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: $18,237,849.
The number of shares of the registrant’s Ordinary Shares outstanding on March 25, 2021, was 53,824,377.
PART
I
Item
1. Business.
We are a leading developer
of contactless payment solutions, Near Field Communication (NFC) technology based, for the unattended market. We have been a technology
leader since 1990, providing systems, devices and services to operators and integrators with solutions and components that are simple
to implement.
To date, we have deployed over one million payment solutions to our
focused unattended markets: self-service kiosk, micro-markets and vending machines, entertainment and gaming, automated teller machines,
or ATM, Mass Transit Ticketing Validation, and fuel payments.
We operate through regional offices, supporting
clients and payment industry partners with its unique contactless payment solutions.
On March 29, 2021, we entered into an agreement, or the Sale Agreement,
for the sale of 100% of the issued and outstanding share capital of our wholly owned Polish subsidiary, ASEC S.A., or ASEC, with Vector
Software SP. Z O.O., or the Buyer. ASEC is headquartered in Krakow, Poland and has been conducting our Mass Transit Ticketing business
in Europe. The consideration for ASEC is $3,000,000, of which approximately $2,100,000 shall be used to repay Polish banks loans
at the closing date, as mentioned in the Sale Agreement, further offset by minor adjustments. The Sale Agreement contains customary representations
and warranties, as well as covenants, including an undertaking we provided not to compete with the business of ASEC for a period of five
years after the closing and an undertaking to indemnify ASEC and the Buyer for certain damages. Our liability is limited to the purchase
price actually paid by the Buyer.
In addition, we engaged an
investment bank to explore strategic options and are investing resources in this process.
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 quoted on the OTCQX® market, or OTCQX, under the symbol OTIVF.
Our Markets
We plan to continue to support
our growing unattended markets which are self-service kiosks, micro-markets and vending machines, entertainment and gaming, ATM, mass
transit ticketing validation, and fuel payments.
We believe that worldwide
events including the COVID-19 pandemic are accelerating the trend towards adoption of unattended contactless payments in these markets.
Our
Products
We
combine a unique radio frequency, or RF technology with an “open garden” approach, and we enable our customers and
partners to pick and choose products and services from our wide offering.
Our
solutions include: Readers, Controllers and Terminals, Management Software, Payment Services, and a complete Payment System as
a Service (PSaaS).
OTI
Readers
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, among 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.
Controllers
and Terminals
Controllers
and Terminals are hardware devices that manage the flow of data between two machines and are used to “control” a peripheral
device (e.g., a vending machine). We have a range of Controllers and Terminals that provide secured and certified access
to payment service providers which enable contactless payment acceptance, connectivity, and cloud-based management for machines.
Management
software
We
provide a cloud-based software for Self-Service Kiosks, Micro-Markets, Vending and any Pulse machines that provides real-time
control and insights of each machine, enabling operators to remotely manage their terminal’s fleet.
Payment
Services
Our
payment services include the following payment options:
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Payment Service API - a simple and powerful application programming
interface, or API, to our payment servers to provide our customers and partners access to a certified Europay Mastercard Visa, or EMV,
system to enable a fast and secured integration to new processors.
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Close
Loop Payment - extending EMV payment, we offer support for close-loop payment
cards with different technologies such as MIFARE and Mag-Stripe.
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Mobile
Payment - we provide APIs for effortless and smooth integration with mobile payment
solutions, enabling mobile payments on our system.
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A
complete Payment System as a Service (PSaaS)
Our system is a modular,
cost-effective solution for self-service kiosks, micro-markets, vending and any pulse machines which enable contactless payments.
The complete PSaaS system
incorporates telemetry, sales and operations into an all-inclusive solution that makes any kiosk, pulse or vending business connected
and interactive, providing cloud control with real-time online management and alerts.
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™, Google
Pay™ and Samsung Pay™, all of which require a contactless reader to be available at the merchant countertop.
In
addition, we believe that the COVID-19 pandemic has accelerated the trend towards adoption of unattended contactless payments
in these markets.
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. We have been working for the past few months on updating
our strategy for the coming years, which we believe will enable us to realize our potential and resume our growth, and ultimately
create shareholder value. In addition, we engaged an investment bank to explore strategic options and are investing resources
in this process.
Key
elements of our strategy for achieving this goal include:
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Expanding
our global market presence. We market our products through regional offices in the United States, Europe, Africa and
our headquarters in Israel. We are using our headquarters and regional offices 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 partners and distributors around the globe.
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Increasing
our focus on generating high-margin, recurring revenues. We are continuing our strategy to shift from hardware sales
to SaaS and in upgrading our hardware to maintain our technological lead. 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 to develop new technologies,
extend the functionality of our products and services, and offer innovative products and services to our customers and partners.
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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 regional
offices, distributors and local services providers, including employees located in our corporate headquarters in Yokneam, Israel,
as well as employees located in our offices in Europe, South Africa and the United States. Our customer service teams in Yokneam
provide central services to our global network. Our offices, 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 and solutions through our distributors, we sell and market our products directly and through
our regional offices. 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, our subsidiary in Poland, OTI Europe Sp.z.o.o. In Israel and in
regions where we do not have local subsidiaries or representatives, we market and sell through our main headquarters in Yokneam,
Israel. Our marketing and sales staff implement marketing campaigns and programs to promote our products and services to enhance
our global brand recognition. Our current marketing efforts include participation in digital events, webinars, press releases,
websites, social media and client / distributor meetings. We also conduct technical seminars to inform sales staff, customers,
distributors, business partners and other industry contributors of our unique products and innovative technologies.
Customers
Our
customer base is concentrated among a limited number of large 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 2020 and 2019, a customer in North
America accounted for 19% and 20%, respectively, of our total revenues for such periods. Another customer in Asia accounted for
14% and 6% of our total revenues for 2020 and 2019, respectively. An additional customer in Europe accounted for 12% and 13% of
our total revenues for 2020 and 2019, 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.
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 source.
We
are ISO 9001:2015 certified. We require that our suppliers and subcontractors be ISO 9001:2015 certified. ISO 9001:2015 is an
international standard promulgated by the International Standards Organization, 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. 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 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 comply with the regulations in the markets in which we operate.
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 on two major areas:
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developing new innovative
technologies related to the contactless 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 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 9001:2015 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 customers, 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. As part of
our efficiency program, we have reduced our investment in non-core patents and registrations. The expiration dates for our granted
patents range between 2027 to 2033.
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 and 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 contactless payments solutions products and technologies:
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In the Kiosk,
Micro markets and Vending markets, our competition includes unattended payment solution and technology providers such
as ID Tech, Nayax and Ingenico.
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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
As of December 31, 2020, we had 121 employees. This number includes
approximately 40 employees of ASEC that on March 29, 2021, we entered into an agreement to sell.
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.
SEC
Filings
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
do not have enough existing cash resources to fund our operations for the next twelve months and if we are unable to secure additional
capital, we may be required to seek strategic alternatives, including but not limited to reducing or ceasing our operations.
Our principal sources of liquidity
have been revenues, proceeds from sales of equity securities, borrowings from banks, government and shareholders, cash from the exercise
of options and warrants as well as proceeds from the divestiture of parts of our businesses, such as the recent Sale Agreement of ASEC.
We had cash, cash equivalents and short-term investments representing bank deposits of $1,482,000 (of which an amount of $105,000 has
been pledged as securities for certain items), excluding cash and cash equivalents held for sale, as of December 31, 2020. Based on the
projected cash flows and our cash balances as of December 31, 2020, our management is of the opinion that without further fund raising
or other increase in our cash, we will not have sufficient resources to enable us to continue our operations for a period of at least
the next 12 months. As a result, there is a substantial doubt about our ability to continue as a going concern. We are attempting to raise
additional funds and to increase our cash. While we believe in our ability to raise additional funds and increase our cash, there can
be no assurances to that we will be successful in doing so.
If
additional financing is not available when required or is not available on acceptable terms, we may be unable to take advantage
of business opportunities or respond to competitive pressures, which could have a material adverse effect on our revenue, results
of operations and financial condition. To preserve our cash resources, we may be required to reorganize our operations. If we
are unable to fund our operations without additional external financing and therefore cannot sustain future operations, we may
be required to cease our operations and/or seek bankruptcy protection.
We
have a history of losses, and we expect to continue to incur full-year losses in 2021 and may further incur losses in subsequent
years.
We
have incurred losses in each year since we commenced operations in 1990. We reported net losses attributable to shareholders of
$5,896,000 in 2020, $5,889,000 in 2019 and $263,000 in 2018. We expect to continue to incur full-year losses in 2021 and may incur
losses also in subsequent years, as we invest in the expansion of our global sales and marketing network, shift our business model
away from product sales towards services and transaction fees, and enhance our research and development capabilities to develop
existing and new products.
We
face risks resulting from the outbreak of the COVID-19 pandemic, which could have a material adverse effect on our business and
results of operations.
Our operations and business could be materially adversely affected
by the outbreak of COVID-19. Our revenues from Mass Transit Ticketing sales in the Polish market decreased since March 2020 compared to
the year preceding the COVID-19 outbreak. On March 29, 2021, we entered into an agreement to sell ASEC, including its Mass Transit Ticketing
activity, as mentioned above. Additionally, recently, as a result of COVID-19, some of our customers have delayed issuance of orders in
our pipeline. In addition, the execution of sales transactions is slow due to COVID-19 and there is no assurance that we will close any
of the potential transactions with customers and partners. Further, another impact of COVID-19 is on product delivery, where components’
procurement lead time is longer and a shortage in components has grown as the duration of the COVID-19 pandemic has continued. As long
as the COVID-19 pandemic continues, the components’ lead time may be longer than normal and shortages in components may continue
or get worse. Although we maintain a comprehensive network of world-wide suppliers to handle such delays in delivery, we may still suffer
delays. Additionally, some of our employees, including management members, were in quarantine. Simultaneously, we are attempting to comply
with rapidly changing restrictions, such as travel restrictions, curfews and others. Currently travel to and from work is still permitted;
however, the authorities may place additional, more restrictive measures on businesses and individuals. Though we may still operate under
such regulations, any additional actions taken by the Israeli government could further limit that ability, which may have a material adverse
effect on our operations and financial results. A significant reduction in our workforce and our compliance with instructions imposed
by Israeli authorities may harm our ability to continue operating our business and materially and adversely affect our operations and
financial condition. Further, we cannot assure you that we will be designated an “essential business”, as defined under regulatory
instructions, and moreover, we cannot foresee whether the Israeli authorities will impose further restrictive instructions, which if implemented
may lead to significant changes.
Authorities
around the world have and may continue implementing similar restrictions on business and individuals in their jurisdictions. We
continue to assess our business operations and system supports and the impact COVID-19 may have on our results and financial condition.
To date, we have taken action to reduce our operating expenses in the short term, but there can be no assurance that this analysis
or remedial measures will enable us to avoid part or all of any impact from the spread of COVID-19 or its consequences.
We
are a party to multiple litigation matters which consume management attention, high costs and expose us to pay significant amounts
to third parties.
We
are party to multiple litigation and arbitration processes, including with Merwell, Inc., or Merwell, where we are being sued,
and SuperCom Ltd., where we are suing SuperCom, both cases that relate to activities we conducted in Tanzania. We are also party
to other litigation processes, as detailed in Note 10E to the consolidated financial statements contained in “Item 8. Financial
Statements and Supplementary Data” of this Annual Report. These litigation and other proceedings consume much management,
require us to retain legal representation that burdens our cash position and generally might expose us to payment of damage and
other compensation if we are defendants and lose the matter, as well as legal fees of the other party if we lose in the proceeding
in question.
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, and fueling. Such adoption of cashless payment solutions and technologies 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 and we may fail to achieve our business goals.
Additionally,
potential customers, 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 from ours might be adopted
by the markets and could reduce the need for our payment solutions.
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 2020 and 2019, a customer in North America accounted for 19% and 20%, respectively,
of our total revenues for such periods. Another customer in Asia accounted for 14% and 6%, of our total revenues for 2020 and
2019, respectively. Another customer in Europe accounted for 12% and 13% of our total revenues for 2020 and 2019, 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.
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. We compete on the basis of a range of 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 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, 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 specialized and may require us to enter into strategic relationships in order to facilitate
or accelerate our market penetration. 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 of Directors, or
the 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. For example,
in March 29, 2021, we entered into an agreement to sell our Mass Transit Ticketing operation in Poland. 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.
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.
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.
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.
Most
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 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 mainly in U.S. 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.
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.
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.
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
use 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.
We
have certain operations in countries that may be adversely affected by political or economic instability.
We
are a company with worldwide operations. In addition to being headquartered in 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.
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.
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 OTCQX 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.
There
is a limited market for our Ordinary Shares, and the trading price of our Ordinary Shares is subject to volatility.
Our
Ordinary Shares began trading on the OTCQX in October 2019, following the delisting of our Ordinary Shares from the Nasdaq Capital
Market. Because our Ordinary Shares are no longer listed on a registered national securities exchange, we are subject to certain
“blue sky” laws of the various states which impose restrictions on our ability to offer and sell our securities. These
“blue sky” laws may make it more difficult for us to raise capital or to issue our Ordinary Shares for equity compensation
or other strategic purposes, which could adversely affect our ability to fund our operations or to attract and retain employees.
In addition, our Ordinary Shares may be defined as a “penny stock” under Rule 3a51-1 under the Exchange Act. “Penny
stocks” are subject to Rule 15g-9, which imposes additional sales practice requirements on broker-dealers that sell low-priced
securities to persons other than established customers and institutional accredited investors. For transactions covered by this
rule, a broker-dealer must make a special suitability determination for the purchaser and have received the purchaser’s
written consent to the transaction prior to sale. Consequently, the rule may affect the ability of broker-dealers to sell our
Ordinary Shares and affect the ability of holders to sell their Ordinary Shares in the secondary market. To the extent our share
is subject to the penny stock regulations, the market liquidity for the Ordinary Shares will be adversely affected.
We
may need additional funds in the future and our share price could be adversely affected by future sales of our Ordinary Shares.
We
have experienced an immediate need to raise funds and on December 9, 2020 we entered into a loan agreement, or the Loan Agreement,
with Jerry L. Ivy, Jr. Descendants’ Trust, or Ivy, the controlling shareholder of the company. Under the Loan Agreement,
as amended, we received from Ivy and another lender a loan in the aggregate amount of $1,600,000. The loan amount and interest
thereon may be converted into our Ordinary Shares at a price per share that is substantially lower than the current price per
share. We will likely need additional funding and if such funding is obtained by way of issuance of our equity securities, including
by way of a rights offering, or if the loan amount is converted into our Ordinary Shares, the market price of our Ordinary Shares
could drop. 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 unless those rights are provided pursuant to a contract.
This means that generally our shareholders do not have the legal right to purchase shares in a new issue before they are offered
to third parties. However, pursuant to the terms and provisions of the share purchase agreement, or the Share Purchase Agreement,
dated December 23, 2019, Ivy has a right to purchase any future equity securities offered by us, except with respect to certain
exempt issuances as set forth in the Share Purchase Agreement. 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.
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, 1999, or the Companies Law.
Risks
Related to Conducting Business in Israel
Provisions
of Israeli law may make it easy for our shareholders to demand that we convene a shareholders meeting, and/or allow shareholders
to convene a shareholder meeting without the consent of our management, which may disrupt our management’s ability to run
our company.
Section
63(b) of the Companies Law may allow any one or more of our shareholders holding at least 5% of our voting rights to demand that
we convene an extraordinary shareholders meeting. Also, in the event that we choose not to convene an extraordinary shareholders
meeting pursuant to such a request, Sections 64-65 of the Companies Law provide, among others, that such shareholders may independently
convene an extraordinary shareholders meeting within three months (or under court’s ruling) and require us to cover the
costs, within reason, and as a result thereof, our directors might be required to repay us such costs. If our shareholders decide
to exercise these rights in a way inconsistent with our management’s strategic plans, our management’s ability to
run our company may be disrupted, and this process may entail significant costs to us.
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. Any armed conflicts, political instability, terrorism, cyberattacks or any other
hostilities involving Israel or the interruption or curtailment of trade between Israel and its present trading partners could
affect adversely our operations. Ongoing and revived hostilities in the Middle East or other Israeli political or economic factors,
could harm our operations and solution development and cause any future sales to decrease.
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.
In
addition, Israel is experiencing a level of unprecedented political instability. The Israeli government has been in a transitionary
phase since December 2018, when the Israeli Parliament, or the Knesset, first resolved to dissolve itself and call for new general
elections. Since then, Israel held general elections three times – in April and September of 2019 and in March of 2020.
A fourth election took place on March 23, 2021. The Knesset has not passed a budget for the year 2021, and certain government
ministries, which may be critical to the operation of our business, are without necessary resources and may not receive sufficient
funding moving forward. In the event that the current political stalemate is not resolved during 2021, our ability to conduct
our business effectively may be adversely affected.
Finally,
many Israeli citizens are obligated to perform several days, and in some cases more, of annual military reserve duty each year
until they reach the age of 40 (or older, for reservists who are military officers or who have certain occupations) and, in the
event of a military conflict, may be called to active duty. In response to increases in terrorist activity, there have been periods
of significant call-ups of military reservists. It is possible that there will be military reserve duty call-ups in the future.
Our operations could be disrupted by such call-ups, which may include the call-up of members of our management. Such disruption
could materially adversely affect our business, prospects, financial condition and results of operations.
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 2020). 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, 2020, we received a total of approximately $7 million from the IIA. The total
amount of grants received as of December 31, 2020, net of royalties paid, was approximately $3.4 million (including accrued interest).
With respect to such grants, we are committed to pay the IIA royalties at a rate of 3.5%-3% 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.
General
Risk Factors
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. 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.
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.
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 the recent spread of the
coronavirus, 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, that on March 29,
2021, we entered into an agreement to sell, 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.
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
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, 2020, 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.
Item
1B. Unresolved Staff Comments.
None.
Item
2. Properties.
We
lease 700 square meters in Yokne’am, Israel, which serves as our headquarters. This lease expires on January 31, 2025 with
an option of a 5-year extension which shall begin on February 1, 2025 and ends on January 31, 2030. We also lease 260 square meters
in Rosh Pina, Israel, where our research and development functions are located. This lease will expire on August 30, 2023 subject
to three one-year options of extension.
We
believe that the current space we have is adequate to meet our current and near future needs.
Item
3. Legal Proceedings.
For
information with respect to legal proceedings to be disclosed under this Item, see Note 10E to the consolidated financial statements
contained in “Item 8. Financial Statements and Supplementary Data” of this Annual Report.
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
|
Sandra
B Hardardottir
|
|
46
|
|
Chairman
of the Board of Directors
|
William C. Anderson
III (1)(2)(3)
|
|
50
|
|
Director
|
Uri Arazy (1)
|
|
63
|
|
Director
|
Leonid Berkovitch
(1)(2)(3)(4)
|
|
54
|
|
Director
|
Donna Marks (1)(2)(3)(4)
|
|
64
|
|
Director
|
Michael Shanahan
(1)
|
|
66
|
|
Director
|
Yehuda Holtzman
|
|
60
|
|
Chief Executive
Officer
|
Assaf Cohen
|
|
36
|
|
Chief Financial
Officer
|
(1)
|
Independent Director
under Nasdaq rules
|
(2)
|
Member of Compensation
Committee
|
(3)
|
Member
of Audit Committee
|
(4)
|
External director
under the Companies Law
|
Sandra
B. Hardardottir was appointed in May 2020 as a director and as Chairman of our Board. From 1994 to 2001, Ms. Hardardottir
was the founder and Managing Director of Premier Recruitment Ltd., a recruitment company specializing in the construction industry,
and co-founder of Premier Electrical Ltd., an electrical contractor in the commercial and industrial sectors. From 2003 to 2008,
Ms. Hardardottir served initially as a Senior Business Analyst and then was promoted to Senior Executive of a national U.S. management
consulting firm. From 2008 to 2012, Ms. Hardardottir held interim roles such as President and Director of Operations of companies
that required short term relief to shareholders and leadership teams that faced immediate challenges requiring a shift in strategic
focus and rebuilding of core competencies to align with company goals. From 2014 to 2017, Ms. Hardardottir acted as a Senior Business/Executive
Analyst for Cogent Analytics, LLC, performing holistic business analysis and providing recommendations to improve performance
through organizational structuring, operational efficiencies, and profit engineering. Ms. Hardardottir completed an International
Finance Reporting and Controls course and holds an M.B.A. with honors from Durham University Business School in England.
William C. Anderson
III has served as a director since 2014. Mr. Anderson is the founder of AmpThink LLC, a wireless solutions company focused on
building large, complex, wireless networks employing different technologies, and 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. 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.
Uri Arazy has
served as a director since March 2021. He served in a variety of positions in Intel Corporation between 1984 and 2019. Between 2005 and
2019, Mr. Arazy served as an Investment Director of Intel Capital Israel. In the past five years, Mr. Arazy invested and served on the
board of directors of technology startups including WSC Sports Technologies, Interlude, Spotinst, Moovit, Velostrata, Cloudify and Gigaspaces.
Mr. Arazy holds a B.A. in Computer Science from Queens College, NY, an M.Sc. in Computer Science from Columbia University, NY, an M.B.A.
from Tel Aviv University and Northwestern University and an M.A. in Security and Diplomacy from the Tel Aviv University.
Leonid Berkovitch
has served as an External Director since April 2020. Mr. Berkovitch has nearly 30 years of experience in the smart card industry, having
worked in leading technology companies in areas including telecom, e-transactions and digital security. From 1996 to 2004, Mr. Berkovitch
served as a Senior Vice President Sales EMEA, Marketing & Product lines Director in the Test & Transactions Division of Schlumberger
Limited (NYSE: SLB). From 2004 to 2006, Mr. Berkovitch served as a Business Unit Director for Axalto. From 2006 to 2011, Mr. Berkovitch
served as a Managing Director Emerging Businesses for Gemalto N.V. Mr. Berkovitch joined Orange Group at the end of 2011 and served as
a Vice-President Product Marketing in Viaccess-Orca (an affiliate company of Orange) until 2018. Since 2018, he has been Director IoT,
Connected Home at Orange’s Corporate Unit and since the end of 2020, has taken a position of Senior Director; Connectivity at Orange
Business Services. Mr. Berkovitch holds a Master of Science degree in Telecommunication Engineering from the State University of Telecommunications
of Saint-Petersburg.
Donna Marks
has served as a director since 2015, and currently qualifies as an External Director under the Companies Law. Ms. Marks is a Certified
Public Accountant with a wide variety of experience serving clients in various industries over her 39 years in the practice of public
accounting. Ms. Marks has served as a director, working at the Fuoco Group, LLC, an accounting firm between the years 2011 and 2014, while
acting as a consultant for Fuoco Group through 2018. Prior to joining the Fuoco Group, Mrs. 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). Ms. 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.
Michael Shanahan
has served as a director since January 2020. Mr. Shanahan has served as owner and managing partner at Shanahan Law Firm since 2006. From
1988 to 1998, Mr. Shanahan served as an associate and then partner at the Seattle, Washington law firm, Bauer Moynihan & Johnson.
From 1998 to 2003, Mr. Shanahan served as Vice President of administration and general counsel for Western Pioneer, Inc., and from 2003
to 2006, as Vice President of administration and general counsel for Blue North Fisheries, Inc., both companies in the fishing industry.
In addition, since 1997, Mr. Shanahan has served as an adjunct professor at the Seattle University Law School. Mr. Shanahan holds a J.D.
from the Seattle University School of Law and a B.A. from the University of Washington.
Executive
Officers
Yehuda
Holtzman was appointed as the Company’s Chief Executive Officer effective November 25, 2019. Mr. Holtzman served
from 1998 to 2011 as president of MobileAccess Ltd., a cellular technology company he co-founded and sold to Corning in 2011.
Following that, Mr. Holtzman co-founded and was the Chief Executive Officer of ExploreGate Ltd., a big data/AI company, and from
2016 until 2018, he was the Chief Executive Officer of Mobilogy Inc., a provider of mobile lifecycle solutions which was acquired
in 2018.
Assaf
Cohen was appointed as the Company’s Chief Financial Officer effective February 27, 2018 and served also as the
Company’s Interim Chief Executive Officer from July 2019 to November 2019. 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
Board currently consists of six directors. Our non-External Directors 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 and our
Articles of Association.
Once
elected at a shareholders’ meeting, our directors, except for External Directors, 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, 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.
Holtzman is our Chief Executive Officer, and Ms. Hardardottir is Chairman of our Board. As Chief Executive Officer of the Company,
Mr. Holtzman reports to the 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, companies incorporated under the laws of the State of Israel whose shares were offered to and are traded by
the public, such as us, must appoint at least two External Directors, unless they qualify and choose to adopt the exemption specified
in Regulation 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 Regulations. We no longer qualify for the Exemption Regulations and therefore
on April 16, 2020 our shareholders elected Donna Marks and Leonid Berkovitch as External Directors for a three years term. Based
on the information provided to us, both Ms. Marks and Mr. Berkovitch qualify as External Directors under the Companies Law.
The
Companies Law provides that a person may not be appointed as an External Director if the person is a relative of the controlling
shareholder of the company or if the person (or any of the person’s relatives, partners, employers or anyone to whom the
person is directly or indirectly subjected to or any entity under the person’s control) has or had during the two years
preceding the date of appointment any affiliation with the company, its controlling shareholder, any of the controlling shareholder’s
relatives, any other entity under the control of the company or the company’s controlling shareholder, and, where there
is no controlling shareholder and no shareholder holding 25% or more of the voting power of the company, any affiliation to the
chairman of the board of directors of the company, the company’s chief executive officer, any beneficial owner of 5% or
more of the issued shares or the voting power of the company or the most senior executive officer of the company in the finance
field.
The
term affiliation includes: an employment relationship, a business or professional relationship maintained on a regular basis,
control, and service as an office holder, excluding service as a director in a private company prior to the first offering of
its shares to the public, if such director was appointed as a director of the private company in order to serve as an External
Director following the public offering.
“Office
holder” is defined in the Companies Law as a chief executive officer, chief business manager, deputy general manager, vice
general manager, any person who holds such position in the company, even if such person holds a different title, any director
and other manager or officer who reports directly to the chief executive officer.
No
person can serve as an External Director if his or her position or other business interests create, or may create, a conflict
of interest with his or her responsibilities as an External Director or may otherwise interfere with his or her ability to serve
as an External Director.
No
person can serve as an External Director if the person (or any of the person’s relatives, partners, employers, anyone to
whom the person is directly or indirectly subjected to or any entity under the person’s control) has business or professional
relations with anyone the affiliation with whom is prohibited by the Companies Law, even if those affiliations are not of an ongoing
nature, excluding negligible affiliations.
Our
External Directors are required to possess professional qualifications as set out in regulations promulgated under the Companies
Law. In addition, our Board is required to determine how many of our non-External Directors should be required to have financial
and accounting expertise. In determining such number, the Board must consider, among other things, the type and size of the company
and the scope and complexity of its operations.
Under
the Companies Law, each of our External Directors must also serve on our Audit Committee and Compensation Committee, unless we
qualify and choose to adopt the exemption specified in Regulation 5D of the Exemption Regulations. Ms. Marks and Mr. Berkovitch
are both currently members of our Audit Committee and Compensation Committee. Ms. Marks serves as Chairman of our Audit Committee
and Mr. Berkovitch serves as Chairman of our Compensation Committee.
Under
the Companies Law, until the lapse of two years from termination of office (and with respect to a relative of an External Director
who is not the External Director’s spouse or child, one year from termination of office), we, our controlling shareholders
and any corporation in their control, may not grant a person who served as an External Director of the company, or to its spouse
or child, any benefit, directly or indirectly, and may not engage a person who served as an External Director of the company,
or its spouse or child, as an office holder of the company or an entity under the control of the company’s controlling shareholder
and cannot employ or receive services from that person, either directly or indirectly, including through a corporation controlled
by that person.
None
of the External Directors has any relationship with us besides serving on our Board.
If,
at the time an External Director is appointed, all current members of the Board, who are not controlling shareholders or family
members thereof, are of the same gender, then that External Director must be of the other gender. The requirement of Israeli residency
does not apply to the External Directors of companies whose shares are listed for trading outside of Israel.
External
Directors are elected by a majority vote at a shareholders’ meeting at which either the majority of shares voted at the
meeting, including at least a majority of the shares held by non-controlling shareholders disinterested with respect to the interests
of controlling shareholders voted at the meeting, vote in favor of the election of the External Director, or the total number
of shares held by non-controlling shareholders disinterested with respect to the interests of controlling shareholders voted against
the election of the External Director does not exceed two percent of the aggregate voting rights in the company.
The
initial term of an External Director is three years commencing from the date of his or her election and under regulations that
apply to Israeli companies whose shares that have been offered to the public outside of Israel or traded on a stock exchange outside
of Israel, may be extended for consecutive additional three year periods (unlike other public companies, in which only two additional
three year periods are allowed). External Directors may only be removed by the same percentage of shareholders as is required
for their election, or by a court, and then only if the External Directors cease to meet the statutory qualifications for their
appointment or if they violate their duty of loyalty to the company. If an External Directorship becomes vacant, our Board is
required under the Companies Law to call a shareholders’ meeting promptly to appoint a new External Director. Unless we
qualify and choose to adopt the exemption specified in Regulation 5D of the Exemption Regulations, each committee of our Board
that is required by law to be formed must include at least one External Director and the Audit Committee and Compensation Committee
must include all of the External Directors. An 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.
Alternate
Directors
Under
our articles of association, 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
None
of our directors has 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 Marks and Leonid Berkovitch. Donna 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 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 seven meetings during the fiscal year ended December 31, 2020 (and two written resolutions 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 Marks and Leonid Berkovitch. Mr. Berkovitch 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, as amended from time to time, 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, 2020.
Our
Compensation Committee held four meetings during the fiscal year ended December 31, 2020 (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. 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. 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., Hatnufa 5, Yokneam Industrial
Zone, Yokneam, Israel.
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.
Delinquent
Section 16(a) Reports
Based
solely upon a review of Forms 3 and 4, and amendments thereto, submitted to the SEC during the fiscal year ended December 31, 2020, 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, except form 4 filed by Sandra Hardardottir on
May 8, 2020, which was due May 7, 2020.
Item
11. Executive Compensation.
Summary Compensation Table
The following table sets forth the compensation earned during the years
ended December 31, 2020 and 2019 by (i) our Chief Executive Officer; (ii) our Chief Financial Officer; (iii) our VP of Hardware Engineering;
(iv) our VP, Research and Development and (v) our VP Operations. We refer to the persons listed in (i) and (ii) collectively as the Named
Executive Officers, which includes additional officers not required under SEC rules, in accordance with the requirements of Israeli law.
Name and
|
|
|
|
|
Salary
|
|
|
Bonus
|
|
|
Stock-based Awards
|
|
|
Non-equity Incentive Plan Compensation
|
|
|
All other Compensation
|
|
|
Total
|
|
Principal Position
|
|
Year
|
|
|
($)(1)
|
|
|
($)
|
|
|
($)(2)
|
|
|
($)
|
|
|
($)(3)
|
|
|
($)
|
|
Yehuda Holtzman
|
|
2020
|
|
|
|
273,844
|
|
|
|
-
|
|
|
|
67,612
|
|
|
|
-
|
|
|
|
79,811
|
|
|
|
421,268
|
|
Chief Executive Officer (4)
|
|
2019
|
|
|
|
28,194
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7,873
|
|
|
|
36,067
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assaf Cohen
|
|
2020
|
|
|
|
173,155
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
43,639
|
|
|
|
216,794
|
|
Chief Financial Officer (5)
|
|
2019
|
|
|
|
152,018
|
|
|
|
-
|
|
|
|
13,650
|
|
|
|
28,054
|
|
|
|
44,799
|
|
|
|
238,521
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nehemia Itay
|
|
2020
|
|
|
|
169,683
|
|
|
|
-
|
|
|
|
1,022
|
|
|
|
-
|
|
|
|
42,988
|
|
|
|
213,693
|
|
VP of Hardware Engineering (6)
|
|
2019
|
|
|
|
167,129
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
44,052
|
|
|
|
211,182
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amir Eilam
|
|
2020
|
|
|
|
154,042
|
|
|
|
-
|
|
|
|
1,022
|
|
|
|
-
|
|
|
|
46,306
|
|
|
|
201,370
|
|
VP, Research & Development (7)
|
|
2019
|
|
|
|
150,688
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
48,213
|
|
|
|
198,901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sagi Nataf
|
|
2020
|
|
|
|
112,348
|
|
|
|
-
|
|
|
|
1,022
|
|
|
|
-
|
|
|
|
38,316
|
|
|
|
151,687
|
|
VP Operations (8)
|
|
2019
|
|
|
|
103,774
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
39,747
|
|
|
|
143,521
|
|
|
(1)
|
Salary
payments which were in NIS were translated into U.S. Dollars according to the annual average exchange rate of NIS 3.44 per U.S.
Dollar in 2020 and NIS 3.56 per U.S. Dollar in 2019.
|
|
(2)
|
The
fair value recognized for the 2020
option awards
was determined as of the grant date in accordance with FASB ASC Topic 718 (see Note 12C to
our consolidated financial statements included in this Annual Report. The fair value recognized
for the 2020
option awards
was determined as of the grant date in accordance with FASB ASC Topic 718, based on the following
assumptions: expected dividend yield of 0%, expected volatility of 78% to 109%, risk-free
interest rate of 0.26% to 1.63% and expected life of 2.44 to 2.50 years.
|
|
(3)
|
This
cost reflects social benefits (as required under applicable Israeli law) and car expenses.
|
|
(4)
|
The
2020 “All Other Compensation” of Mr. Holtzman, as shown in the table above, is comprised of $22,920 of car expenses
and $56,891 of social benefits. The 2019 “All Other Compensation” of Mr. Holtzman, as shown in the table above, is
comprised of $1,788 of car expenses and $6,085 of social benefits.
|
|
(5)
|
The
2020 “All Other Compensation” of Mr. Cohen, as shown in the table above, is comprised of $14,931 of car expenses and
$28,708 of social benefits. The 2019 “All Other Compensation” of Mr. Cohen, as shown in the table above, is comprised
of $17,169 of car expenses and $27,630 of social benefits.
|
(6)
|
The
2020 “All Other Compensation” of Mr. Itay, as shown in the table above, is comprised of $15,745 of car expenses
and $27,243 of social benefits. The 2019 “All Other Compensation” of Mr. Itay, as shown in the table above, is
comprised of $17,169 of car expenses and $26,883 of social benefits.
|
(7)
|
The
2020 “All Other Compensation” of Mr. Eilam, as shown in the table above, is comprised of $14,902 of car expenses
and $31,404 of social benefits. The 2019 “All Other Compensation” of Mr. Eilam, as shown in the table above, is
comprised of $17,169 of car expenses and $31,044 of social benefits.
|
(8)
|
The
2020 “All Other Compensation” of Mr. Nataf, as shown in the table above, is comprised of $13,828 of car expenses and
$24,488 of social benefits. The 2019 “All Other Compensation” of Mr. Eilam, as shown in the table above, is comprised
of $17,169 of car expenses and $22,578 of social benefits.
|
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 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. An updated compensation policy was not approved by our shareholders at
our meeting on September 27, 2019. However, our Board approved it notwithstanding such shareholders vote.
The Compensation Policy sets
rules and guidelines with respect to our compensation strategy for executive officers and directors, and is designed to provide for the
retention of, and to attract, highly qualified executives. The Compensation 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 executive officers based on common principles. With respect
to variable compensation components, the Compensation Policy is designed to allow us to consider each executive officer’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 officer’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:
Agreement with Yehuda
Holtzman. We have an employment agreement with Mr. Holtzman, which provides that Mr. Holtzman will serve as Chief Executive Officer
of the Company and our subsidiaries, in consideration of a monthly gross salary (effective December 1, 2019 and as described below NIS
76,000) and other standard benefits. Mr. Holtzman 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. According to the employment agreement, Mr. Holtzman is eligible to receive an annual bonus in an amount up to
10 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. On November 22, 2020, as part of the cost reduction
steps taken by our management, our Board of Directors and Compensation Committee approved that effective November 1, 2020, Mr. Holtzman’s
monthly gross salary is decreased for a period of one year from NIS 76,000 to NIS 58,520.
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 (effective August 1, 2019 and as described below NIS 45,000;
between January 1, 2019 and July 31, 2019 NIS 35,000; between March 1, 2018 and December 31, 2018 NIS 30,000) 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.
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 six months (formerly was three months), prior to termination. Effective August 1, 2019, as approved by
our Board and Compensation Committee, and pursuant to the amendment to Mr. Cohen’s employment agreement dated September 30, 2019,
Mr. Cohen’s monthly gross salary is NIS 45,000 and the abovementioned written notice for termination is six months. In addition,
pursuant to the amendment to Mr. Cohen’s employment agreement, as also approved by the Company’s shareholders, Mr. Cohen received
a lump sum bonus, in the amount of NIS 100,000, for his services as the Interim Chief Executive Officer of the Company. On March 17, 2020,
our Board and Compensation Committee approved an increase in Mr. Cohen’s 2020 maximum annual bonus from 4 months’ to 6 months’
gross base salary. On November 22, 2020, as part of the cost reduction steps taken by our
management, our Board of Directors and Compensation Committee approved
that effective November 1, 2020, Mr. Cohen’s monthly gross salary is decreased for a period of one year from NIS 45,000 to
NIS 34,650.
Outstanding
Equity Awards at Fiscal Year-End
The
following table shows options to purchase our Ordinary Shares outstanding on December 31, 2020, 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
|
|
Yehuda Holtzman (1)
|
|
|
150,000
|
|
|
|
300,000
|
|
|
$
|
0.20
|
|
|
04/14/2025
|
|
|
|
|
-
|
|
|
|
100,000
|
|
|
|
0.35
|
|
|
04/14/2025
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assaf Cohen (2)
|
|
|
15,000
|
|
|
|
-
|
|
|
$
|
1.07
|
|
|
11/30/2021
|
|
|
|
|
15,000
|
|
|
|
-
|
|
|
$
|
1.21
|
|
|
11/28/2022
|
|
|
|
|
13,333
|
|
|
|
6,667
|
|
|
$
|
0.84
|
|
|
11/27/2023
|
|
|
|
|
33,333
|
|
|
|
66,667
|
|
|
$
|
0.38
|
|
|
08/13/2024
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nehemia Itay (3)
|
|
|
15,000
|
|
|
|
-
|
|
|
$
|
1.07
|
|
|
11/30/2021
|
|
|
|
|
|
|
|
|
10,000
|
|
|
|
0.28
|
|
|
03/17/2025
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amir Eilam (4)
|
|
|
20,000
|
|
|
|
-
|
|
|
$
|
1.07
|
|
|
11/30/2021
|
|
|
|
|
-
|
|
|
|
10,000
|
|
|
$
|
0.28
|
|
|
03/17/2025
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sagi Nataf (5)
|
|
|
10,000
|
|
|
|
5,000
|
|
|
$
|
0.84
|
|
|
11/27/2023
|
|
|
|
|
-
|
|
|
|
10,000
|
|
|
$
|
0.28
|
|
|
03/17/2025
|
|
|
(1)
|
On April 14, 2020, 450,000 options were granted to Mr. Holtzman
under the OTI 2001 Stock Option Plan, or the 2001 Plan. The options vest in three equal annual installments, commencing November 25,
2020. On April 14, 2020, 100,000 options were granted to Mr. Holtzman under the 2001 Plan. The options vest in three equal annual installments,
commencing January 1, 2021.
|
|
(2)
|
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. On August 13, 2019, 100,000 options were granted to Mr. Cohen under the 2001 Plan. The options vest
in three equal annual installments, commencing August 13, 2020.
|
(3)
|
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. On March 17, 2020, 10,000 options were granted to Mr. Itay under the 2001 Plan. The options
vest in three equal annual installments, commencing March 17, 2021.
|
(4)
|
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. On March 17, 2020, 10,000 options were granted to Mr. Eilam under the 2001 Plan. The options
vest in three equal annual installments, commencing March 17, 2021.
|
(5)
|
On
November 27, 2018, 15,000 options were granted to Mr. Nataf under the Plan. The options vest in three equal annual installments,
commencing November 27, 2019. On March 17, 2020, 10,000 options were granted to Mr. Nataf under the 2001 Plan. The options
vest in three equal annual installments, commencing March 17, 2021.
|
Director
Compensation for 2020
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, 2020:
Name
|
|
Fees Earned or Paid in Cash
($) (1)
|
|
|
Option Awards
($)
|
|
|
Total
($)
|
|
Sandra Hardardottir
|
|
|
13,442
|
(3)
|
|
|
5,097
|
|
|
|
18,539
|
|
William C. Anderson III
|
|
|
24,112
|
|
|
|
-
|
|
|
|
24,112
|
|
Leonid Berkovitch
|
|
|
19,747
|
(3)
|
|
|
3,813
|
|
|
|
23,560
|
|
Donna Marks
|
|
|
28,602
|
|
|
|
-
|
|
|
|
28,602
|
|
Michael Shanahan
|
|
|
19,338
|
(3)
|
|
|
4,008
|
|
|
|
23,346
|
|
Eran Gilad (2)
|
|
|
12,406
|
|
|
|
-
|
|
|
|
12,406
|
|
Scott Medford (2)
|
|
|
10,617
|
|
|
|
-
|
|
|
|
10,617
|
|
Michael Soluri (2)
|
|
|
13,805
|
|
|
|
-
|
|
|
|
13,805
|
|
(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.
|
(2)
|
Former director.
|
(3)
|
The fair value of each option granted to directors during 2020
was estimated on the date of grant, using the Black-Scholes model and the following assumptions:
·
Expected dividend yield: 0%.
·
Expected volatility: 97%-109%
·
Risk-free interest rate: 0.22%-1.53%
· Expected life: Years 2.49
1. Dividend yield of zero percent.
2. Expected average volatility represents a weighted average standard deviation rate for the price of the Company's ordinary shares on the
OTCQX market.
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.
|
As
of December 31, 2020, our directors held options to purchase our Ordinary Shares as follows:
Name
|
|
Aggregate number of shares Underlying stock options
|
Sandra Hardardottir
|
|
|
30,000
|
|
William C. Anderson III
|
|
|
30,000
|
|
Leonid Berkovitch
|
|
|
30,000
|
|
Donna Marks
|
|
|
30,000
|
|
Michael Shanahan
|
|
|
30,000
|
|
From January 1, 2020, until
November 22, 2020, we reimbursed our directors for expenses incurred in connection with attending Board meetings and committee meetings
and provided the following compensation for directors: annual compensation of NIS 49,110 (approximately $15,280); meeting participation
fees of NIS 3,283 (approximately $1,020) per in-person meeting; meeting participation by telephone of NIS 1,971 (approximately $610) per
meeting; and NIS 1,642 (approximately $510) per written resolution.
On November 22, 2020, as part
of our management's efforts to reduce costs, four of our board members, Ms. Sandra Bjork Hardardottir, Mr. Leonid Berkovitch, Ms. Donna
Seidenberg Marks and Michael Shanahan, volunteered to reduce their compensation by 25%, such that the cash compensation paid to each
of these directors effective November 22, 2020, shall be as follows: Annual compensation of NIS 36,833 (approximately $11,500), meeting
participation fees of NIS 2,462 (approximately $770) per in-person meeting, meeting participation by telephone fees of NIS 1,478 (approximately
$460) per meeting and NIS 1,232 (approximately $380) per written resolution. In addition, on November 22, 2020, our fifth director, William
C. Anderson, volunteered to receive no compensation from the Company effective November 22, 2020. Our directors agreed to revisit the
voluntary reduction in the directors fees in six months from the time the reduction took place.
Our executive directors do
not receive additional separate compensation for their service on the Board or any committee of the Board. During 2020, 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 2020 was $142,471.
Under the Companies Law,
an 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 25, 2021 (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 current directors; (3) each of our Named Executive
Officers; and (4) all of our current directors and executive officers as a group.
Unless otherwise indicated below,
all information with respect to the ownership of any of the below shareholders has been furnished by such shareholder and we believe that
the 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 our current directors and executive officers include the shares owned by
their family members to which such nominees, 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 53,824,377 Ordinary Shares outstanding as of March 25, 2021 and reflects number of shares owned. Unless otherwise indicated,
the address of each of the individuals named below is: c/o On Track Innovations Inc., Hatnufa 5, Yokneam Industrial Zone, Yokneam, Israel,
2069200.
Name of beneficial owner
|
|
Position
|
|
Number of Ordinary Shares Beneficially Owned
|
|
% of Class
of Ordinary
Shares
|
William C. Anderson III(1)
|
|
Director
|
|
|
2,090,000
|
|
|
|
3.9
|
%
|
Leonid Berkovitch(2)
|
|
External Director
|
|
|
10,000
|
|
|
|
*
|
|
Sandra Bjork Hardardottir(3)
|
|
Director
|
|
|
1,521,203
|
|
|
|
2.8
|
%
|
Donna Marks(4)
|
|
External Director
|
|
|
20,000
|
|
|
|
*
|
|
Michael Shanahan(5)
|
|
Director
|
|
|
10,000
|
|
|
|
*
|
|
Uri Arazy
|
|
Director
|
|
|
—
|
|
|
|
*
|
|
Yehuda Holtzman(6)
|
|
Chief Executive Officer
|
|
|
183,333
|
|
|
|
*
|
|
Assaf Cohen(7)
|
|
Chief Financial Officer
|
|
|
76,666
|
|
|
|
*
|
|
Nehemia Itay(8)
|
|
VP Hardware Engineering
|
|
|
18,333
|
|
|
|
*
|
|
Amir Eilam(9)
|
|
VP Research & Development
|
|
|
23,333
|
|
|
|
*
|
|
Sagi Nataf(10)
|
|
VP Operations
|
|
|
13,333
|
|
|
|
*
|
|
All current
directors and executive officers as a group persons)
|
|
|
|
|
3,911,202
|
|
|
|
7.2
|
%
|
5% Shareholders
|
|
|
|
|
3,911,202
|
|
|
|
7.2
|
%
|
Jerry L. Ivy, Jr.(11)
|
|
Shareholder
|
|
|
24,050,174
|
|
|
|
38.4
|
%
|
|
(1)
|
Includes
2,060,000 Ordinary Shares held by Mr. Anderson and includes options held by Mr. Anderson to purchase 30,000 Ordinary Shares currently
exercisable or exercisable within 60 days of this table.
|
|
(2)
|
Consists of options
held by Mr. Berkovitch to purchase 10,000 Ordinary Shares currently exercisable or exercisable within 60 days of this
table.
|
|
(3)
|
Includes
1,511,203 Ordinary Shares held by Ms. Hardardottir. Such shares are also included in the Ordinary Shares held by Mr. Jerry
L. Ivy, Jr., as detailed in footnote 11 below and includes options held by Ms. Hardardottir to purchase 10,000 Ordinary Shares
currently exercisable or exercisable within 60 days of this table.
|
|
(4)
|
Consists
of options held by Ms. Marks to purchase 20,000 Ordinary Shares currently exercisable or exercisable within 60 days
of this table.
|
|
(5)
|
Consists
of options held by Mr. Shanahan to purchase 10,000 Ordinary Shares currently exercisable or exercisable within 60 days
of this table.
|
|
(6)
|
Consists
of options held by Mr. Holtzman to purchase 183,333 Ordinary Shares currently exercisable or exercisable within 60 days
of this table.
|
|
(7)
|
Consists
of options held by Mr. Cohen to purchase 76,666 Ordinary Shares currently exercisable or exercisable within 60 days of this
table.
|
|
(8)
|
Consists
of options held by Mr. Itay to purchase 18,333 Ordinary Shares currently exercisable or exercisable within 60 days of this
table.
|
|
(9)
|
Consists
of options held by Mr. Eilam to purchase 23,333 Ordinary Shares currently exercisable or exercisable within 60 days of this
table.
|
|
(10)
|
Consists
of options held by Mr. Nataf to purchase 13,333 Ordinary Shares currently exercisable or exercisable within 60 days of this
table.
|
|
(11)
|
Information
is based solely on Schedule 13D/A filed by Mr. Jerry L. Ivy, Jr. with the SEC on March 17,
2021, and consists of 22,538,971 Ordinary Shares held by Mr. Ivy and 1,511,203 Ordinary Shares
held by Ms. Hardardottir. The calculation is based on a total of 62,585,871 Ordinary
Shares, par value NIS 0.10 per share, which includes (i) 53,824,377 shares outstanding as
of January 22, 2021, as reported by us in our Proxy Statement filed with the Securities and
Exchange Commission on January 26, 2021, plus (ii) 8,761,494 shares that would be issued
pursuant to the terms of a convertible loan if converted on March 17, 2021.Mr. Ivy’s
address is 1003 Lake St. #301, Kirkland, WA 98033.
|
All of the 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.
The
following table summarizes certain information regarding our equity compensation plan as of December 31, 2020:
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
|
|
|
1,443,333
|
|
|
$
|
0.54
|
|
|
|
635,167
|
|
Equity compensation plan not approved by security holders
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
|
1,443,333
|
|
|
$
|
0.54
|
|
|
|
635,167
|
|
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 25, 2021, options for 14,371,500 Ordinary Shares had been exercised, and options for 1,982,500 Ordinary Shares are outstanding,
including vested options with respect to 705,014 Ordinary Shares. Of the options that are outstanding, as of March 25, 2021, 1,030,000
options are held by our directors and officers and have a weighted average exercise price of $0.32 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.
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, and except for the Loan Agreement, the Share Purchase Agreement, and the Chairman of the Board, Ms. Hardardottir,
and the Director, Mr. Shanahan, who were designated by Ivy pursuant to the Share Purchase Agreement, none of our directors, executive
officers or shareholders holding more than 5% of our outstanding Ordinary Shares, or members of any such person’s immediate
family, has any relationship with the Company besides serving as directors or executive officers.
Item
14. Principal Accounting Fees and Services.
Independent
Registered Public Accounting Firm
The
Company has engaged Kesselman and Kesselman, Certified Public Accountants (Isr.), a member firm of PricewaterhouseCoopers International
Limited, or PWC Israel, as its principal independent registered public accounting firm for the fiscal year ended December 31,
2020.
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 PWC Israel. 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, PWC Israel 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 PWC Israel and affiliate firms for professional services rendered thereby for the year ended December
31, 2020, and 2019 (in thousands):
|
|
2020
|
|
|
2019
|
|
Audit Fees (1)
|
|
$
|
155
|
|
|
$
|
155
|
|
Audit-Related Fees
|
|
$
|
-
|
|
|
|
-
|
|
Tax Fees (2)
|
|
$
|
-
|
|
|
$
|
6
|
|
All Other Fees (3)
|
|
$
|
3
|
|
|
|
5
|
|
Total
|
|
$
|
158
|
|
|
$
|
166
|
|
(1)
|
The audit fees for
the years ended December 31, 2020 and 2019, are the aggregate fees billed or billable (for the year) for the professional
services rendered for the audits of our 2020 and 2019 annual consolidated financial statements, review of consolidated quarterly
financial statements of 2020 and 2019, 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)
|
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.
|
(3)
|
All other fees are
fees billed for accounting standard procedure.
|
Notes
to the Consolidated Financial Statements
US
dollars, NIS and Euro 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 OTCQX market (formerly listed on the Nasdaq Capital Market until October 31, 2019).
At December 31, 2020, the Company operates in two operating segments:
(a) Retail, and (b) Petroleum (see Note 16). Subsequent to the balance sheet date, the Company signed an agreement for the sale of its
Mass Transit Ticketing operation (see Note 1B(2)). The Company has determined that the sale of the Mass Transit Ticketing business qualifies
as held for sale and as a discontinued operation as of December 31, 2020. 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.
As to the Company’s major customers,
see Note 17.
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 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 claims against the Company during the arbitration for material damages. 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 approximately $1,300 that reflects the maximum earn-out amount
that has not yet been paid to the Company by SuperCom. The arbitration verdict was approved as a court’s verdict in June
2019, but SuperCom failed to disclose the financial information in the way it should have done according to the arbitration decision.
Therefore, in December 2019 the Company submitted a complementary claim to the arbitrator, asking for a final award that includes
a final payment by SuperCom (as opposed to merely disclosing information). A hearing in this procedure took place on August 18,
2020, and the parties are now submitting written summaries, to be followed by an arbitration Verdict.
As
mentioned in Note 2U, 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 years ended December 31, 2020 and 2019.
On
Track Innovations Ltd.
and
Subsidiaries
Notes
to the Consolidated Financial Statements
US
dollars, NIS and Euro in thousands, except share and per share data
Note
1 – General (cont’d)
B.
|
Divestiture
of operations (cont’d)
|
|
2.
|
On March 29, 2021 the Company entered into an agreement, or the Sale
Agreement, for the sale of 100% of the issued and outstanding share capital of its wholly owned Polish subsidiary, ASEC S.A., or ASEC,
with Vector Software SP. Z O.O., or the Buyer. ASEC is headquartered in Krakow, Poland, and has been conducting the Company’s Mass
Transit Ticketing business in Europe. The consideration for ASEC is $3,000, of which approximately $2,100 shall be used to repay Polish
banks loans at the closing date, as mentioned in the Sale Agreement, offset by minor adjustments. The Sale Agreement contains customary
representations and warranties, as well as covenants, including an undertaking the Company provided not to compete with the business of
ASEC for a period of five years after the closing and an undertaking to indemnify ASEC and the Buyer for certain damages. The Company’s
liability is limited to the purchase price actually paid by the Buyer. The Company has determined that the sale of the Mass Transit Ticketing
business qualifies as held for sale and as a discontinued operation as of December 31, 2020. 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. In addition, assets and liabilities of the Polish subsidiary and assets
and liabilities related to the Mass Transit Ticketing operation that have not yet been actually sold as of December 31, 2020, are presented
as assets and liabilities held for sale in the balance sheets as of December 31, 2020 and 2019.
|
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, are as follows:
A.
|
Liquidity
and Capital Resources
|
The Company has had recurring losses
and currently has an accumulated deficit as of December 31, 2020 of $222,965. The Company also has a payable balance on its short-term
liabilities that is due within the next 12 months, of $1,167, of which an amount of $625 reflects a convertible short-term loan from a
controlling shareholder. This amount does not include short-term loans held for sale. In January 2021, subsequent to the balance sheet
date, the Company received an additional convertible short-term loan from two shareholders in a total amount of $975, as mentioned in
Note 20.
Since inception, the Company’s principal sources of liquidity
have been revenues, proceeds from sales of equity securities (regarding to the issuance of shares during the reporting period, see Note
12), borrowings from banks, government and shareholders, including convertible loans, proceeds from the exercise of options and warrants
as well as proceeds from the divestiture of parts of the Company’s businesses. The Company had cash, cash equivalents and short-term
investments representing bank deposits of $1,482 (of which an amount of $105 has been pledged as security for certain items), excluding
cash and cash equivalents held for sale, as of December 31, 2020. The recent deterioration in the Corona Virus (COVID-19) (“COVID-19”)
pandemic situation in Poland has led to an almost complete stop to the Company’s Mass Transit Ticketing sales business, negatively
impacting the Company’s cash flow since March 2020. On March 29, 2021, the Company entered into an agreement to sell ASEC, including
its Mass Transit Ticketing activity - see Note 1B(2). Further, in December 2020 and January 2021, the Company borrowed a loan, in two
tranches aggregating $1,600, from its controlling shareholder and another shareholder that, if not converted, would mature in May 2021.
Based on the projected cash flows and the Company’s cash balances as of December 31, 2020, the
Company’s management is of
the opinion that without further fund raising or other increase in its cash, the Company will not have sufficient resources to enable
it to continue its operations for a period of at least the next 12 months. As a result, there is a substantial doubt regarding the Company’s
ability to continue as a going concern. The Company’s management has taken cost reduction steps, including material reductions
in the salaries of its management and employees, and has been working for the past few months on updating the Company’s strategy
for the coming years in order to realize its potential and resume its growth, and ultimately create shareholder value. The Company
is attempting to raise additional funds and to increase its cash. While the Company’s management believes in its ability to raise
additional funds and increase its cash, there can be no assurances to that effect. In addition, the Company engaged an investment bank
to explore strategic options and is investing resources in this process. The financial statements do not include any adjustments relating
to the recoverability and classification of recorded assets and the amounts and classification of liabilities that might be necessary
should the Company be unable to continue as a going concern.
On
Track Innovations Ltd.
and
Subsidiaries
Notes
to the Consolidated Financial Statements
US
dollars, NIS and Euro in thousands, except share and per share data
Note
2 – Significant Accounting Policies (cont’d)
A.
|
Liquidity
and Capital Resources (cont’d)
|
In connection with the outbreak
of COVID-19, the Company has taken steps to protect its workforce in Israel, the United States, Poland, South Africa and elsewhere. Such
steps include work from home where possible, minimizing face-to-face meetings and utilizing video conference as much as possible, social
distancing at facilities and elimination of all international travel. The Company continues to comply with all local health directives.
So far, the main direct impact of the COVID-19 pandemic has been a
decrease in the Company’s revenues derived from Mass Transit Ticketing activity in the Polish market. The revenues from this operation,
that were relatively stable during the year preceding the COVID-19 outbreak, decreased by approximately $1,300 in 2020 compared to 2019,
mainly due to the lockdown and other restrictions and consequences of the COVID-19 as started in March 2020. On March 29, 2021, the Company
entered into an agreement to sell ASEC, including its Mass Transit Ticketing activity, as mentioned above. The consideration for ASEC
is $3,000 of which approximately $2,100 shall be used to repay Polish banks loans at the closing date, as mentioned in the Sale Agreement,
offset by minor adjustments. The results and the cash flows of the Mass Transit Ticketing 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. As part of the Polish regulations and government assistance introduced in relation to the COVID-19, the Polish subsidiary
received a long-term loan and a consent to postpone the maturity date of a secured bank loan. Both loans are presented as held for sale
in the balance sheets (see Note 15) and have been disposed of through the Mass Transit Ticketing divestiture.
In addition, recently, as a result
of COVID-19, some of the Company’s customers have delayed issuance of orders in the Company’s pipeline. As a response to this
effect, the Company has taken steps to reduce some costs that are not essential under the current circumstances and during the fourth
quarter of 2020 the Company took additional steps to reduce its cash expenses, including voluntary reduction of salaries to its management
and employees.
Another impact of COVID-19 has been
on product delivery, where components’ procurement lead time is longer and a shortage in components has grown as the duration of
the COVID-19 pandemic has continued. As long as the COVID-19 pandemic continues, the components’ lead time may be longer than normal
and shortage in components may continue or get worse. Therefore, the Company maintains a comprehensive network of world-wide suppliers.
The Company has seen a higher interest
from a growing number of potential customers and partners as they forecasted that the need for the Company’s products will grow,
yet execution of closing is still slow due to the current business environment.
It is difficult to predict what
other impacts the COVID-19 pandemic may have on the Company.
On
Track Innovations Ltd.
and
Subsidiaries
Notes
to the Consolidated Financial Statements
US
dollars, NIS and Euro in thousands, except share and per share data
Note
2 – Significant Accounting Policies (cont’d)
B.
|
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, components and 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).
C.
|
Principles
of consolidation
|
The
consolidated financial statements include the financial statements of the Company and its wholly-owned subsidiaries. Intercompany
transactions and balances have been eliminated in consolidation.
D.
|
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, discontinued operations, valuation of accounts receivable
and allowance for doubtful accounts, valuation of inventories, legal contingencies, the assumptions whether renewal options of
lease period of buildings will be exercised in the future, 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.
On
Track Innovations Ltd.
and
Subsidiaries
Notes
to the Consolidated Financial Statements
US
dollars, NIS and Euro in thousands, except share and per share data
Note
2 – Significant Accounting Policies (cont’d)
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.
G.
|
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 10C).
|
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 have been
included in cost of revenues.
I.
|
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
|
|
Computers, software and manufacturing equipment
|
|
3-5
|
|
Office furniture and equipment
|
|
5-16
|
|
|
|
(mainly - 10)
|
|
Leasehold
improvements are amortized by the straight-line method over the shorter of the lease term or the estimated useful economic life
of such improvements.
On
Track Innovations Ltd.
and
Subsidiaries
Notes
to the Consolidated Financial Statements
US
dollars, NIS and Euro in thousands, except share and per share data
Note
2 – Significant Accounting Policies (cont’d)
J.
|
Impairment
of long-lived assets
|
Long-lived
assets, such as right-of-use assets due to operating leases, 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.
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 and licensing agreements. Revenues are also generated
from non-recurring engineering, customer services and technical support.
In
May 2014, the Financial Accounting Standards Board (“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.
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 a 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.
On
Track Innovations Ltd.
and
Subsidiaries
Notes
to the Consolidated Financial Statements
US
dollars, NIS and Euro in thousands, except share and per share data
Note
2 – Significant Accounting Policies (cont’d)
K.
|
Revenue
recognition (cont’d)
|
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.
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 11.
In
addition, when the Company has an unconditional right to receive proceeds before the performance obligation was fulfilled, it
is required to record receivables against contract liabilities.
L.
|
Research,
development costs and intangible assets
|
Research
and development costs, which consist mainly of labor costs, materials and subcontractors, are charged to operations as incurred.
In
accordance with ASC Topic 350-40, “Internal Use Software”, the subsidiary in Poland capitalizes certain
internal use software development costs associated with creating and enhancing internally developed software related to its operations.
Software development activities generally consist of three stages (i) the research and planning stage, (ii) the application
and development stage, and (iii) the post-implementation stage. Costs incurred in the research and planning stage and in
the post-implementation stage are expensed as incurred. Costs incurred in the application and infrastructure development stage
are capitalized. These costs include personnel and related employee benefits expenses for employees who are directly associated
with the software development. These capitalized costs are amortized on a straight-line basis over the estimated useful life of
5 years upon initial release of the software. The capitalized internal use software development costs, net of accumulated amortization,
are $370 and $483 as of December 31, 2020 and 2019, respectively, and presented as held for sale. Amortization expenses derive
from the capitalized internal use software development costs are presented within discontinued operations in the consolidated
statements of operations for all reporting periods in those financial statements.
On
Track Innovations Ltd.
and
Subsidiaries
Notes
to the Consolidated Financial Statements
US
dollars, NIS and Euro in thousands, except share and per share data
Note
2 – Significant Accounting Policies (cont’d)
L.
|
Research,
development costs and intangible assets (cont’d)
|
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. As of December 31, 2020,
the capitalized certification costs, net of accumulated amortization, are $247 (as of December 31, 2019 - $250).
Amortization
expenses amounted to $180 and $202 for the years ended December 31, 2020 and 2019, respectively. The amortization is presented
within research and development in the consolidated statements of operations.
M.
|
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 (“ASC Topic 718”), 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 estimates forfeitures based on historical experience.
The
Company elected to recognize compensation cost for awards with only service conditions that have a graded vesting schedule using
the straight-line method.
N.
|
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 anti-dilutive 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 6,483,656 and 809,000 outstanding as of the years ended December 31, 2020 and 2019, 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 those periods presented.
On
Track Innovations Ltd.
and
Subsidiaries
Notes
to the Consolidated Financial Statements
US
dollars, NIS and Euro in thousands, except share and per share data
Note
2 – Significant Accounting Policies (cont’d)
O.
|
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. The liabilities held for sale includes long-term loan, that
does not bear any interest, but taking into account the schedule of its maturities, its amount and the relatively current low
market rates, the difference between its carrying amount and its fair value is insignificant.
Derivatives
Embedded
derivatives are separated from the host contract and carried at fair value when (1) the embedded derivative possesses economic
characteristics that are not clearly and closely related to the economic characteristics of the host contract and (2) a separate,
standalone instrument with the same terms would qualify as a derivative instrument. The derivative is measured both initially
and in subsequent periods at fair value, with changes in fair value charged to financial expenses, net. As to embedded derivatives
arising from the issuance of convertible debentures, see Note 9. Transaction expenses related to the embedded derivatives are
recognized as financial expenses at the date of the initial recognition.
On
Track Innovations Ltd.
and
Subsidiaries
Notes
to the Consolidated Financial Statements
US
dollars, NIS and Euro 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.
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.
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, 2020 and 2019 amounted to $249 and $275, respectively. Defined contribution plan
expenses were $224 and $231 in the years ended December 31, 2020 and 2019, respectively.
On
Track Innovations Ltd.
and
Subsidiaries
Notes
to the Consolidated Financial Statements
US
dollars, NIS and Euro in thousands, except share and per share data
Note
2 – Significant Accounting Policies (cont’d)
Advertising
expenses are charged to the statements of operations as incurred. Advertising expenses as presented within the results of the
continuing operations for the years ended December 31, 2020 and 2019 amounted to $250 and $216, 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 17.
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, 2020 and 2019 is as follows:
|
|
2020
|
|
|
(*)
2019
|
|
Allowance for doubtful accounts at beginning of year
|
|
$
|
(*) 570
|
|
|
$
|
502
|
|
Additions charged to allowance for doubtful accounts
|
|
|
109
|
|
|
|
54
|
|
Write-downs charged against the allowance
|
|
|
(82
|
)
|
|
|
-
|
|
Other
|
|
|
23
|
|
|
|
14
|
|
Allowance for doubtful accounts at end of year
|
|
$
|
620
|
|
|
$
|
570
|
|
|
(*)
|
Reclassified
to conform with the current period presentation, see Note 1B(2).
|
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.
On
Track Innovations Ltd.
and
Subsidiaries
Notes
to the Consolidated Financial Statements
US
dollars, NIS and Euro in thousands, except share and per share data
Note
2 – Significant Accounting Policies (cont’d)
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 Mass Transit Ticketing divesture
and the SmartID Division divesture qualify as discontinued operations and therefore have been presented as such.
Assets
and liabilities of discontinued operations that have not yet been actually sold are presented on the balance sheet as of the end
of each reporting year in one line.
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.
On
Track Innovations Ltd.
and
Subsidiaries
Notes
to the Consolidated Financial Statements
US
dollars, NIS and Euro in thousands, except share and per share data
Note
2 – Significant Accounting Policies (cont’d)
V.
|
Restricted
Cash and Cash Equivalents in Statement of Cash Flows
|
The
Company implements the 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
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
|
|
|
2020
|
|
|
2019
|
|
Cash and cash equivalents (*)
|
|
$
|
2,394
|
|
|
$
|
2,543
|
|
Restricted cash and cash equivalents (**)
|
|
|
105
|
|
|
|
105
|
|
Total cash, cash equivalents, and restricted cash and cash equivalents presented in the statements of cash flows
|
|
$
|
2,499
|
|
|
$
|
2,648
|
|
|
(*)
|
Including
cash and cash equivalents held for sale. See Notes 1B(2) and 15.
|
|
(**)
|
The
restricted cash and cash equivalents are included in short-term investments in the accompanying
consolidated balance sheets.
|
On
Track Innovations Ltd.
and
Subsidiaries
Notes
to the Consolidated Financial Statements
US
dollars, NIS and Euro in thousands, except share and per share data
Note
2 – Significant Accounting Policies (cont’d)
In
February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”), 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
until December 31, 2018, only financing-type lease liabilities (capital leases) were recognized on the balance sheet. Right-of-use
assets represent a company’s right to use an underlying asset for the lease term and lease liabilities represent a 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.
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. ASU 2016-02
provides a number of optional practical expedients in transition. The Company elected 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 ASU 2016-02 and also elected the practical expedient pertaining to the use-of hindsight. ASU 2016-02 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 ASU 2016-02 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 ASU 2016-02 on January
1, 2019. The adoption of this standard did not have a material impact on the results of operations and cash flows. See Note 18
for additional disclosures, as required by the ASU 2016-02.
On
Track Innovations Ltd.
and
Subsidiaries
Notes
to the Consolidated Financial Statements
US
dollars, NIS and Euro in thousands, except share and per share data
Note
2 – Significant Accounting Policies (cont’d)
X.
|
Recent
accounting pronouncements
|
|
1.
|
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 the Company for fiscal years beginning after December 15, 2022,
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.
|
|
2.
|
In
December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying
the Accounting for Income Taxes, which simplifies the accounting for income taxes.
This ASU, among other things, removes the exception to the incremental approach for intra-period
allocation of tax expense when a company has a loss from continuing operations and income
from other items that are not included in continuing operations, such as income from
discontinued operations, or income recorded in other comprehensive income. The general
rule under ASC 740-20-45-7 is that the tax effect of pretax income or loss from continuing
operations should be determined by a computation that does not consider the tax effects
of items that are not included in continuing operations. Previously, companies could
consider the impact on a loss from continuing operations of items in discontinued operations
or other comprehensive income. However, under the amended guidance, companies should
not consider the effect of items outside of continuing operations in calculating the
tax effect on continuing operations. The new standard is effective for fiscal years,
and interim periods within those fiscal years, beginning after December 15, 2020.
Early adoption is permitted, with the amendments to be applied on a retrospective, modified
retrospective or prospective basis, depending on the specific amendment. The impact of
adopting this guidance depends on the Company’s results in the future. For example,
if the Company or one of its subsidiaries have carry-forward losses for tax purposes
and on the one hand present loss from continuing operations before taxes on income, but
on the other hand present income from discontinued operations at the same tax year, the
loss from continuing operation will not attract a deferred tax benefit with a corresponding
deferred tax expenses in the discontinued operations.
|
|
3.
|
In
August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and
Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s
Own Equity (Subtopic 815-40). This pronouncement simplifies the accounting for certain
financial instruments with characteristics of liabilities and equity, including convertible
instruments and contracts on an entity’s own equity. Specifically, the ASU simplifies
accounting for convertible instruments by removing major separation models required under
current accounting standard. In addition, the ASU removes certain settlement conditions
that are required for equity contracts to qualify for it and simplifies the diluted earnings
per share calculations in certain areas. This guidance is effective for fiscal years,
and interim periods within those fiscal years, beginning after December 15, 2021. Early
adoption is permitted for annual period beginning after December 15, 2020. The Company
is currently evaluating the impact that this new guidance will have on its consolidated
financial statements.
|
On
Track Innovations Ltd.
and
Subsidiaries
Notes
to the Consolidated Financial Statements
US
dollars, NIS and Euro in thousands, except share and per share data
Note
3 – Short-term investment
Balances
at December 31, 2020 and 2019 consist of bank deposits. The bank deposits bear weighted average annual interest of 0.8% as of
December 31, 2020 (As of December 31, 2019 – 1.82%).
See
Note 10C as to restrictions on certain deposits.
Note
4 – Other Receivables and Prepaid Expenses
|
|
December 31
|
|
|
|
2020
|
|
|
(*)
2019
|
|
Government
institutions
|
|
$
|
104
|
|
|
$
|
155
|
|
Prepaid
expenses
|
|
|
257
|
|
|
|
152
|
|
Suppliers
advance
|
|
|
227
|
|
|
|
450
|
|
Other
receivables
|
|
|
107
|
|
|
|
54
|
|
|
|
$
|
695
|
|
|
$
|
811
|
|
(*)
|
Reclassified
to conform with the current period presentation, see Note 1B(2).
|
Note
5 – Inventories
|
|
December 31
|
|
|
|
2020
|
|
|
(*)
2019
|
|
Raw
materials
|
|
$
|
926
|
|
|
$
|
1,264
|
|
Finished
products
|
|
|
1,553
|
|
|
|
1,756
|
|
|
|
$
|
2,479
|
|
|
$
|
3,020
|
|
(*)
|
Reclassified
to conform with the current period presentation, see Note 1B(2).
|
On
Track Innovations Ltd.
and
Subsidiaries
Notes
to the Consolidated Financial Statements
US
dollars, NIS and Euro in thousands, except share and per share data
Note
6 – Property, Plant and Equipment, Net
|
|
December 31
|
|
Cost
|
|
2020
|
|
|
(*)
2019
|
|
Leasehold
improvements
|
|
$
|
245
|
|
|
$
|
189
|
|
Computers,
software and manufacturing equipment
|
|
|
7,591
|
|
|
|
7,411
|
|
Office
furniture and equipment
|
|
|
193
|
|
|
|
187
|
|
Motor
vehicles
|
|
|
146
|
|
|
|
146
|
|
Total
cost
|
|
|
8,175
|
|
|
|
7,933
|
|
Total
accumulated depreciation
|
|
|
7,423
|
|
|
|
7,186
|
|
|
|
$
|
752
|
|
|
$
|
747
|
|
(*)
|
Reclassified
to conform with the current period presentation, see Note 1B(2).
|
B.
|
As
to liens - See Note 10C.
|
C.
|
Depreciation
expenses amounted to $239 and $239 for the years ended December 31, 2020 and 2019, respectively.
|
Note 7
– Other Current Liabilities
|
|
December 31
|
|
|
|
2020
|
|
|
(*)
2019
|
|
Employees
and related expenses
|
|
$
|
516
|
|
|
$
|
528
|
|
Accrued
expenses
|
|
|
811
|
|
|
|
837
|
|
Customer
advances
|
|
|
142
|
|
|
|
110
|
|
Short-term
liabilities due to operating leases and current maturities (***)
|
|
|
762
|
|
|
|
512
|
|
Other
current liabilities
|
|
|
52
|
|
|
|
(**)
618
|
|
|
|
$
|
2,283
|
|
|
$
|
2,605
|
|
(*)
|
Reclassified
to conform with the current period presentation, see Note 1B(2).
|
(**)
|
Thebalance
as of December 31, 2019 include provision in amounts of $553, as mentioned in Note 15.
|
On
Track Innovations Ltd.
and
Subsidiaries
Notes
to the Consolidated Financial Statements
US
dollars, NIS and Euro in thousands, except share and per share data
Note
8 – Bank Loans
A.
|
Composition
of long-term loans:
|
|
|
December 31
|
|
|
|
2020
|
|
|
2019
|
|
Long-term
loans (*)
|
|
$
|
15
|
|
|
$
|
24
|
|
Less
- current maturities
|
|
|
1
|
|
|
|
2
|
|
|
|
$
|
14
|
|
|
$
|
22
|
|
(*)
|
As
of December 31, 2020, the bank loans are denominated in South African Rand.
|
B.
|
Composition
of short-term loans, bank credit and current maturities of long-term loans:
|
|
|
December 31
|
|
|
December 31
|
|
|
|
2020
|
|
|
2020
|
|
|
(*)
2019
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate
|
|
|
|
|
|
|
|
|
|
In
NIS
|
|
4.
90
|
|
|
|
541
|
|
|
|
456
|
|
|
|
|
|
|
|
541
|
|
|
|
456
|
|
Current
maturities of long-term loans
|
|
|
|
|
|
1
|
|
|
|
2
|
|
|
|
|
|
|
$
|
542
|
|
|
$
|
458
|
|
(*)
|
Reclassified
to conform with the current period presentation, see Note 1B(2).
|
C.
|
Liens
for short-term and long-term loans - see Note 10C.
|
D.
|
As
of December 31, 2020, the Group (excluding the Polish subsidiary that subsequent to the balance
sheet date the Company entered into an agreement to sell ) has authorized unused credit
lines of $1,109.
|
On
Track Innovations Ltd.
and
Subsidiaries
Notes
to the Consolidated Financial Statements
US
dollars, NIS and Euro in thousands, except share and per share data
Note
9 – Convertible short-term loan from a controlling shareholder
On December 9, 2020, the Company entered into
a loan financing agreement (the “Loan Agreement”), with Jerry L. Ivy, Jr., Descendants’ Trust (“Ivy”, or
the “Lender”), the Company’s Controlling Shareholder (as such term is defined under the Israeli Companies Law, 5759-1999,
as amended, or the Companies Law). The Loan Agreement provides that the Lender will extend a loan to the Company in the amount of up to
$1,500, payable in two tranches: one of $625 at the initial closing that took place on December 17, 2020, and the other of $875 at the
second closing subject to the terms and conditions of the Loan Agreement.
The amount lent under the Loan Agreement is secured
pursuant to a debenture (the “Debenture”) by a first priority floating charge over all the Company’s tangible or intangible
assets and other property, the Company owns, subject only to certain permitted security interests, as set forth in Loan Agreement.
The amount lent under the Loan Agreement and all
accrued interest matures on June 17, 2021 (the “Maturity Date”), and will be payable in full on the Maturity Date, provided
that the maturity date can be extended by six months at the sole option of Ivy. The amount lent bears interest on all outstanding principal
at an interest rate of 8.0% per annum, or the Interest; provided, however, that upon an extension of the maturity period beyond the Maturity
Date, the Interest will automatically increase, effective as of the Maturity Date, to the rate of 10.0% per annum. Also, in case of an
extension of the Maturity Date, the accrued interest for the first six months for which the Loan Amount has been outstanding will be payable
by the Company to the Lender at the time of the extension, and the accrued Interest for the extension period will be payable by us on
the extended maturity date. In addition, the Company may repay the amount lent, in whole and not in part, and any accrued Interest thereon,
at any time prior to the Maturity Date (as it may be extended), in its sole discretion.
The Company has obtained shareholders’ approval
to the grant of a right to Ivy, pursuant to which, at any time prior to the repayment in full of the amount lent, together with Interest
accrued and all other amounts outstanding under the Agreement (the “Secured Amount”), Ivy will be entitled, at its sole discretion,
to demand to convert (the “Conversion Right”) the entire Secured Amount into the Company’s Ordinary Shares, at a price
per share equal to the lower of (a) $0.20 per share (subject to adjustment in the event of any bonus shares, combinations or splits) and
(b) a price per share reflecting a discount to the average closing bid price of an Ordinary Share over the 20 trading days preceding the
Initial Closing (the “Benchmark Price”) ($0.248), as follows: (i) if conversion occurs until March 17, 2021 (no later than
three months after the initial closing), the conversion price per share will be $0.1984 (reflects discount of 20% of the Benchmark Price);
(ii) if conversion occurs between March 18, 2021, and June 17, 2021 (more than three months but no later than six months after the initial
closing), the conversion price per share will be $0.1736 (reflects discount of 30% of the Benchmark Price); (iii) if conversion occurs
after June 17, 2021 (more than six months after the initial closing (to the extent extended in accordance with the terms of the Loan Agreement)),
the conversion price per share will be $0.124 (reflects discount of 50% of the Benchmark Price); and (iv) if conversion occurs upon an
event of default, the conversion price per share will be $0.124 (reflects discount of 50% of the Benchmark Price).
Pursuant to the Loan Agreement, the Conversion
Right will become effective only following the approval thereof by the shareholders of the Company in accordance with the requirements
of the Companies Law, which approval applies to a controlling shareholder transaction that includes a private offering that may increase
the holdings of a controlling shareholder to and above 45% of the share capital of the Company, and will be deemed of no force or effect
at any time prior to obtaining such Shareholders' Approval, if at all. The Company obtained such shareholders’ approval.
On
Track Innovations Ltd.
and
Subsidiaries
Notes
to the Consolidated Financial Statements
US
dollars, NIS and Euro in thousands, except share and per share data
Note
9 – Convertible short-term loan from a controlling shareholder (cont’d)
The Loan Agreement includes customary events of
default, including, among others, failures to repay any amounts due to the Lender, breaches or defaults under the terms of the Agreement,
etc. If an event of default occurs, the Secured Amount shall immediately become due and payable, without the need for any notice by the
Lender.
The Loan Agreement was subsequently amended to
allow for an additional lender to lend $100 under the same terms as Ivy. Accordingly, the aggregate gross amount the Company received
under the Loan Agreement is $1,600, out of which $975 took place as part of the second closing on January 28, 2021, subsequent to the
balance sheet.
In accordance with ASC 815-15-25,“Derivatives
and Hedging”, the conversion feature (“the conversion component”) was considered embedded derivative instrument.
Since, as described above, the conversion component was required to be approved by the shareholders of the Company, the conversion component
did not qualify for the scope exception under ASC 815-10-15-74(a). Therefore, the conversion component is to be recorded separately from
the loan component. The conversion component is measured both initially and in subsequent periods at fair value, with changes in fair
value charged to finance expenses, net.
The
fair value of the conversion component at the initial closing, December 17, 2020, was estimated using the Trinomial model based
on the assumptions, as follows:
Expected
volatility (%)
|
|
|
125.2
|
%
|
Risk-free interest
rate (%)
|
|
|
0.09
|
%
|
Expected dividend yield
|
|
|
0
|
%
|
Contractual term (years)
|
|
|
0.5
|
|
Conversion price (US
dollars per share)
|
|
|
0.124
|
|
Underlying Share price
(US dollars per share)
|
|
|
0.220
|
|
Based on the Trinomial model, the fair value of
the convertible component was $617 as of December 17, 2020. Accordingly, the loan component was $8 as of December 17, 2020.
There
are no significant changes in the model assumptions as of December 31, 2020, compared to the assumptions as of December 17, 2020,
as mentioned above. Therefore, the convertible component and the loan component are $617 and $8, respectively, as of December
31, 2020. Both components are presented as Convertible short-term loan from a controlling shareholder within the short-term liabilities.
Transaction
expenses related to this convertible loan were $90 during the year ended December 31, 2020 and are presented as financial expenses.
On
Track Innovations Ltd.
and
Subsidiaries
Notes
to the Consolidated Financial Statements
US
dollars, NIS and Euro in thousands, except share and per share data
Note
10 – Commitments and Contingencies
A.
|
Royalties
to the Israel Innovation Authority (the “IIA”)
|
The
Company has entered into several research and development agreements, pursuant to which the Company received grants from the IIA,
and are therefore obligated to pay royalties to the IIA 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, 2020, net of royalties paid, was approximately $3,400 (including accrued
interest). No grants from the IIA were received during the two-year period ended December 31, 2020.
There
is a dispute between the Company and the IIA in the amount of approximately NIS 3,571 ($1,111) including accrued interest (while
the current debt to the IIA as presented in the Company’s financial statements amounts to approximately $180) due to a claim
of the IIA about miscalculations in the amount of royalties paid by the Company and the revenues on which the Company must pay
royalties. The company has not yet completed its discussions with the IIA and intends to exhaust all options in order to resolve
this matter in a favorable manner. Management believes that, at the current stage, it is more likely than not that a positive
resolution will be applied to this dispute. Accordingly, no additional accrual has been recorded in the financial statements in
respect of this matter.
During
the years ended December 31, 2020 and 2019, there were no royalty expenses.
The
Group operates from leased facilities in the United States, Israel, South Africa and Poland, leased for periods expiring in years
2021 through 2025.
Minimum
future rentals of premises, including construction costs-reimbursement (excluding assets held for sale), that should be paid under
non-cancelable operating lease agreements at rates in effect as of December 31, 2020 are as follows:
2021
|
|
$
|
537
|
|
2022
|
|
|
458
|
|
2023
|
|
|
318
|
|
2024
|
|
|
(*)
584
|
|
|
|
$
|
1,897
|
|
(*)
|
Including
cost-reimbursement that the Company will need to pay at end of 2024, if it decides to
not continue to lease the headquarters office in Yokne’am during the extension-period,
as mentioned in the agreement.
|
See
also Note 18.
On
Track Innovations Ltd.
and
Subsidiaries
Notes
to the Consolidated Financial Statements
US
dollars, NIS and Euro in thousands, except share and per share data
Note
10 – Commitments and Contingencies (cont’d)
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 $105 have been pledged as security in respect of guarantees granted.
Such deposits cannot be pledged to others or withdrawn without the consent of the bank.
As of December 31, 2020, the Company
granted a guarantee in amount of $109, with an expiration date in May 2024. In addition, as of December 31, 2020, the Company granted
performance guarantees in amount of $417 related to the Mass Transit Ticketing. The expiration dates of those guarantees ranged from January
2021 to September 2021. Following the agreement to sell ASEC (see Note 1B(2)), the Company will be no longer subject to these guarantees.
|
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, as well as a right to receive additional information
from the Company regarding an additional engagement period in Tanzania and a right to
possibly receive additional amounts from the Company, if at all, according to the information
that will be provided. 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. Since SuperCom failed to pay the Company the amounts due,
in February 2019 the Company initiated an arbitration process to collect from SuperCom, the amount paid to Merwell, as well as
any complementary amounts, as may be ordered in the future.
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, 2020 and December 31, 2019, in accordance with accounting standard ASC 450, “Contingencies”.
On
Track Innovations Ltd.
and
Subsidiaries
Notes
to the Consolidated Financial Statements
US
dollars, NIS and Euro in thousands, except share and per share data
Note
10 – Commitments and Contingencies (cont’d)
|
2.
|
On
June 12, 2019, Merwell submitted a complementary claim against the Company in arbitration,
with respect to the additional financial details that Merwell claims that the Company
was ordered to provide according to the arbitration verdict from February 21, 2016, and
additional payments that Merwell claims that the Company is obligated to pay Merwell.
The said financial details refer to the quantity of smart driving licenses that Merwell
claims were issued in the later period of a project in Tanzania in which Merwell claims
to have provided services to the Company. Merwell claims that despite the Company’s
failure to provide the details, Merwell obtained the details independently from other
sources, and they indicate that the Company is obligated to pay Merwell an additional
amount of approximately $1,618, and there might be additional amounts to be claimed in
the future, as additional information might be found from time to time. On March 4, 2020,
the Company submitted a response to this complementary claim, rejecting Merwell’s
claims. On September 16, 2020, Merwell filed a request to amend the additional amount
claimed from approximately $1,618 to approximately $3,012. On December 3, 2020, the Company
submitted a response to this complementary claim, rejecting Merwell’s claims, and
on December 29, 2020, Merwell submitted a response to the Company’s response. As
mentioned above, the Company is conducting in parallel a separate arbitration process
against SuperCom in that matter, as the Company deems SuperCom to be liable for all the
costs and liabilities arising out of this claim. Based on the assessment of the Company’s
external legal counsel, given the preliminary stage of the procedure, it is difficult,
at this point, to estimate the chances of Merwell’s claims for a complementary
arbitration verdict.
|
|
3.
|
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 $1,840) 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 ($61) plus interest in damages plus another approximately €5
($6) in other fees and penalties. As, in accordance with the sale agreement signed between
the Company and Parx France, the Company is liable and shall indemnify Parx France for
any amount ruled against it as part of that claim, 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 ($617) plus interest and expenses. On November 7, 2019,
the Company’s external legal counsel concluded that the appeal was inadmissible,
and that it believed that the opposing claims would be dismissed. The appeal hearing
is scheduled for April 21, 2021. 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.
|
|
4.
|
In
July 2019, the Company received a request (the “Request”), to allow a petitioner
to submit a class action, which concerns the petitioner’s claims that, inter alia,
through the EasyPark card, drivers are permitted to exceed the quota of permitted hours
in accordance with the instructions of various local authorities in Israel. The Request
was submitted against a company (the “Buyer’s Company”) incorporated
by the buyer of the assets (including the parking activity) of the Israeli subsidiaries
of the Company (the “Company’s Subsidiaries”) and against two other
companies that operate technological means for payment for public parking spaces scattered
throughout the cities. Since the majority of potential claims against the Company’s
Subsidiaries relate to the period following the sale of the Company’s Subsidiaries’
assets, including the parking activity, it appears that the Company’s exposure
through this channel is limited. Furthermore, even if payment will be required, the buyer
would be liable for the majority of such payment. Therefore, the Company will not participate
in such procedure at this stage. Based on the assessment of the Company’s external
legal counsel, the exposure of the Company is low.
|
|
5.
|
The Company has been responding to a Subpoena from the Department
of Justice, or DOJ, and a document request from the SEC relating to an inquiry concerning a press release the Company issued on December
18, 2017. The Company has produced the requested documents, participated in voluntary interviews, and is otherwise cooperating
with the inquiry. At present, the Company has not been accused of any wrongdoing and it does not currently view the inquiry as material.
|
|
6.
|
Regarding additional legal claims please see Notes 1B(1) and 15.
|
On
Track Innovations Ltd.
and
Subsidiaries
Notes
to the Consolidated Financial Statements
US
dollars, NIS and Euro in thousands, except share and per share data
Note
11 – Revenues
Disaggregation
of revenue
The
following table disaggregates the Company’s revenues by major source based on categories that depict its nature and timing
as reviewed by management for the years ended December 31, 2020 and 2019:
|
|
Year
ended December 31
|
|
|
|
2020
|
|
|
|
Retail
|
|
|
Petroleum
|
|
|
Total
|
|
Cashless
payment products (A)
|
|
$
|
6,958
|
|
|
$
|
-
|
|
|
$
|
6,958
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Complete
cashless payment solutions (B):
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
of products (B1)
|
|
|
2,179
|
|
|
|
1,682
|
|
|
|
3,861
|
|
Licensing
fees, transaction fees and services (B2)
|
|
|
1,037
|
|
|
|
886
|
|
|
|
1,923
|
|
|
|
|
3,216
|
|
|
|
2,568
|
|
|
|
5,784
|
|
Total
revenues
|
|
$
|
10,174
|
|
|
$
|
2,568
|
|
|
$
|
12,742
|
|
|
|
Year
ended December 31
|
|
|
|
(*)
2019
|
|
|
|
Retail
|
|
|
Petroleum
|
|
|
Total
|
|
Cashless
payment products (A)
|
|
$
|
5,384
|
|
|
$
|
-
|
|
|
$
|
5,384
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Complete
cashless payment solutions (B):
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
of products (B1)
|
|
|
1,048
|
|
|
|
1,964
|
|
|
|
3,012
|
|
Licensing
fees, transaction fees and services (B2)
|
|
|
975
|
|
|
|
1,278
|
|
|
|
2,253
|
|
|
|
|
2,023
|
|
|
|
3,242
|
|
|
|
5,265
|
|
Total
revenues
|
|
$
|
7,407
|
|
|
$
|
3,242
|
|
|
$
|
10,649
|
|
(*)
|
Reclassified
to conform with the current period presentation, see Note 1B(2).
|
On
Track Innovations Ltd.
and
Subsidiaries
Notes
to the Consolidated Financial Statements
US
dollars, NIS and Euro in thousands, except share and per share data
Note
11 – Revenues (cont’d)
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 Note 11A 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.
On
Track Innovations Ltd.
and
Subsidiaries
Notes
to the Consolidated Financial Statements
US
dollars, NIS and Euro in thousands, except share and per share data
Note
11 – Revenues (cont’d)
Contract
balances (excluding assets held for sales)
|
|
December
31
|
|
|
December
31
|
|
|
|
2020
|
|
|
(*)
2019
|
|
Trade
receivables, net of allowance for doubtful accounts
|
|
$
|
1,148
|
|
|
$
|
2,134
|
|
Customer
advances
|
|
$
|
142
|
|
|
$
|
110
|
|
(*)
|
Reclassified
to conform with the current period presentation, see Note 1B(2).
|
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.
Note
12 – Equity
On
December 23, 2019, the Company entered into a share purchase agreement (the “Agreement”) with Jerry L Ivy, Jr. Descendants
Trust (“Ivy”) and two other investors (collectively together with Ivy – “Investors”). The Agreement
relates to a private placement of an aggregate of up to 12,500,000 ordinary shares of the Company for aggregate gross proceeds
to the Company of up to $2,500.
As
part of this Agreement, in December 2019 and January 2020, the Company issued 5,460,000 and 1,040,000 ordinary shares, respectively,
for aggregate gross proceeds of $1,092 and $208, respectively. Under the term of the Agreement and following the issuance of those
shares, the Company appointed one representative to its Board of Directors (the “Board”), designated by Ivy. Also,
pursuant to the Agreement, Ivy has a right to purchase any future equity securities offered by the Company, except with respect
to certain exempt issuances as set forth in the Agreement.
The
issuance of the remaining 6,000,000 ordinary shares (the “Subsequent Closing”) for aggregate gross proceeds of $1,200
took place in April 2020, following the approval by the Company’s shareholders on April 14, 2020, of the resolutions detailed
below, that were required for the consummation of the Subsequent Closing under the Agreement and the applicable law: (i) an increase
in the number of the ordinary shares authorized for issuance from 50,000,000 to 100,000,000; (ii) the issuance of the ordinary
shares to Ivy following which Ivy will hold 25% or more of the total voting rights at general meetings of the shareholders of
the Company; and (iii) the election of the representative designated by Ivy to the Board.
On
Track Innovations Ltd.
and
Subsidiaries
Notes
to the Consolidated Financial Statements
US
dollars, NIS and Euro in thousands, except share and per share data
Note
12 – Equity (cont’d)
A.
|
Share
capital (cont’d)
|
The
issuance costs were approximately $39 and $111 during 2020 and 2019, respectively.
In
addition, pursuant to the terms of the Agreement, on May 5, 2020, after the consummation of the Subsequent Closing, the Board
appointed an additional representative designated by Ivy. The appointment of such designee shall remain valid through the next
general meeting of the Company’s shareholders or as set forth in the Articles of Association of the Company.
Regarding
to a convertible loan that the Company received from Ivy in December 2020 and subsequent to the balance sheet, please see Note
9.
B.
|
Shares
to non-employees
|
There
were no grants to non-employees during the year ended December 31, 2020.
During
2019 the Company granted its consultants 30,000 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 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 2014, the Board approved an increase of 16,375,000 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.
On
Track Innovations Ltd.
and
Subsidiaries
Notes to the Consolidated Financial Statements
US
dollars, NIS and Euro in thousands, except share and per share data
Note
12 – Equity (cont’d)
|
C.
|
Stock
option plans (cont’d)
|
The
fair value of each option granted to employees during 2020 and 2019 was estimated on the date of grant, using the Black-Scholes
model and the following assumptions:
|
|
Year
ended December 31
|
|
|
|
2020
|
|
|
2019
|
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected volatility
|
|
|
97%-109
|
%
|
|
|
78%-88
|
%
|
Risk-free interest rate
|
|
|
0.22%-1.53
|
%
|
|
|
1.63%-2.47
|
%
|
Expected life - in years
|
|
|
2.49
|
|
|
|
2.44
|
|
|
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 and on the OTCQX market, as applicable.
|
|
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 during 2020 (including options to non-employees) and information as to options outstanding and
options exercisable as of December 31, 2020 and 2019 are summarized in the following table:
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
average
|
|
|
|
|
|
|
Number of
|
|
|
exercise
|
|
|
Aggregate
|
|
|
|
options
|
|
|
price per
|
|
|
intrinsic
|
|
|
|
outstanding
|
|
|
share
|
|
|
value
|
|
Outstanding – December 31, 2019
|
|
|
809,000
|
|
|
$
|
0.93
|
|
|
|
|
|
Options granted
|
|
|
814,000
|
|
|
|
0.24
|
|
|
|
|
|
Options expired or forfeited
|
|
|
(179,667
|
)
|
|
|
0.88
|
|
|
|
|
|
Outstanding – December 31, 2020
|
|
|
1,443,333
|
|
|
$
|
0.54
|
|
|
$
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable as of:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
|
681,330
|
|
|
$
|
0.83
|
|
|
$
|
2
|
|
The
weighted average grant date fair value of options granted is $0.12 and $0.19 per option during 2020 and 2019, respectively.
On
Track Innovations Ltd.
and
Subsidiaries
Notes to the Consolidated Financial Statements
US
dollars, NIS and Euro in thousands, except share and per share data
Note
12 – Equity (cont’d)
|
C.
|
Stock
option plans (cont’d)
|
The
following table summarizes information about options outstanding and exercisable (including options to non-employees) as of December
31, 2020:
|
|
Options outstanding
|
|
|
Options Exercisable
|
|
|
|
Number
|
|
|
Weighted
|
|
|
|
|
|
|
Number
|
|
|
Weighted
|
|
|
|
|
|
|
outstanding
|
|
|
average
|
|
|
Weighted
|
|
|
Outstanding
|
|
|
average
|
|
|
Weighted
|
|
|
|
as of
|
|
|
remaining
|
|
|
Average
|
|
|
as
of
|
|
|
remaining
|
|
|
Average
|
|
|
|
December 31,
|
|
|
contractual
|
|
|
Exercise
|
|
|
December 31,
|
|
|
contractual
|
|
|
Exercise
|
|
Range of exercise
price
|
|
2020
|
|
|
life (years)
|
|
|
Price
|
|
|
2020
|
|
|
life (years)
|
|
|
Price
|
|
$ 0.20-0.90
|
|
|
1,057,333
|
|
|
|
3.87
|
|
|
$
|
0.33
|
|
|
|
295,330
|
|
|
|
3.18
|
|
|
$
|
0.44
|
|
$ 1.07-1.22
|
|
|
386,000
|
|
|
|
1.27
|
|
|
$
|
1.13
|
|
|
|
386,000
|
|
|
|
1.27
|
|
|
$
|
1.13
|
|
|
|
|
1,443,333
|
|
|
|
3.17
|
|
|
|
|
|
|
|
681,330
|
|
|
|
2.10
|
|
|
|
|
|
No
options were exercised during the years ended December 31, 2020 and 2019.
As
of December 31, 2020, there was $99 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 1.41 years. The total fair value of shares vested during
the year ended December 31, 2020 was $60.
During
2020 and 2019, the Company recorded stock-based compensation expenses in the amount of $67 and $125, respectively, in accordance
with ASC Topic 718.
Stock-based
compensation expenses are not deductible for tax purposes.
|
1.
|
During
2019, 40,000 warrants expired.
|
|
2.
|
As
of December 31, 2020 and 2019, there are no outstanding warrants.
|
On
Track Innovations Ltd.
and
Subsidiaries
Notes to the Consolidated Financial Statements
US
dollars, NIS and Euro in thousands, except share and per share data
Note
13 – Supplemental statement of operations data
Other
income, net
Consists
of:
|
|
Year ended December 31
|
|
|
|
2020
|
|
|
(*) 2019
|
|
Gain on sale of property and equipment, net (**)
|
|
|
-
|
|
|
|
(326
|
)
|
Other
|
|
|
(11
|
)
|
|
|
-
|
|
Other income, net
|
|
$
|
(11
|
)
|
|
$
|
(326
|
)
|
|
(*)
|
Reclassified
to conform with the current period presentation, see Note 1B(2).
|
|
(**)
|
In
March 2019, OTI Petrosmart (Pty), Ltd., the South African subsidiary (“Petrosmart”), entered into an agreement pursuant
to which Petrosmart agreed to sell its head office in Cape Town, South Africa, to a third party for consideration of Rand 15,500
(approximately $1,100), and Petrosmart agreed to lease back this building for its current operations. The sale has been completed
and the operating lease commenced during the third quarter of 2019. The leaseback period is three years. The annual rent for the
first year is approximately Rand 1,800 (approximately $123) and will be increased by 8.5% each year. Petrosmart has the right
to extend the lease by two years. The Company recognized a profit in the amount of approximately $328 during the third quarter
of 2019 due to the sale of the building. In February 2021, subsequent to the balance sheet date, Petrosmart signed an addendum
to this agreement pursuant to which Petrosmart is entitled to insignificant rental reduction.
|
On
Track Innovations Ltd.
and
Subsidiaries
Notes to the Consolidated Financial Statements
US
dollars, NIS and Euro in thousands, except share and per share data
Note
14 – 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.
The
standard tax rate in Israel is 23% during the years 2019-2020.
Current
and deferred taxes for the reported periods are calculated according to this tax rate mentioned above.
|
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, the 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.
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.
On
Track Innovations Ltd.
and
Subsidiaries
Notes to the Consolidated Financial Statements
US
dollars, NIS and Euro in thousands, except share and per share data
Note
14 – Income Taxes (cont’d)
|
B.
|
Non-Israeli
subsidiaries are taxed based on the income tax laws in their country of residence.
|
|
C.
|
Deferred
tax assets and liabilities:
|
|
|
December 31
|
|
|
December 31
|
|
|
|
2020
|
|
|
(*) 2019
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Carryforward losses
|
|
$
|
47,132
|
|
|
$
|
46,102
|
|
Other
|
|
|
812
|
|
|
|
766
|
|
|
|
|
|
|
|
|
|
|
Total gross deferred tax assets
|
|
|
47,944
|
|
|
|
46,868
|
|
Less – valuation allowance
|
|
|
(47,944
|
)
|
|
|
(46,868
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liability -
|
|
|
|
|
|
|
|
|
Other
|
|
|
-
|
|
|
|
(16
|
)
|
Net deferred tax liability (**)
|
|
$
|
(**) -
|
|
|
$
|
(16
|
)
|
|
(*)
|
Reclassified
to conform with the current period presentation, see Note 1B(2).
|
|
(**)
|
Excluding
deferred tax liability held for sale.
|
The
net changes in the total valuation allowance for each of the years ended December 31, 2020 and 2019, are comprised as follows:
|
|
Year ended December 31
|
|
|
|
2020
|
|
|
2019
|
|
Balance at beginning of year
|
|
$
|
46,868
|
|
|
$
|
45,689
|
|
Additions during the year from Continuing operations
|
|
|
1,039
|
|
|
|
1,233
|
|
Discontinued operations - see Note 1B
|
|
|
57
|
|
|
|
164
|
|
Tax from previous years
|
|
|
(39
|
)
|
|
|
(169
|
)
|
Exchange rate differences on carryforward losses
|
|
|
3
|
|
|
|
13
|
|
Deferred intercompany transactions
|
|
|
32
|
|
|
|
(44
|
)
|
Other changes
|
|
|
(16
|
)
|
|
|
(18
|
)
|
Balance at end of year
|
|
$
|
47,944
|
|
|
$
|
46,868
|
|
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.
On
Track Innovations Ltd.
and
Subsidiaries
Notes to the Consolidated Financial Statements
US
dollars, NIS and Euro in thousands, except share and per share data
Note
14 – Income Taxes (cont’d)
|
D.
|
As
of December 31, 2020, the operating loss carry-forwards and capital loss carryforwards
relating to Israeli companies amounted to $164,056 and $37,381, 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 14A(1)), tax loss carry-forwards are denominated
in U.S. dollars.
|
Net operating carry-forward losses
relating to non-Israeli companies, excluding the Polish subsidiary that on March 29, 2021, the Company entered into an agreement to sell (see Note 1B(2)), aggregate $3,583, which will expire as follows:
2027 -
|
|
$
|
2,779.
|
|
2028 -
|
|
$
|
533.
|
|
Indefinitely:
|
|
$
|
271.
|
|
|
E.
|
The
Company has not recognized a deferred tax liability for the undistributed earnings of its
foreign subsidiaries that arose in 2020 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, 2020,
the undistributed earnings of these foreign subsidiaries, excluding the Polish subsidiary
that on March 29, 2021, the Company entered into an agreement to sell (see Note 1B(2)),
were $1,560. It is impracticable to determine the additional taxes payable when these earnings
are remitted.
|
|
F.
|
Income
tax expenses allocated to continuing operations are as follows:
|
|
|
Year ended December 31
|
|
|
|
2020
|
|
|
(*) 2019
|
|
Current income tax expenses
|
|
$
|
-
|
|
|
$
|
-
|
|
Current income tax (expenses) benefits from previous years
|
|
|
(26
|
)
|
|
|
128
|
|
Deferred tax benefit (expenses)
|
|
|
36
|
|
|
|
(22
|
)
|
Income tax benefit, net
|
|
$
|
10
|
|
|
$
|
106
|
|
|
(*)
|
Reclassified
to conform with the current period presentation, see Note 1B(2).
|
The
net loss of discontinued operations for the year ended December 31, 2020 includes income tax benefits of $202. The net loss from
discontinued operations for the year ended December 31, 2019 included income tax expenses of $49.
On
Track Innovations Ltd.
and
Subsidiaries
Notes to the Consolidated Financial Statements
US
dollars, NIS and Euro in thousands, except share and per share data
Note
14 – Income Taxes (cont’d)
Reported
income tax benefit for the years ended December 31, 2020 and 2019 differed from the amounts that would result from applying the
Israeli statutory tax rate of 23%, to loss from continuing operations before taxes on income, as a result of the following:
|
|
Year ended December 31
|
|
|
|
2020
|
|
|
(*) 2019
|
|
Computed “expected” income tax benefit
|
|
$
|
1,162
|
|
|
$
|
1,254
|
|
Decrease in income tax benefit resulting
from:
|
|
|
|
|
|
|
|
|
Change in valuation allowance, net
|
|
|
(1,039
|
)
|
|
|
(1,233
|
)
|
Nondeductible stock-based compensation related to options issued to employees
|
|
|
(15
|
)
|
|
|
(29
|
)
|
Other nondeductible expenses
|
|
|
(50
|
)
|
|
|
(11
|
)
|
Tax from previous years
|
|
|
(26
|
)
|
|
|
128
|
|
Other
|
|
|
(22
|
)
|
|
|
(3
|
)
|
Reported income tax benefit
|
|
$
|
10
|
|
|
$
|
106
|
|
|
(*)
|
Reclassified
to conform with the current period presentation, see Note 1B(2).
|
|
G.
|
Loss
from continuing operations before taxes on income consists of the following:
|
|
|
Year ended December 31
|
|
|
|
2020
|
|
|
(*) 2019
|
|
Israel
|
|
$
|
(4,765
|
)
|
|
$
|
(5,526
|
)
|
Non-Israel
|
|
|
(285
|
)
|
|
|
76
|
|
|
|
$
|
(5,050
|
)
|
|
$
|
(5,450
|
)
|
|
(*)
|
Reclassified
to conform with the current period presentation, see Note 1B(2).
|
|
H.
|
Unrecognized
tax benefits
|
As
of December 31, 2020 and 2019, 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, 2020 and 2019, no interest and penalties related to unrecognized tax benefits have been accrued.
The Company and its major subsidiaries
file income tax returns in Israel, South Africa and Poland. With few exceptions, the income tax returns of the Company and its major subsidiaries
(excluding the Polish subsidiary that on March 29, 2021, the Company entered into an agreement to sell, see Note 1B(2))) are open
to examination by the Israeli and the respective foreign tax authorities for the tax years beginning in 2016.
On
Track Innovations Ltd.
and
Subsidiaries
Notes to the Consolidated Financial Statements
US
dollars, NIS and Euro in thousands, except share and per share data
Note
15 – Discontinued operations
As described in Note 1B, the Company divested
its interest in the Mass Transit Ticketing activity and the SmartID division and presented these activities as discontinued operations.
Set
forth below are the results of the discontinued operations:
|
|
Year ended December 31
|
|
|
|
2020
|
|
|
(*) 2019
|
|
Revenues
|
|
$
|
2,817
|
|
|
$
|
4,102
|
|
Expenses
|
|
|
(3,910
|
)
|
|
|
(4,165
|
)
|
Other loss, net
|
|
|
-
|
|
|
|
(**)(482
|
)
|
Net loss from discontinued operations
|
|
$
|
(1,093
|
)
|
|
$
|
(545
|
)
|
|
(*)
|
Reclassified
to conform with the current period presentation, see Note 1B(2).
|
|
(**)
|
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
January 26, 2020, Harel and the Company agreed to the offer of the Israeli Supreme Court, as made by way of settlement in which
the Company will pay back to Harel the sum of NIS 1,907 (approximately $553) in three monthly equal installments starting February
26, 2020. Accordingly, the Company recorded ‘other loss, net’ of $482 within the net loss from discontinued operations
and ‘general and administrative expenses’ of $71 within the net loss from continuing operations. As of December 31,
2020, the Company paid all the settlement amount.
On
Track Innovations Ltd.
and
Subsidiaries
Notes to the Consolidated Financial Statements
US
dollars, NIS and Euro in thousands, except share and per share data
Note
15 – Discontinued operations (cont’d)
The
following table summarizes information about assets and liabilities from discontinued operations held for sale as of December
31, 2020 and 2019:
|
|
December 31
|
|
|
|
2020
|
|
|
(*) 2019
|
|
Assets held for sale from discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,017
|
|
|
$
|
1,003
|
|
Trade receivables, net of allowance for doubtful accounts of $42
|
|
|
409
|
|
|
|
296
|
|
Other receivables and prepaid expenses
|
|
|
454
|
|
|
|
1,011
|
|
Inventories
|
|
|
392
|
|
|
|
312
|
|
Property, plant and equipment, net
|
|
|
3,136
|
|
|
|
-
|
|
Intangible assets, net
|
|
|
370
|
|
|
|
-
|
|
Right-of-use assets due to operating leases
|
|
|
580
|
|
|
|
-
|
|
|
|
|
6,358
|
|
|
|
2,622
|
|
Long-term assets:
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
-
|
|
|
|
2,947
|
|
Intangible assets, net
|
|
|
-
|
|
|
|
483
|
|
Right-of-use assets due to operating leases
|
|
|
-
|
|
|
|
721
|
|
|
|
|
-
|
|
|
|
4,151
|
|
|
|
|
|
|
|
|
|
|
Liabilities held for sale from discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Short-term bank credit and current maturities of long-term loans
|
|
|
2,339
|
|
|
|
2,020
|
|
Trade payables
|
|
|
1,832
|
|
|
|
3,505
|
|
Other current liabilities
|
|
|
443
|
|
|
|
449
|
|
Long-term loans, net of current maturities
|
|
|
(**)642
|
|
|
|
-
|
|
Long-term liabilities due to operating leases, net of current maturities
|
|
|
(**)401
|
|
|
|
-
|
|
Deferred tax liability
|
|
|
172
|
|
|
|
-
|
|
|
|
|
5,829
|
|
|
|
5,974
|
|
Long-term liabilities:
|
|
|
|
|
|
|
|
|
Long-term liabilities due to operating leases, net of current maturities
|
|
|
-
|
|
|
|
546
|
|
Deferred tax liability
|
|
|
-
|
|
|
|
400
|
|
|
|
$
|
-
|
|
|
$
|
946
|
|
|
(*)
|
Reclassified
to conform with the current period presentation, see Note 1B(2).
|
|
(**)
|
Those
liabilities were received for a long-term (more than twelve months) in ASEC, but are presented
as held for sale within the current assets as of December 31, 2020, because the Company has
determined that the sale of ASEC qualifies as held for sale and as a discontinued operation
as of December 31, 2020.
|
On
Track Innovations Ltd.
and
Subsidiaries
Notes to the Consolidated Financial Statements
US
dollars, NIS and Euro in thousands, except share and per share data
Note
16 – 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 (b) Petroleum.
The
following summary describes the operations in each of the Group’s operating segments:
|
●
|
Retail
- includes selling and marketing a variety of products for cashless payment solutions
for the retail market.
|
|
●
|
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.
|
|
Year ended December 31,
2020
|
|
|
|
Retail
|
|
|
Petroleum
|
|
|
Consolidated
|
|
Revenues
|
|
$
|
10,174
|
|
|
$
|
2,568
|
|
|
$
|
12,742
|
|
Reportable segment gross profit (**)
|
|
|
4,118
|
|
|
|
1,021
|
|
|
|
5,139
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of reportable segment
|
|
|
|
|
|
|
|
|
|
|
|
|
gross profit to gross profit for the period
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
|
|
|
|
|
|
|
|
(34
|
)
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
(4
|
)
|
Gross profit for the period
|
|
|
|
|
|
|
|
|
|
$
|
5,101
|
|
|
|
Year
ended December 31, 2019 (*)
|
|
|
|
Retail
|
|
|
Petroleum
|
|
|
Consolidated
|
|
Revenues
|
|
$
|
7,407
|
|
|
$
|
3,242
|
|
|
$
|
10,649
|
|
Reportable segment gross profit (**)
|
|
|
2,786
|
|
|
|
1,500
|
|
|
|
4,286
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of reportable segment
|
|
|
|
|
|
|
|
|
|
|
|
|
gross profit to gross profit for the period
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
|
|
|
|
|
|
|
|
(34
|
)
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
(5
|
)
|
Gross profit for the period
|
|
|
|
|
|
|
|
|
|
$
|
4,247
|
|
|
(*)
|
Reclassified
to conform with the current period presentation, see Note 1B(2).
|
|
(**)
|
Gross
profit as reviewed by the CODM represents gross profit, adjusted to exclude depreciation
and stock-based compensation.
|
On
Track Innovations Ltd.
and
Subsidiaries
Notes to the Consolidated Financial Statements
US
dollars, NIS and Euro in thousands, except share and per share data
Note
17 – Geographic Information and Major Customers
The
data is presented in accordance with ASC Topic 280, “Segment reporting.”
|
|
Year ended December 31
|
|
|
|
2020
|
|
|
(*) 2019
|
|
Revenues by geographical areas from external customers
|
|
|
|
|
|
|
|
|
Americas
|
|
$
|
4,574
|
|
|
$
|
3,625
|
|
Asia
|
|
|
2,415
|
|
|
|
1,074
|
|
Africa
|
|
|
1,520
|
|
|
|
2,087
|
|
Europe
|
|
|
4,233
|
|
|
|
3,863
|
|
Total export
|
|
|
12,742
|
|
|
|
10,649
|
|
|
(*)
|
Reclassified
to conform with the current period presentation. See Note 1B(2).
|
|
|
December 31
|
|
|
December 31
|
|
|
|
2020
|
|
|
(*) 2019
|
|
Long lived assets by geographical areas (excluding assets held for sale)
|
|
|
|
|
|
|
|
|
Domestic (Israel)
|
|
$
|
3,538
|
|
|
$
|
1,846
|
|
Poland (excluding assets held for sale)
|
|
|
40
|
|
|
|
50
|
|
South Africa
|
|
|
322
|
|
|
|
496
|
|
America
|
|
|
2
|
|
|
|
19
|
|
|
|
$
|
3,902
|
|
|
$
|
2,411
|
|
|
(*)
|
Reclassified
to conform with the current period presentation, see Note 1B(2).
|
Major
Customers
|
|
Year ended December 31
|
|
|
|
2020
|
|
|
(*) 2019
|
|
|
|
%
|
|
|
%
|
|
Major Customers by percentage from total revenues
|
|
|
|
|
|
|
|
|
Customer A
|
|
|
19
|
%
|
|
|
20
|
%
|
Customer B
|
|
|
14
|
%
|
|
|
6
|
%
|
Customer C
|
|
|
12
|
%
|
|
|
13
|
%
|
|
(*)
|
Reclassified
to conform with the current period presentation. See Note 1B(2).
|
The
revenues derived from those four customers are presented within the revenues from the Retail segment.
On
Track Innovations Ltd.
and
Subsidiaries
Notes to the Consolidated Financial Statements
US
dollars, NIS and Euro in thousands, except share and per share data
Note
18 – Leases
The
Company leases a limited number of assets, mainly offices and cars for use in its operations. The Company adopted the 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 December 31, 2020, right-of-use assets due to operating leases, excluding right-of-use assets that held for sale, are $2,903)
as of December 31, 2019 - $1,413) and the liabilities due to operating leases, excluding liabilities that held for sale, are $3,105
(as of December 31, 2019 - $1,449), out of which $2,343 are classified as long-term liabilities and $762 are classified as current
liabilities (see Note 7).
The
right-of-use assets and the liabilities due to operating leases as of December 31, 2020, include assets and liabilities in the
amount of $1,650 and $1,773, respectively, that derive from the lease commencement of the headquarters office in Yokneam, Israel
(in lieu of the previous leased headquarters building in Rosh Pina) in January 2020. The operating lease period of this office
is five years (excluding the extension-period, as mentioned in the agreement). The total annual rent expenses of this building,
including management fees and excluding construction costs-reimbursement payments, is approximately NIS 595 ($185) during the
lease period and approximately NIS 654 ($203) during the extension-period, if extended. The construction costs reimbursement payments
are approximately NIS 2,913 ($906), out of which 50% will be paid during the lease period. If the Company leases this office during
the extension-period of five years, the rest of the 50% costs-reimbursement payments will be paid during the extension-period.
Otherwise, the rest of the 50% costs-reimbursement payments will be paid at the end of 2024.
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 nine years as of December 31, 2020. The weighted average
remaining lease term is 3.2 years as of December 31, 2020.
The
following is a schedule of the maturities of operating lease liabilities for the next five years as of December 31, 2020, and
thereafter, as were taken into account in the calculation of the operating lease liabilities as of December 31, 2020:
2021
|
|
$
|
954
|
|
2022
|
|
|
803
|
|
2023
|
|
|
381
|
|
2024
|
|
|
243
|
|
2025
|
|
|
258
|
|
Thereafter
|
|
|
1,032
|
|
Total leases payments
|
|
|
3,671
|
|
Less - discount
|
|
|
566
|
|
Operating lease liabilities (*)
|
|
$
|
3,105
|
|
|
(*)
|
Excluding
liabilities held for sale
|
As
of December 31, 2020, the weighted average discount rate of those operating leases is approximately 5.4%.
Operating
lease costs and cash paid for amounts included in the measurement of the lease liabilities, excluding liabilities held for sale,
were approximately $906 and $868, respectively, during the year ended December 31, 2020. Operating lease costs and cash paid for
amounts included in the measurement of the lease liabilities, excluding liabilities held for sale, were approximately $700 during
the year ended December 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.
On
Track Innovations Ltd.
and
Subsidiaries
Notes to the Consolidated Financial Statements
US
dollars, NIS and Euro in thousands, except share and per share data
Note
19 – Related party
Regarding
to transaction and balance with a related party, Ivy, as of December 31, 2020, see Note 9. See also Note 20 about subsequent events.
Note
20 – Subsequent events
|
A.
|
Regarding to an agreement to sell ASEC, including its Mass Transit Ticketing operation, as signed subsequent
to the balance sheet date, see Notes 1B(2) and 15.
|
|
B.
|
Regarding to convertible short-term loan in amount of $975, out of which $875 was received from a controlling
shareholder on January 28, 2021, see Note 9.
|
|
C.
|
Subsequent to the balance sheet date, the Company granted 602,500 options to its employees, out of which
100,000 and 50,000 were granted to the Company’s Chief Executive Officer and the Company’s Chief Financial Officer, respectively.
Each option shall be exercisable to one ordinary share of the Company upon payment exercise price of $0.22. The options will be subject
to a three-year vesting period starting on the grant date so that each portion of 200,833 options shall vest on each of the first, second
and third anniversaries of the grant date.
|
In addition, the Company granted to
its new director, Uri Arazy, 30,000 options, whose terms are similar to the terms of the options mentioned above, except the exercise
price that amounted to $0.36.