UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

Form 10-Q

 

(Mark One)

x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2017

 

o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

 

For the transition period from __________ to __________

 

Commission file number 000-49877

 

ON TRACK INNOVATIONS LTD.

(Exact name of registrant as specified in its charter)

 

Israel		N/A
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

 

Z.H.R. Industrial Zone, P.O. Box 32, Rosh Pina, Israel 1200001

(Address of principal executive offices)

 

+ 972-4-6868000

(Registrant’s telephone number)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  

 

Yes ☒         No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registration was required to submit and post such files).  

 

Yes ☒         No ☐

 

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

 

Large accelerated filer ☐

Accelerated filer ☐

Non-accelerated filer ☐ (do not check if a smaller reporting company)

Smaller reporting company  ☒

 

Emerging growth company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). 

 

Yes ☐          No ☒

 

State the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date: 41,119,378 Ordinary Shares outstanding as of August 2, 2017.

 

 

 

ON TRACK INNOVATIONS LTD.

 

TABLE OF CONTENTS

Part I - Financial Information
Item 1.		Financial Statements		1
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations		2
Item 4.		Controls and Procedures		13
Part II - Other Information
Item 1.		Legal Proceedings		13
Item 6.		Exhibits		14

 

Signatures

15

 

 

PART I - FINANCIAL INFORMATION

 

Item 1.   Financial Statements.

 

ON TRACK INNOVATIONS LTD. AND ITS SUBSIDIARIES

 

INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

As of June 30, 2017

 

(Unaudited)

  

 

On Track Innovations Ltd.

and its Subsidiaries

 

Interim Unaudited Condensed Consolidated Financial Statements as of June 30, 2017

 

Contents

 

			Page
Interim Unaudited Condensed Consolidated Balance Sheets			F-2 - F-3
Interim Unaudited Condensed Consolidated Statements of Operations			F-4
Interim Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss)			F-5
Interim Unaudited Condensed Consolidated Statements of Changes in Equity			F-6
Interim Unaudited Condensed Consolidated Statements of Cash Flows			F-7 - F-8
Notes to the Interim Unaudited Condensed Consolidated Financial Statements			F-9 - F-17

 

 

On Track Innovations Ltd.

and its Subsidiaries

 

Interim Unaudited Condensed Consolidated Balance Sheets

 

US dollars in thousands except share data

 

		June 30,				December 31,
		2017				2016
Assets
Current assets
Cash and cash equivalents		$	6,242			$	5,952
Short-term investments			3,084				5,585
Trade receivables (net of allowance for doubtful accounts of $694 and $720 as of June 30, 2017 and December 31, 2016, respectively)			6,843				5,620
Other receivables and prepaid expenses			1,554				1,638
Inventories			3,180				3,069
Total current assets			20,903				21,864
Long-term restricted deposit for employees benefit			500				453
Severance pay deposits			355				322
Property, plant and equipment, net			5,967				5,788
Intangible assets, net			351				278
Total Assets		$	28,076			$	28,705

 

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

 

 

On Track Innovations Ltd.

and its Subsidiaries

 

Interim Unaudited Condensed Consolidated Balance Sheets

 

US dollars in thousands except share data

 

		June 30,				December 31,
		2017				2016
Liabilities and Equity
Current Liabilities
Short-term bank credit and current maturities of long-term bank loans		$	4,663			$	4,369
Trade payables			7,104				6,957
Other current liabilities			1,991				2,822
Total current liabilities			13,758				14,148
Long-Term Liabilities
Long-term loans, net of current maturities			1,041				1,215
Accrued severance pay			918				811
Deferred tax liability			452				373
Total long-term liabilities			2,411				2,399
Total Liabilities			16,169				16,547
Commitments and Contingencies
Equity
Shareholders' Equity
Ordinary shares of NIS 0.1 par value: Authorized – 50,000,000 shares as of June 30, 2017 and December 31, 2016; issued: 42,288,077 and 42,243,075 shares as of June 30, 2017 and December 31, 2016, respectively; outstanding: 41,109,378 and 41,064,376 shares as of June 30, 2017 and December 31, 2016, respectively			1,062				1,061
Additional paid-in capital			224,603				224,415
Treasury shares at cost - 1,178,699 shares as of June 30, 2017 and December 31, 2016			(2,000	)			(2,000	)
Accumulated other comprehensive loss			(904	)			(1,236	)
Accumulated deficit			(210,854	)			(210,082	)
Total Equity			11,907				12,158
Total Liabilities and Equity		$	28,076			$	28,705

 

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

 

 

On Track Innovations Ltd.

and its Subsidiaries

 

Interim Unaudited Condensed Consolidated Statements of Operations

 

US dollars in thousands except share and per share data

 

		Three Three months ended June 30,								Six months ended June 30,
		2017				2016*				2017				2016*
Revenues
Sales		$	5,646			$	3,584			$	8,426			$	6,946
Licensing and transaction fees			1,300				1,226				2,540				2,436
Total revenues			6,946				4,810				10,966				9,382
Cost of revenues
Cost of sales			3,476				2,360				5,276				4,609
Total cost of revenues			3,476				2,360				5,276				4,609
Gross profit			3,470				2,450				5,690				4,773
Operating expenses
Research and development			889				747				1,591				1,468
Selling and marketing			1,492				1,321				2,834				2,674
General and administrative			939				902				1,795				1,826
Total operating expenses			3,320				2,970				6,220				5,968
Operating income (loss) from continuing operations			150				(520	)			(530	)			(1,195	)
Financial expenses, net			(39	)			(62	)			(110	)			(155	)
Income (loss) from continuing operations before taxes on income			111				(582	)			(640	)			(1,350	)
Income tax			(25	)			(16	)			(56	)			(32	)
Net income (loss) from continuing operations			86				(598	)			(696	)			(1,382	)
Net income (loss) from discontinued operations			7				1,947				(76	)			1,803
Net income (loss)			93				1,349				(772	)			421
Net (income) loss attributable to non-controlling interest			-				(36	)			-				27
Net income (loss) attributable to shareholders		$	93			$	1,313			$	(772	)		$	448
Basic and diluted net income (loss) attributable to shareholders per ordinary share
From continuing operations			**				(0.02	)			(0.02	)			(0.03	)
From discontinued operations			**				0.05				**				0.04
		$	**			$	0.03			$	(0.02	)		$	0.01
Weighted average number of ordinary shares used in computing basic and diluted net income (loss) per ordinary share			41,095,788				40,896,863				41,087,729				40,885,668

 

*         Reclassified to conform with the current period presentation, see Note 1C(2).

**       Less than $0.01 per ordinary share.

 

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

 

 

On Track Innovations Ltd.

and its Subsidiaries

 

Interim Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss)

 

US dollars in thousands

 

		Three months ended June 30,								Six months ended June 30,
		2017				2016				2017				2016
Total comprehensive income (loss):
Net income (loss)		$	93			$	1,349			$	(772	)		$	421
Foreign currency translation adjustments			177				(190	)			332				(22	)
Total comprehensive income (loss)		$	270			$	1,159			$	(440	)		$	399
Comprehensive loss (income) attributable to the non-controlling interest			-				(36	)			-				27
Total comprehensive income (loss) attributable to shareholders		$	270			$	1,123			$	(440	)		$	426

 

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

 

 

On Track Innovations Ltd.

and its Subsidiaries

 

Interim Unaudited Condensed Consolidated Statements of Changes in Equity

 

US dollars in thousands except for number of shares

 

																		Accumulated
		Number of								Additional				Treasury				other								Non
		Shares				Share				paid-in				Shares				comprehensive				Accumulated				controlling				Total
		issued				capital				capital				(at cost)				Income (loss)				deficit				interest				equity
Balance as of December 31, 2015			42,014,673			$	1,055			$	225,925			$	(2,000	)		$	(1,084	)		$	(209,254	)		$	(1,819	)		$	12,823
Changes during the six month period ended June 30, 2016:
Stock-based compensation related to options issued to employees			-				-				105				-				-				-				-				105
Foreign currency translation adjustments			-				-				-				-				(22	)			-				-				(22	)
Exercise of options and warrants			69,402				(*)				-				-				-				-				-				(*)
Net income (loss)			-				-				-				-				-				448				(27	)			421
Balance as of June 30, 2016			42,084,075			$	1,055			$	226,030			$	(2,000	)		$	(1,106	)		$	(208,806	)		$	(1,846	)		$	13,327
Balance as of December 31, 2016			42,243,075			$	1,061			$	224,415			$	(2,000	)		$	(1,236	)		$	(210,082	)		$	-			$	12,158
Changes during the six month period ended June 30, 2017:
Stock-based compensation			30,000(**)				1				173				-				-				-				-				174
Foreign currency translation adjustments			-				-				-				-				332				-				-				332
Exercise of options			15,002				(*)				15				-				-				-				-				15
Net loss			-				-				-				-				-				(772	)			-				(772	)
Balance as of June 30, 2017			42,288,077			$	1,062			$	224,603			$	(2,000	)		$	(904	)		$	(210,854	)		$	-			$	11,907

 

(*)           Less than $1.

(**)        See Note 8C.

 

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

 

 

On Track Innovations Ltd.

and its Subsidiaries

 

Interim Unaudited Condensed Consolidated Statements of Cash Flows

 

US dollars in thousands

 

		Six months ended June 30,
		2017				2016*
Cash flows from continuing operating activities
Net loss from continuing operations		$	(696	)		$	(1,382	)
Adjustments required to reconcile net loss to net cash used in continuing operating activities:
Stock-based compensation related to options issued to employees and others			174				105
Accrued interest and linkage differences, net			(47	)			55
Depreciation			583				617
Deferred tax, net			21				32
Gain on sale of fixed assets			(7	)			-
Changes in operating assets and liabilities:
Accrued severance pay, net			74				(151	)
Increase in trade receivables, net			(1,151	)			(1,115	)
Decrease in other receivables and prepaid expenses			90				215
(Increase) decrease in inventories			(47	)			590
(Decrease) increase in trade payables			(396	)			290
Decrease in other current liabilities			(855	)			(453	)
Net cash used in continuing operating activities			(2,257	)			(1,197	)
Cash flows from continuing investing activities
Purchase of property and equipment, net			(98	)			(139	)
Change in short-term investments, net			2,500				(884	)
Investment in capitalized product costs			(157	)			(98	)
Proceeds from restricted deposit for employee benefits			44				-
Advance payment from sale of property			-				396
Proceeds from sale of fixed assets			12				-
Net cash provided by (used in) continuing investing activities			2,301				(725	)
Cash flows from continuing financing activities
Increase in short-term bank credit, net			213				81
Proceeds from long-term bank loans			-				27
Repayment of long-term bank loans			(374	)			(538	)
Proceeds from exercise of options and warrants			15				**
Net cash used in continuing financing activities			(146	)			(430	)
Cash flows from discontinued operations
Net cash used in discontinued operating activities			(71	)			(214	)
Net cash provided by discontinued investing activities			-				1,949
Total net cash (used in) provided by discontinued operations			(71	)			1,735
Effect of exchange rate changes on cash and cash equivalents			463				(17	)
Increase (decrease) in cash and cash equivalents			290				(634	)
Cash and cash equivalents at the beginning of the period			5,952				5,450
Cash and cash equivalents at the end of the period		$	6,242			$	4,816

 

*         Reclassified to conform with the current period presentation, see Note 1C(2).

**       Less than $1.

 

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

 

 

On Track Innovations Ltd.

and its Subsidiaries

 

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

 

US dollars in thousands

 

		Six months ended June 30,
		2017				2016
Supplementary cash flows activities:
Cash paid during the period for:
Interest paid		$	74			$	118
Income taxes paid		$	30			$	-

  

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

 

 

On Track Innovations Ltd.

and Subsidiaries

 

Notes to the Interim Unaudited Condensed Consolidated Financial Statements

 

US dollars in thousands

 

Note 1 - Organization and Basis of Presentation

 

A.	Description of business

 

On Track Innovations Ltd. (the “Company”) was founded in 1990, in Israel. The Company and its subsidiaries (together, the “Group”) are principally engaged in the field of design and development of cashless payment solutions. During the three month period ended June 30, 2017, we completed the liquidation of our wholly-owned subsidiaries, Softchip Israel Ltd. and Softchip Technologies (3000) Ltd., and these entities are no longer part of the Group.

 

The Company’s shares are listed for trading on the NASDAQ Capital Market (formerly listed on the NASDAQ Global Market until April 13, 2016).

 

B.	Interim Unaudited Financial Information

 

The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements and therefore should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.

 

In the opinion of management, all adjustments considered necessary for a fair presentation, consisting of normal recurring adjustments, have been included. Operating results for the six month period ended June 30, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.

 

Use of Estimates:

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the assets, liabilities, revenue, costs, expenses and accumulated other comprehensive income/(loss) that are reported in the Interim Consolidated Financial Statements and accompanying disclosures. These estimates are based on management’s best knowledge of current events, historical experience, actions that the Company may undertake in the future and on various other assumptions that are believed to be reasonable under the circumstances. As a result, actual results may be different from these estimates.

 

C.	Divestiture of operations

 

1.

In December 2013, the Company completed the sale of certain assets, subsidiaries and intellectual property (“IP”) relating to its Smart ID division to SuperCom Ltd. (“SuperCom”). Accordingly, the results and the cash flows of this operation for all reporting periods are presented in the statements of operations and in the statements of cash flows, respectively, as discontinued operations separately from continuing operations.

 

 

On Track Innovations Ltd.

and Subsidiaries

 

Notes to the Interim Unaudited Condensed Consolidated Financial Statements

 

US dollars in thousands

 

Note 1 - Organization and Basis of Presentation (cont’d)

 

C.	Divestiture of operations (cont’d)

 

2.

On September 14, 2016, the Company completed the sale of certain assets and IP related to its former parking segment. The Company has determined that the sale qualifies as a discontinued operation. Accordingly, the results and the cash flows of these operations for all reporting periods are presented in the statements of operations and in the statements of cash flows, respectively, as discontinued operations separately from continuing operations. All prior periods’ information has been reclassified to conform to the current period’s presentation.

 

Note 2 – Significant Accounting Policies

 

These interim unaudited condensed consolidated financial statements have been prepared according to the same accounting policies as those discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.

 

Recent accounting pronouncements

 

1.

In May 2017, the Financial Accounting Standard Board issued Accounting Standards Update (“ASU”) 2017-09, “Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting.” The ASU amends the scope of modification accounting for share-based payment arrangements, provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting. The new guidance will allow companies to make certain changes to awards without accounting for them as modifications. It does not change the accounting for modifications. ASU 2017-09 is effective for all entities for annual reporting periods beginning after December 15, 2017, with early adoption permitted, including adoption in any interim period for which financial statements have not yet been issued. The Company does not expect that the adoption of ASU 2017-09 will have a material impact on the Company's results of operations and financial condition.

 

2.

In connection with other recent accounting pronouncements and the Company’s assessment of the impacts they will have on the ongoing financial reporting, see Note 2W in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.

 

 

On Track Innovations Ltd.

and Subsidiaries

 

Notes to the Interim Unaudited Condensed Consolidated Financial Statements

 

US dollars in thousands

 

Note 3 - Other Receivables and Prepaid Expenses

 

		June 30,				December 31,
		2017				2016
Government institutions		$	325			$	322
Prepaid expenses			660				526
Receivables under contractual obligations to be transferred to others *			174				346
Other receivables			395				444
		$	1,554			$	1,638

 

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

 

Note 4 - Other Current Liabilities

 

		June 30,				December 31,
		2017				2016
Employees and related expenses		$	584			$	1,011
Accrued expenses			1,042				1,473
Customer advances			213				249
Other current liabilities			152				89
		$	1,991			$	2,822

 

Note 5 - Commitments and Contingencies

 

A.	Legal claims

 

1.

In June 2013, prior to the Company's divestiture of its SmartID division, Merwell Inc. (“Merwell”) filed a claim against the Company before an agreed-upon arbitrator alleging breach of contract in connection with certain commissions claimed to be owed to Merwell with respect to the division’s activities in Tanzania.  These activities, along with all other activities of the SmartID division, were later assigned to and assumed by SuperCom in its purchase of the division. SuperCom undertook to indemnify the Company and hold it harmless against any liabilities the Company may incur in connection with Merwell’s consulting agreement and the arbitration. An arbitration decision was issued on February 21, 2016, awarding Merwell approximately $855 for outstanding commissions. The arbitration decision is being appealed and is thus not yet ripe for enforcement. As mentioned above, based on the agreement with SuperCom, SuperCom is liable for the costs and liabilities arising out of this claim. Therefore, the financial statements do not include any provision for this claim.

 

 

On Track Innovations Ltd.

and Subsidiaries

 

Notes to the Interim Unaudited Condensed Consolidated Financial Statements

 

US dollars in thousands

 

Note 5 - Commitments and Contingencies (cont’d)

 

A.	Legal claims (cont’d)

 

2.

On October 3, 2013, a financial claim was filed against the Company and its then French subsidiary, Parx France (referred to in this paragraph, collectively, as the “Defendants”), in the Commercial Court of Paris, France. The sum of the claim is Euro 1,500 (approximately $1,710), and is based on the allegation that the plaintiff sustained certain losses in connection with Defendants not granting the plaintiff exclusive marketing rights to distribute and operate the Defendants’ PIAF Parking System in Paris and the Ile of France. The Company filed an initial memorandum of defense rejecting all the plaintiff’s allegations and claims. A hearing in this matter is scheduled for September 19, 2017. Based on the advice of counsel, the Company currently believes that it has no material obligations to the plaintiff and that there is no need for a provision for the claim.

 

3.

On March 1, 2017, a claim was filed in the U.S. District Court, Eastern District of Pennsylvania against the Company and its U.S. subsidiary, OTI America Inc. by USA Technologies Inc. (“USAT”). The claim asserts, among other things, that products sold by the Company to USAT’s manufacturing subcontractor, Masterwork Electronics, Inc. (“Masterwork”), fail to conform to promised specifications in that they do not include Apple Value Added Services (“VAS”), an add-on feature to Apple Pay which was then not yet offered by the Company. USAT seeks payment of $4,913 plus interest and costs, comprised of $729 to cover payment for alternative products, and $4,184 to cover costs of replacing the allegedly non-conforming products already installed. The Company denies the claims asserted by USAT and intends to defend the complaint vigorously. OTI America submitted its answer to USAT’s complaint on April 24, 2017. The Company submitted its answer to USAT’s complaint on May 8, 2017. Discovery in this proceeding is currently underway. A pre-trial conference for this matter is scheduled for August 2, 2018 with trial dates to be set thereafter. On March 3, 2017, the Company filed a lawsuit against Masterwork in the U.S. District Court for the Northern District of California. The Company seeks payment of $2,518 plus interest and costs as a result of Masterwork’s refusal to perform its obligations in connection with a purchase order supplied by Masterwork to the Company, based on Masterwork’s allegations that its customer, USAT, had apparently claimed that the products do not include the VAS feature requested by USAT, though such feature was not offered then by the Company and was not specified in the purchase order. The products subject to USAT’s litigation mentioned above include the products subject to the purchase order referred to in the Company’s claim against Masterwork. Masterwork submitted its answer to the Company’s complaint on April 20, 2017. On May 26, 2017, the Company amended its complaint to add USAT as a defendant, asserting claims against USAT for tortious interference with contract. On June 3, 2017, Masterwork moved to transfer the California matter to the U.S. District Court, Eastern District of Pennsylvania so that it be consolidated with the above-described USAT litigation. Masterwork’s request was granted on July 20, 2017, resulting in the transfer of this matter to the Eastern District of Pennsylvania where it is expected to be consolidated with the USAT litigation described above. Based on the advice of counsel, the Company currently believes that it and OTI America have no obligations to USAT in connection with USAT’s claims against the Company and OTI America and, similarly, that it has a meritorious claim against Masterwork and USAT.

 

 

On Track Innovations Ltd.

and Subsidiaries

 

Notes to the Interim Unaudited Condensed Consolidated Financial Statements

 

US dollars in thousands

 

Note 5 - Commitments and Contingencies (cont’d)

 

B.	Guarantees

 

As of June 30, 2017, the Company has granted performance guarantees and guarantees to secure customer advances in the sum of $347. The expiration dates of these guarantees range from October 2017 to June 2019.

 

Note 6 - Discontinued operations

 

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

 

Set forth below are the results of the discontinued operations:

 

		Three months ended June 30,								Six months ended June 30,
		2017				2016				2017				2016
Revenues			-				279				-				584
Expenses			-				(471	)			(83	)			(920	)
Other income, net			7				2,139				7				2,139
Net profit (loss) from discontinued operations			7				1,947				(76	)			1,803

 

Note 7 - 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.

 

 

On Track Innovations Ltd.

and Subsidiaries

 

Notes to the Interim Unaudited Condensed Consolidated Financial Statements

 

US dollars in thousands

 

Note 7 - Fair Value of Financial Instruments (cont’d)

 

By distinguishing between inputs that are observable in the market place, and therefore more objective, and those that are unobservable and therefore more subjective, the hierarchy is designed to indicate the relative reliability of the fair value measurements. A financial asset or liability's classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.

 

The Company, in estimating fair value for financial instruments, used the following methods and assumptions:

 

The carrying amounts of cash and cash equivalents, short-term interest bearing investments, trade receivables, short-term bank credit and trade payables are equivalent to, or approximate their fair value due to the short-term maturity of these instruments.

 

The carrying amounts of variable interest rate long-term loans are equivalent or approximate to their fair value as they bear interest at approximate market rates. As of June 30, 2017, the fair value of bank loans with fixed interest rates did not differ materially from the carrying amount.

 

As of June 30, 2017, the Company held approximately $3,084 of short-term bank deposits (as of December 31, 2016, $5,585). As of June 30, 2017 and December 31, 2016, short-term deposits in the amount of $1,548 have been pledged as security in respect of guarantees granted in respect of performance guarantees, loans and credit lines received from a bank and cannot be pledged to others or withdrawn without the consent of the bank.

 

Note 8 - Equity

 

A.	Stock option plans

 

During the six months ended June 30, 2017 and June 30, 2016, 100,000 and 270,000 options were granted, respectively. The vesting period for the options ranges from three years to four years. The exercise prices for the options range from $0.44 to $1.58. Those options expire up to five years after the date of grant. Any options which are forfeited or cancelled before expiration become available for future grants under the Company’s option plan.

 

The fair value of each option granted to employees and non-employees during the six months ended June 30, 2017 and June 30, 2016, was estimated on the date of grant, using the Black-Scholes model and the following assumptions:

 

	1.	Dividend yield of zero percent for all periods.
	2.	Risk-free interest rate of 1.35% and 1.18% for grants during the six months ended June 30, 2017 and June 30, 2016, respectively, based on U.S. Treasury yield curve in effect at the time of grant.

 

3.

Estimated expected lives of 3.50 and 3.56 years for grants during the six months ended June 30, 2017 and June 30, 2016, respectively, using the simplified method.

 

4.

Expected average volatility of 74% and 72% for grants during the six months ended June 30, 2017 and June 30, 2016, respectively, which represent a weighted average standard deviation rate for the price of the Company's Ordinary Shares on the NASDAQ Capital Market.

 

 

On Track Innovations Ltd.

and Subsidiaries

 

Notes to the Interim Unaudited Condensed Consolidated Financial Statements

 

US dollars in thousands

 

Note 8 - Equity (cont’d)

 

A.	Stock option plans (cont’d)

 

The Company’s options activity (including options to non-employees) during the six months ended June 30, 2017 and options outstanding and options exercisable as of December 31, 2016 and June 30, 2017, are summarized in the following table:

 

							Weighted
			Number of				average exercise
			options outstanding				price per share
	Outstanding – December 31, 2016			1,604,836			$	1.36
	Options granted			100,000				1.58
	Options expired or forfeited			(281,334	)			1.91
	Options exercised			(15,002	)			1.05
	Outstanding – June 30, 2017			1,408,500				1.27
	Exercisable as of:
	December 31, 2016			591,017			$	1.83
	June 30, 2017			538,500			$	1.62

 

The weighted average fair value of options granted during the six months ended June 30, 2017 and during the six months ended June 30, 2016 is $0.93 and $0.41, respectively, per option. The aggregate intrinsic value of outstanding options as of June 30, 2017 and December 31, 2016 is approximately $414 and $909, respectively. The aggregate intrinsic value of exercisable options as of June 30, 2017 and December 31, 2016 is approximately $120 and $167, respectively.

 

The following table summarizes information about options outstanding and exercisable (including options to non-employees) as of June 30, 2017:

 

			Options outstanding												Options exercisable
			Number				Weighted								Number				Weighted
			Outstanding				average				Weighted				Outstanding				average				Weighted
			as of				remaining				Average				As of				remaining				Average
	Range of		June 30,				contractual				Exercise				June 30,				contractual				Exercise
	exercise price		2017				life (years)				Price				2017				life (years)				Price
	$ 0.44- $0.90			595,000				3.25			$	0.76				225,000				2.81			$	0.78
	1.07-1.46			425,000				4.03				1.12				50,000				1.05				1.46
	1.58-1.68			115,000				4.33				1.59				10,000				2.51				1.68
	2.32-2.36			233,500				1.88				2.35				233,500				1.88				2.35
	3.03			40,000				2.23			$	3.03				20,000				2.23			$	3.03
				1,408,500				3.31								538,500				2.21

 

As of June 30, 2017, there was approximately $408 of total unrecognized compensation cost related to non-vested stock-based compensation arrangements. That cost is expected to be recognized over a weighted-average period of approximately 1.22 years.

 

 

On Track Innovations Ltd.

and Subsidiaries

 

Notes to the Interim Unaudited Condensed Consolidated Financial Statements

 

US dollars in thousands

 

Note 8 - Equity (cont’d)

 

A.

Stock option plans (cont’d)

 

During the six months ended June 30, 2017 and June 30, 2016, the Company recorded stock-based compensation expenses in the amount of $174 and $105, respectively, in accordance with ASC 718 “Compensation-Stock Compensation.”

 

B.

Warrants

 

As of June 30, 2017, there are remaining 40,000 outstanding warrants with a per share exercise price of $0.95. The warrants expire during 2019.

 

C.

Shares to non-employees

 

During the six months ended June 30, 2017, the Company granted 30,000 ordinary shares to one of its consultants. The expenses that are recognized due to this grant are immaterial and are presented within ‘stock-based compensation’ in the statement of changes in equity for the six months ended June 30, 2017.

 

Note 9 - Operating segments

 

For the purposes of allocating resources and assessing performance in order to improve profitability, the Company's chief operating decision maker (“CODM”) examines two segments which are the Company's strategic business units: (1) Retail and Mass Transit Ticketing; and (2) Petroleum. In addition to its two reportable segments, certain products for the medical industry and other secure smart card solutions are classified under the Company’s “Other” segment.

 

Information regarding the results of each reportable segment is included below based on the internal management reports that are reviewed by the CODM.

 

		Three months ended June 30, 2017
		Retail and Mass Transit Ticketing				Petroleum				Other				Consolidated
Revenues		$	4,682			$	1,910			$	354			$	6,946
Reportable segment gross profit *			2,568				889				211				3,668
Reconciliation of reportable segment gross profit to gross profit for the period
Depreciation															(199	)
Stock-based compensation															1
Gross profit for the period														$	3,470

 

* 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 Interim Unaudited Condensed Consolidated Financial Statements

 

US dollars in thousands

 

Note 9 - Operating segments (cont’d)

 

		Three months ended June 30, 2016
		Retail and Mass Transit Ticketing				Petroleum				Other				Consolidated
Revenues		$	3,239			$	831			$	740			$	4,810
Reportable segment gross profit *			1,795				497				350				2,642
Reconciliation of reportable segment gross profit to gross profit for the period
Depreciation															(188	)
Stock-based compensation															(4	)
Gross profit for the period														$	2,450

 

		Six months ended June 30, 2017
		Retail and Mass Transit Ticketing				Petroleum				Other				Consolidated
Revenues		$	7,423			$	2,728			$	815			$	10,966
Reportable segment gross profit *			4,209				1,396				469				6,074
Reconciliation of reportable segment gross profit to gross profit for the period
Depreciation															(383	)
Stock-based compensation															(1	)
Gross profit for the period														$	5,690

 

		Six months ended June 30, 2016
		Retail and Mass Transit Ticketing				Petroleum				Other				Consolidated
Revenues		$	6,138			$	1,940			$	1,304			$	9,382
Reportable segment gross profit *			3,310				1,198				642				5,150
Reconciliation of reportable segment gross profit to gross profit for the period
Depreciation															(377	)
Stock-based compensation															-
Gross profit for the period														$	4,773

 

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

 

 

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Forward - Looking Statements

 

The statements contained in this Quarterly Report on Form 10-Q, or Quarterly Report, that are not historical facts are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and other federal securities laws. Such forward-looking statements may be identified by, among other things, the use of forward-looking terminology such as “believes”, “intends”, “plans”, “expects”, “may”, “will”, “should”, or “anticipates” or the negative thereof or other variations thereon or comparable terminology, and similar expressions are intended to identify forward-looking statements. We remind readers that forward-looking statements are merely predictions and therefore are inherently subject to uncertainties and other factors and involve known and unknown risks that could cause the actual results, performance, levels of activity, or our achievements, or industry results, to be materially different from any actual future results, performance, levels of activity, or our achievements, or industry results, expressed or implied by such forward-looking statements. Such forward-looking statements may appear in this Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” as well as elsewhere in this Quarterly Report and include, among other statements, statements regarding the following:

 

●	our expectations regarding the growth of the near-field communication, or NFC, market;

 

●	the expected development and potential benefits from our existing or future products or our intellectual property, or IP;

 

●	increased generation of revenues from licensing, transaction fees and/or other arrangements;

 

●	future sources of revenue, ongoing relationships with current and future business partners, distributors, suppliers, customers, end-user customers and resellers;

 

●	our intention to generate additional recurring revenues, licensing and transaction fees;

 

●	future costs and expenses and adequacy of capital resources;

 

●	our intention to continue to expand our market presence via strategic partnerships around the globe;

 

●	our expectations that revenues from our business will grow in the next years, and the expected reasons for that growth;

 

●	our expectations regarding our short-term and long-term capital requirements;

 

●	our intention to continue to invest in research and development;

 

●	our outlook for the coming months; and

 

●	information with respect to any other plans and strategies for our business.

 

The factors discussed herein, including those risk factors expressed from time to time in our press releases or filings with the Securities and Exchange Commission, or the SEC, could cause actual results and developments to be materially different from those expressed in or implied by such statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak and are made only as of the date of this filing.

 

 

Our business and operations are subject to substantial risks, which increase the uncertainty inherent in the forward-looking statements contained in this Quarterly Report. Except as required by law, we undertake no obligation to release publicly the result of any revision to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Further information on potential factors that could affect our business is described among others under the heading “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2016 filed with SEC. Readers are also urged to carefully review and consider the various disclosures we have made in that report.

 

As used in this Quarterly Report, the terms “we”, “us”, “our”, “the Company”, and “OTI” mean On Track Innovations Ltd. and our subsidiaries and affiliates, unless otherwise indicated or as otherwise required by the context.

 

All figures in this Quarterly Report are stated in United States dollars, unless otherwise specified in.

 

Overview

 

We are a pioneer and leading developer of cutting-edge secure cashless payment solutions, providing global enterprises with innovative technology for over two decades. We currently operate in two main segments: (1) Retail and Mass Transit Ticketing; and (2) Petroleum (following the divesture of our parking business as specified below). In addition to our two reportable segments, certain products for the medical industry and other secure smart card solutions are classified under “Other” in segment analyses appearing in this Quarterly Report.

 

Our field-proven suite of cashless payment solutions is based on an extensive IP portfolio, including registered patents and patent applications worldwide. Since our incorporation in 1990, we have built an international reputation for reliability and innovation, deploying a large number of solutions for the unattended retail, mass transit, banking, medical and petroleum industries. 

 

We operate a global network of regional offices, distributors and partners to support various solutions deployed across the globe.

 

We focus our efforts on our core business of providing innovative cashless payment solutions based among other things on our contactless NFC technology. To this end, and in line with our efforts to focus on our core business, in September 2016 we completed the sale of the operations, including our employees, as well as intellectual property directly related to our parking business. We have increased our efforts to further develop existing and new products and solutions, including among others by the introduction of our new products and solutions for the unattended payment market and Internet of Payment Things, or IoPT, technology. We have also increased our sales and marketing activities and resources.

 

This discussion and analysis should be read in conjunction with our interim condensed consolidated financial statements and notes thereto contained in “Item 1.  Financial Statements” of this Quarterly Report.

 

Results of Operations

 

Discontinued operations. In September 2016 we completed the sale of certain assets and IP related to our parking business. In December 2013, we completed the sale of certain assets, certain subsidiaries and IP directly related to our SmartID division. The results from such operations and the cash flows for the reporting periods are presented in the statements of operations and in the statements of cash flows, respectively, as discontinued operations separately from continuing operations. All the data in this Quarterly Report that are derived from our financial statements, unless otherwise specified, exclude the results of those discontinued operations.

 

 

Three months ended June 30, 2017, compared to the three months ended June 30, 2016

 

Sources of Revenue

 

We have historically derived a substantial majority of our revenues from the sale of our products, including both complete systems and original equipment manufacturer components and also, less significantly, from engineering services, customer services and technical support. In addition, we generate revenues from licensing and transaction fees. During the three months ended June 30, 2017 and June 30, 2016, the revenues that we derived from sales and licensing and transaction fees were as follows (in thousands):

 

		Three months ended June 30,
		2017				2016
Sales		$	5,646			$	3,584
Licensing and transaction fees		$	1,300			$	1,226
Total revenues		$	6,946			$	4,810

 

Sales. Sales increased by $2.1 million, or 58%, in the three months ended June 30, 2017, compared to the three months ended June 30, 2016. The increase is mainly attributed to an increase in Retail and Mass Transit Ticketing segment sales in the Japanese market and an increase in Petroleum segment sales in Africa.

 

Licensing and transaction fees. Licensing and transaction fees include single and periodic payments for distribution rights for our products as well as licensing our IP rights to third parties. Transaction fees are paid by customers based on the volume of transactions processed by systems that contain our products. Our licensing and transaction fees in the three months ended June 30, 2017, compared to the three months ended June 30, 2016, increased by $74,000, or 6%. The increase is mainly attributed to an increase in licensing and transaction fees related to our otiMetry solution in Europe and to an increase in mass transit transaction fees in Poland. 

 

We have historically derived revenues from different geographical areas.  The following table sets forth our revenues, by dollar amount (in thousands) and as a percentage of quarterly revenues in different geographical areas, in the three months ended June 30, 2017 and June 30, 2016:

 

Three months ended June 30,		Africa								Europe								APAC								Americas
2017		$	1,567				22	%		$	1,706				25	%		$	1,399				20	%		$	2,274				33	%
2016		$	1,131				24	%		$	1,463				30	%		$	133				3	%		$	2,083				43	%

 

Our revenues from sales in Africa increased by $436,000, or 39%, in the three months ended June 30, 2017, compared to the three months ended June 30, 2016, mainly due to an increase in sales of petroleum products, partially offset by a decrease of our MediSmart products.

 

Our revenues from sales in Europe increased by $243,000, or 17%, in the three months ended June 30, 2017, compared to the three months ended June 30, 2016, mainly due to an increase in Retail and Mass Transit Ticketing segment sales.

 

Our revenues from sales in the Asia-Pacific region, or APAC, increased by $1.3 million, or 952%, in the three months ended June 30, 2017, compared to the three months ended June 30, 2016, mainly due to our first deliveries to the Japanese market.

 

Our revenues from sales in Americas increased by $191,000, or 9%, in the three months ended June 30, 2017, compared to the three months ended June 30, 2016, mainly due to an increase in sales of Petroleum products to the South American market partially offset by a decrease in sales of readers to the U.S. market.

 

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

 

 

The following table sets forth our revenues by dollar amount (in thousands) and as a percentage of revenues by segments, during the three months ended June 30, 2017 and June 30, 2016:

 

Three months ended June 30,		Retail and Mass Transit Ticketing								Petroleum								Other
2017		$	4,682				67	%		$	1,910				28	%		$	354				5	%
2016		$	3,239				67	%		$	831				17	%		$	740				16	%

 

Our revenues from Retail and Mass Transit Ticketing in the three months ended June 30, 2017 increased by $1.4 million, or 45%, compared to the three months ended June 30, 2016, mainly due to an increase in sales in the Japanese market partially offset by a decrease in sales of readers in the United States.

 

Our revenues in the three months ended June 30, 2017 from Petroleum increased by $1.1 million, or 130%, compared to the three months ended June 30, 2016, mainly due to an increase in Petroleum products in Africa and South America.

 

Our revenues in the three months ended June 30, 2017, from our other segment decreased by $386,000, or 52%, compared to the three months ended June 30, 2016, mainly due to a decrease in sales of MediSmart products in East Africa.

 

Cost of Revenues and Gross Margin

 

Our cost of revenues, presented by gross profit and gross margin percentage, in the three months ended June 30, 2017 and June 30, 2016, were as follows (dollar amounts in thousands):

 

		Three months ended June 30,
		2017				2016
Cost of sales		$	3,476			$	2,360
Gross profit		$	3,470			$	2,450
Gross margin percentage			50	%			51	%

 

Cost of sales. Cost of sales consists primarily of materials, as well as salaries, fees to subcontractors and related costs of our technical staff that assemble our products. The increase of $ 1.1 million, or 47%, in the three months ended June 30, 2017, compared to the three months ended June 30, 2016, resulted primarily from an increase in our revenues.

 

Gross margin. The decrease in gross margin in the three months ended June 30, 2017, compared to the three months ended June 30, 2016, is mainly attributed to a change in our revenue mix.

 

 

Operating expenses

 

Our operating expenses in the three months ended June 30, 2017 and June 30, 2016, were as follows (in thousands):

 

Operating expenses		Three months ended June 30,
		2017				2016
Research and development		$	889			$	747
Selling and marketing		$	1,492			$	1,321
General and administrative		$	939			$	902
Total operating expenses		$	3,320			$	2,970

 

Research and development.  Our research and development expenses consist primarily of the salaries and related expenses of our research and development staff, as well as subcontracting expenses. The increase of $142,000, or 19%, in the three months ended June 30, 2017, compared to the three months ended June 30, 2016, is primarily attributed to an increase in the number of research and development employees and to a lesser extent to an increase in subcontractor expenses.

 

Selling and marketing. Our selling and marketing expenses consist primarily of salaries and substantially all of the expenses of our sales and marketing subsidiaries and offices in the United States, South Africa and Europe, as well as expenses related to advertising, professional expenses and participation in exhibitions and tradeshows. The increase of $171,000, or 13%, in the three months ended June 30, 2017, compared to the three months ended June 30, 2016, is primarily attributed to an increase in marketing and advertising expenses and to a lesser extent to an increase in employment expenses of selling and marketing employees.

 

General and administrative.  Our general and administrative expenses consist primarily of salaries and related expenses of our executive management and financial and administrative staff. These expenses also include costs of our professional advisors (such as legal and accounting), office expenses, insurance and provision for doubtful accounts. Our general and administrative expenses, in the three months ended June 30, 2017, compared to the three months ended June 30, 2016, remained consistent.

 

Financing expenses, net

 

Our financing expenses, net, in the three months ended June 30, 2017 and June 30, 2016 were as follows (in thousands):

 

		Three months ended June 30,
		2017				2016
Financing expenses, net		$	(39	)		$	(62	)

 

Financing expenses consist primarily of interest payable on bank loans, bank commissions and foreign exchange losses. Financing income consists primarily of foreign exchange gains and interest earned on investments in short-term deposits. The decrease in financing expenses, net in the three months ended June 30, 2017, compared to the three months ended June 30, 2016, of $23,000, or 37%, is mainly attributed to lower interest payable on bank loans.

 

Net income (loss) from continuing operations

 

Our net income (loss) from continuing operations in the three months ended June 30, 2017 and June 30, 2016, was as follows (in thousands):

 

		Three months ended June 30,
		2017				2016
Net income (loss) from continuing operations		$	86			$	(598	)

 

The increase of $684,000, in the three months ended June 30, 2017, compared to the three months ended June 30, 2016, is primarily due an increase in our sales and an increase in our gross profit, partially offset by an increase in our operating expenses, as described above.

 

 

Net profit from discontinued operations

 

Our net profit from discontinued operations in the three months ended June 30, 2017 and June 30, 2016, was as follows (in thousands):

 

		Three months ended June 30,
		2017				2016
Net profit from discontinued operations		$	7			$	1,947

 

In September 2016, we completed the sale of certain assets and IP related to our parking business. In December 2013, we completed the sale of certain assets, certain subsidiaries and IP directly related to our SmartID division.

 

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

 

The decrease in net profit from discontinued operations of $1.9 million in the three months ended June 30, 2017, compared to the three months ended June 30, 2016, is mainly attributed to the $2.1 million settlement fee paid to us in May 2016, in connection with a litigation with SuperCom Ltd. relating to the sale of our SmartID division.

 

Net income

 

Our net income in the three months ended June 30, 2017 and June 30, 2016, was as follows (in thousands):

 

		Three months ended June 30,
		2017				2016
Net income		$	93			$	1,349

 

The decrease in net income of $1.3 million, in the three months ended June 30, 2017, compared to the three months ended June 30, 2016, is primarily due to a decrease in net profit from discontinued operations partially offset by an increase in our gross profit.

 

 

Six months ended June 30, 2017, compared to the six months ended June 30, 2016

 

Sources of Revenue

 

During the six months ended June 30, 2017 and June 30, 2016, the revenues that we derived from sales and licensing and transaction fees were as follows (in thousands):

 

		Six months ended June 30,
		2017				2016
Sales		$	8,426			$	6,946
Licensing and transaction fees		$	2,540			$	2,436
Total revenues		$	10,966			$	9,382

Sales. Sales increased by $1.5 million, or 21%, in the six months ended June 30, 2017, compared to the six months ended June 30, 2016. The increase is mainly attributed to an increase in Retail and Mass Transit Ticketing segment sales in the Japanese market, an increase in Petroleum segment sales in Africa and an increase in sales of readers and our otiMetry solution in Europe partially offset by a decrease in sales of readers to the U.S. market.

 

Licensing and transaction fees. Our licensing and transaction fees in the six months ended June 30, 2017, compared to the six months ended June 30, 2016, increased by $104,000, or 4%. The increase is mainly attributed to licensing and transaction fees related to our otiMetry solution in Europe and to an increase in mass transit transaction fees in Poland. 

 

The following table sets forth our revenues, by dollar amount (in thousands) and as a percentage of revenues in different geographical areas, in the six months ended June 30, 2017 and June 30, 2016:

 

Six months ended June 30,		Africa								Europe								APAC								Americas
2017		$	2,353				21	%		$	3,934				36	%		$	1,734				16	%		$	2,945				27	%
2016		$	1,967				21	%		$	2,930				31	%		$	233				3	%		$	4,252				45	%

 

Our revenues from sales in Africa increased by $386,000, or 20%, in the six months ended June 30, 2017, compared to the six months ended June 30, 2016, mainly due to an increase in sales of our petroleum products, partially offset by a decrease in sales of MediSmart products.

 

Our revenues from sales in Europe increased by $1 million, or 34%, in the six months ended June 30, 2017, compared to the six months ended June 30, 2016, mainly due to an increase in our otiMetry solution in the European market.

 

Our revenues from sales in APAC increased by $1.5 million, or 644%, in the six months ended June 30, 2017, compared to the six months ended June 30, 2016, mainly due to an increase in sales in the Japanese market.

 

Our revenues from sales in Americas decreased by $1.3 million, or 31%, in the six months ended June 30, 2017, compared to the six months ended June 30, 2016, mainly due to a decrease in sales of readers to the U.S. market.

 

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

 

The following table sets forth our revenues by dollar amount (in thousands) and as a percentage of revenues by segments, during the six months ended June 30, 2017 and June 30, 2016:

 

Six months ended June 30,		Retail and Mass Transit Ticketing								Petroleum								Other
2017		$	7,423				68	%		$	2,728				25	%		$	815				7	%
2016		$	6,138				65	%		$	1,940				21	%		$	1,304				14	%

 

Our revenues from Retail and Mass Transit Ticketing in the six months ended June 30, 2017 increased by $1.3 million, or 21%, compared to the six months ended June 30, 2016, mainly due to an increase in sales in the Japanese market and an increase in readers and otiMetry solution sales in the European market partially offset by a decrease in sales of readers in the United States.

 

Our revenues in the six months ended June 30, 2017 from Petroleum increased by $788,000, or 41%, compared to the six months ended June 30, 2016, mainly due to an increase in Petroleum products in Africa.

 

Our revenues in the six months ended June 30, 2017, from our Other segment decreased by $489,000, or 38%, compared to the six months ended June 30, 2016, mainly due to a decrease in sales of MediSmart products in East Africa.

 

 

Cost of Revenues and Gross Margin

 

Our cost of revenues, presented by gross profit and gross margin percentage, in the six months ended June 30, 2017 and June 30, 2016, were as follows (dollar amounts in thousands):

 

		Six months ended June 30,
		2017				2016
Cost of sales		$	5,276			$	4,609
Gross profit		$	5,690			$	4,773
Gross margin percentage			52	%			51	%

 

Cost of sales. The increase of $667,000, or 14%, in the six months ended June 30, 2017, compared to the six months ended June 30, 2016, resulted primarily from an increase in our revenues.

 

Gross margin. The increase in gross margin in the six months ended June 30, 2017, compared to the six months ended June 30, 2016, is mainly attributed to a favorable change in our revenue mix.

 

Operating expenses

 

Our operating expenses in the six months ended June 30, 2017 and June 30, 2016, were as follows (in thousands):

 

Operating expenses		Six months ended June 30,
		2017				2016
Research and development		$	1,591			$	1,468
Selling and marketing		$	2,834			$	2,674
General and administrative		$	1,795			$	1,826
Total operating expenses		$	6,220			$	5,968

 

Research and development. The increase of $123,000, or 8%, in the six months ended June 30, 2017, compared to the six months ended June 30, 2016, is primarily attributed to an increase in the number of research and development employees and to an increase in subcontractor expenses.

 

Selling and marketing. The increase of $160,000, or 6%, in the six months ended June 30, 2017, compared to the six months ended June 30, 2016, is primarily attributed to an increase in employment expenses of selling and marketing employees and to an increase in marketing and advertising expenses.

 

General and administrative. Our general and administrative expenses, in the six months ended June 30, 2017, compared to the six months ended June 30, 2016, remained consistent.

 

 

Financing expenses, net

 

Our financing expenses, net, in the six months ended June 30, 2017 and June 30, 2016, were as follows (in thousands):

 

		Six months ended June 30,
		2017				2016
Financing expenses, net		$	(110	)		$	(155	)

 

The decrease of financing income in the six months ended June 30, 2017, compared to the six months ended June 30, 2016, of $45,000, or 29%, is mainly due to a decrease in financing expense related to interest payable on bank loans.

 

Net loss from continuing operations

 

Our net loss from continuing operations in the six months ended June 30, 2017 and June 30, 2016, was as follows (in thousands):

 

		Six months ended June 30,
		2017				2016
Net loss from continuing operations		$	(696	)		$	(1,382	)

 

The decrease of $686,000, or 50%, in the six months ended June 30, 2017, compared to the six months ended June 30, 2016, is primarily due an increase in our sales and an increase in our gross profit partially offset by an increase in our operating expenses.

 

Net profit (loss) from discontinued operations

 

Our net profit (loss) from discontinued operations in the six months ended June 30, 2017 and June 30, 2016, was as follows (in thousands):

 

		Six months ended June 30,
		2017				2016
Net profit (loss) from discontinued operations		$	(76	)		$	1,803

 

The decrease in net profit (loss) from discontinued operations of $1.9 million in the six months ended June 30, 2017, compared to the six months ended June 30, 2016, is mainly attributed to the $2.1 million settlement fee paid to us in May 2016, in connection with a litigation with SuperCom Ltd. relating to the sale of our SmartID division.

 

Net income (loss)

 

Our net income (loss) in the six months ended June 30, 2017 and June 30, 2016, was as follows (in thousands):

 

		Six months ended June 30,
		2017				2016
Net income (loss)		$	(772	)		$	421

 

The decrease in net income of $1.2 million, in the six months ended June 30, 2017, compared to the six months ended June 30, 2016, is primarily due to a decrease in net profit from discontinued operations partially offset by a decrease in net loss from continuing operations as described above.

 

 

Liquidity and Capital Resources

 

Our principal sources of liquidity since our inception have been sales of equity securities, borrowings from banks, cash from the exercise of options and warrants and proceeds from divestitures of parts of our businesses. We had cash, cash equivalents and short-term investments representing bank deposits of $9.3 million as of June 30, 2017 (of which $1.5 million had then been pledged as a security in respect of performance guarantees granted to third parties and guarantees to secure customer advances, loans and credit lines received from a bank) and $11.5 million as of December 31, 2016 (of which $1.5 million had then been pledged as a security in respect of performance guarantees granted to third parties, loans and credit lines received from a bank). We believe that we have sufficient capital resources to fund our operations in the next 12 months.  We adhere to an investment policy which is intended to enable the Company to avoid being classified as a “passive foreign investment company,” or PFIC, under U.S. law. That said, we cannot provide complete assurance that PFIC status will be avoided in the future. In addition, our investment policy requires investment in high-quality investment-grade securities. As of June 30, 2017, our bank loans are denominated in the following currencies: Polish Zloty ($964,000, with maturity dates ranging from 2017 through 2019) and South African Rand ($632,000, with maturity dates ranging from 2017 through 2023). As of June 30, 2017, these loans bear interest at rates ranging from 3.2%-10.5% per annum.

 

Our composition of long-term loans as of June 30, 2017, was as follows (in thousands):

 

		June 30, 2017
Long-term loans		$	1,596
Less - current maturities			555
		$	1,041

 

Our composition of short-term loans, bank credit and current maturities of long-term loans as of June 30, 2017 was as follows (in thousands):

 

		June 30, 2017
		Interest rate
In U.S. dollars			5.28	%		$	2,262
In Polish Zloty			3.63	%			1,074
In NIS			4.35	%			772
							4,108
Current maturities of long-term loans							555
						$	4,663

 

Our and certain of our subsidiaries’ manufacturing facilities and certain equipment have been pledged as security in respect of a loan received from a bank. Our short term deposits in the amount of $1.5 million have been pledged as security in respect of guarantees granted to third parties, loans and credit lines received from a bank. Such deposits cannot be pledged to others or withdrawn without the consent of the bank.

 

As of June 30, 2017, we granted guarantees to third parties including performance guarantees and guarantees to secure customer advances in the sum of $347,000. The expiration dates of the guarantees range from October 2017 to June 2019.

 

Operating activities related to continuing operations

 

For the six months ended June 30, 2017, net cash used in continuing operating activities was $2.3 million primarily due to a $1.2 million increase in trade receivables, an $855,000 decrease in other current liabilities, a $696,000 net loss from continuing operations, a $396,000 decrease in trade payables, a $47,000 increase in inventory, a $47,000 increase in accrued interest and a $7,000 gain on sale of fixed assets, partially offset by $583,000 of depreciation, a $174,000 expense due to stock based compensation issued to employees, a $90,000 decrease in other receivables and prepaid expenses, a $74,000 increase in accrued severance pay and a $21,000 increase in deferred tax liability.

 

 

For the six months ended June 30, 2016, net cash used in continuing operating activities was $1.2 million, primarily due to a $1.4 million net loss from continuing operations, a $1.1 million increase in trade receivables, a $453,000 decrease in other current liabilities, and a $151,000 decrease in accrued severance pay, partially offset by a $617,000 of depreciation, a $590,000 decrease in inventory, a $290,000 increase in trade payables, a $215,000 decrease in other receivables and prepaid expenses, a $105,000 expense due to stock based compensation issued to employees, a $55,000 decrease in accrued interest and a $32,000 increase in deferred tax liability.

 

Operating activities related to discontinued operations

 

For the six months ended June 30, 2017, net cash used in discontinued operating activities was $71,000, related to our previous parking business and SmartID division.

 

For the six months ended June 30, 2016, net cash used in discontinued operating activities was $214,000, related to our previous parking business and SmartID division.

 

Investing and financing activities related to continuing operations

 

For the six months ended June 30, 2017, net cash provided by continuing investing activities was $2.3 million, mainly due to a $2.5 million change in short-term investments, net, $44,000 in proceeds from restricted deposit for employee benefits and $12,000 in proceeds from the sale of fixed assets, partially offset by a $157,000 investment in capitalized product costs and $98,000 of purchases of property and equipment.

 

For the six months ended June 30, 2016, net cash used in continuing investing activities was $725,000, mainly due to an $884,000 change in short-term investments, net, $139,000 of purchases of property and equipment and a $98,000 investment in capitalized product costs, partially offset by $396,000 of advance payment from sale of property.

 

For the six months ended June 30, 2017, net cash used in continuing financing activities was $146,000, mainly due to a $374,000 repayment of long-term bank loans, partially offset by a $213,000 increase in short-term bank credit, net and $15,000 of proceeds from exercises of options and warrants.

 

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

 

 Investing and financing activities related to discontinued operations

 

We had no cash flows provided by or used in discontinued investing activities in the six months ended June 30, 2017.

 

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

 

We had no cash flows provided by or used in discontinued financing activities in the six months ended June 30, 2017 and June 30, 2016.

 

 

Off Balance Sheet Arrangements

 

We have no off balance sheet arrangements.

 

Item 4.  Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures - We maintain a system of disclosure controls and procedures that are designed for the purposes of ensuring that information required to be disclosed in our SEC reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer, or CEO, and our Chief Financial Officer, or CFO, as appropriate to allow timely decisions regarding required disclosures.

 

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our CEO and our CFO, of the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended.  Based on that evaluation, our CEO and CFO concluded that our disclosure controls and procedures are effective.

 

Changes in Internal Control Over Financial Reporting - There has been no change in our internal control over financial reporting during the second quarter of fiscal 2017 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

As previously reported in our Annual Report on Form 10-K filed with the SEC on March 28, 2017, on March 1, 2017, USA Technologies Inc., or USAT, filed a claim against us and our U.S. subsidiary, OTI America Inc., or OTI America, in the U.S. District Court, Eastern District of Pennsylvania. The claim asserts, among other things, that products sold by us to USAT’s manufacturing subcontractor, Masterwork Electronics, Inc., or Masterwork, fail to conform to promised specifications in that they do not include Apple Value Added Services, or VAS, an add-on feature to Apple Pay which was then not yet offered on our products. USAT seeks payment of $4,912,600 plus interest and costs, comprised of $728,800 to cover payment for alternative products, and $4,183,800 to cover costs of replacing the allegedly non-conforming products already installed. We deny the allegations asserted by USAT and intend to defend the claim vigorously. OTI America submitted its answer to USAT’s complaint on April 24, 2017. We submitted our answer to USAT’s complaint on May 8, 2017. Discovery in this proceeding is currently underway. A pre-trial conference for this matter is scheduled for August 2, 2018 with trial dates to be set thereafter Based on the advice of counsel, we currently believe that neither OTI America nor we have any obligations to USAT in connection with USAT’s claims specified above.

 

As previously reported in our Annual Report on Form 10-K filed with the SEC on March 28, 2017, on March 3, 2017, we filed a claim against Masterwork in the U.S. District Court for the Northern District of California. We seek payment of $2,518,000 plus interest and costs as a result of Masterwork’s refusal to perform its obligations in connection with a purchase order supplied by Masterwork to us, based on Masterwork’s allegations that its customer, USAT, had apparently claimed that the products do not include the VAS feature requested by USAT, though such feature was then not offered by us and was not specified in the purchase order. The products subject to USAT’s litigation mentioned above include the products subject to the purchase order referred to in our claim against Masterwork. Masterwork submitted its answer to our complaint on April 20, 2017. On May 26, 2017, we amended our complaint to add USAT as a defendant, asserting claims against USAT for tortious interference with contract. On June 3, 2017, Masterwork moved to transfer the California matter to the U.S. District Court, Eastern District of Pennsylvania so that it be consolidated with the above-described USAT litigation. Masterwork’s request was granted on July 20, 2017, resulting in the transfer of this matter to the Eastern District of Pennsylvania where it is expected to be consolidated with the USAT litigation described above. Based on the advice of counsel, we currently believe that we have a meritorious claim against Masterwork and USAT.

 

On October 3, 2013, a financial claim was filed against us and our then-subsidiary, Parx France (referred to in this paragraph, collectively, as the Defendants), in the Commercial Court of Paris, France. The sum of the claim is €1.5 million (approximately $1.7 million), 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. We filed an initial memorandum of defense rejecting all the plaintiff’s allegations and claims. A hearing in this matter is scheduled for September 19, 2017. Based on the advice of counsel, we currently believe that we have no material obligations to the plaintiff.

 

 

Item 6. Exhibits.

 

3.1	Amended and Restated Articles of Incorporation (incorporated by reference to the Company’s Report on Form 6-K filed with the SEC on October 31, 2013).
3.2	Memorandum of Association, dated February 14, 1990 (incorporated by reference to the Company’s Registration Statement on Form F-1, filed with the SEC on June 14, 2002).
31.1*	Rule 13a-14(a) Certification of Chief Executive Officer.
31.2*	Rule 13a-14(a) Certification of Chief Financial Officer.
32.1**	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350.
32.2**	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350.
101 *	The following materials from our Quarterly Report on Form 10-Q for the quarter ended June 30, 2017 formatted in XBRL (eXtensible Business Reporting Language): (i) the Interim Condensed Consolidated Balance Sheets, (ii) the Interim Condensed Consolidated Statements of Operations, (iii) the Interim Condensed Consolidated Statements of Comprehensive Income (Loss), (iv) the Interim Condensed Statements of Changes in Equity, (v) the Interim Condensed Consolidated Statements of Cash Flows, and (vi) the Notes to Interim Condensed Consolidated Financial Statements, tagged as blocks of text and in detail.

 

* Filed herewith.

 

** Furnished herewith.

 

 

SIGNATURES

 

In accordance with the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

ON TRACK INNOVATIONS LTD.
By:	/s/ Shlomi Cohen
	Shlomi Cohen, Chief Executive Officer
	(Principal Executive Officer)
Dated: August 9, 2017
By:	/s/ Yishay Curelaru
	Yishay Curelaru, Chief Financial Officer
	(Principal Financial and Accounting Officer)
Dated: August 9, 2017

 

 

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