold, as a gain or loss.
Discontinued
operations
Upon
divesture of a business, the Company classifies such business as a discontinued operation, if the divested business represents
a strategic shift that has (or will have) a major effect on an entity’s operations and financial results.
For
disposals other than by sale such as abandonment, the results of operations of a business would not be recorded as a discontinued
operation until the period in which the business is actually abandoned.
The
SmartID Division divesture, the parking business divesture and the Medismart divesture qualify as discontinued operations and
therefore have been presented as such.
The
results of businesses that have qualified as discontinued operations have been presented as such for all reporting periods. Results
of discontinued operations include all revenues and expenses directly derived from such businesses; general corporate overhead
is not allocated to discontinued operations.
Any
loss or gain that arose from the divesture of a business that qualifies as discontinued operations has been included within the
results of the discontinued operations.
The
Company also presents cash flows from discontinued operations separately from cash flows of continuing operations.
Contingent
consideration
The
Company’s sale arrangements consist of contingent consideration based on the divested businesses’ future sales or
profits. The Company records the contingent consideration portion of the arrangement when the consideration is determined to be
realizable.
V.
|
Patent litigation and maintenance expenses
|
Patent
litigation and maintenance expenses, which consist mainly of salaries and consultants’ fees, are expensed as incurred. The
Company presents such expenses (excluding expenses associated directly with revenues from a litigation settlement agreement that
contains a license agreement) as a separate item within its operating expenses because it believes that such presentation improves
the understandability of the statement of operations.
Expenses
associated directly with revenues from a litigation settlement agreement that contains a license agreement are presented within
‘cost of licensing’.
On
Track Innovations Ltd.
and its
Subsidiaries
Notes
to the Consolidated Financial Statements
In
thousands, except share and per share data
Note
2 - Significant Accounting Policies (cont’d)
W.
|
Recently Adopted Accounting Pronouncements
|
|
1.
|
Restricted
Cash and Cash Equivalents in Statement of Cash Flows
|
In
December 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
2016-18,
Statement of Cash Flows (Topic 230): Restricted Cash
, which requires amounts generally described as restricted
cash and restricted cash equivalents to be included within cash and cash equivalents when reconciling the beginning-of-period
and end-of-period total amounts shown in the statement of cash flows. The Company has adopted ASU 2016-18 commencing from January
1, 2018. The Company has applied the guidance retrospectively to all periods presented.
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:
|
|
December 31
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Cash and cash equivalents
|
|
$
|
4,827
|
|
|
$
|
6,742
|
|
|
$
|
5,952
|
|
|
$
|
5,450
|
|
Restricted cash and cash equivalents (*)
|
|
|
278
|
|
|
|
1,057
|
|
|
|
1,548
|
|
|
|
2,254
|
|
Total cash, cash equivalents, and restricted cash and cash equivalents presented in the statements of cash flows
|
|
$
|
5,105
|
|
|
$
|
7,799
|
|
|
$
|
7,500
|
|
|
$
|
7,704
|
|
|
(*)
|
The
restricted cash and cash equivalents are included in short-term investments in the accompanying consolidated balance sheets.
|
In
May 2014, the FASB issued ASC Topic 606,
Revenue from Contracts with Customers
(“Topic 606”). 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
Company has adopted Topic 606 commencing from January 1, 2018 on a modified retrospective basis. Results for reporting periods
beginning after January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be
reported in accordance with historic accounting under Topic 605 (as described in Note 2 J).
The
Company utilized a comprehensive approach in order to assess the impact of the guidance on its contract portfolio by reviewing
its current accounting policies and practices to identify potential differences that would result from applying the new requirements,
including evaluation of the performance obligations and variable consideration.
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.
On
Track Innovations Ltd.
and its
Subsidiaries
Notes
to the Consolidated Financial Statements
In
thousands, except share and per share data
Note
2 - Significant Accounting Policies (cont’d)
|
W.
|
Recently
Adopted Accounting Pronouncements (cont’d)
|
|
2.
|
Revenue
Recognition (cont’d)
|
Topic
606 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.
|
The
Company accounts for a contract with customer when it has approval and commitment from both parties, the rights of the parties
and payment terms are identified, the contract has commercial substance and collectability of consideration is probable.
For
each contract, the Company exercises judgement to identify separate performance obligations and to evaluate, at the inception
of the contract, if each distinct performance obligation within the contract is satisfied at a point in time or over time.
Revenue
is measured based on a consideration specified in a contract with a customer, and excludes any sales incentives and amounts collected
on behalf of third parties.
In
certain arrangements with variable consideration, the Company exercises judgement in order to estimate the amount of variable
consideration to be included in the transaction price. In these arrangements, revenue is recognized over time as it is mainly
attributed to ongoing services provided. An insignificant 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.
Revenue
is allocated among performance obligations in a manner that reflects the consideration that the Company expects to be entitled
for the promised goods or services based on standalone selling prices (SSP). SSP are estimated for each distinct performance obligation
and judgment may be required in their determination. The best evidence of SSP is the observable price of a product or service
when the Company sells the goods separately in similar circumstances and to similar customers.
The
Company recognizes revenue when it satisfies a performance obligation by transferring control over a product or service to a customer.
For an analysis of the performance obligations and the timing of revenue recognition, for each type of the contract, see also
Note 9.
The
new standard requires the Company to provide more robust disclosures than required by previous guidance. Such disclosures have
been provided in Note 9.
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.
On
Track Innovations Ltd.
and its
Subsidiaries
Notes
to the Consolidated Financial Statements
In
thousands, except share and per share data
Note
2 - Significant Accounting Policies (cont’d)
|
X.
|
Recent
accounting pronouncements
|
|
1.
|
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. The guidance is effective for interim and annual reporting periods beginning after December 15, 2018, with early
adoption permitted. The Company will adopt this standard on January 1, 2019, under the effective date method. In accordance with
the effective date method, the Company needs to record a cumulative-effect adjustment within its accumulated deficit in the equity
on January 1, 2019, without reclassification of previous financial statements. The guidance is not expected to have a material
impact on the Company’s financial statements, including the results of its operations and its cash flows, with an expected
increase of the Company’s assets and liabilities in amount that reflects approximately 4%-7% of the Company’s total
assets as of January 1, 2019, subject to completion of its assessment.
|
|
2.
|
In
June 2016, the FASB issued ASU 2016-13,
Financial Instruments — Credit Losses
(Topic 326)
. The main objective of this ASU is to provide financial statement users
with more decision-useful information about the expected credit losses on financial instruments
and other commitments to extend credit held by a reporting entity at each reporting date.
To achieve this objective, the amendments in this ASU replace the incurred loss impairment
methodology in current GAAP with a methodology that reflects expected credit losses and
requires consideration of a broader range of reasonable and supportable information to
inform credit loss estimates. The amendments affect entities holding financial assets
and net investment in leases that are not accounted for at fair value through net income.
The amendments affect loans, debt securities, trade receivables, net investments in leases,
off-balance-sheet credit exposures, reinsurance receivables, and any other financial
assets not excluded from the scope that have the contractual right to receive cash. ASU
2016-13 is effective for fiscal years beginning after December 15, 2019, including interim
periods within those fiscal years. Early adoption is permitted for fiscal years beginning
after December 15, 2018. The Company currently does not expect the adoption of this accounting
standard to have a material impact on its consolidated financial statements.
|
|
Y.
|
Immaterial
error correction
|
The
consolidated balance Sheet as of December 31, 2017 includes the impact of an immaterial correction that is reflected by increasing
other receivables and prepaid expenses and other current liabilities by $855 in order to reflect the Company’s exposure to a claim
and the right to receive full indemnity for this exposure (see Note 8E1). In addition, the Company reclassified supplier advance
that was previously presented net of the trade payables in the amount of $907 to other receivables and prepaid expenses. These
corrections had no impact on the previously reported amounts of total equity, consolidated statements of operations, consolidated
statements of comprehensive loss, consolidated statements of changes in equity and consolidated cash flows from operating, investing
or financing activities.
On
Track Innovations Ltd.
and its
Subsidiaries
Notes
to the Consolidated Financial Statements
In
thousands, except share and per share data
Note
2 - Significant Accounting Policies (cont’d)
|
Y.
|
Immaterial
error correction (cont’d)
|
The
Company evaluated these corrections and determined, based on quantitative and qualitative factors, that the corrections made were
not material to the consolidated financial statements taken as a whole for any previously filed consolidated financial statement.
Note
3 - Short-term investments:
Balances
at December 31, 2018 and 2017 consist of bank deposits. The bank deposits bear weighted average annual interest of 2.29% as of
December 31, 2018 (As of December 31, 2017 – 0.7%).
See
Note 8C as to restrictions on certain deposits.
Note
4 - Other Receivables and Prepaid Expenses
|
|
December 31
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Government institutions
|
|
$
|
387
|
|
|
$
|
263
|
|
Prepaid expenses
|
|
|
226
|
|
|
|
381
|
|
Receivables under contractual obligations to be transferred to others (*)
|
|
|
349
|
|
|
|
446
|
|
Suppliers advance
|
|
|
932
|
|
|
|
(**) 1,029
|
|
Other receivables
|
|
|
166
|
|
|
|
(**) 1,206
|
|
|
|
$
|
2,060
|
|
|
$
|
3,325
|
|
|
(*)
|
The
Company’s subsidiary in Poland is required to collect certain fees that are to be transferred to local authorities.
|
Note
5 - Property, Plant and Equipment, Net
|
|
December 31
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Cost
|
|
|
|
|
|
|
Buildings
|
|
$
|
966
|
|
|
$
|
917
|
|
Computers, software and manufacturing equipment
|
|
|
16,052
|
|
|
|
16,279
|
|
Office furniture and equipment
|
|
|
153
|
|
|
|
172
|
|
Motor vehicles
|
|
|
195
|
|
|
|
201
|
|
Total cost
|
|
|
17,366
|
|
|
|
17,569
|
|
Total accumulated depreciation
|
|
|
12,333
|
|
|
|
11,710
|
|
|
|
$
|
5,033
|
|
|
$
|
5,859
|
|
|
B.
|
As
to liens - See Note 8C.
|
|
C.
|
Depreciation
expenses amounted to $1,113, $991 and $1,082 for the years ended December 31, 2018, 2017
and 2016, respectively.
|
On
Track Innovations Ltd.
and its
Subsidiaries
Notes
to the Consolidated Financial Statements
In
thousands, except share and per share data
Note
6 - Other Current Liabilities
|
|
December 31
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Employees and related expenses
|
|
$
|
1,042
|
|
|
$
|
1,073
|
|
Accrued expenses
|
|
|
921
|
|
|
|
1,054
|
|
Customer advances
|
|
|
141
|
|
|
|
178
|
|
Other current liabilities
|
|
|
* 1,518
|
|
|
|
* 971
|
|
|
|
$
|
3,622
|
|
|
$
|
3,276
|
|
|
*
|
See Notes 8E(1) and 2Y.
|
Note
7 - Bank Loans
|
A.
|
Composition
of long-term loans:
|
|
|
December 31
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Long-term loans (*)
|
|
$
|
299
|
|
|
$
|
1,400
|
|
Less - current maturities
|
|
|
260
|
|
|
|
586
|
|
|
|
$
|
39
|
|
|
$
|
814
|
|
|
(*)
|
As
of December 31, 2018, the bank loans are denominated in the following currencies: Polish Zloty ($252; matures in 2019) and South
African Rand ($47; matures in 2019-2020). As of December 31, 2018, these loans bear a weighted average interest rate of 4.66%
per annum.
|
|
B.
|
Repayment
dates of long-term loans subsequent to December 31, 2018:
|
|
C.
|
Composition
of short-term loans, bank credit and current maturities of long-term loans:
|
|
|
December 31
|
|
|
December 31
|
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
Interest rate
|
|
|
|
|
|
|
|
In U.S. Dollars
|
|
4.50
|
|
|
$
|
-
|
|
|
$
|
1,669
|
|
In Polish Zloty
|
|
3.63
|
|
|
|
-
|
|
|
|
1,147
|
|
In NIS
|
|
3.60
|
|
|
|
-
|
|
|
|
779
|
|
|
|
|
|
|
|
-
|
|
|
|
3,595
|
|
Current maturities of long-term loans
|
|
|
|
|
|
260
|
|
|
|
586
|
|
|
|
|
|
|
$
|
260
|
|
|
$
|
4,181
|
|
The
weighted average interest rates of the short-term bank credit for the years ended December 31, 2018 and 2017 were 3.82% and 4.03%,
respectively, per annum.
|
D.
|
Liens
for short-term and long-term loans - see Note 8C.
|
|
E.
|
As
of December 31, 2018, the Group has authorized unused credit lines of $2,565.
|
On
Track Innovations Ltd.
and its
Subsidiaries
Notes
to the Consolidated Financial Statements
In
thousands, except share and per share data
Note
8 - Commitments and Contingencies
|
A.
|
Commitments
and Contingencies:
|
The
Company has entered into several research and development agreements, pursuant to which the Company received grants from the Government
of Israel, and are therefore obligated to pay royalties to the Government of Israel at a rate of 3%-3.5% of its sales up to the
amounts granted (linked to the U.S. dollar with annual interest at LIBOR as of the date of approval, for programs approved from
January 1, 1999 and thereafter). The total amount of grants received as of December 31, 2018, net of royalties paid, was approximately
$3,800 (including accrued interest). No grants from the Government of Israel were received during the three-year period ended
December 31, 2018.
During
the year ended December 31, 2018, there were no royalty expenses. Royalty expenses amounted to $111 and $423 for the years ended
December 31, 2017 and 2016, respectively, and were charged to cost of revenues.
The
Group operates from leased facilities in the United States, Israel, Poland and South Africa, leased for periods expiring in years
2019 through 2023.
Minimum
future rentals of premises under non-cancelable operating lease agreements at rates in effect as of December 31, 2018 are as follows:
2019
|
|
$
|
284
|
|
2020
|
|
|
184
|
|
2021
|
|
|
170
|
|
2022
|
|
|
175
|
|
2023
|
|
|
46
|
|
|
|
$
|
859
|
|
Rent
expenses amounted to $363, $399 and $313 for the years ended December 31, 2018, 2017 and 2016, respectively. See also Note
16.
The
Company and certain subsidiaries have recorded floating charges on all of its tangible assets in favor of banks.
The
Company’s and certain subsidiaries’ manufacturing facilities and certain equipment have been pledged as security in respect of
a loan received from a bank.
The
Company’s short-term deposits in the amount of $278 have been pledged as security in respect of guarantees granted and in respect
of credit lines received from a bank
.
Such deposits cannot be pledged to others or withdrawn without the consent of the
bank.
As
of December 31, 2018, the Company granted performance guarantees and guarantees to secure customer advances in the sum of $304.
The expiration dates of the guarantees range from January 2019 to June 2019.
On
Track Innovations Ltd.
and its
Subsidiaries
Notes
to the Consolidated Financial Statements
In
thousands, except share and per share data
Note
8 - Commitments and Contingencies (cont’d)
|
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, plus expenses and legal fees. The arbitration decision had been appealed and the appeal
was denied on June 17, 2018. In order to collect the award, Merwell filed a motion against the Company and the Nazareth District
Court issued a judgment requiring the Company to pay Merwell an amount of NIS 5,080 (approximately $1,370) that was paid by
the Company on January 8, 2019. As mentioned above, based on the agreement with SuperCom from April 2016 (which was granted an
effect of a court judgment), SuperCom is liable for all the costs and liabilities arising out of this claim. Subsequent to the
balance sheet date, the Company initiated an arbitration process to collect from SuperCom, the amount paid to Merwell, which SuperCom
failed to pay as of the date hereof.
|
As
of December 31, 2018, the Company recorded a provision for the full amount paid. Despite the fact that, based on the assessment
of the Company’s external legal counsel, the likelihood to succeed in the arbitration process (or other legal procedure
in that matter) is high, the Company did not record an indemnification asset as of December 31, 2018, in accordance with
accounting standard ASC 450.
|
2.
|
In
October 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. The Company will submit its answer to the appeal by November
7, 2019, and the appeal hearing is scheduled for December 5, 2019. 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.
|
On
Track Innovations Ltd.
and its
Subsidiaries
Notes
to the Consolidated Financial Statements
In
thousands, except share and per share data
Note
9 - Revenues
Disaggregation
of revenue
The
following table disaggregates the Company’s revenue by major source based on categories that depict its nature and timing
as reviewed by management for the year ended December 31, 2018:
|
|
Year ended December 31
|
|
|
|
2018
|
|
|
|
Retail and
Mass Transit
Ticketing
|
|
|
Petroleum
|
|
|
Total
|
|
Cashless payment products (A)
|
|
$
|
8,751
|
|
|
$
|
-
|
|
|
$
|
8,751
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Complete cashless payment solutions (B):
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales of products (B1)
|
|
|
2,986
|
|
|
|
3,794
|
|
|
|
6,780
|
|
Licensing fees, transaction fees and services (B2)
|
|
|
4,890
|
|
|
|
1,457
|
|
|
|
6,347
|
|
|
|
|
7,876
|
|
|
|
5,251
|
|
|
|
13,127
|
|
Total revenues
|
|
$
|
16,627
|
|
|
$
|
5,251
|
|
|
$
|
21,878
|
|
Performance
obligations
Below
is a listing of performance obligations for the Company’s main revenue streams:
|
A.
|
Cashless
payment products –
|
The
performance obligation is the selling of contactless payment products. Most of those products are Near Field Communication (NFC)
readers. For such sales the performance obligation, transfer of control and revenue recognition occur when the products are delivered.
|
B.
|
Complete
cashless payment solutions –
|
The
complete solution includes selling of products and complementary services, as follows:
|
●
|
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 occur when the products are delivered.
|
2.
|
Licensing
fees, transaction fees and services -
|
The
types of arrangements and their main performance obligations are as follows:
|
●
|
To
provide terminal management system licensing for software that is responsible for remote
terminal management and cloud-based software licensing which provide data insights. For
such services, the revenue recognition occurs as the services are rendered since the
performance obligation is satisfied over time.
|
|
●
|
To
enable loading and sale of electronic contactless and paper cards. For such transaction
fees the revenue recognition occurs on the transaction date.
|
|
●
|
To
provide technical and customer services for products. For such services, the performance
obligation is satisfied over time and therefore revenue recognition occurs as the services
are rendered.
|
On
Track Innovations Ltd.
and its
Subsidiaries
Notes
to the Consolidated Financial Statements
In
thousands, except share and per share data
Note
9 - Revenues (cont’d)
Performance
obligations (cont’d)
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
|
|
December 31
|
|
|
December 31
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Trade receivables, net of allowance for doubtful accounts
|
|
$
|
4,530
|
|
|
$
|
5,827
|
|
Customer advances
|
|
$
|
141
|
|
|
$
|
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 is mainly attributed to ongoing services provided. An insignificant 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.
On
Track Innovations Ltd.
and its
Subsidiaries
Notes
to the Consolidated Financial Statements
In
thousands, except share and per share data
Note
10 - Equity
|
A.
|
Shares
to non-employees
|
During
2018, 2017 and 2016, the Company granted its consultants 80,000, 45,000 and 15,000 ordinary shares, respectively. The expenses
that are recognized due to these grants are immaterial and are presented within ’stock-based compensation’ in the
statement of changes in equity.
In
February 2001, the Company’s Board of Directors (the “Board”) approved an option plan, under which up to 75,000
share options are to be granted to the Company’s employees, directors and consultants and those of the Company’s subsidiaries
and affiliates.
During
the years 2002 to 2012, the Board approved an increase of 13,125,000 options to be reserved under the Company’s share option
plan.
On
October 22, 2013, the Board approved a further increase of 2,500,000 options to be reserved under the Company’s share option
plan.
On
June 17, 2014, the Board approved a further increase of 750,000 options to be reserved under the Company’s share option
plan.
On
November 21, 2017, following the approval of the compensation committee and the Board, the shareholders of the Company approved
an amendment to the Company’s share option plan, so that securities may be issued under such plan from time to time until
December 31, 2021.
The
vesting period for the options ranges from immediate vesting to ratable vesting over a four- year period. The exercise price of
options under the plan is at varying prices. 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.
The
fair value of each option granted to employees during 2018, 2017 and 2016 was estimated on the date of grant, using the Black-Scholes
model and the following assumptions:
|
|
Year ended December 31
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected volatility
|
|
|
69%-81
|
%
|
|
|
67%-74
|
%
|
|
|
71%-75
|
%
|
Risk-free interest rate
|
|
|
1.92%-2.84
|
%
|
|
|
1.35%-1.83
|
%
|
|
|
0.97%-1.42
|
%
|
Expected life - in years
|
|
|
2.33
|
|
|
|
2.45
|
|
|
|
2.45-3.5
|
|
|
1.
|
Dividend
yield of zero percent for all periods.
|
|
2.
|
Expected
average volatility represents a weighted average standard deviation rate for the price of the Company’s ordinary shares
on Nasdaq.
|
|
3.
|
Risk-free
interest rate is based on the U.S. Treasury yield curve in effect at the time of grant.
|
|
4.
|
For
options granted during 2018 and 2017 - estimated expected lives are based on historical grants data. For 2016 - estimated expected
lives are according to the simplified method.
|
On
Track Innovations Ltd.
and its
Subsidiaries
Notes
to the Consolidated Financial Statements
In
thousands, except share and per share data
Note
10 - Equity (cont’d)
|
B.
|
Stock
option plans (cont’d)
|
The
Company’s options activity during 2018 (including options to non-employees) and information as to options outstanding and
options exercisable as of December 31, 2018 and 2017 are summarized in the following table:
|
|
Number of
|
|
|
Weighted average exercise
|
|
|
Aggregate
|
|
|
|
options
|
|
|
price
|
|
|
intrinsic
|
|
|
|
outstanding
|
|
|
per share
|
|
|
value
|
|
Outstanding – December 31, 2017
|
|
|
1,495,000
|
|
|
$
|
1.27
|
|
|
|
|
|
Options granted
|
|
|
224,000
|
|
|
|
1.06
|
|
|
|
|
|
Options expired or forfeited
|
|
|
(218,001
|
)
|
|
|
1.32
|
|
|
|
|
|
Options exercised
|
|
|
(39,999
|
)
|
|
|
0.86
|
|
|
|
|
|
Outstanding – December 31, 2018
|
|
|
1,461,000
|
|
|
$
|
1.24
|
|
|
$
|
6
|
|
Exercisable as of:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
855,642
|
|
|
$
|
1.32
|
|
|
$
|
4
|
|
The
weighted average grant date fair value of options granted is $0.46, $0.66 and $0.95 per option during 2018, 2017 and 2016, respectively.
The
following table summarizes information about options outstanding and exercisable (including options to non-employees) as of December
31, 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
|
|
|
December 31,
|
|
|
contractual
|
|
|
Exercise
|
|
|
December 31,
|
|
|
contractual
|
|
|
Exercise
|
|
exercise price
|
|
|
2018
|
|
|
life (years)
|
|
|
Price
|
|
|
2018
|
|
|
life (years)
|
|
|
Price
|
|
$
|
0.44-0.90
|
|
|
|
544,000
|
|
|
|
2.65
|
|
|
$
|
0.76
|
|
|
|
356,666
|
|
|
|
1.95
|
|
|
$
|
0.74
|
|
|
1.07-1.68
|
|
|
|
707,000
|
|
|
|
3.44
|
|
|
|
1.23
|
|
|
|
288,976
|
|
|
|
3.19
|
|
|
|
1.18
|
|
|
2.32-2.36
|
|
|
|
170,000
|
|
|
|
0.37
|
|
|
|
2.35
|
|
|
|
170,000
|
|
|
|
0.37
|
|
|
|
2.35
|
|
$
|
3.03
|
|
|
|
40,000
|
|
|
|
0.73
|
|
|
$
|
3.03
|
|
|
|
40,000
|
|
|
|
0.73
|
|
|
$
|
3.03
|
|
|
|
|
|
|
1,461,000
|
|
|
|
2.71
|
|
|
|
|
|
|
|
855,642
|
|
|
|
2.00
|
|
|
|
|
|
The
total exercise date intrinsic value of options exercised during the years ended December 31, 2018, 2017 and 2016, was $16, $32
and $45, respectively.
As
of December 31, 2018, there was $251 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 1.21 years. The total fair value of shares vested during
the year ended December 31, 2018 was $180.
During
2018, 2017 and 2016, the Company recorded stock-based compensation expenses in the amount of $234, $254 and $239, respectively,
in accordance with ASC Topic 718.
Stock-based
compensation expenses are not deductible for tax purpose.
On
Track Innovations Ltd.
and its
Subsidiaries
Notes
to the Consolidated Financial Statements
In
thousands, except share and per share data
Note
10 - Equity (cont’d)
|
1.
|
During
2018, no warrants expired or were exercised into ordinary shares.
|
|
2.
|
As
of December 31, 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.
|
|
D
.
|
Change
in the ownership rate
|
During
2016, the Company bought out the minority interest in its subsidiaries that operated the parking business, PARX Ltd. and Easy
Park Ltd., in consideration of $69. In addition to the payment of $69, the Consolidated Statement of Changes in Equity for
the year ended December 31, 2016 includes classification between Non-controlling interest and additional paid-in capital of $1,851
due to this increase in the ownership rate.
Note
11 - Supplemental statement of operations data
Other
expenses, net
Consists
of:
|
|
Year ended December 31.
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
(Gain) loss on sale of property and
|
|
|
|
|
|
|
|
|
|
equipment, net (1)
|
|
|
(37
|
)
|
|
|
52
|
|
|
|
83
|
|
Cessation of employment agreements (2)
|
|
|
-
|
|
|
|
-
|
|
|
|
108
|
|
Consulting fees
|
|
|
70
|
|
|
|
-
|
|
|
|
-
|
|
Other expenses, net
|
|
$
|
33
|
|
|
$
|
52
|
|
|
$
|
191
|
|
|
1
|
On
May 7, 2016, the Company entered into an agreement pursuant to which the Company agreed to sell its headquarters building in Rosh
Pina, Israel, to a third party for consideration of NIS 7,000 (approximately $1,848) and will lease back the portion of the building
necessary for its current operations. The leaseback period is two years and the annual rent is $130. On September 4, 2016, the
sale of the building was completed. As a result of the sale, the Company recorded a loss of $83. The Company has the right to
extend the lease by two additional one year periods on the same terms and it has extended the lease by one year until July 31,
2019.
|
|
2
|
During
2016, the Company recorded compensation expenses related to the cessation of employment of the Company’s former Chief Financial
Officer and former General Counsel and Secretary.
|
On
Track Innovations Ltd.
and its
Subsidiaries
Notes
to the Consolidated Financial Statements
In
thousands, except share and per share data
Note
12 - Income Taxes
|
A.
|
The
Company and its Israeli subsidiaries
|
|
1.
|
Measurement
of taxable income under the Income Tax (Inflationary Adjustments) Law, 1985
|
The
Company and one of its Israeli subsidiaries are foreign invested companies, and have elected, commencing January 1, 2007, to maintain
their books and records in U.S. dollars for income tax purposes, as permitted under the tax regulations.
|
2.
|
The
Law for the Encouragement of Industry (taxes), 1969
|
The
Company believes that it qualifies as an “Industrial Company” under the Law for the Encouragement of Industry. The
principal tax benefits for the Company are the deductibility of costs in connection with public offerings and amortization of
certain intangibles.
Presented
hereunder are the standard tax rates in Israel in the years 2016-2018:
2018
– 23%
2017
– 24%
2016
– 25%
Current
taxes for the reported periods are calculated according to the tax rates presented above.
On
January 4, 2016, the statutory tax rate was changed to 25% following a reduction of a corporate tax by the Israeli government.
Furthermore, on December 22, 2016, the Israeli government passed a law under which the corporate tax rate was reduced from 25%
to 23% in two steps. The first reduction was to a rate of 24% as from January 2017 and the second reduction was to a rate of 23%
as from January 2018.
The
deferred tax balances as at December 31, 2018 and 2017 were calculated according to the new tax rates, at the tax rate expected
to apply on the date of reversal.
|
4.
|
Benefits
under the Law for the Encouragement of Capital Investments
|
According
to the Law for the Encouragement of Capital Investments – 1959 (the “Law”), as amended, two new tax tracks exist,
one of which may be relevant to the Company, the preferred enterprise track, which mainly provide a uniform and reduced tax rate
for all the Company’s income entitled to benefits. According to the amended law, t
he
tax rates on income derived by preferred companies are as follows: 7.5% for Development Area A and 16% for the rest of the country.
Additional amendments to the Law became effective in January 2017 (the “2017 Amendment”), according to which,
subject to certain conditions, income derived by preferred companies which will meet the definition of ‘Preferred Technological
Enterprises’ or “PTE” (as defined in the 2017 Amendment), would be subject to reduced corporate tax rates of 7.5%
in Development Area A and 12% for the rest of the country.
In
addition to the aforesaid beneficial tax rates, preferred companies in Development Area A are entitled to grants track.
On
Track Innovations Ltd.
and its
Subsidiaries
Notes
to the Consolidated Financial Statements
In
thousands, except share and per share data
Note
12 - Income Taxes (cont’d)
|
A.
|
The
Company and its Israeli subsidiaries (cont’d)
|
|
4.
|
Benefits
under the Law for the Encouragement of Capital Investments (cont’d)
|
The
Law also provides that no tax will apply to a dividend distributed out of preferred income to a shareholder that is an Israeli
resident company. A tax rate of 20% shall apply to a dividend distributed out of preferred income to an individual shareholder
or foreign resident, subject to double taxation prevention treaties.
The Company currently meets
the conditions provided in the Law for inclusion in the scope of the preferred enterprise track.
|
B.
|
Non-Israeli
subsidiaries are taxed based on the income tax laws in their country of residence.
|
On
December 22, 2017, the U.S. Tax Cuts and Jobs Act (the “US Tax Legislation”) was enacted in the United States. Except
for certain provisions, the Tax Legislation is effective for tax years beginning on or after January 1, 2018. The Tax Legislation
significantly revises several sections of the U.S. Internal Revenue Code including, among other things, lowering the corporate
income tax rate from 35% to 21% effective January 1, 2018, limiting deductibility of interest expense and implementing a modified
territorial tax system that imposes a repatriation tax on deemed repatriated earnings of foreign subsidiaries. The main effect
on the Company’s U.S. subsidiary is the lowering the corporate income tax rate from 35% to 21%, which does not have a material
effect on the Company’s financial statements.
|
C.
|
Deferred
tax assets and liabilities:
|
|
|
December 31
|
|
|
December 31
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
Carryforward losses
|
|
$
|
44,926
|
|
|
$
|
45,239
|
|
Other
|
|
|
763
|
|
|
|
785
|
|
Total gross deferred tax assets
|
|
|
45,689
|
|
|
|
46,024
|
|
Less – valuation allowance
|
|
|
(45,689
|
)
|
|
|
(46,024
|
)
|
Net deferred tax assets
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liability -
|
|
|
|
|
|
|
|
|
Other *
|
|
|
(445
|
)
|
|
|
(500
|
)
|
Net deferred tax liability
|
|
$
|
(445
|
)
|
|
$
|
(500
|
)
|
|
*
|
Relates
mainly to property, plant and equipment.
|
On
Track Innovations Ltd.
and its
Subsidiaries
Notes
to the Consolidated Financial Statements
In
thousands, except share and per share data
Note
12 - Income Taxes (cont’d)
|
C.
|
Deferred
tax assets and liabilities (cont’d)
|
The
net changes in the total valuation allowance for each of the years ended December 31, 2018, 2017 and 2016, are comprised as follows:
|
|
Year ended December 31
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Balance at beginning of year
|
|
$
|
46,024
|
|
|
$
|
46,450
|
|
|
$
|
52,431
|
|
Additions during the year from
Continuing operations
|
|
|
122
|
|
|
|
413
|
|
|
|
764
|
|
Changes due to amendments to tax laws and applicable future tax rates, see Note 12A(3)
|
|
|
-
|
|
|
|
(518
|
)
|
|
|
(6,408
|
)
|
Discontinued operations - see Note 1B
|
|
|
(5
|
)
|
|
|
(239
|
)
|
|
|
(382
|
)
|
Tax from previous years
|
|
|
(310
|
)
|
|
|
(312
|
)
|
|
|
-
|
|
Exchange rate differences on carryforward losses
|
|
|
(20
|
)
|
|
|
244
|
|
|
|
33
|
|
Adjustments to beginning-of-the-year balance due to utilization of carryforward losses in certain subsidiaries
|
|
|
-
|
|
|
|
(16
|
)
|
|
|
-
|
|
Deferred intercompany transactions
|
|
|
(122
|
)
|
|
|
-
|
|
|
|
-
|
|
Other changes
|
|
|
-
|
|
|
|
2
|
|
|
|
12
|
|
Balance at end of year
|
|
$
|
45,689
|
|
|
$
|
46,024
|
|
|
$
|
46,450
|
|
In
assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some or all of
the deferred tax assets will not be realized. The ultimate realization of deferred tax assets depends on the generation of future
taxable income during the periods in which those temporary differences or carry-forwards are deductible. Based on the level of
historical taxable losses, management has reduced the deferred tax assets with a valuation allowance to the amount it believes
is more likely than not to be realized.
|
D.
|
As
of December 31, 2018, the operating loss carry-forwards and capital loss carryforwards
relating to Israeli companies amounted to $155,341 and $36,741, respectively. Operating
losses in Israel may be carried forward indefinitely to offset against future taxable
operational income. Under the Income Tax (Inflationary Adjustments) Law, 1985, and based
on the Company’s election (see Note 12A(1)), tax loss carry-forwards are denominated
in U.S. dollars.
|
Net
operating carry-forward losses relating to non-Israeli companies aggregate $3,364, which will expire as follows: 2027 - $2,831
and 2028- $533.
|
E.
|
The
Company has not recognized a deferred tax liability for the undistributed earnings of
its foreign subsidiaries that arose in 2018 and prior years, because the Company considers
these earnings to be indefinitely reinvested. These undistributed earnings will be taxed
upon distribution, if at all. A deferred tax liability will be recognized when the Company
can no longer demonstrate that it plans to indefinitely reinvest these undistributed
earnings. As of December 31, 2018, the undistributed earnings of these foreign subsidiaries
were $4,435. It is impracticable to determine the additional taxes payable when these
earnings are remitted.
|
On
Track Innovations Ltd.
and its
Subsidiaries
Notes
to the Consolidated Financial Statements
In
thousands, except share and per share data
Note
12 - Income Taxes (cont’d)
|
F.
|
Income
tax expenses allocated to continuing operations are as follows:
|
|
|
Year ended December 31
|
|
|
|
2018
|
|
|
*2017
|
|
|
*2016
|
|
|
|
|
|
|
|
|
|
|
|
Current income tax expenses
|
|
$
|
(176
|
)
|
|
$
|
(27
|
)
|
|
$
|
(24
|
)
|
Deferred tax benefit
|
|
|
477
|
|
|
|
165
|
|
|
|
155
|
|
Income tax benefit, net
|
|
$
|
301
|
|
|
$
|
138
|
|
|
$
|
131
|
|
|
*
|
Reclassified
to conform with the current period presentation. See Note 1B(3).
|
Income
tax expenses included in discontinued operations expenses are $515, $212 and $213 for the years ended December 31, 2018, 2017
and 2016.
Reported
income tax expense for the years ended December 31, 2018, 2017 and 2016, differed from the amounts that would result from applying
the Israeli statutory tax rates of 23%, 24% and 25%, respectively, to loss from continuing operations before taxes on income,
as a result of the following:
|
|
Year ended December 31
|
|
|
|
2018
|
|
|
*2017
|
|
|
*2016
|
|
|
|
|
|
|
|
|
|
|
|
Computed “expected” income tax benefit
|
|
$
|
503
|
|
|
$
|
606
|
|
|
$
|
794
|
|
Decrease in income tax benefit resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in valuation allowance, net
|
|
|
(122
|
)
|
|
|
(413
|
)
|
|
|
(764
|
)
|
Nondeductible stock-based compensation related to options issued to employees
|
|
|
(53
|
)
|
|
|
(61
|
)
|
|
|
(60
|
)
|
Other nondeductible expenses
|
|
|
(3
|
)
|
|
|
(22
|
)
|
|
|
(16
|
)
|
Tax from previous years
|
|
|
(15
|
)
|
|
|
(13
|
)
|
|
|
110
|
|
Other
|
|
|
(9
|
)
|
|
|
41
|
|
|
|
67
|
|
Reported income tax benefit
|
|
$
|
301
|
|
|
$
|
138
|
|
|
$
|
131
|
|
|
*
|
Reclassified
to conform with the current period presentation. See Note 1B(3).
|
|
G.
|
Loss
from continuing operations before taxes on income consists of the following:
|
|
|
Year ended December 31
|
|
|
|
2018
|
|
|
*2017
|
|
|
*2016
|
|
|
|
|
|
|
|
|
|
|
|
Israel
|
|
$
|
(2,765
|
)
|
|
$
|
(2,906
|
)
|
|
$
|
(3,775
|
)
|
Non-Israel
|
|
|
576
|
|
|
|
383
|
|
|
|
600
|
|
|
|
$
|
(2,189
|
)
|
|
$
|
(2,523
|
)
|
|
$
|
(3,175
|
)
|
|
*
|
Reclassified
to conform with the current period presentation. See Note 1B(3).
|
On
Track Innovations Ltd.
and its
Subsidiaries
Notes
to the Consolidated Financial Statements
In
thousands, except share and per share data
Note
12 - Income Taxes (cont’d)
|
H.
|
Unrecognized
tax benefits
|
As
of December 31, 2018, 2017 and 2016, the Company did not have any unrecognized tax benefits. In addition, the Company does not
expect that the amount of unrecognized tax benefits will change significantly within the next twelve months.
For
the years ended December 31, 2018, 2017 and 2016, no interest and penalties related to unrecognized tax benefits have been accrued.
The
Company and its major subsidiaries file income tax returns in Israel, Poland and South Africa. With few exceptions, the
income tax returns of the Company and its major subsidiaries are open to examination by the Israeli and the respective
foreign tax authorities for the tax years beginning in 2013,
except the income tax returns
of the subsidiary in South Africa that are open to examination for the tax years beginning in 2017
.
Note
13 - Discontinued operations
As
described in Note 1B, the Company divested its interest in the SmartID division, its parking business and Medismart activity and
presented these activities as discontinued operations.
During
the year ended December 31, 2018, the total gain from the Medismart operation divesture, net of transaction costs, amounted to
$2,639. This gain is presented as ‘other income, net’ within the net income from discontinued operations. This gain
together with the expense in the amount of $1,355 that derives from a loss contingency, as mentioned in Note 8E(1), are included
in ‘other income, net’ within the net income from discontinued operations.
During
the year ended December 31, 2017, the Company recorded $1,346 as ‘other income, net’ within the net income from discontinued
operations based on a judgment 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 in 2011. 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.
During
the year ended December 31, 2016, the Company recorded and received profit from contingent consideration in the amount of $209,
according to an earn out mechanism derived from the Smart ID division divesture. This profit is presented as ‘other income,
net’ within income from discontinued operations for the year ended December 31, 2016. The profit for the year ended December
31, 2016, includes a one-time payment for the SmartID division divesture of $2,050 and loss in the amount of $111 which derives
from the parking business divesture, including transaction costs.
Set
forth below are the results of the discontinued operations:
|
|
Year ended December 31
|
|
|
|
2018
|
|
|
*2017
|
|
|
*2016
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
1,722
|
|
|
$
|
1,509
|
|
|
$
|
2,580
|
|
Expenses
|
|
|
(1,381
|
)
|
|
|
(1,068
|
)
|
|
|
(2,456
|
)
|
Other income, net
|
|
|
1,284
|
|
|
|
1,346
|
|
|
|
2,060
|
|
Net income from discontinued operations
|
|
$
|
1,625
|
|
|
$
|
1,787
|
|
|
$
|
2,184
|
|
|
*
|
Reclassified
to conform with the current period presentation. See Note 1B(3).
|
On
Track Innovations Ltd.
and its
Subsidiaries
Notes
to the Consolidated Financial Statements
In
thousands, except share and per share data
Note
14 - Operating segments
In
view of how the Company’s chief operating decision maker (“CODM”) reviews operating results for the purposes of allocating
resources and assessing performance, the Company currently reports two segments which are the Group’s strategic business units:
(a) Retail and Mass Transit Ticketing, and (b) Petroleum.
The
following summary describes the operations in each of the Group’s operating segments:
|
●
|
Retail
and Mass Transit Ticketing - includes selling and marketing a variety of products for cashless payment solutions for the retail
market and mass transit ticketing.
|
|
●
|
Petroleum
- includes manufacturing and selling of fuel payment and management solutions. The Group’s solution is a wireless,
cashless, cardless and paperless refueling tracking and payment solution, providing customers with maximum flexibility and security.
|
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.
On
Track Innovations Ltd.
and its
Subsidiaries
Notes
to the Consolidated Financial Statements
In
thousands, except share and per share data
Note
14 - Operating segments (cont’d)
|
|
Year ended December 31, 2018
|
|
|
|
Retail and Mass Transit Ticketing
|
|
|
Petroleum
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
16,627
|
|
|
$
|
5,251
|
|
|
$
|
21,878
|
|
Reportable segment gross profit *
|
|
|
9,441
|
|
|
|
2,557
|
|
|
|
11,998
|
|
Reconciliation of reportable segment gross profit to gross profit for the period
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
|
|
|
|
|
|
|
|
(826
|
)
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
(4
|
)
|
Gross profit for the period
|
|
|
|
|
|
|
|
|
|
$
|
11,168
|
|
|
|
Year ended December 31, 2017**
|
|
|
|
Retail and Mass Transit Ticketing
|
|
|
Petroleum
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
15,755
|
|
|
$
|
5,118
|
|
|
$
|
20,873
|
|
Reportable segment gross profit *
|
|
|
8,623
|
|
|
|
2,552
|
|
|
|
11,175
|
|
Reconciliation of reportable segment gross profit to gross profit for the period
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
|
|
|
|
|
|
|
|
(757
|
)
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
Gross profit for the period
|
|
|
|
|
|
|
|
|
|
$
|
10,417
|
|
|
|
Year ended December 31, 2016**
|
|
|
|
Retail and Mass Transit Ticketing
|
|
|
Petroleum
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
(***) 14,630
|
|
|
$
|
4,122
|
|
|
$
|
18,752
|
|
Reportable segment gross profit *
|
|
|
7,598
|
|
|
|
2,365
|
|
|
|
9,963
|
|
Reconciliation of reportable segment gross profit to gross profit for the period
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
|
|
|
|
|
|
|
|
(733
|
)
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
(4
|
)
|
Gross profit for the period
|
|
|
|
|
|
|
|
|
|
$
|
9,226
|
|
|
*
|
Gross
profit as reviewed by the CODM represents gross profit, adjusted to exclude depreciation and stock-based compensation.
|
|
**
|
Reclassified
to conform with the current period presentation. See Note 1B(3).
|
|
***
|
The
revenues from retail and mass transit ticketing segment for the years ended December 31, 2016 include revenues derived from litigation
settlements with a perpetual license agreement. Those revenues are presented within revenues from ‘licensing and transaction
fees’ in the statements of operations.
|
On
Track Innovations Ltd.
and its
Subsidiaries
Notes
to the Consolidated Financial Statements
In
thousands, except share and per share data
Note
15 - Geographic Information and Major Customers
The
data is presented in accordance with ASC Topic 280, “
Disclosures About Segments of an Enterprise and Related Information.
”
|
|
Year ended December 31
|
|
|
|
2018
|
|
|
*
2017
|
|
|
*
2016
|
|
|
|
|
|
|
|
|
|
|
|
Revenues by geographical areas from external customers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
$
|
7,914
|
|
|
$
|
7,167
|
|
|
$
|
9,984
|
|
Asia
|
|
|
3,122
|
|
|
|
3,421
|
|
|
|
286
|
|
Africa
|
|
|
2,447
|
|
|
|
2,814
|
|
|
|
2,310
|
|
Europe
|
|
|
8,395
|
|
|
|
7,295
|
|
|
|
5,890
|
|
Total export
|
|
|
21,878
|
|
|
|
20,697
|
|
|
|
18,470
|
|
Domestic (Israel)
|
|
|
-
|
|
|
|
176
|
|
|
|
282
|
|
|
|
$
|
21,878
|
|
|
$
|
20,873
|
|
|
$
|
18,752
|
|
|
*
|
Reclassified
to conform with the current period presentation. See Note 1B(3).
|
|
|
December 31
|
|
|
December 31
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Long lived assets by geographical areas
|
|
|
|
|
|
|
Domestic (Israel)
|
|
$
|
686
|
|
|
$
|
740
|
|
Poland
|
|
|
3,704
|
|
|
|
4,555
|
|
South Africa
|
|
|
884
|
|
|
|
900
|
|
America
|
|
|
-
|
|
|
|
-
|
|
|
|
$
|
5,274
|
|
|
$
|
6,195
|
|
Major
Customers
|
|
Year ended December 31
|
|
|
|
2018
|
|
|
*
2017
|
|
|
*
2016
|
|
|
|
%
|
|
|
%
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Major Customers by percentage from total revenues
|
|
|
|
|
|
|
|
|
|
Customer A
|
|
|
15
|
%
|
|
|
16
|
%
|
|
|
17
|
%
|
Customer B
|
|
|
9
|
%
|
|
|
12
|
%
|
|
|
9
|
%
|
Customer C
|
|
|
11
|
%
|
|
|
11
|
%
|
|
|
0
|
%
|
|
*
|
Reclassified
to conform with the current period presentation. See Note 1B(3).
|
|
**
|
The
revenues derived from those three customers are presented within the revenues from the Retail and Mass Transit Ticketing.
|
Note
16 - Subsequent events
In
January 2019, the Company signed agreements pursuant to which the Company will lease offices in Yokne’am and in Rosh Pina,
Israel (in lieu of the current leased headquarters building in Rosh Pina). The operating lease periods of those buildings in Yokne’am
and in Rosh Pina are five years and three years, respectively (excluding the extension-periods, as mentioned in the agreements),
and expected to commence during the second quarter of 2019. The total annual rent expenses of both offices, including management
fees and excluding construction costs-reimbursement, are $150. The construction costs-reimbursement are expected to be approximately
$1,000 that will be paid during the lease period.
F-38