UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form
(Mark One)
For the quarterly period
ended
For the transition period from __________ to __________
Commission file number
| (Exact name of registrant as specified in its charter) |
| (State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: +
| Title of each class | Trading Symbol(s) | Name
of each exchange on which registered | ||
| None |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ | ☒ | 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
Indicate the number of shares outstanding of
each of the issuer’s classes of common stock, as of the latest practicable date:
ON TRACK INNOVATIONS LTD.
TABLE OF CONTENTS
| Part I - Financial Information | 1 | |
| Item 1. | Financial Statements | 1 |
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 2 |
| Item 4. | Controls and Procedures | 10 |
| Part II - Other Information | 11 | |
| Item 1. | Legal Proceedings | 11 |
| Item 6. | Exhibits | 11 |
| Signatures | 12 | |
i
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
ON TRACK INNOVATIONS LTD. AND ITS SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
As of March 31, 2022
(Unaudited)
1
On Track Innovations Ltd.
and its Subsidiaries
Interim Condensed Consolidated Financial Statements
As of March 31, 2022
(Unaudited)
On Track Innovations Ltd.
and its Subsidiaries
Interim Unaudited Condensed Consolidated Financial Statements as of March 31, 2022
Contents
F-1
On Track Innovations Ltd.
and its Subsidiaries
Interim Unaudited Condensed Consolidated Balance Sheets
US dollars in thousands except share data
| March 31 | December 31 | |||||||
| 2022 | 2021 | |||||||
| Assets | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Trade receivables (net of allowance for doubtful accounts of $ | ||||||||
| Other receivables and prepaid expenses | ||||||||
| Inventories | ||||||||
| Total current assets | ||||||||
| Non-current assets | ||||||||
| Restricted bank deposit | ||||||||
| Long term restricted deposit for employee benefits | ||||||||
| Severance pay deposits | ||||||||
| Property, plant and equipment, net | ||||||||
| Intangible assets, net | ||||||||
| Right-of-use assets due to operating leases | ||||||||
| Total non-current assets | ||||||||
| Total Assets | $ | $ | ||||||
The accompanying notes are an integral part of these interim unaudited condensed consolidated financial statements.
F-2
On Track Innovations Ltd.
and its Subsidiaries
Interim Unaudited Condensed Consolidated Balance Sheets
US dollars in thousands except share data
| March 31 | December 31 | |||||||
| 2022 | 2021 | |||||||
| Liabilities and Equity | ||||||||
| Current Liabilities | ||||||||
| Short-term bank credit and current maturities of long-term bank loans | $ | $ | ||||||
| Convertible short-term loan from shareholders, including a controlling shareholder | ||||||||
| Convertible loan from Nayax Ltd. (“Nayax”) | ||||||||
| Trade payables | ||||||||
| Other current liabilities | ||||||||
| Total current liabilities | ||||||||
| Long-Term Liabilities | ||||||||
| Long-term loans, net of current maturities | ||||||||
| Long-term liabilities due to operating leases, net of current maturities | ||||||||
| Accrued severance pay | ||||||||
| Total long-term liabilities | ||||||||
| Total Liabilities | ||||||||
| Commitments and Contingencies, see note 6 | ||||||||
| Equity | ||||||||
| Ordinary shares of NIS | ||||||||
| Additional paid-in capital | ||||||||
| Treasury shares at cost - | ( | ) | ( | ) | ||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total Equity | ( | ) | ( | ) | ||||
| Total Liabilities and Equity | $ | $ | ||||||
The accompanying notes are an integral part of these interim unaudited condensed consolidated financial statements.
F-3
On Track Innovations Ltd.
and its Subsidiaries
Interim Unaudited Condensed Consolidated Statements of Operations
US dollars in thousands except share and per share data
| Three
months ended March 31 | ||||||||
| 2022 | 2021 | |||||||
| Revenues | ||||||||
| Sales | $ | $ | ||||||
| Software as a Service (“SaaS”) | ||||||||
| Total revenues | ||||||||
| Cost of revenues | ||||||||
| Cost of sales | ||||||||
| Total cost of revenues | ||||||||
| Gross profit | ||||||||
| Operating expenses | ||||||||
| Research and development | ||||||||
| Selling and marketing | ||||||||
| General and administrative | ||||||||
| Total operating expenses | ||||||||
| Operating loss from continuing operations | ( | ) | ( | ) | ||||
| Loss from change in fair value of embedded derivative | ( | ) | ||||||
| Other financial (expenses) income, net | ( | ) | ||||||
| Financial (expenses) income, net | ( | ) | ( | ) | ||||
| Loss from continuing operations before taxes on income | ( | ) | ( | ) | ||||
| Income tax benefits, net | ||||||||
| Loss from continuing operations | ( | ) | ( | ) | ||||
| Loss from discontinued operations | ( | ) | ||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Basic and diluted net loss attributable to shareholders per ordinary share | ||||||||
| From continuing operations | $ | ( | ) | $ | ( | ) | ||
| From discontinued operations | $ | ( | ) | $ | ( | ) | ||
| $ | ( | ) | $ | ( | ) | |||
| Weighted average number of ordinary shares used in computing basic and diluted net loss per ordinary share | ||||||||
The accompanying notes are an integral part of these interim unaudited condensed consolidated financial statements.
F-4
On Track Innovations Ltd.
and its Subsidiaries
Interim Unaudited Condensed Consolidated Statements of Comprehensive Loss
US dollars in thousands
| Three months ended March 31 | ||||||||
| 2022 | 2021 | |||||||
| Total comprehensive loss: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Exchange differences on translation of foreign continuing operations | ( | ) | ||||||
| Exchange differences on translation of foreign discontinued operations | ( | ) | ||||||
| Total comprehensive loss | $ | ( | ) | $ | ( | ) | ||
The accompanying notes are an integral part of these interim unaudited condensed consolidated financial statements.
F-5
On Track Innovations Ltd.
and its Subsidiaries
Interim Unaudited Condensed Consolidated Statements of Changes in Equity
US dollars in thousands
| Accumulated | ||||||||||||||||||||||||||||
| Additional | Treasury | other | ||||||||||||||||||||||||||
| Number of | Share | paid-in | Shares | comprehensive | Accumulated | Total | ||||||||||||||||||||||
| Shares issued | capital | capital | (at cost) | Income (loss) | deficit | equity | ||||||||||||||||||||||
| Balance as of December 31, 2020 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||
| Changes during the three month period ended March 31, 2021: | ||||||||||||||||||||||||||||
| Classification of embedded derivative from liability to equity | - | |||||||||||||||||||||||||||
| Stock-based compensation | - | |||||||||||||||||||||||||||
| Foreign currency translation adjustments | - | ( | ) | ( | ) | |||||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||||||||||
| Balance as of March 31, 2021 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||
| Balance as of December 31, 2021 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||||||||||
| Changes during the three month period ended March 31, 2022: | ||||||||||||||||||||||||||||
| Stock-based compensation | - | |||||||||||||||||||||||||||
| Foreign currency translation adjustments | - | |||||||||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||||||||||
| Balance as of March 31, 2022 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||||||||||
The accompanying notes are an integral part of these interim unaudited condensed consolidated financial statements.
F-6
On Track Innovations Ltd.
and its Subsidiaries
Interim Unaudited Condensed Consolidated Statements of Cash Flows
US dollars in thousands
| Three months ended March 31 | ||||||||
| 2022 | 2021 | |||||||
| Cash flows from continuing operating activities | ||||||||
| Net loss from continuing operations | $ | ( | ) | $ | ( | ) | ||
| Adjustments required to reconcile net loss to net cash provided by continuing operating activities: | ||||||||
| Stock-based compensation related to options, restricted stock awards and shares issued to employees and others | ||||||||
| Accrued interest and linkage differences, net | ( | ) | ( | ) | ||||
| Transaction expenses related to convertible loan received | ||||||||
| Loss from change in fair value of embedded derivative | ||||||||
| Depreciation and amortization | ||||||||
| Deferred tax benefits, net | ( | ) | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Change in accrued severance pay, net | ( | ) | ||||||
| Increase (decrease) in trade receivables, net | ( | ) | ||||||
| Decrease (increase) in other receivables and prepaid expenses | ( | ) | ||||||
| Decrease (increase) in inventories | ( | ) | ||||||
| (Decrease) in trade payables | ( | ) | ( | ) | ||||
| (Decrease) increase in other current liabilities | ( | ) | ||||||
| Net cash used in continuing operating activities | ( | ) | ( | ) | ||||
| Cash flows from continuing investing activities | ||||||||
| Purchase of property and equipment and intangible assets | ( | ) | ( | ) | ||||
| Net cash used in continuing investing activities | ( | ) | ( | ) | ||||
| Cash flows from continuing financing activities | ||||||||
| Increase in short-term bank credit | ||||||||
| Repayment of short-term bank credit | ( | ) | ( | ) | ||||
| Repayment of convertible short-term loan received from shareholders, net of transaction expenses | ( | ) | ||||||
| Convertible loan received from Nayax | ||||||||
| Repayment of long-term loans | ( | ) | ( | ) | ||||
| Net cash provided by (used in) continuing financing activities | ( | ) | ||||||
| Net cash (used in) provided by discontinued operating activities | ( | ) | ||||||
| Net cash provided by discontinued investing activities | ||||||||
| Net cash provided by discontinued financing activities | ||||||||
| Total net cash (used in) provided by discontinued operations | ( | ) | ||||||
| Effect of exchange rate changes on cash and cash equivalents | ( | ) | ( | ) | ||||
| Increase in cash, cash equivalents and restricted cash | ||||||||
| Cash, cash equivalents and restricted cash - beginning of the period | ||||||||
| Cash, cash equivalents and restricted cash - end of the period | $ | $ | ||||||
The accompanying notes are an integral part of these interim unaudited condensed consolidated financial statements.
F-7
On Track Innovations Ltd.
and its Subsidiaries
Interim Unaudited Condensed Consolidated Statements of Cash Flows (cont’d)
US dollars in thousands
| Three months ended March 31 | ||||||||
| 2022 | 2021 | |||||||
| Supplementary cash flows activities: | ||||||||
| Cash paid during the period for: | ||||||||
| Interest paid | $ | $ | (*) | |||||
| Income taxes paid | $ | $ | ||||||
| Income tax refund received | $ | $ | ||||||
| (*) | Including $7 that derives from discontinued operations. |
| Supplemental disclosures of non-cash flow information | ||||||||
| Payables due to transaction expenses related to convertible short-term loan received | $ | $ | ||||||
| Payables due to purchase of property and equipment and intangible assets | $ | $ | ||||||
| Classification of embedded derivative from liability to equity | $ | $ | ||||||
The accompanying notes are an integral part of these interim unaudited condensed consolidated financial statements.
F-8
On Track Innovations Ltd.
and its Subsidiaries
Notes to the Interim Unaudited Condensed Consolidated Financial Statements
US dollars, NIS and Euro in thousands, except share and per share data
Note 1 - Organization and Basis of Presentation
| A. | Description of business |
On Track Innovations Ltd. (the “Company”) was founded in 1990, in Israel. The Company and its subsidiaries (together, the “Group”) are principally engaged in the field of design and development of cashless payment solutions.
The Company’s ordinary shares are quoted for trading on the OTCQX market (formerly listed on the Nasdaq Capital Market until October 31, 2019).
On January 10, 2022, the Company filed a petition (the “Petition”) with the Israeli county court of Nazareth, seeking protections from its creditors in accordance with the Israeli Insolvency and Economic Rehabilitation Law-2018, after the Company’s Board of Directors determined that the Company is insolvent from a cash flow perspective.
On
January 19, 2022,
On
January 27, 2022 (the “Effective Date”), the Company entered into a definitive agreement and debenture relating to the Nayax
Loan (the “Nayax Loan Agreement”). On March 17, 2022, the Company entered into an Agreement and Plan of Merger, with Nayax
and OTI Merger Sub Ltd., an |Israeli company, wholly owned by Nayax, (“Merger Sub”), pursuant to which Merger Sub will merge
with and into the Company, with the Company surviving as a direct wholly-owned subsidiary of Nayax, in exchange for $
On
May 10, 2022,
At March 31, 2022, the Company operates in two operating segments: (a) Retail, and (b) Petroleum (see Note 11).
| 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, 2021 that the Company filed with the U.S. Securities and Exchange Commission on April 13, 2022, as amended on April 15, 2022.
In the opinion of management, all adjustments considered necessary for a fair statement, consisting of normal recurring adjustments, have been included. Operating results for the three month period ended March 31, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022.
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 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.
F-9
On Track Innovations Ltd.
and its Subsidiaries
Notes to the Interim Unaudited Condensed Consolidated Financial Statements
US dollars, NIS and Euro in thousands, except share and per share data
Note 1 - Organization and Basis of Presentation (cont’d)
| C. | Liquidity and Capital Resources |
The
Company has had recurring losses and cash outflows from operating activities. It has an accumulated deficit as of March 31, 2022 of $
In
the event where the Merger, as mentioned in Note 1A, is not completed, under certain circumstances, the Company will be required to pay
Nayax a termination fee of $
F-10
On Track Innovations Ltd.
and its Subsidiaries
Notes to the Interim Unaudited Condensed Consolidated Financial Statements
US dollars, NIS and Euro in thousands, except share and per share data
Note 1 - Organization and Basis of Presentation (cont’d)
| C. | Liquidity and Capital Resources (cont’d) |
Since
inception, the Company’s principal sources of liquidity have been revenues, proceeds from sales of equity securities, 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 and cash equivalents of $
The ongoing situation in Poland resulting from the coronavirus (“COVID-19”) pandemic, led to an almost complete stop to the Company’s Mass Transit Ticketing sales business, which negatively impacted the Company’s cash flow. On April 21, 2021, the Company completed the sale of its subsidiary ASEC S.A., including its Mass Transit Ticketing activity. The results, including the revenues, 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.
In connection with the outbreak of the COVID-19 pandemic, the Company has taken steps to protect its workforce in Israel, South Africa, the United States, Poland, and elsewhere. Such steps include working from home where possible, minimizing face-to-face meetings, utilizing video conferencing as much as possible, social distancing at facilities and elimination of most international travel. The Company continues to comply with all local health directives.
The global shortage in components, which caused an increase in components prices, freight cost and longer lead-time, created a delay in fulfilling customers’ orders which adversely impacted the Company’s revenues and product gross margin, mainly in the Retail segment. As a response to this business environment, the Company encouraged its customers to provide a forecast for their demand. The Company continues to maintain a comprehensive network of world-wide suppliers in order to optimize its access to critical components. As long as the COVID-19 pandemic continues, and possibly also thereafter, the components’ lead-time may be longer than normal, and the shortage in components may continue or get worse.
It is difficult to predict with certainty what other impacts the COVID-19 pandemic may have on the Company.
F-11
On Track Innovations Ltd.
and its Subsidiaries
Notes to the Interim Unaudited Condensed Consolidated Financial Statements
US dollars, NIS and Euro in thousands, except share and per share data
Note 2 - Significant Accounting Policies
Except as described in Note 2A below, these interim unaudited condensed consolidated financial statements have been prepared according to the same accounting policies as those discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
| A. | Recently Adopted Accounting Pronouncements |
| 1. | In August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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 periods beginning after December 15, 2020. The Company adopted ASU 2020-06 in the first quarter of 2022 using the modified retrospective method. The adoption of this accounting standard did not have a material effect on the Company’s financial position, results of operations and cash flows. |
| B. | 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. |
F-12
On Track Innovations Ltd.
and its Subsidiaries
Notes to the Interim Unaudited Condensed Consolidated Financial Statements
US dollars, NIS and Euro in thousands, except share and per share data
Note 3 - Other Receivables and Prepaid Expenses
| March 31 | December 31 | |||||||
| 2022 | 2021 | |||||||
| Government institutions | $ | $ | ||||||
| Prepaid expenses | ||||||||
| Suppliers advance | ||||||||
| Other receivables | ||||||||
| $ | $ | |||||||
Note 4 - Other Current Liabilities
| March 31 | December 31 | |||||||
| 2022 | 2021 | |||||||
| Employees and related expenses | $ | $ | ||||||
| Accrued expenses | ||||||||
| Customer advances | ||||||||
| Short-term liabilities due to operating leases and current maturities | ||||||||
| Other current liabilities | ||||||||
| $ | $ | |||||||
F-13
On Track Innovations Ltd.
and its Subsidiaries
Notes to the Interim Unaudited Condensed Consolidated Financial Statements
US dollars, NIS and Euro in thousands, except share and per share data
Note 5 - Loans
| 1. | Convertible short-term loan from Shareholders |
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 (the “Companies Law”)). The Loan Agreement provides that the Lender will extend
a loan to the Company in the amount of up to $
The
Loan
On
January 28, 2022, the Secured Amount of $
| 2. | Convertible loan from Nayax |
On
January 27, 2022, the Company entered into a senior secured convertible loan financing agreement with Nayax in the amount of $
The
Loan is subject to a
Non-completion
of the merger would be considered an “event of default” under the Nayax Loan Agreement, which can result in Nayax’s
requirement for an immediate repayment of the Nayax Loan, or an increase of the annual interest on the Nayax Loan from
| 3. | Short-term bank loan |
On
February 28, 2022, the Company received a $
F-14
On Track Innovations Ltd.
and its Subsidiaries
Notes to the Interim Unaudited Condensed Consolidated Financial Statements
US dollars, NIS and Euro in thousands, except share and per share data
Note 6 - Commitments and Contingencies
| A. | Other contingency |
The
Company has entered into several research and development agreements, pursuant to which the Company received grants from the Israel Innovation
Authority (“IIA”), and is therefore obligated to pay royalties to the IIA at a rate of
During the three months ended March 31, 2022 and 2021, there were no royalty expenses.
| B. | Guarantees |
Nayax
has provided the Company with a full guarantee for a $
F-15
On Track Innovations Ltd.
and its Subsidiaries
Notes to the Interim Unaudited Condensed Consolidated Financial Statements
US dollars, NIS and Euro in thousands, except share and per share data
Note 7 - Revenues
Disaggregation of revenue
The following tables disaggregate the Company’s revenue by major source based on categories that depict its nature and timing as reviewed by management for the three months ended March 31, 2022 and 2021:
| Three months ended March 31 | ||||||||||||
| 2022 | ||||||||||||
| Retail | Petroleum | Total | ||||||||||
| Cashless payment products (A) | $ | $ | $ | |||||||||
| Complete cashless payment solutions (B): | ||||||||||||
| Sales of products (B1) | ||||||||||||
| SaaS and services (B2) | ||||||||||||
| Total revenues | $ | $ | $ | |||||||||
| Three months ended March 31 | ||||||||||||
| 2021 | ||||||||||||
| Retail | Petroleum | Total | ||||||||||
| Cashless payment products (A) | $ | $ | $ | |||||||||
| Complete cashless payment solutions (B): | ||||||||||||
| Sales of products (B1) | ||||||||||||
| SaaS and other services (B2) | ||||||||||||
| Total revenues | $ | $ | $ | |||||||||
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.
F-16
On Track Innovations Ltd.
and its Subsidiaries
Notes to the Interim Unaudited Condensed Consolidated Financial Statements
US dollars, NIS and Euro in thousands, except share and per share data
Note 7 - Revenues (cont’d)
Performance obligations (cont’d)
| B. | Complete cashless payment solutions – |
The complete solution includes selling of products and complementary services, as follows:
| 1. | Sales of products – |
| ● | Selling of contactless payment products (see A above) together with payment gateways and machine-to-machine controllers. |
| ● | Selling of petroleum payment solutions including site and vehicle equipment. |
For such sales, the performance obligation, transfer of control and revenue recognition occur when the products are delivered.
| 2. | SaaS and other 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 provide technical and customer services for products. For such services, the performance obligation is satisfied over time and therefore revenue recognition occurs as the services are rendered. |
The Company includes a warranty in connection with certain contracts with customers, which are not considered to be separate performance obligations. The cost to the Company of this warranty is insignificant.
Contract balances
| March 31 | December 31 | |||||||
| 2022 | 2021 | |||||||
| Trade receivables, net of allowance for doubtful accounts | $ | $ | ||||||
| Customer advances | $ | $ | ||||||
Accounts receivable are recognized when the right to consideration becomes unconditional based upon contractual billing schedules.
F-17
On Track Innovations Ltd.
and its Subsidiaries
Notes to the Interim Unaudited Condensed Consolidated Financial Statements
US dollars, NIS and Euro in thousands, except share and per share data
Note 8 - Discontinued operations
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:
| Three months ended March 31 | ||||||||
| 2022 | 2021 | |||||||
| Revenues | $ | $ | ||||||
| Expenses | ( | ) | ||||||
| Other loss, net | ( | ) | ||||||
| Net loss from discontinued operations | $ | $ | ( | ) | ||||
Note 9 - Fair Value of Financial Instruments
The Company’s financial instruments consist mainly of cash and cash equivalents, short-term interest bearing investments, accounts receivable, restricted deposits for employee benefits, accounts payable and short-term, long-term loans and convertible loan from Nayax.
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 and convertible loan from Nayax are equivalent or approximate to their fair value as they bear interest at approximate market rates.
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. Transaction expenses related to the embedded derivatives are recognized as financial expenses at the date of the initial recognition.
F-18
On Track Innovations Ltd.
and its Subsidiaries
Notes to the Interim Unaudited Condensed Consolidated Financial Statements
US dollars, NIS and Euro in thousands, except share and per share data
Note 10 - Equity
| A. | Stock option plans |
During
each of the three-month periods ended March 31, 2022 and March 31, 2021,
| Three months ended March 31 | ||||||||
| 2022 | 2021 | |||||||
| Expected dividend yield | % | |||||||
| Expected volatility (average) | % | |||||||
| Risk-free interest rate (average) | % | |||||||
| Expected life - in years | ||||||||
| 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 (including options to non-employees) and options outstanding and options exercisable as of December 31, 2021 and March 31, 2022, are summarized in the following table:
| Number of | Weighted | |||||||
| options | average exercise | |||||||
| outstanding | price per share | |||||||
| Outstanding – December 31, 2021 | $ | |||||||
| Options granted | ||||||||
| Options expired or forfeited | ( | ) | $ | |||||
| Outstanding – March 31, 2022 | $ | |||||||
| Exercisable as of: | ||||||||
| December 31, 2021 | $ | |||||||
| March 31, 2022 | $ | |||||||
F-19
On Track Innovations Ltd.
and its Subsidiaries
Notes to the Interim Unaudited Condensed Consolidated Financial Statements
US dollars, NIS and Euro in thousands, except share and per share data
Note 10 - Equity (cont’d)
| A. | Stock option plans (cont’d) |
The
weighted average fair value of options granted during the three months ended March 31, 2021 is $
The aggregate intrinsic
value of outstanding options as of each of March 31, 2022 and December 31, 2021 is $
The following table summarizes information about options outstanding and exercisable (including options to non-employees) as of March 31, 2022:
| Options outstanding | Options Exercisable | |||||||||||||||||||||||||
| Number | Weighted | Number | Weighted | |||||||||||||||||||||||
| outstanding | average | Weighted | Outstanding | average | Weighted | |||||||||||||||||||||
| as of | remaining | Average | as of | remaining | Average | |||||||||||||||||||||
| Range of | March 31, | contractual | Exercise | March 31, | contractual | Exercise | ||||||||||||||||||||
| exercise price ($) | 2022 | life (years) | Price ($) | 2022 | life (years) | Price ($) | ||||||||||||||||||||
As
of March 31, 2022, there was approximately $
| B. | Equity Incentive Plan |
On
July 19, 2021, and September 22, 2021, each of the compensation committee of the Board (the “Committee”) and the Board
approved a new incentive plan (the “Equity Incentive Plan”). In the fourth quarter of 2021, following the filing of the Equity
Incentive Plan with the Israeli Tax Authorities, the waiver of certain options and signing of appropriate grant documents by the grantees,
the Company granted
F-20
On Track Innovations Ltd.
and its Subsidiaries
Notes to the Interim Unaudited Condensed Consolidated Financial Statements
US dollars, NIS and Euro in thousands, except share and per share data
Note 10 - Equity (cont’d)
| B. | Equity Incentive Plan (cont’d) |
The Company does not plan to issue any additional securities under its 2001 Stock Option Plan. The company granted RSAs, among others, to some executive officers in exchange for their agreement to forfeit their outstanding options that were granted under the 2001 Stock Option Plan. The cancelation of the existing equity-classified award along with a concurrent grant of a replacement award, was accounted for as a modification. The modification amount resulted in an insignificant incremental fair value.
The fair value of each RSA granted to employees was calculated based on the intrinsic value on the grant date.
The Company’s RSA activity during 2022 and information as to RSAs outstanding and RSAs exercisable as of March 31, 2022 is summarized in the following table:
| Weighted | ||||||||
| Number
of | average exercise | |||||||
| RSAs outstanding | price per share | |||||||
| Outstanding – December 31, 2021 | $ | |||||||
| RSAs granted | $ | |||||||
| RSAs expired or forfeited | ( | ) | $ | |||||
| Outstanding – March 31, 2022 | $ | |||||||
| Exercisable as of: | ||||||||
| December 31, 2021 | $ | |||||||
| March 31, 2022 | $ | |||||||
F-21
On Track Innovations Ltd.
and its Subsidiaries
Notes to the Interim Unaudited Condensed Consolidated Financial Statements
US dollars, NIS and Euro in thousands, except share and per share data
Note 10 - Equity (cont’d)
| B. | Equity Incentive Plan (cont’d) |
The
weighted average grant date fair value of RSAs granted is $
The aggregate intrinsic value of outstanding options as of March 31,
2022 and December 31, 2021 is $
The following table summarizes information about RSAs outstanding and exercisable as of March 31, 2022:
RSAs outstanding | RSAs exercisable | |||||||||||||||||
| Number | Number | |||||||||||||||||
| outstanding | Weighted | Outstanding | Weighted | |||||||||||||||
| as of | Average | As of | Average | |||||||||||||||
| Range of | March 31, | Exercise | March 31, | Exercise | ||||||||||||||
| exercise price | 2022 | Price | 2022 | Price | ||||||||||||||
| $ | $ | $ | ||||||||||||||||
As
of March 31, 2022, there was $
| C. | During
the three months ended March 31, 2022, and March 31, 2021, the Company recorded stock-based compensation expenses in the amount of $ |
| D. | Stock options and warrants in the amounts of |
F-22
On Track Innovations Ltd.
and its Subsidiaries
Notes to the Interim Unaudited Condensed Consolidated Financial Statements
US dollars, NIS and Euro in thousands, except share and per share data
Note 11 - Segment Reporting
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 (2) Petroleum.
Information regarding the results of each reportable segment is included below based on the internal management reports that are reviewed by the CODM.
| Three months ended March 31, 2022 | ||||||||||||
| Retail | Petroleum | Total | ||||||||||
| Revenues | $ | $ | $ | |||||||||
| Reportable segment gross profit (*) | ||||||||||||
| Reconciliation of reportable segment | ||||||||||||
| gross profit to gross profit for the period | ||||||||||||
| Depreciation | ( | ) | ||||||||||
| Stock-based compensation | ( | ) | ||||||||||
| Gross profit | $ | |||||||||||
| Three months ended March 31, 2021 | ||||||||||||
| Retail | Petroleum | Total | ||||||||||
| Revenues | $ | $ | $ | $ | ||||||||
| Reportable segment gross profit (*) | ||||||||||||
| Reconciliation of reportable segment | ||||||||||||
| gross profit to gross profit for the period | ||||||||||||
| Depreciation | ( | ) | ||||||||||
| Stock-based compensation | ( | ) | ||||||||||
| Gross profit | $ | |||||||||||
| (*) |
Note 12 - Related party
Regarding transactions and balances with a related party, Ivy, a controlling shareholder, see Notes 5(1).
Note 13 - Subsequent events
1. On April 26, 2022, Nayax extended an additional amount of $
F-23
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:
| ● | the closing of the merger transaction we entered into with Nayax Ltd., or Nayax; |
| ● | our ability to continue as a going concern and any efforts that we may undertake to support our future operations, service our debt obligations and to further execute our business plans; |
| ● | any impact of the Corona Virus, or COVID-19, pandemic on our business and cash flow, including timing of receipt of orders and payment from our customers; |
| ● | the impact of general economic, political, demographic and business conditions worldwide, including geopolitical uncertainty and instability, such as the Russia-Ukraine conflict, on general economic conditions and on our business in the short and long terms; |
| ● | future sources of revenue, ongoing relationships with current and future business partners, distributors, suppliers, customers, end-user customers and resellers; |
| ● | future costs and expenses and adequacy of capital resources; |
| ● | our expectations regarding our short-term and long-term capital requirements and satisfaction thereof; |
| ● | interest from current and new customers and rate of orders; |
| ● | the global shortage in components and the related effects of an increase in components’ prices, freight cost and longer lead-times; |
| ● | our outlook for the coming months; and |
| ● | information with respect to other plans and strategies for our business. |
The factors discussed herein, and in those risk factors expressed below and 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.
2
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” below and in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 filed with the SEC. Readers are also urged to carefully review and consider the various disclosures we have made in that report.
As used in this Quarterly Report, the terms “we”, “us”, “our”, “the Company”, and “OTI” mean On Track Innovations Ltd. and our subsidiaries, unless otherwise indicated or as otherwise required by the context.
All figures in this Quarterly Report are stated in United States dollars, unless otherwise specified herein.
Overview
We are a 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, 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 January 10, 2022, we filed a petition, or the Petition, with the Israeli county court of Nazareth, or the Court, seeking protections from our creditors in accordance with the Israeli Insolvency and Economic Rehabilitation Law-2018, after our board of directors, or the Board, determined that we are insolvent from a cash flow perspective.
On January 19, 2022, we entered into a binding term sheet, or the Term Sheet, with Nayax. The Term Sheet provides that we and Nayax will enter into a two-step transaction relating to (i) Nayax extending to us a senior secured convertible loan, or the Nayax Loan; and (ii) the purchase by Nayax of 100% of our share capital in consideration for $4,500,000. Consequently, to the entry into the Term Sheet, and at our request, the Court dismissed the Petition.
On January 27, 2022, we entered into a definitive agreement and debenture relating to the Nayax Loan, or the Nayax Loan. On March 17, 2022, we entered into an Agreement and Plan of Merger, or the Merger Agreement, with Nayax and OTI Merger Sub Ltd., an Israeli company, wholly owned by Nayax, or Merger Sub, pursuant to which Merger Sub will merge with and into our company, with our company surviving as a direct wholly-owned subsidiary of Nayax, or the Merger, in exchange for $4,500,000 in cash, or the Merger Consideration. On May 10, 2022, the shareholders approved the Merger. The Company expects that the Merger will be completed after June 10, 2022, following and subject to the passage of the waiting periods prescribed under the Companies Law, 1999, and the fulfillment of certain closing conditions.
This discussion and analysis should be read in conjunction with our interim condensed consolidated financial statements and notes thereto contained in “Item 1. Financial Statements” of this Quarterly Report and our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 filed with the SEC.
3
Three months ended March 31, 2022, compared to the three months ended March 31, 2021
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. Furthermore, we generate revenues from licensing and transaction fees, and also less significantly, from engineering services, customer services and technical support. In addition, we have derived revenues from Software as a Service, or SaaS. During the three months ended March 31, 2022 and March 31, 2021, the revenues that we derived from those sources are presented in two separate line items, as follows (in thousands):
Three months ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Sales | $ | 2,465 | $ | 2,387 | ||||
| SaaS | $ | 428 | $ | 382 | ||||
| Total revenues | $ | 2,893 | $ | 2,769 | ||||
Sales. Sales increased by $78,000, or 3%, in the three months ended March 31, 2022, compared to the three months ended March 31, 2021. The increase is mainly attributed to an increase of Retail segment sales in the Americas and an increase in sales of Petroleum products in the Americas and Africa, partially offset by a decrease of Retail sales in Europe and APAC.
SaaS. SaaS revenues include monthly payments for a set of different software applications such as Terminal Management Systems, Payment gateway, and other software applications for the Retail segment, and a separate set of applications for fuel management systems supporting the Petroleum segment. Our SaaS revenues increased by $46,000, or 12%, in the three months ended March 31, 2022, compared to the three months ended March 31, 2021. The increase is mainly attributed to an increase in revenues in our Retail segment.
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 March 31, 2022 and March 31, 2021:
| Three months ended March 31, | Americas | Europe | Africa | APAC | ||||||||||||||||||||||||||||
| 2022 | $ | 1,940 | 67 | % | $ | 338 | 12 | % | $ | 429 | 15 | % | $ | 186 | 6 | % | ||||||||||||||||
| 2021 | $ | 873 | 32 | % | $ | 914 | 33 | % | $ | 368 | 13 | % | $ | 614 | 22 | % | ||||||||||||||||
Our revenues from sales in Americas increased by $1.1 million, or 122%, in the three months ended March 31, 2022, compared to the three months ended March 31, 2021, mainly due to an increase in sales of readers to the U.S. market and sales of Petroleum products.
Our revenues from sales in Europe decreased by $576,000, or 63%, in the three months ended March 31, 2022, compared to the three months ended March 31, 2021, mainly due to a decrease in Retail sales in the Russian market.
4
Our revenues from sales in Africa increased by $61,000, or 17%, in the three months ended March 31, 2022, compared to the three months ended March 31, 2021, mainly due to an increase in sales of Petroleum products.
Our revenues from sales in the Asia-Pacific region, or APAC, decreased by $428,000, or 70%, in the three months ended March 31, 2022, compared to the three months ended March 31, 2021, mainly due to a decrease in Retail sales.
Our revenues derived from outside the United States are primarily transacted 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.
Due to the conflict between Russia and Ukraine, and in light of sanctions imposed by certain countries on Russia, our Board guided our management to halt sales to Russian customers. As a result, our revenues will continue to be adversely impacted.
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 March 31, 2022 and March 31, 2021:
| Three months ended March 31, | Retail | Petroleum | ||||||||||||||
| 2022 | $ | 2,121 | 73 | % | $ | 772 | 27 | % | ||||||||
| 2021 | $ | 2,282 | 82 | % | $ | 487 | 18 | % | ||||||||
Our revenues from Retail in the three months ended March 31, 2022 decreased by $161,000, or 7%, compared to the three months ended March 31, 2021, mainly attributed to a decrease of sales in Europe and a decrease of sales in APAC, partially offset by an increase in sales in the Americas.
Our revenues in the three months ended March 31, 2022, from Petroleum increased by $285,000, or 59%, compared to the three months ended March 31, 2021, mainly due to an increase in sales of Petroleum products in the Americas and Africa.
Cost of Revenues and Gross Margin
Our cost of revenues, presented by gross profit and gross margin percentage, for the three months ended March 31, 2022 and March 31, 2021, were as follows (dollar amounts in thousands):
| Cost of revenues | Three months ended March 31, | |||||||
| 2022 | 2021 | |||||||
| Cost of sales | $ | 1,543 | $ | 1,366 | ||||
| Gross profit | $ | 1,350 | $ | 1,403 | ||||
| Gross margin percentage | 47 | % | 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 $177,000, or 13%, in the three months ended March 31, 2022, compared to the three months ended March 31, 2021, resulted primarily from an increase in sales and an increase in the cost of components due to a global components shortage as a result of the COVID-19 pandemic.
Gross margin. The decrease in gross margin percentage in the three months ended March 31, 2022, compared to the three months ended March 31, 2021, is mainly attributed to an increase of cost of components due to a global shortage of components as part of the impact of the COVID-19 pandemic.
5
Operating expenses
Our operating expenses for the three months ended March 31, 2022 and March 31, 2021, were as follows (in thousands):
| Operating expenses | Three months ended March 31, | |||||||
| 2022 | 2021 | |||||||
| Research and development | $ | 731 | $ | 838 | ||||
| Selling and marketing | $ | 580 | $ | 605 | ||||
| General and administrative | $ | 853 | $ | 746 | ||||
| Total operating expenses | $ | 2,164 | $ | 2,189 | ||||
Research and development. Our research and development expenses consist primarily of the salaries and related expenses of our research and development staff, as well as subcontracting expenses. The decrease of $107,000, or 13%, in the three months ended March 31, 2022, compared to the three months ended March 31, 2021, is primarily attributed to an increase in expenses relating to employees.
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 and professional expenses. Our selling and marketing, in the three months ended March 31, 2022, compared to the three months ended March 31, 2021, remained consistent.
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 and insurance. The increase of $107,000, or 14%, in the three months ended March 31, 2022, compared to the three months ended March 31, 2021, is primarily attributed to an increase in legal expenses derived mainly from the operation of the Merger with Nayax.
Financing (expenses) income, net
Our financing (expenses) income, net, for the three months ended March 31, 2022 and March 31, 2021, were as follows (in thousands):
| Three months ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Loss from change in fair value of embedded derivative | $ | - | $ | (1,974 | ) | |||
| Other financial (expenses) income, net | $ | (146 | ) | $ | 4 | |||
| Financing expenses, net | $ | (146 | ) | $ | (1,970 | ) | ||
Financing expenses, net, consist primarily of financing expense related to interest payable on bank loans, bank commissions and to a change in fair value of embedded derivative in the convertible short-term loan received from shareholders, partially offset by financing income related to interest earned on investments in short-term deposits and foreign exchange differentials. The change in total financing expenses, net, of $1.8 million in the three months ended March 31, 2022, compared to the three months ended March 31, 2021, is mainly due to a loss from change in the fair value of embedded derivative of $2.0 million in the first quarter of 2021, partially offset by financing expense related to interest payable on the Nayax Loan of $0.1 million.
6
Income tax benefit, net
| Three months ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Income tax benefit, net | $ | - | $ | 13 | ||||
The decrease in our income tax benefit, net, of $13,000, in 2022 compared to 2021 is mainly attributed to income tax benefit due to previous years as recognized by our South African subsidiary in 2021.
Net loss from continuing operations
Our net loss from continuing operations for the three months ended March 31, 2022 and March 31, 2021, was as follows (in thousands):
| Three months ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Net loss from continuing operations | $ | (960 | ) | $ | (2,743 | ) | ||
The change in our net loss from continuing operations of $1.8 million, in the three months ended March 31, 2022, compared to the three months ended March 31, 2021, is mainly due to a decrease in our financing expenses, net, due to a loss from change in fair value of embedded derivative of $2.0 million, partially offset by financing expense related to interest payable on the Nayax Loan of $0.1 million , as described above.
Net loss from discontinued operations
Our net loss from discontinued operations for the three months ended March 31, 2022 and March 31, 2021, was as follows (in thousands):
| Three months ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Net loss from discontinued operations | $ | - | $ | (418 | ) | |||
The results from the Mass Transit Ticketing activity and the SmartID activity for the reporting periods are presented in the statements of operations as discontinued operations separately from continuing operations. The decrease in the net loss from discontinued operations of $418,000, in the three months ended March 31, 2022, compared to the three months ended March 31, 2021, is mainly due to a decrease in loss from the Mass Transit Ticketing operation in the first quarter of 2021 as a result of the impact of COVID-19. We completed the sale of this operation on April 21, 2021.
Net loss
Our net loss for the three months ended March 31, 2022 and March 31, 2021, was as follows (in thousands):
| Three months ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Net loss | $ | (960 | ) | $ | (3,161 | ) | ||
The decrease in net loss of $2.2 million, in the three months ended March 31, 2022, compared to the three months ended March 31, 2021, is primarily due to a decrease in our financing expenses, net, derived from loss from change in fair value of embedded derivative in the first quarter of 2021 and a decrease in net loss from discontinued operations, as described above.
7
Liquidity and Capital Resources
Our principal sources of liquidity since our inception have been revenues, proceeds from sales of equity securities, borrowings from banks, governments and shareholders, including convertible loans, proceeds from the exercise of options and warrants as well as proceeds from the divestiture of parts of our businesses. As of March 31, 2022, we had cash, cash equivalents and short-term investments representing bank deposits of approximately $1.75 million. As of March 31, 2022, we also have a payable balance on our short-term bank loan, that is due within the next 12 months of approximately $2.0 million and a convertible short-term loan from Nayax (including accrued interest), of approximately $5.6 million. On January 10, 2022, we filed the Petition with the Court seeking protections from our creditors in accordance with the Israeli Insolvency and Economic Rehabilitation Law-2018, after our Board determined that we are insolvent from a cash flow perspective. However, following the signing of the agreement relating to the Nayax Loan, such Petition was dismissed and all amounts due under the convertible loan from shareholders (including our controlling shareholder) and the Bank Leumi loan, were paid in full. In addition, Nayax has provided us with a full guarantee for a $2.0 million short-term loan provided to us by a bank which bears an annual interest rate of SOFR plus 2.45%, which is being rolled over on a monthly basis (i.e., repaid and re-provided on a monthly basis), and additional guarantees to our suppliers and subcontractors to allow us to maintain our ongoing production and sale of our products. On April 26, 2022, Nayax extended an additional amount of $1.0 million to us, which is added to the previous $5.5 million loan and shall be subject to the provisions of the Nayax Loan.
In the event where the Merger is not completed, under certain circumstances, we will be required to pay Nayax a termination fee of $1.5 million. Furthermore, non-completion of the merger would be considered an “event of default” under the Nayax Loan, which can result in Nayax’s requirement for an immediate repayment of the Nayax Loan Amount, or an increase of the annual interest on the Nayax Loan Amount from 10% to 16% interest, at Nayax’s sole discretion. We will also be required to repay the bank loan provided with Nayax’s guarantee and would be exposed to a risk of not being able to conduct our business due to the loss of the guarantees provided by Nayax to our suppliers and subcontractors. Based on the projected cash flows and our cash balances as of March 31, 2022, we believe that without: (1) the completion of the Merger and increase of our cash by receiving additional loans from Nayax (at Nayax’s sole discretion) under the terms set under the Nayax Loan; or (2) 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 from the date of this filing, and may need to commence insolvency proceedings. As a result, there is substantial doubt regarding our ability to continue as a going concern.
In connection with the outbreak of the COVID-19 pandemic, we have taken steps to protect our workforce in Israel, the United States, Poland, South Africa and elsewhere. Such steps include working from home where possible, minimizing face-to-face meetings, utilizing video conferencing as much as possible, social distancing at facilities and elimination of most international travel. We continue to comply with all local health directives.
The global shortage in components, which caused an increase in components prices, freight cost and longer lead-time, created a delay in fulfilling customers’ orders, which impacted our revenues and product gross margin, mainly in the Retail segment. As a response to this business environment, we encouraged our customers to provide a forecast for their demand. We continue to maintain a comprehensive network of world-wide suppliers in order to optimize our access to critical components. As long as the COVID-19 pandemic continues, and possibly also thereafter, the components’ lead-time may be longer than normal and the shortage in components may continue or get worse.
It is difficult to predict with certainty what other impacts the COVID-19 pandemic may have on us.
As of March 31, 2022, our and certain of our subsidiaries’ manufacturing facilities and certain equipment have been pledged as security to Nayax in respect of a Nayax Loan.
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Operating activities related to continuing operations
For the three months ended March 31, 2022, net cash used in continuing operating activities was $2.8 million, primarily due to a $1.0 million net loss from continuing operations, a $2.4 million decrease in trade payables, a $406,000 increase in other receivables and prepaid expenses, a $269,000 decrease in other current liabilities, a $198,000 increase in inventory and a $51,000 change in accrued interest and linkage differences, partially offset by a $1.3 million decrease in trade receivables, $108,000 of transaction expenses related to the convertible short-term loan received, $83,000 of depreciation and amortization, $36,000 of expenses due to stock-based compensation issued to employees and others and a $16,000 change in accrued severance pay.
For the three months ended March 31, 2021, net cash used in continuing operating activities was $1.5 million, primarily due to a $2.7 million net loss from continuing operations, a $764,000 increase in trade receivables, a $169,000 decrease in trade payables, a $169,000 change in accrued interest and linkage differences, $13,000 of deferred tax benefits and a $13,000 change in accrued severance pay, partially offset by a $2.0 million loss from change in fair value of embedded derivative, a $152,000 increase in other current liabilities, a $110,000 decrease in inventory, $100,000 of depreciation and amortization, a $50,000 decrease in other receivables and prepaid expenses, $14,000 of expenses due to stock-based compensation issued to employees and others and $10,000 of transaction expenses related to the convertible short-term loan received from shareholders.
Operating activities related to discontinued operations
For the three months ended March 31, 2022, net cash provided by discontinued operating activities was $19,000, mainly related to legal fees.
For the three months ended March 31, 2021, net cash provided by discontinued operating activities was $3,000, mainly related to the Mass Transit Ticketing operations that were managed by ASEC.
Investing and financing activities related to continuing operations
For the three months ended March 31, 2022, net cash used in continuing investing activities was $59,000, due to $59,000 of purchases of long-lived assets.
For the three months ended March 31, 2021, net cash used in continuing investing activities was $29,000, due to $29,000 of purchases of long-lived assets.
For the three months ended March 31, 2022, net cash provided by continuing financing activities was $3.7 million, primarily due to a $5.5 million convertible short-term loan from Nayax, and $2.0 million in short term bank credit, partially offset by a $2.1 million repayment of short-term bank credit, a $1.8 million repayment of convertible short-term loan from shareholders and a $8,000 repayment of a long-term loan.
For the three months ended March 31, 2021, net cash used in continuing financing activities was $201,000, due to a $1.2 million decrease in short-term bank credit, net and a $2,000 repayment of long-term loans, partially offset by $961,000 of proceeds from convertible short-term loan received from shareholders, net of transaction expenses.
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Investing and financing activities related to discontinued operations
We had no cash flows provided by or used in discontinued investing activities in the three months ended March 31, 2022.
For the three months ended March 31, 2021, net cash provided by discontinued investing activities was $2.1 million mainly related to the proceeds from the sale of ASEC that were received prior to the closing to repay certain debt in Poland.
We had no cash flows provided by or used in discontinued financing activities in the three months ended March 31, 2022 or March 31, 2021.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures - Our management, including our Chief Executive Officer, or CEO, and Chief Financial Officer, or CFO, are responsible for establishing and maintaining our disclosure controls and procedures (within the meaning of Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended, or Exchange Act). These controls and procedures are designed to ensure that information required to be disclosed in the reports that we file under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that such information was made known to our management, including our CEO and CFO, by others within the Company, as appropriate to allow timely decisions regarding required disclosure. We evaluated these disclosure controls and procedures under the supervision of our CEO and CFO as of March 31, 2022. Based upon that evaluation, our management, including our CEO and CFO, concluded that our disclosure controls and procedures are effective as of such date.
Changes in Internal Control Over Financial Reporting - There has been no change in our internal control over financial reporting during the quarter ended March 31, 2022 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
For information with respect to legal proceedings to be disclosed under this Item, see Note 6A to the consolidated Financial Statements included under Part I Item 1 in this Quarterly Report.
Item 6. Exhibits.
| 3.1 | ||
| 3.2 | ||
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 March 31, 2022 formatted in inline XBRL (inline eXtensible Business Reporting Language): (i) the Interim Condensed Consolidated Balance Sheets, (ii) the Interim Condensed Consolidated Statements of Operations, (iii) the Interim Condensed Consolidated Statements of Comprehensive Loss, (iv) the Interim Condensed Statements of Changes in Equity, (v) the Interim Condensed Consolidated Statements of Cash Flows, and (vi) the Notes to Interim Condensed Consolidated Financial Statements, tagged as blocks of text and in detail. | |
| 104 * | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
| * | Filed herewith. |
| ** | Furnished herewith. |
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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/ Amir Eilam | |
| Amir Eilam, Chief Executive Officer | ||
| (Principal Executive Officer) | ||
| Dated: May 23, 2022 | ||
| By: | /s/ Assaf Cohen | |
| Assaf Cohen, Chief Financial Officer | ||
| (Principal Financial and Accounting Officer) | ||
| Dated: May 23, 2022 | ||
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