Item 1. Financial Statements.
ON TRACK INNOVATIONS LTD. AND ITS SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
As of March 31, 2019
(Unaudited)
On
Track Innovations Ltd.
and
its Subsidiaries
Interim
Unaudited Condensed Consolidated Financial Statements as of March 31, 2019
Contents
|
Page
|
|
|
|
|
Interim
Unaudited Condensed Consolidated Balance Sheets
|
F-2
- F-3
|
|
|
Interim
Unaudited Condensed Consolidated Statements of Operations
|
F-4
|
|
|
Interim
Unaudited Condensed Consolidated Statements of Comprehensive Loss
|
F-5
|
|
|
Interim
Unaudited Condensed Consolidated Statements of Changes in Equity
|
F-6
|
|
|
Interim
Unaudited Condensed Consolidated Statements of Cash Flows
|
F-7
- F-8
|
|
|
Notes
to the Interim Unaudited Condensed Consolidated Financial Statements
|
F-9
- F-21
|
On
Track Innovations Ltd.
and
its Subsidiaries
Interim
Unaudited Condensed Consolidated Balance Sheets
US
dollars in thousands except share data
|
|
March 31
|
|
|
December 31
|
|
|
|
2019
|
|
|
2018
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
4,014
|
|
|
$
|
4,827
|
|
Short-term investments
|
|
|
905
|
|
|
|
1,078
|
|
Trade receivables (net of allowance for doubtful accounts of $560 and 555 as of March 31, 2019 and December 31, 2018,
respectively)
|
|
|
2,707
|
|
|
|
4,530
|
|
Other receivables and prepaid expenses
|
|
|
1,789
|
|
|
|
2,060
|
|
Inventories
|
|
|
3,964
|
|
|
|
3,527
|
|
Asset held for sale
|
|
|
772
|
|
|
|
-
|
|
Total current assets
|
|
|
14,151
|
|
|
|
16,022
|
|
|
|
|
|
|
|
|
|
|
Long-term restricted deposit for employees benefit
|
|
|
454
|
|
|
|
451
|
|
|
|
|
|
|
|
|
|
|
Severance pay deposits
|
|
|
387
|
|
|
|
375
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
4,013
|
|
|
|
5,033
|
|
|
|
|
|
|
|
|
|
|
Intangible assets, net
|
|
|
241
|
|
|
|
241
|
|
|
|
|
|
|
|
|
|
|
Right-of-use assets
|
|
|
1,381
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
20,627
|
|
|
$
|
22,122
|
|
The
accompanying notes are an integral part of these interim unaudited condensed consolidated financial statements.
On
Track Innovations Ltd.
and
its Subsidiaries
Interim
Unaudited Condensed Consolidated Balance Sheets
US
dollars in thousands except share data
|
|
March 31
|
|
|
December 31
|
|
|
|
2019
|
|
|
2018
|
|
Liabilities and Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
Short-term bank credit and current maturities of long-term bank loans
|
|
$
|
518
|
|
|
$
|
260
|
|
Trade payables
|
|
|
4,937
|
|
|
|
4,712
|
|
Other current liabilities
|
|
|
2,534
|
|
|
|
3,622
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
$
|
7,989
|
|
|
$
|
8,594
|
|
|
|
|
|
|
|
|
|
|
Long-Term Liabilities
|
|
|
|
|
|
|
|
|
Long-term loans, net of current maturities
|
|
|
32
|
|
|
|
39
|
|
Long-term liabilities due to operating leases, net of current maturities
|
|
|
857
|
|
|
|
-
|
|
Accrued severance pay
|
|
|
894
|
|
|
|
853
|
|
Deferred tax liability
|
|
|
426
|
|
|
|
445
|
|
Total long-term liabilities
|
|
|
2,209
|
|
|
|
1,337
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
10,198
|
|
|
|
9,931
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies, see note 6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary shares of NIS 0.1 par value: Authorized – 50,000,000 shares as of March 31, 2019 and December 31, 2018; issued: 42,473,076 shares as of March 31, 2019 and December 31, 2018; outstanding: 41,294,377 shares as of March 31, 2019 and December 31, 2018
|
|
|
1,068
|
|
|
|
1,068
|
|
Additional paid-in capital
|
|
|
225,068
|
|
|
|
225,022
|
|
Treasury shares at cost - 1,178,699 shares as of March 31, 2019 and December 31, 2018
|
|
|
(2,000
|
)
|
|
|
(2,000
|
)
|
Accumulated other comprehensive loss
|
|
|
(1,019
|
)
|
|
|
(956
|
)
|
Accumulated deficit
|
|
|
(212,688
|
)
|
|
|
(210,943
|
)
|
Total Equity
|
|
|
10,429
|
|
|
|
12,191
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Equity
|
|
$
|
20,627
|
|
|
$
|
22,122
|
|
The
accompanying notes are an integral part of these interim unaudited condensed consolidated financial statements.
On
Track Innovations Ltd.
and
its Subsidiaries
Interim
Unaudited Condensed Consolidated Statements of Operations
US
dollars in thousands except share and per share data
|
|
Three months ended March 31
|
|
|
|
2019
|
|
|
*2018
|
|
Revenues
|
|
|
|
|
|
|
Sales
|
|
$
|
1,722
|
|
|
$
|
4,241
|
|
Licensing and transaction fees
|
|
|
1,291
|
|
|
|
1,271
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
3,013
|
|
|
|
5,512
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
1,370
|
|
|
|
2,632
|
|
Total cost of revenues
|
|
|
1,370
|
|
|
|
2,632
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
1,643
|
|
|
|
2,880
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
871
|
|
|
|
820
|
|
Selling and marketing
|
|
|
1,285
|
|
|
|
1,645
|
|
General and administrative
|
|
|
965
|
|
|
|
907
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
3,121
|
|
|
|
3,372
|
|
|
|
|
|
|
|
|
|
|
Operating loss from continuing operations
|
|
|
(1,478
|
)
|
|
|
(492
|
)
|
Financial expenses, net
|
|
|
(69
|
)
|
|
|
(32
|
)
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before taxes on income
|
|
|
(1,547
|
)
|
|
|
(524
|
)
|
|
|
|
|
|
|
|
|
|
Income tax (expenses) benefits
|
|
|
(5
|
)
|
|
|
124
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
(1,552
|
)
|
|
|
(400
|
)
|
(Loss) income from discontinued operations
|
|
|
(193
|
)
|
|
|
67
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,745
|
)
|
|
$
|
(333
|
)
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss attributable to shareholders per ordinary share
|
|
|
|
|
|
|
|
|
From continuing operations
|
|
$
|
(0.04
|
)
|
|
$
|
(0.01
|
)
|
From discontinued operations
|
|
$
|
**
|
|
|
$
|
**
|
|
|
|
$
|
(0.04
|
)
|
|
$
|
(0.01
|
)
|
Weighted average number of ordinary shares used in computing basic and diluted net loss per ordinary share
|
|
|
41,294,377
|
|
|
|
41,214,378
|
|
|
*
|
Reclassified
to conform with the current period presentation, see Note 1C(2).
|
|
**
|
Less
than $0.01 per ordinary share.
|
The
accompanying notes are an integral part of these interim unaudited condensed consolidated financial statements.
On
Track Innovations Ltd.
and
its Subsidiaries
Interim
Unaudited Condensed Consolidated Statements of Comprehensive Loss
US
dollars in thousands
|
|
Three months ended March 31
|
|
|
|
2019
|
|
|
2018
|
|
Total comprehensive loss:
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,745
|
)
|
|
$
|
(333
|
)
|
Foreign currency translation adjustments
|
|
|
(63
|
)
|
|
|
58
|
|
Total comprehensive loss
|
|
$
|
(1,808
|
)
|
|
$
|
(275
|
)
|
The
accompanying notes are an integral part of these interim unaudited condensed consolidated financial statements.
On
Track Innovations Ltd.
and
its Subsidiaries
Interim
Unaudited Condensed Consolidated Statements of Changes in Equity
US
dollars in thousands
|
|
Number of
Shares
|
|
|
Share
|
|
|
Additional
paid-in
|
|
|
Treasury
Shares
|
|
|
Accumulated
other
comprehensive
|
|
|
Accumulated
|
|
|
Total
|
|
|
|
issued
|
|
|
capital
|
|
|
capital
|
|
|
(at cost)
|
|
|
Income (loss)
|
|
|
deficit
|
|
|
equity
|
|
Balance as of December 31, 2017
|
|
|
42,353,077
|
|
|
$
|
1,064
|
|
|
$
|
224,758
|
|
|
$
|
(2,000
|
)
|
|
$
|
(691
|
)
|
|
$
|
(210,680
|
)
|
|
$
|
12,451
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes during the three month period ended March 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
53
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
53
|
|
Foreign currency translation adjustments
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
58
|
|
|
|
-
|
|
|
|
58
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(333
|
)
|
|
|
(333
|
)
|
Balance as of March 31, 2018
|
|
|
42,353,077
|
|
|
$
|
1,064
|
|
|
$
|
224,811
|
|
|
$
|
(2,000
|
)
|
|
$
|
(633
|
)
|
|
$
|
(211,013
|
)
|
|
$
|
12,229
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2018
|
|
|
42,473,076
|
|
|
$
|
1,068
|
|
|
$
|
225,022
|
|
|
$
|
(2,000
|
)
|
|
$
|
(956
|
)
|
|
$
|
(210,943
|
)
|
|
$
|
12,191
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes during the three month period ended March 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
46
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
46
|
|
Foreign currency translation adjustments
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(63
|
)
|
|
|
-
|
|
|
|
(63
|
)
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,745
|
)
|
|
|
(1,745
|
)
|
Balance as of March 31, 2019
|
|
|
42,473,076
|
|
|
$
|
1,068
|
|
|
$
|
225,068
|
|
|
$
|
(2,000
|
)
|
|
$
|
(1,019
|
)
|
|
$
|
(212,688
|
)
|
|
$
|
10,429
|
|
The
accompanying notes are an integral part of these interim unaudited condensed consolidated financial statements.
On
Track Innovations Ltd.
and
its Subsidiaries
Interim
Unaudited Condensed Consolidated Statements of Cash Flows
US
dollars in thousands
|
|
Three months ended March 31
|
|
|
|
2019
|
|
|
*2018
|
|
Cash flows from continuing operating activities
|
|
|
|
|
|
|
Net loss from continuing operations
|
|
$
|
(1,552
|
)
|
|
$
|
(400
|
)
|
Adjustments required to reconcile net loss to net cash provided by continuing operating activities:
|
|
|
|
|
|
|
|
|
Stock-based compensation related to options issued to employees and others
|
|
|
46
|
|
|
|
53
|
|
Gain on sale of property and equipment, net
|
|
|
(2
|
)
|
|
|
-
|
|
Accrued interest and linkage differences, net
|
|
|
(12
|
)
|
|
|
14
|
|
Depreciation and amortization
|
|
|
320
|
|
|
|
335
|
|
Deferred tax benefits, net
|
|
|
(10
|
)
|
|
|
(124
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accrued severance pay, net
|
|
|
29
|
|
|
|
(3
|
)
|
Decrease in trade receivables, net
|
|
|
1,323
|
|
|
|
886
|
|
Decrease in other receivables and prepaid expenses
|
|
|
264
|
|
|
|
33
|
|
Increase in inventories
|
|
|
(457
|
)
|
|
|
(35
|
)
|
Increase (decrease) in trade payables
|
|
|
423
|
|
|
|
(117
|
)
|
Decrease in other current liabilities
|
|
|
(186
|
)
|
|
|
(51
|
)
|
Net cash provided by continuing operating activities
|
|
|
186
|
|
|
|
591
|
|
|
|
|
|
|
|
|
|
|
Cash flows from continuing investing activities
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(115
|
)
|
|
|
(322
|
)
|
Proceeds from sale of property, plant and equipment
|
|
|
10
|
|
|
|
-
|
|
Change in short-term investments, net
|
|
|
6
|
|
|
|
1,164
|
|
Proceeds from restricted deposit for employee benefits
|
|
|
10
|
|
|
|
-
|
|
Investment in capitalized certification costs
|
|
|
(48
|
)
|
|
|
(13
|
)
|
Net cash (used in) provided by continuing investing activities
|
|
|
(137
|
)
|
|
|
829
|
|
|
|
|
|
|
|
|
|
|
Cash flows from continuing financing activities
|
|
|
|
|
|
|
|
|
Increase in short-term bank credit, net
|
|
|
372
|
|
|
|
33
|
|
Repayment of long-term bank loans
|
|
|
(119
|
)
|
|
|
(144
|
)
|
Net cash provided by (used in) continuing financing activities
|
|
|
253
|
|
|
|
(111
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from discontinued operations
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by discontinued operating activities
|
|
|
(1,231
|
)
|
|
|
244
|
|
|
|
|
|
|
|
|
|
|
Total net cash (used in) provided by discontinued operations
|
|
|
(1,231
|
)
|
|
|
244
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
(57
|
)
|
|
|
63
|
|
|
|
|
|
|
|
|
|
|
Increase in cash, cash equivalents and restricted cash
|
|
|
(986
|
)
|
|
|
1,616
|
|
Cash, cash equivalents and restricted cash - beginning of the period
|
|
|
5,105
|
|
|
|
7,799
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and restricted cash - end of the period
|
|
$
|
4,119
|
|
|
$
|
9,415
|
|
*
Reclassified to conform with the current period presentation, see Note 1C(2).
The
accompanying notes are an integral part of these interim unaudited condensed consolidated financial statements.
On
Track Innovations Ltd.
and
its Subsidiaries
Interim
Unaudited Condensed Consolidated Statements of Cash Flows (cont’d)
US
dollars in thousands
|
|
Three
months ended March 31
|
|
|
|
2019
|
|
|
2018
|
|
Supplementary cash flows activities:
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
Interest paid
|
|
$
|
4
|
|
|
$
|
41
|
|
Income taxes paid
|
|
$
|
69
|
|
|
$
|
-
|
|
The
accompanying notes are an integral part of these interim unaudited condensed consolidated financial statements.
On
Track Innovations Ltd.
and
Subsidiaries
Notes
to the Interim Unaudited Condensed Consolidated Financial Statements
US
dollars in thousands
Note
1 - Organization and Basis of Presentation
|
A.
|
Description
of business
|
On
Track Innovations Ltd. (the “Company”) was founded in 1990, in Israel. The Company and its subsidiaries (together,
the “Group”) are principally engaged in the field of design and development of cashless payment solutions.
The
Company’s ordinary shares are listed for trading on the Nasdaq Capital Market (formerly listed on the Nasdaq Global Market
until April 13, 2016).
At
March 31, 2019, the Company operates in two operating segments: (a) Retail and Mass Transit Ticketing, and (b) Petroleum. See
Note 11. During 2018, the Company sold its medical smart cards operation – see Note 1C(2).
|
B.
|
Interim
Unaudited Financial Information
|
The
accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted
accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q. Accordingly,
they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements and therefore
should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.
In
the opinion of management, all adjustments considered necessary for a fair statement, consisting of normal recurring adjustments,
have been included. Operating results for the three month period ended March 31, 2019 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2019.
Use
of Estimates:
The
preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect
the assets, liabilities, revenue, costs, expenses and accumulated other comprehensive income/(loss) that are reported in the Interim
Consolidated Financial Statements and accompanying disclosures. These estimates are based on management’s best knowledge
of current events, historical experience, actions that the Company may undertake in the future and on various other assumptions
that are believed to be reasonable under the circumstances. As a result, actual results may be different from these estimates.
On
Track Innovations Ltd.
and
Subsidiaries
Notes
to the Interim Unaudited Condensed Consolidated Financial Statements
US
dollars in thousands
Note
1 - Organization and Basis of Presentation (cont’d)
|
C.
|
Divestiture
of operations
|
|
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 procedure. An arbitration
decision was issued on December 24, 2018 in the Company’s favor and denied SuperCom's claims. The Arbitrator ordered SuperCom
to disclose the financial information regarding the earn-out payments that the Company is entitled to receive, and to pay the
Company accordingly, or otherwise pay the Company the maximum earn-out amount, which equals $1,500 minus the earn-out amounts
that were already paid by SuperCom to the Company. 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 19, 2019.
The
Company records the earn-out payments only when the consideration is determined to be realizable. The Company did not record or
receive any contingent consideration during the three months ended March 31, 2019 and 2018.
|
2.
|
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 8). All
prior periods’ information has been reclassified to conform with the current period’s
presentation.
|
|
D.
|
Events
in the reporting period
|
|
1.
|
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 four years, respectively (excluding the extension-periods,
as mentioned in the agreements), and expected to commence in the middle of 2019. The
total annual rent expenses of both offices, including management fees and excluding construction
costs-reimbursement, are expected to be approximately NIS 650 ($180). The construction
costs-reimbursement are expected to be approximately NIS 3,450 ($950) that will be paid
during the lease period.
|
On
Track Innovations Ltd.
and
Subsidiaries
Notes
to the Interim Unaudited Condensed Consolidated Financial Statements
US
dollars in thousands
Note
1 - Organization and Basis of Presentation (cont’d)
|
D.
|
Events
in the reporting period (cont’d)
|
|
2.
|
In
March 2019, OTI Petrosmart (Pty), Ltd., the South African subsidiary (hereinafter –
“Petrosmart”), entered into an agreement pursuant to which Petrosmart will
sell its head office in Cape Town, South Africa, to a third party for a consideration
of Rand 15,500 (approximately $1,064), that will be received on the date of the sale,
and Petrosmart will lease back this building for its current operations. Subject to the
fulfillment of certain conditions, the sale is expected to be completed and the operating
lease is expected to commence on July 1, 2019. The leaseback period is three years. The
annual rent for the first year will be approximately Rand 1,800 (approximately $124)
and will be increased by 8.5% each year. Petrosmart has the right to extend the lease
by two years. As of March 31, 2019, this building’s book value is $772 and is presented as asset held for sale within ‘current assets’.
|
The
Company does not record right-of-use assets and operating lease liabilities regarding those buildings, as mentioned above,
in its consolidated financial statements as of March 31, 2019, due to the fact that the commencement date of the lease
periods is subsequent to the balance sheet date – see also Note 2A. The Company is in the process of determining the
final terms of those leases, including the commencement date of the lease periods, and evaluating their impact on the
consolidated financial statements.
Note
2 - Significant Accounting Policies
Except
as described below,
these interim unaudited condensed consolidated financial statements have
been prepared according to the same accounting policies as those discussed in the Company’s Annual Report on Form 10-K for
the year ended December 31, 2018
.
|
A.
|
Recently
Adopted Accounting Pronouncements
|
In February 2016, the Financial
Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842),
which supersedes Accounting Standards Codification (“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 until December 31, 2018, only financing-type lease liabilities
(capital leases) were recognized on the balance sheet. Right-of-use assets represent company’s right to use an underlying
asset for the lease term and lease liabilities represent company’s obligation to make lease payments arising from the lease.
Operating and finance lease right-of-use assets and liabilities are recognized at the commencement date based on the present value
of lease payments over the lease term. The Company uses its incremental borrowing rate based on the information available at the
commencement date to determine the present value of the lease payments.
In addition, the definition
of a lease in the ASU 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.
On
Track Innovations Ltd.
and
Subsidiaries
Notes
to the Interim Unaudited Condensed Consolidated Financial Statements
US
dollars in thousands
Note
2 - Significant Accounting Policies (cont’d)
|
A.
|
Recently
Adopted Accounting Pronouncements (cont’d)
|
The Company has adopted ASU 2016-02
commencing from January 1, 2019, under the effective date method. In accordance with the effective date method, comparative
periods are not restated, and 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 new standard
provides a number of optional practical expedients in transition. The Company elect the ‘package of practical expedients’,
which permits the Company not to reassess its prior conclusions regarding lease identification, lease classification and initial
direct costs under the new standard and also elect the practical expedient pertaining to the use-of hindsight. The new standard
also provides practical expedients for an entity’s ongoing accounting. The Company also elected the practical expedient
to not separate lease and non-lease components for all of the Company’s leases, other than leases of real estate. Additionally,
following the adoption of the new standard and in subsequent measurements, the Company applies the portfolio approach to account
for the operating lease right-of-use assets and liabilities for certain leases and incremental borrowing rates.
The
Company did not have a cumulative-effect adjustment to retained earnings as a result of the adoption of the new standard.
The adoption of this standard does not have a material impact on the results of operations and cash flows. See Note 5 for the
impact on the balance sheet as of March 31, 2019, and additional disclosures, as required by the new standard.
|
B.
|
Recent
accounting pronouncements
|
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.
On
Track Innovations Ltd.
and
Subsidiaries
Notes
to the Interim Unaudited Condensed Consolidated Financial Statements
US
dollars in thousands
Note
3 - Other Receivables and Prepaid Expenses
|
|
March 31
|
|
|
December 31
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Government institutions
|
|
$
|
304
|
|
|
$
|
387
|
|
Prepaid expenses
|
|
|
251
|
|
|
|
226
|
|
Receivables under contractual obligations to be transferred to others *
|
|
|
283
|
|
|
|
349
|
|
Suppliers advance
|
|
|
828
|
|
|
|
932
|
|
Other receivables
|
|
|
123
|
|
|
|
166
|
|
|
|
$
|
1,789
|
|
|
$
|
2,060
|
|
|
*
|
The
Company’s subsidiary in Poland is required to collect certain fees that are to be transferred to local authorities.
|
Note
4 - Other Current Liabilities
|
|
March 31
|
|
|
December 31
|
|
|
|
2019
|
|
|
2018
|
|
Employees and related expenses
|
|
$
|
1,072
|
|
|
$
|
1,042
|
|
Accrued expenses
|
|
|
753
|
|
|
|
921
|
|
Customer advances
|
|
|
60
|
|
|
|
141
|
|
Short-term liabilities due to operating leases and current maturities **
|
|
|
531
|
|
|
|
-
|
|
Other current liabilities
|
|
|
118
|
|
|
|
*1,518
|
|
|
|
$
|
2,534
|
|
|
$
|
3,622
|
|
On
Track Innovations Ltd.
and
Subsidiaries
Notes
to the Interim Unaudited Condensed Consolidated Financial Statements
Note
5 - Leases
The Company leases a limited number of
assets, mainly offices and cars for use in its operations. The Company adopted the new accounting standard ASC 842 “Leases”
and all the related amendments on January 1, 2019 and used the effective date as company’s date of initial application.
As of March 31, 2019, right-of-use assets
due to operating leases are $1,381 (as of January 1, 2019 - $1,572) and the liabilities due to operating leases are $1,388 (as
of January 1, 2019 - $1,572), out of which $857 are classified as long-term liabilities and $531 are classified as current liabilities.
The Company includes renewal options that
it is reasonably certain to exercise in the measurement of the lease liabilities. The remaining operating lease periods of the
leases range from less than one year to six years as of March 31, 2019. The weighted average remaining lease term is 2.6 as of
March 31, 2019.
The following is a schedule of the maturities
of operating lease liabilities for the next five years as of March 31, 2019, and thereafter:
Remainder of 2019
|
|
$
|
393
|
|
2020
|
|
|
346
|
|
2021
|
|
|
274
|
|
2022
|
|
|
159
|
|
2023
|
|
|
137
|
|
Thereafter
|
|
|
152
|
|
Total leases payments
|
|
|
1,461
|
|
Less - discount
|
|
|
73
|
|
Operating lease liabilities
|
|
$
|
1,388
|
|
As of March 31, 2019, the weighted average
discount rate of the operating leases is approximately 4.1%.
Operating lease costs and cash paid for
amounts included in the measurement of the lease liabilities were approximately $180 during the three months ended March 31, 2019.
Operating lease costs include fixed payments and variable payments that depend on an index or rate. There are no other significant
variable lease payments.
The Company does not have any material
leases, individually or in the aggregate, classified as a finance leasing arrangement.
The following is a schedule of the maturities
of operating lease liabilities for the next five years as of December 31, 2018, and thereafter:
2019
|
|
$
|
523
|
|
2020
|
|
|
350
|
|
2021
|
|
|
277
|
|
2022
|
|
|
163
|
|
2023
|
|
|
140
|
|
Thereafter
|
|
|
156
|
|
Total leases payments
|
|
$
|
1,609
|
|
On
Track Innovations Ltd.
and
Subsidiaries
Notes
to the Interim Unaudited Condensed Consolidated Financial Statements
US
dollars in thousands
Note
6 - Commitments and Contingencies
|
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 approximately 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. In the first quarter of
2019, 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.
|
The
consolidated financial statements as of December 31, 2018, include 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 March 31, 2019 and
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 (approximately $1,684) 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 ($56) 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 ($565) 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.
|
As
of March 31, 2019, the Company has granted performance guarantees and guarantees to secure customer advances in the sum of $271.
The expiration dates of the guarantees range from April 2019 to June 2019.
On
Track Innovations Ltd.
and
Subsidiaries
Notes
to the Interim Unaudited Condensed Consolidated Financial Statements
US
dollars in thousands
Note
7 - Revenues
Disaggregation
of revenue
The
following tables disaggregates the Company’s revenue by major source based on categories that depict its nature and timing
as reviewed by management for the three months ended March 31, 2019 and 2018:
|
|
Three months ended March 31
|
|
|
|
2019
|
|
|
|
Retail
and Mass
Transit
Ticketing
|
|
|
Petroleum
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Cashless payment products (A)
|
|
$
|
839
|
|
|
$
|
-
|
|
|
$
|
839
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Complete cashless payment solutions (B):
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales of products (B1)
|
|
|
137
|
|
|
|
505
|
|
|
|
642
|
|
Licensing fees, transaction fees and services (B2)
|
|
|
1,217
|
|
|
|
315
|
|
|
|
1,532
|
|
|
|
|
1,354
|
|
|
|
820
|
|
|
|
2,174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
2,193
|
|
|
$
|
820
|
|
|
$
|
3,013
|
|
|
|
Three months ended March 31
|
|
|
|
2018*
|
|
|
|
Retail
and Mass
Transit
Ticketing
|
|
|
Petroleum
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Cashless payment products (A)
|
|
$
|
2,304
|
|
|
$
|
-
|
|
|
$
|
2,304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Complete cashless payment solutions (B):
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales of products (B1)
|
|
|
1,027
|
|
|
|
594
|
|
|
|
1,621
|
|
Licensing fees, transaction fees and services (B2)
|
|
|
1,239
|
|
|
|
348
|
|
|
|
1,587
|
|
|
|
|
2,266
|
|
|
|
942
|
|
|
|
3,208
|
|
Total revenues
|
|
$
|
4,570
|
|
|
$
|
942
|
|
|
$
|
5,512
|
|
|
*
|
Reclassified
to conform with the current period presentation, see Note 1C(2).
|
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.
On
Track Innovations Ltd.
and
Subsidiaries
Notes
to the Interim Unaudited Condensed Consolidated Financial Statements
US
dollars in thousands
Note
7 - Revenues (cont’d)
Performance
obligations (cont’d)
|
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.
|
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
|
|
March 31
|
|
|
December 31
|
|
|
|
2019
|
|
|
2018
|
|
Trade receivables, net of allowance for doubtful accounts
|
|
$
|
2,707
|
|
|
$
|
4,530
|
|
Customer advances
|
|
$
|
60
|
|
|
$
|
141
|
|
Accounts
receivable are recognized when the right to consideration becomes unconditional based upon contractual billing schedules.
Transaction
price and variable consideration
The
transaction price is the amount of consideration to which the Company expects to be entitled in exchange for transferring goods
or services to a customer, excluding amounts collected on behalf of third parties. In certain arrangements with variable consideration,
revenue is recognized over time as it mainly is attributed to ongoing services provided. An immaterial amount which is related
to the product is not recognized upon delivery since it is not probable that a significant reversal in the amount of cumulative
revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved.
On
Track Innovations Ltd.
and
Subsidiaries
Notes
to the Interim Unaudited Condensed Consolidated Financial Statements
US
dollars in thousands
Note
8 - Discontinued operations
As
described in Note 1C, the Company divested its interest in the SmartID division and its Medismart activity, and presented these
activities as discontinued operations.
Set
forth below are the results of the discontinued operations:
|
|
Three months ended
March 31
|
|
|
|
2019
|
|
|
*
2018
|
|
Revenues
|
|
$
|
-
|
|
|
$
|
363
|
|
Expenses
|
|
|
(193
|
)
|
|
|
(296
|
)
|
Net (loss) income from discontinued operations
|
|
$
|
(193
|
)
|
|
$
|
67
|
|
|
*
|
Reclassified
to conform with the current period presentation, see Note 1C(2).
|
Note
9 - 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 and long term bank loans and trade payables are equivalent to, or approximate their fair value due to
the short-term maturity of these instruments.
The
carrying amounts of variable interest rate long-term loans are equivalent or approximate to their fair value as they bear interest
at approximate market rates.
As
of March 31, 2019, the Company held approximately $905 of short-term bank deposits (as of December 31, 2018 - $1,078). As of March
31, 2019 and December 31, 2018, short-term deposits in the amount of $105 and $278, respectively, have been pledged as security
in respect of guarantees granted in respect of performance guarantees, loans and credit lines received from a bank and cannot
be pledged to others or withdrawn without the consent of the bank.
On
Track Innovations Ltd.
and
Subsidiaries
Notes
to the Interim Unaudited Condensed Consolidated Financial Statements
US
dollars in thousands
Note
10 - Equity
During
each of the three-month periods ended March 31, 2019 and March 31, 2018, 100,000 options were granted. The vesting period for
the options is three years. The exercise prices for the options that were granted during the three months ended March 31, 2019
and March 31, 2018, are $0.7 and $1.33, respectively. Those options expire up to five years after the date of grant. Any options
which are forfeited or cancelled before expiration become available for future grants under the Company’s option plan. The
fair value of each option granted to employees during the three months ended March 31, 2019 and March 31, 2018 was estimated on
the date of grant, using the Black-Scholes model and the following assumptions:
|
|
Three months ended
March 31
|
|
|
|
2019
|
|
|
2018
|
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected volatility
|
|
|
79
|
%
|
|
|
80
|
%
|
Risk-free interest rate
|
|
|
2.47
|
%
|
|
|
1.92
|
%
|
Expected life - in years
|
|
|
2.44
|
|
|
|
2.33
|
|
|
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.
|
Estimated
expected lives are based on historical grants data.
|
The
Company’s options activity (including options to non-employees) and options outstanding and options exercisable as of December
31, 2018 and March 31, 2019, are summarized in the following table:
|
|
Number of
options
outstanding
|
|
|
Weighted
average
exercise
price per
share
|
|
Outstanding – December 31, 2018
|
|
|
1,461,000
|
|
|
$
|
1.24
|
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
100,000
|
|
|
|
0.70
|
|
Options expired or forfeited
|
|
|
(5,334
|
)
|
|
|
1.21
|
|
Outstanding – March 31, 2019
|
|
|
1,555,666
|
|
|
|
1.20
|
|
|
|
|
|
|
|
|
|
|
Exercisable as of:
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
855,642
|
|
|
$
|
1.32
|
|
March 31, 2019
|
|
|
985,642
|
|
|
$
|
1.29
|
|
On
Track Innovations Ltd.
and
Subsidiaries
Notes
to the Interim Unaudited Condensed Consolidated Financial Statements
US
dollars in thousands
Note
10 - Equity (cont’d)
|
A.
|
Stock
option plans (cont’d)
|
The
weighted average fair value of options granted during the three months ended March 31, 2019 and during the three months ended
March 31, 2018 is $0.25 and $0.65, respectively, per option. The aggregate intrinsic value of outstanding options as of March
31, 2019 and December 31, 2018 is approximately $8 and $6, respectively. The aggregate intrinsic value of exercisable options
as of March 31, 2019 and December 31, 2018 is approximately $8 and $4, respectively.
The
following table summarizes information about options outstanding and exercisable (including options to non-employees) as of March
31, 2019:
|
|
|
Options outstanding
|
|
|
Options Exercisable
|
|
Range of
exercise price ($)
|
|
|
Number
outstanding
as of March 31,
2019
|
|
|
Weighted
average
remaining
contractual
life (years)
|
|
|
Weighted
Average
Exercise
Price ($)
|
|
|
Number
Outstanding
as of March 31,
2019
|
|
|
Weighted
average
remaining
contractual
life (years)
|
|
|
Weighted
Average
Exercise
Price ($)
|
|
0.44-0.90
|
|
|
|
644,000
|
|
|
|
2.77
|
|
|
|
0.75
|
|
|
|
420,000
|
|
|
|
1.73
|
|
|
|
0.74
|
|
1.07-1.68
|
|
|
|
701,666
|
|
|
|
3.17
|
|
|
|
1.23
|
|
|
|
355,642
|
|
|
|
2.99
|
|
|
|
1.23
|
|
2.32-2.36
|
|
|
|
170,000
|
|
|
|
0.13
|
|
|
|
2.35
|
|
|
|
170,000
|
|
|
|
0.13
|
|
|
|
2.35
|
|
3.03
|
|
|
|
40,000
|
|
|
|
0.48
|
|
|
|
3.03
|
|
|
|
40,000
|
|
|
|
0.48
|
|
|
|
3.03
|
|
|
|
|
|
1,555,666
|
|
|
|
2.60
|
|
|
|
|
|
|
|
985,642
|
|
|
|
1.86
|
|
|
|
|
|
As
of March 31, 2019, there was approximately $236 of total unrecognized compensation cost related to non-vested stock-based compensation
arrangements. That cost is expected to be recognized over a weighted-average period of approximately 1.18 years.
During
the three months ended March 31, 2019, and March 31, 2018, the Company recorded stock-based compensation expenses in the amount
of $46 and $53, respectively, in accordance with ASC 718, “Compensation-Stock Compensation.”
|
1.
|
During
the three months ended March 31, 2019, no warrants expired or were exercised into ordinary
shares.
|
|
2.
|
As
of March 31, 2019, there are remaining 40,000 outstanding warrants issued to one of the
Company’s consultants during 2016 with a per share exercise price of $0.95. The
warrants expire during 2019.
|
|
C.
|
Stock
options and warrants in the amounts of 1,595,666 and 1,558,333 outstanding as of March
31, 2019 and 2018, 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.
|
On
Track Innovations Ltd.
and
Subsidiaries
Notes
to the Interim Unaudited Condensed Consolidated Financial Statements
US
dollars in thousands
Note
11 - Operating segments
For
the purposes of allocating resources and assessing performance in order to improve profitability, the Company's chief operating
decision maker (“CODM”) examines two segments which are the Company's strategic business units: (1) Retail and Mass
Transit Ticketing; and (2) Petroleum.
Information
regarding the results of each reportable segment is included below based on the internal management reports that are reviewed
by the CODM.
|
|
Three months ended March 31, 2019
|
|
|
|
Retail
and Mass
Transit
Ticketing
|
|
|
Petroleum
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
2,193
|
|
|
$
|
820
|
|
|
$
|
3,013
|
|
Reportable segment gross profit *
|
|
|
1,498
|
|
|
|
346
|
|
|
|
1,844
|
|
Reconciliation of reportable segment gross profit to gross profit for the period
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
|
|
|
|
|
|
|
|
(200
|
)
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
Gross profit for the period in the consolidated financial statement
|
|
|
|
|
|
|
|
|
|
$
|
1,643
|
|
|
|
Three months ended March
31, 2018
**
|
|
|
|
Retail
and Mass
Transit
Ticketing
|
|
|
Petroleum
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
4,570
|
|
|
$
|
942
|
|
|
$
|
5,512
|
|
Reportable segment gross profit *
|
|
|
2,543
|
|
|
|
552
|
|
|
|
3,095
|
|
Reconciliation of reportable segment gross profit to gross profit for the period
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
|
|
|
|
|
|
|
|
(214
|
)
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
Gross profit for the period in the consolidated financial statement
|
|
|
|
|
|
|
|
|
|
$
|
2,880
|
|
|
*
|
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 1C(2).
|
Item 2. Management’s Discussion and Analysis
of Financial Condition and Results of Operations.
Forward - Looking Statements
The statements contained
in this Quarterly Report on Form 10-Q, or Quarterly Report, that are not historical facts are “forward-looking statements”
within the meaning of the Private Securities Litigation Reform Act of 1995 and other federal securities laws. Such forward-looking
statements may be identified by, among other things, the use of forward-looking terminology such as “believes,” “intends,”
“plans”, “expects,” “may,” “will,” “should,” or “anticipates”
or the negative thereof or other variations thereon or comparable terminology, and similar expressions are intended to identify
forward-looking statements. We remind readers that forward-looking statements are merely predictions and therefore are inherently
subject to uncertainties and other factors and involve known and unknown risks that could cause the actual results, performance,
levels of activity, or our achievements, or industry results, to be materially different from any actual future results, performance,
levels of activity, or our achievements, or industry results, expressed or implied by such forward-looking statements. Such forward-looking
statements may appear in this Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations”
as well as elsewhere in this Quarterly Report and include, among other statements, statements regarding the following:
|
●
|
our expectations regarding the growth of the near-field
communication, or NFC, market;
|
|
●
|
the expected development and potential benefits from our
existing or future products or our intellectual property, or IP;
|
|
●
|
increased generation of revenues from licensing, transaction
fees and/or other arrangements;
|
|
●
|
future sources of revenue, ongoing relationships with current
and future business partners, distributors, suppliers, customers, end-user customers and resellers;
|
|
●
|
our intention to generate additional recurring revenues,
licensing and transaction fees;
|
|
●
|
future costs and expenses and adequacy of capital resources;
|
|
●
|
our intention to continue to expand our market presence
via strategic partnerships around the globe;
|
|
●
|
our expectations that revenues from our business will grow
in the next years, and the expected reasons for that growth;
|
|
●
|
our expectations regarding our short-term and long-term
capital requirements;
|
|
●
|
our intention to continue to invest in research and development;
|
|
●
|
our outlook for the coming months;
|
|
●
|
information with respect to any other plans and strategies
for our business; and
|
|
●
|
information with respect to the closing of the sale of
the OTI PetroSmart (Pty), Ltd.’s building.
|
The factors discussed
herein, including those risk factors expressed from time to time in our press releases or filings with the Securities and Exchange
Commission, or the SEC, could cause actual results and developments to be materially different from those expressed in or implied
by such statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak and are
made only as of the date of this filing.
Our business and operations
are subject to substantial risks, which increase the uncertainty inherent in the forward-looking statements contained in this Quarterly
Report. Except as required by law, we undertake no obligation to release publicly the result of any revision to these forward-looking
statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated
events. Further information on potential factors that could affect our business is described among others under the heading “Risk
Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2018 filed with the
SEC. Readers are also urged to carefully review and consider the various disclosures we have made in that report.
As used in this Quarterly
Report, the terms “we”, “us”, “our”, “the Company”, and “OTI” mean On Track
Innovations Ltd. and our subsidiaries, unless otherwise indicated or as otherwise required by the context.
All figures in this
Quarterly Report are stated in United States dollars, unless otherwise specified in.
Overview
We are a fintech pioneer
and 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. As a result
of the closing of the MediSmart Transaction, we no longer report our “Other” segment.
Our field-proven suite
of cashless payment solutions is based on an extensive IP portfolio including registered patents and patent applications worldwide.
Since our incorporation in 1990, we have built an international reputation for reliability and innovation, deploying a large number
of solutions for the unattended retail, mass transit, banking, medical and petroleum industries.
We operate a global
network of regional offices and distributors to support various solutions deployed across the globe.
RESULTS OF OPERATIONS – THREE MONTHS ENDED MARCH 31,
2019 COMPARED TO THREE MONTHS ENDED MARCH 31, 2018
This discussion
and analysis should be read in conjunction with our interim condensed consolidated financial statements and notes thereto contained
in “Item 1. Financial Statements” of this Quarterly Report and our Annual Report on Form 10-K for the fiscal
year ended December 31, 2018 filed with the SEC.
Results of Operations
Discontinued operations
.
In December 2013, we completed the sale of certain assets, certain subsidiaries and IP directly related to our SmartID division.
The results from such operations and the cash flows for the reporting periods are presented in the statements of operations and
in the statements of cash flows, respectively, as discontinued operations separately from continuing operations. All the data in
this Quarterly Report that are derived from our financial statements, unless otherwise specified, exclude the results of those
discontinued operations.
In December 2018, we
completed the sale of our medical smart card’s operation, or Medismart, (formerly part of the Company’s “Other segment”)
to Smart Applications International Limited, or Smart, for a total price of $2.75 million. We have 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. [All the data in this Quarterly Report that are derived from our financial statements,
unless otherwise specified, exclude the results of those discontinued operations.]
Sources of Revenue
We have historically
derived a substantial majority of our revenues from the sale of our products, including both complete systems and original equipment
manufacturer components. In addition, we generate revenues from licensing and transaction fees, and also, less significantly, from
engineering services, customer services and technical support. During the three months ended March 31, 2019 and March 31, 2018,
the revenues that we derived from sales and licensing and transaction fees were as follows (in thousands):
|
|
Three months ended
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Sales
|
|
$
|
1,722
|
|
|
$
|
4,241
|
|
Licensing and transaction fees
|
|
$
|
1,291
|
|
|
$
|
1,271
|
|
Total revenues
|
|
$
|
3,013
|
|
|
$
|
5,512
|
|
|
|
|
|
|
|
|
|
|
Sales.
Sales decreased by $2.5 million, or 59%, in the three months ended March 31, 2019, compared to the three months ended March 31,
2018. The decrease is mainly attributed to a decrease in sales in the United States and Japan.
Licensing and transaction
fees.
Licensing and transaction fees include single and periodic payments for distribution rights for our products as well
as licensing our IP rights to third parties. Transaction fees are paid by customers based on the volume of transactions processed
by systems that contain our products. Our licensing and transaction fees remained consistent.
We have historically
derived revenues from different geographical areas. The following table sets forth our revenues, by dollar amount (in
thousands) and as a percentage of quarterly revenues in different geographical areas, for the three months ended March 31, 2019
and March 31, 2018:
Three months ended
March 31,
|
|
Americas
|
|
|
Europe
|
|
|
Africa
|
|
|
APAC
|
|
2019
|
|
$
|
641
|
|
|
|
21
|
%
|
|
$
|
1,646
|
|
|
|
55
|
%
|
|
$
|
573
|
|
|
|
19
|
%
|
|
$
|
153
|
|
|
|
5
|
%
|
2018
|
|
$
|
2,238
|
|
|
|
41
|
%
|
|
$
|
1,674
|
|
|
|
30
|
%
|
|
$
|
536
|
|
|
|
10
|
%
|
|
$
|
1,064
|
|
|
|
19
|
%
|
Our revenues from
sales in Americas decreased by $1.6 million, or 71%, in the three months ended March 31, 2019, compared to the three months ended
March 31, 2018, mainly due to a decrease in sales of readers to the U.S. market.
Our revenues from
sales in Europe in the three months ended March 31, 2019, compared to the three months ended March 31, 2018, remained consistent.
Our revenues from
sales in Africa increased by $37,000, or 7%, in the three months ended March 31, 2019, compared to the three months ended March
31, 2018, mainly due to an increase in sales of Petroleum products.
Our revenues from
sales in the Asia-Pacific region, or APAC, decreased by $911,000, or 86%, in the three months ended March 31, 2019, compared to
the three months ended March 31, 2018, mainly due to a decrease in sales of our Uno Plus and GoBox products in Japan.
Our revenues derived
from outside the United States are primarily received in currencies other than the U.S. dollar and accordingly have a varying impact
upon our total revenues as a result of fluctuations in exchange rates.
The following table
sets forth our revenues by dollar amount (in thousands) and as a percentage of revenues by segments, for the three months ended
March 31, 2019 and March 31, 2018:
Three months ended
March 31,
|
|
Retail and Mass
Transit Ticketing
|
|
|
Petroleum
|
|
2019
|
|
$
|
2,193
|
|
|
|
73
|
%
|
|
$
|
820
|
|
|
|
27
|
%
|
2018
|
|
$
|
4,570
|
|
|
|
83
|
%
|
|
$
|
942
|
|
|
|
17
|
%
|
Our revenues from
Retail and Mass Transit Ticketing in the three months ended March 31, 2019 decreased by $2.4 million, or 52%, compared to the three
months ended March 31, 2018, mainly attributed to a decrease in sales of readers in United States and due a decrease in sales in
the Japanese market.
Our revenues in the three months ended
March 31, 2019 from Petroleum decreased by $122,000, or 13%, compared to the three months ended March 31, 2018, mainly due to a
decrease in sales of Petroleum products in Asia.
Cost of Revenues and Gross Margin
Our cost of revenues,
presented by gross profit and gross margin percentage, for the three months ended March 31, 2019 and March 31, 2018, were as follows
(dollar amounts in thousands):
Cost of Revenues
|
|
Three months ended
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Cost of sales
|
|
$
|
1,370
|
|
|
$
|
2,632
|
|
Gross profit
|
|
$
|
1,643
|
|
|
$
|
2,880
|
|
Gross margin percentage
|
|
|
55
|
%
|
|
|
52
|
%
|
Cost of sales.
Cost
of sales consists primarily of materials, as well as salaries, fees to subcontractors and related costs of our technical staff
that assemble our products. The decrease of $1.3 million, or 48%, in the three months ended March 31, 2019, compared to the three
months ended March 31, 2018, resulted primarily from the decrease in revenues mainly attributed to the decrease in Retail and Mass
Transit Ticketing segment sales in the United States and in Japan.
Gross margin.
The increase in gross margin percentage in the three months ended March 31, 2019, compared to the three months ended March 31,
2018, is mainly attributed to a change in our revenue mix.
Operating expenses
Our operating expenses
for the three months ended March 31, 2019 and March 31, 2018, were as follows (in thousands):
Operating expenses
|
|
Three months ended
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Research and development
|
|
$
|
871
|
|
|
$
|
820
|
|
Selling and marketing
|
|
$
|
1,285
|
|
|
$
|
1,645
|
|
General and administrative
|
|
$
|
965
|
|
|
$
|
907
|
|
Total operating expenses
|
|
$
|
3,121
|
|
|
$
|
3,372
|
|
Research and development.
Our
research and development expenses consist primarily of the salaries and related expenses of our research and development staff,
as well as subcontracting expenses. The increase of $51,000, or 6%, in the three months ended March 31, 2019, compared to
the three months ended March 31, 2018, is primarily attributed to an increase in subcontractor expenses.
Selling and marketing.
Our
selling and marketing expenses consist primarily of salaries and substantially all of the expenses of our sales and marketing subsidiaries
and offices in the United States, South Africa and Europe, as well as expenses related to advertising, professional expenses and
participation in exhibitions and tradeshows. The decrease of $360,000, or 22%, in the three months ended March 31, 2019, compared
to the three months ended March 31, 2018, is primarily attributed to a decrease in employment expenses and to a lesser extent to
a decrease in marketing and advertising expenses.
General and
administrative.
Our general and administrative expenses consist primarily of salaries and related expenses of
our executive management and financial and administrative staff. These expenses also include costs of our professional
advisors (such as legal and accounting), office expenses, insurance, provision for doubtful accounts and patent maintenance
expenses which consist of professional advisors of our patents and other IP. Our general and administrative expenses in the
three months ended March 31, 2019, compared to the three months ended March 31, 2018, increase of $58,000 or 6%, is primarily
attributed due to an increase in professional expenses.
Financing expenses, net
Our financing expenses, net, for the three
months ended March 31, 2019 and March 31, 2018, were as follows (in thousands):
|
|
Three months ended
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Financing expenses, net
|
|
$
|
(69
|
)
|
|
$
|
(32
|
)
|
Financing expenses,
net consist primarily of financing expense related to interest payable on bank loans, bank commissions and foreign exchange differentials,
partially offset by financing income related to interest earned on investments in short-term deposits. The increase in financing
expenses, net of $37,000, or 116%, in the three months ended March 31, 2019, compared to the three months ended March 31, 2018,
is mainly due to an exchange rate differential, partially offset by a decrease in interest expenses.
Net loss from continuing operations
Our net loss
from
continuing operations for the three months ended March 31, 2019 and March 31, 2018, was as follows (in thousands):
|
|
Three months ended
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Net loss from continuing operations
|
|
$
|
(1,552
|
)
|
|
$
|
(400
|
)
|
The increase in our
net loss
from continuing operations of $1.2 million, or 288%, in the three months ended March 31, 2019, compared
to the three months ended March 31, 2018, is mainly due to a decrease in our sales and a decrease in our gross profit, partially
offset by a decrease in our operating expenses, as described above.
Net loss from discontinued operations
Our net loss from discontinued operations
for the three months ended March 31, 2019 and March 31, 2018, was as follows (in thousands):
|
|
Three months ended
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Net (loss) income from discontinued operations
|
|
$
|
(193
|
)
|
|
$
|
67
|
|
The results from these
operations for the reporting periods are presented in the statements of operations as discontinued operations separately from
continuing operations. The change in the discontinued operations results of $260,000 in the three months ended March 31, 2019,
compared to the three months ended March 31, 2018, is mainly due to income related to the MediSmart activity in 2018 and in a
lesser amount expenses related to SmartID divestiture in 2019.
Net loss
Our net loss for the
three months ended March 31, 2019 and March 31, 2018, was as follows (in thousands):
|
|
Three months ended
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Net loss
|
|
$
|
(1,745
|
)
|
|
$
|
(333
|
)
|
The increase in net
loss of $1.4 million, or 424%, in the three months ended March 31, 2019, compared to the three months ended March 31, 2018, is
primarily due to a decrease in our sales, a decrease in our gross profit and an increase in net loss from discontinued operations,
partially offset by a decrease in our operating expenses, as described above.
Liquidity and Capital Resources
Our principal sources
of liquidity since our inception have been sales of equity securities, borrowings from banks, cash from the exercise of options
and warrants and proceeds from divestiture of part of our businesses. As of March 31, 2019, we had cash, cash equivalents and
short-term investments representing bank deposits of $4.9 million (of which an amount of $105,000 has been pledged as security
in respect of performance guarantees granted to third parties, loans and credit lines received from a bank), and $5.9 million
as of December 31, 2018 (of which an amount of $278,000 had then been pledged as security in respect of performance guarantees
granted to third parties, loans and credit lines received from a bank). We believe that we have sufficient capital resources to
fund our operations for at least the next 12 months. As of March 31, 2019, our long-term bank loans are denominated in the following currencies: Polish Zloty ($138,000,
with maturity dates during 2019) and South African Rand ($40,000, with maturity dates ranging from 2019 through 2023). As of March
31, 2019, these loans bear weighted average annual interest of 4.66%.
In March 2019, OTI Petrosmart (Pty), Ltd., our South African subsidiary, or Petrosmart, entered into an
agreement pursuant to which Petrosmart will sell its head office in Cape Town, South Africa, to a third party for a consideration
of Rand 15,500,000 (approximately $1,064,000), that will be received on the date of the sale, and Petrosmart will lease back this
building for its current operations. Subject to the fulfillment of certain conditions, the sale is expected to be completed and
the operating lease is expected to commence on July 1, 2019.
The composition of our long-term
loans as of March 31, 2019, was as follows (in thousands):
|
|
March 31,
2019
|
|
Long-term loans
|
|
$
|
178
|
|
Less - current maturities
|
|
|
146
|
|
|
|
$
|
32
|
|
Our and certain
of our subsidiaries’ manufacturing facilities and certain equipment have been pledged as security in respect of a loan received
from a bank. Our short-term deposits in the amount of $105,000 have been pledged as security 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 March
31, 2019, we granted guarantees to third parties including performance guarantees and guarantees to secure customer advances in
the sum of $271,000. The expiration dates of the guarantees range from April 2019 to June 2019.
For the three
months ended March 31, 2019, we had a positive cash flow from continuing operations of $186,000.
Operating activities related to continuing
operations
For the three
months ended March 31, 2019, net cash provided by continuing operating activities was $186,000 primarily due to a $1.6
million net loss from continuing operations, a $1.3 million decrease in trade receivables, a $457,000 increase in inventory,
a $423,000 increase in trade payables, a $320,000 of depreciation and amortization, a $264,000 decrease in other
receivables and prepaid expenses, a $186,000 decrease in other current liabilities, a $46,000 expense due to stock based
compensation issued to employees and others, a $29,000 increase in accrued severance pay, a $12,000 decrease in accrued
interest and linkage differences, a $10,000 decrease in deferred tax liability and a $2,000 gain on sale of
property and equipment.
For the three
months ended March 31, 2018, net cash provided by continuing operating activities was $591,000 primarily due to a $886,000
decrease in trade receivables, a $400,000 net loss from continuing operations, a $335,000 of depreciation and amortization, a $124,000
decrease in deferred tax liability, a $117,000 decrease in trade receivables, a $53,000 expense due to stock based compensation issued
to employees and others, a $51,000 decrease in other current liabilities, $35,000 increase in inventory, a $33,000 decrease
in other receivables and prepaid expenses, a $14,000 increase in accrued interest and linkage differences,
and
a $3,000 increase in accrued severance
pay.
Operating activities related to discontinued
operations
For the three
months ended March 31, 2019, net cash used in discontinued operating activities was $1.2 million, related to the dispute
regarding Merwell Inc. related to the SmartID division.
For the three months
ended March 31, 2018, net cash provided by discontinued operating activities was $244,000, related to the Medismart activity.
Investing and financing activities related
to continuing operations
For the three months
ended March 31, 2019, net cash used in continuing investing activities was $137,000, mainly due to $115,000 of purchases of equipment
and a $48,000 investment in capitalized product costs, partially offset by $10,000 in proceeds from restricted deposit for employee
benefits, $10,000 in proceeds from the sale of property and equipment and a $6,000 net change in short-term investments.
For the three months
ended March 31, 2018, net cash provided by continuing investing activities was $829,000, mainly due to a $1.1 million net change
in short-term investments, partially offset by $322,000 of purchases of property and equipment and a $13,000 investment in capitalized
product costs.
For the three months
ended March 31, 2019, net cash provided by continuing financing activities was $253,000, mainly due to a $372,000 increase in short-term
bank credit, net, partially offset by a $119,000 repayment of long-term bank loans.
For the three months ended March 31, 2018,
net cash used in continuing financing activities was $111,000, mainly due to a $144,000 repayment of long-term bank loans, partially
offset by a $33,000 increase in short-term bank credit, net.
Investing and financing activities related
to discontinued operations
We had no cash flows
provided by or used in discontinued investing or financing activities in the three months ended March 31, 2019 and March 31, 2018.
Off Balance Sheet Arrangements
We have no off
balance sheet arrangements.