ON TRACK INNOVATIONS LTD. This discussion and analysis should be read in conjunction with our consolidated financial statements and notes thereto contained in "Item 8. Financial Statements and Supplementary Data" of this Annual Report.
Overview
We are a leading developer of contactless payment solutions, 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, ATM, Mass Transit Ticketing Validation, and fuel payments.
We operate through regional offices, supporting clients and payment industry partners with its unique contactless payment solutions.
OnApril 21, 2021 , we sold our Polish subsidiary,ASEC S.A. , or ASEC, including our Mass Transit Ticketing activity inPoland . The consideration for the sale of ASEC was equal to$3,000,000 , of which approximately$2,100,000 was used to repay Polish bank loans, and which was reduced by an agreed amount of approximately$300,000 due to working capital adjustments. Following this sale of ASEC, we now operate in two segments (1) Retail, and (2) Petroleum. OnJanuary 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 determined that we are insolvent from a cash flow perspective. OnJanuary 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. 22 OnJanuary 27, 2022 , we entered into a definitive agreement and debenture relating to the Nayax Loan. OnMarch 17, 2022 , we entered into an Agreement and Plan of Merger, or the Merger Agreement, with Nayax andOTI 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, in exchange for$4,500,000 in cash. We were incorporated under the laws of theState of Israel onFebruary 15, 1990 , under the name ofDe-Bug Innovations Ltd. , with unlimited duration. Our name was changed toOn Track Innovations Ltd. onJuly 8, 1991 . We are registered with the Israeli Registrar of Companies, under registration number 52-004286-2 and our Ordinary Shares are currently quoted on the OTCQX® market, or OTCQX, under
the symbol OTIVF.
Year ended
Sources of Revenue
We have historically derived a substantial majority of our revenues from the
sale of our products, including both complete systems and original equipment
manufacturer components. In addition, we generate revenues from licensing and
transaction fees, and also, less significantly, from engineering services,
customer services, and technical support. During the past two years, the
revenues that we have derived from sales and from licensing and transaction fees
have been as follows (in thousands):
Year ended December 31,
2021 2020
Sales $ 13,278 $ 11,392
Software as a Service (SaaS) $ 1,597 $ 1,350
Total revenues $ 14,875 $ 12,742
Sales. Sales increased by $2.1 million , or 17%, in 2021 compared to 2020. The
increase in 2021 compared to 2020, is mainly attributed to an increase in Retail
sales in the Americas and Europe , partially offset by a decrease in sales of
Retail products in APAC.
SaaS. Software as a service, or 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. The increase of$247,000 in 2021, or 18%, compared to 2020, is mainly attributed to an increase in our revenues in both segments, mainly 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 annual revenues in different geographical areas, during the
past two years: Year ended December 31, Americas Europe
Africa APAC
2021 $ 7,202 49 % $ 4,335 29 % $ 1,502 10 % $ 1,836 12 %
2020 $ 4,574 36 % $ 4,233 33 % $ 1,520 12 % $ 2,415 19 %
Our revenues from sales in theAmericas increased by$2.6 million , or 57%, in 2021 compared to 2020, mainly due to an increase in Retail sales tothe United States market. Our revenues from sales inEurope increased by$102,000 , or 2%, in 2021 compared to 2020, mainly due to an increase in Retail sales. Our revenues from sales inAfrica remained consistent. Our revenues from sales in APAC decreased by$579,000 , or 24%, in 2021 compared to 2020, mainly due to
a decrease in Retail sales.
Our revenues derived from territories outside
23
Due to the conflict between
The following table sets forth our revenues, by dollar amount (in thousands) and as a percentage of annual revenues by segments, during the past two years:
Year ended December 31, Retail Petroleum
2021 $ 12,223 82 % $ 2,652 18 %
2020 $ 10,174 80 % $ 2,568 20 %
Revenues in 2021 from the Retail segment increased by$2.0 million , or 20%, compared to 2020, mainly attributed to an increase in Retail sales in APAC,the United States andEurope . Revenues in 2021 from the Petroleum segment decreased by$84,000 , or 3%, compared to 2020, mainly due to a decrease in Petroleum
sales inAfrica .
Cost of Revenues and Gross Margin
Our cost of revenues, presented by gross profit and gross margin percentage, for
each of the past two years has been as follows (dollar amounts in thousands):
Year ended December 31,
Cost of revenues 2021 2020
Cost of sales $ 10,848 $ 7,641
Gross profit $ 4,027 $ 5,101
Gross margin percentage 27 % 40 %
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 cost of sales in 2021 compared to 2020 increased by
$3.2 million , or 42%, that 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 in 2021 compared to 2020, 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.
Operating expenses
Our operating expenses for each of the past two years have been as follows (in
thousands):
Year ended December 31,
Operating expenses 2021 2020
Research and development $ 3,718 $ 3,531
Selling and marketing $ 2,893 $ 3,233
General and administrative $ 3,383 $ 3,017
Total operating expenses $ 9,994 $ 9,781
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 and depreciation of long-lived assets.
The increase of $187,000 , or 5%, in 2021 compared to 2020, is primarily
attributed to an increase in expenses relating to employees.
24
Selling and marketing. Our selling and marketing expenses consist primarily of
salaries and substantially all the expenses of our sales and marketing and
offices in
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
Financing expenses, net
Our financing expenses, net, for each of the past two years, have been as
follows (in thousands):
Year ended December 31,
2021 2020
Financial expenses deriving from a convertible short-term
loan from shareholders $ 3,748 $ 90
Other financial expenses, net $ 387 $ 280
Financing expenses, net $ 4,135 $ 370
Financing expenses consist primarily of interest payable on loans, bank
commissions, foreign exchange losses and financial expenses deriving from a
convertible short-term loan received from shareholders. Financing income
consists primarily of foreign exchange gains and interest earned on investments
in short-term deposits. The increase in financing expenses, net, of $3.7 million
in 2021 compared to 2020 is mainly attributed to transaction expenses related to
a convertible short-term loan received from shareholders, partially offset by
exchange rate differentials.
Income tax benefit, net
Our income tax benefit, net for each of the past two years, have been as follows
(in thousands):
Year ended December 31,
2021 2020
Income tax benefit, net $ 13 $ 10 The increase in our tax benefit, net, of
Net loss from continuing operations
Our net loss from continuing operations for each of the past two years has been
as follows (in thousands):
Year ended December 31,
2021 2020
Net loss from continuing operations
25
The increase of net loss from continuing operations of $5.0 million , or 200%,
in 2021 compared to 2020 is mainly due to an increase in non-cash financing
expenses relating to the loan provided by shareholders, and to a lesser degree
due to a decrease in gross profit that resulted primarily from an increase in
components costs which derives from a global components shortage caused due to
the impact of the COVID-19 pandemic, partially offset by a decrease in operating
expenses.
Net loss from discontinued operations
Our net loss from discontinued operations for each of the past two years has been as follows (in thousands):
Year ended December 31,
2021 2020
Net loss from discontinued operations
Our net loss from discontinued operations for the reporting periods are presented in the statements of operations as discontinued operations separately from continuing operations. The increase in the net loss from discontinued operations of$477,000 , or 44% in 2021, compared to 2020, is mainly due to a re-classification of an amount of$746,000 of exchange differences on translation from other comprehensive loss to net loss from discontinued operations made due to completion of the sale of ASEC, and net expenses relating to the settlement of the litigation withMerwell Inc. and SuperCom Ltd. Net loss
Our net loss for each of the past two years has been as follows (in thousands):
Year ended December 31,
2021 2020
Net loss $ (11,659 ) $ (6,133 ) The increase of$5.5 million , or 90%, in net loss in 2021 compared to 2020, is mainly due to an increase in non-cash financing expenses derived from the loan provided by shareholders, an increase in loss from discontinued operations and to a lesser degree due to a decrease in gross profit that resulted primarily from an increase in components costs derived from a global components shortage as part of the impact of the COVID-19 pandemic, partially offset by a decrease in operating expenses.
Critical Accounting Policies and Estimates
We prepare our consolidated financial statements in conformity with accounting principles generally accepted inthe United States . Accordingly, we are required to make certain estimates, judgments and assumptions that we believe are reasonable based on the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and results of operations. To fully understand and evaluate our reported financial results, we believe it is important to understand our revenue recognition policy, our policy with respect to discontinued operations and our policy with respect to contingent consideration. 26 Revenue recognition. We generate revenues from our product sales manufactured based on our technology. In addition, we generate revenues from the technology we developed through transaction fee arrangements and licensing agreements. Revenues are also generated from non-recurring engineering, customer services and technical support. Based on Accounting Standards Update, or ASU, 2014-09, Revenue from Contracts with Customer, we recognize revenue when we satisfy a performance obligation by transferring control over a product or service to
a customer. Our cost of warranty that the product will perform according to certain specifications and that we will repair or replace the product if it ceases to work properly, is insignificant and is treated according to accounting guidance for contingencies. Discontinued operations. Upon divestiture of a business, the Company classifies such business as a discontinued operation, if the divested business represents a strategic shift that has (or will have) a major effect on an entity's operations and financial results. For disposals other than by sale such as abandonment, the results of operations of business would not be recorded as a discontinued operation until the period in which the business is actually abandoned.
We have concluded that the divestiture of the SmartID division and the Mass Transit Ticketing activity qualify as discontinued operations and therefore have been presented as such.
The results of businesses that have qualified as discontinued operations have been presented as such for all reporting periods. Results of discontinued operations include all revenues and expenses directly derived from such businesses; general corporate overhead is not allocated to discontinued operations.
Any loss or gain that arose from the divestiture of a business that qualifies as discontinued operations have been included in the results of the discontinued operations.
We also present cash flows from discontinued operations separately from cash flows of continuing operations.
Assets and liabilities of discontinued operations that have not yet been actually sold are presented on the balance sheet in one line item. Assets and liabilities of such discontinued operations are not offset and are presented as such only for the current year balance sheet. Contingent consideration.Certain sale arrangements consist of contingent consideration based on the divested business future sales or profits. We record the contingent consideration portion of the arrangement when the consideration is determined to be realizable.
Liquidity and Capital Resources
Since inception, our principal sources of liquidity have been revenues, proceeds from sales of equity securities, borrowings from banks, the Israeli government 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. We had cash, cash equivalents and short-term investments representing bank deposits of$815,000 , as ofDecember 31, 2021 . As ofDecember 31, 2021 , we also have a payable balance on our short-term bank loan, that is due within the next 12 months of approximately$2.1 million and a convertible short-term loan from shareholders (including a controlling shareholder) including accrued interest, of approximately$1.7 million . OnJanuary 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 loan, were paid in full. Subsequent to the balance sheet date, we received the new convertible loan from Nayax in the amount of$5.5 million . 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. 27 The situation inPoland resulting from the COVID-19 pandemic, led to an almost complete stop to our Mass Transit Ticketing sales business, which negatively impacted our cash flow. OnApril 21, 2021 , we completed the sale of ASEC, including our Mass Transit Ticketing activity. 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 Agreement, 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 ofDecember 31, 2021 , 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 Agreement; 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, and may need to commence insolvency proceedings. As a result, there is a substantial doubt regarding our ability to continue as a going concern.
In connection with the outbreak of COVID-19, we have taken steps to protect our workforce inIsrael ,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 ofDecember 31, 2021 , our and certain of our subsidiaries' manufacturing facilities and certain equipment have been pledged as security in respect of a loan received from a bank. Our short-term deposits in the amount of$105,000 have been pledged as security in respect of guarantees granted. Such deposits cannot be pledged to others or withdrawn without the consent of the bank.
As of
For the years ended
28
Operating activities related to continuing operations
For the year endedDecember 31, 2021 , net cash used in continuing operating activities was$5.6 million primarily due to a$10.1 million net loss from operating activities, a$2.3 increase in trade receivables, a$727,000 increase in inventories, a$438,000 increase in other receivables and prepaid expenses, a$61,000 change in accrued interest and linkage differences, net,$13,000 of deferred tax benefits, net, and a$13,000 change in accrued severance pay, net, partially offset by$3.7 million of transaction expenses related to a convertible short-term loan received from shareholders, a$3.0 million increase in trade payables, a$766,000 increase in other current liabilities,$378,000 of depreciation and amortization, and a$100,000 non-cash expense due to stock-based compensation issued to employees and others. For the year endedDecember 31, 2020 , net cash used in continuing operating activities was$1.9 million primarily due to a$5.0 million net loss from operating activities, a$212,000 decrease in other current liabilities and a$36,000 of deferred tax benefits, net, partially offset by a$1.0 million increase in trade payables, a$989,000 decrease in trade receivables, a$541,000 decrease in inventories,$419,000 of depreciation and amortization, a$115,000 decrease in other receivables and prepaid expenses, a$110,000 change in accrued interest and linkage differences, net,$90,000 of transaction expenses related to convertible short-term loan received from Ivy, a$67,000 non-cash expense due to stock-based compensation issued to employees and others and a$65,000 change in accrued severance pay, net.
Investing and financing activities related to continuing operations
For the year ended
For the year endedDecember 31, 2020 , net cash provided by continuing investing activities was$1.8 million , mainly due to a$2.2 million net change in short-term investments, partially offset by$407,000 of purchases of property and equipment and intangible assets. For the year endedDecember 31, 2021 , net cash provided by continuing financing activities was$3.9 million , mainly due to$3.2 million in proceeds from the issuance of ordinary shares as part of a rights offering, net of issuance costs, a$923,000 convertible short-term loan received from our controlling shareholder, net of transaction costs, and a$18,000 long-term loan received, partially offset by a$174,000 decrease in short-term bank credit, net, and a$7,000 repayment of long-term bank loans. For the year endedDecember 31, 2020 , net cash provided by continuing financing activities was$1.7 million , mainly due to$1.4 million in proceeds from the issuance of Ordinary Shares, net of issuance costs, and a$578,000 convertible short-term loan received from our controlling shareholder, net of transaction costs, partially offset by a$215,000 decrease in short-term bank credit, net, and$7,000 repayment of long-term bank loans. We raised additional funds and increased our cash, cash equivalents and long-term investments in a gross amount of$3.3 million by closing a rights offering, or the Rights Offering, on May, 19, 2021, under which we offered our existing shareholders to purchase additional ordinary shares in consideration for a lower exercise price than the quoted share price in the active market. The Rights Offering was oversubscribed and generated$3.3 million in gross proceeds. The issuance costs derived for the Rights Offering were approximately$128,000 . As part of the Rights Offering, we issued an aggregate of 18,965,516 ordinary shares for$0.174 per share. As contemplated by the Nayax Loan Agreement, the Nayax Loan is subject to 10% interest per year, and the accumulated interest and value added tax, if any, is payable quarterly commencing onApril 1, 2022 . The Nayax Loan matures on the second anniversary of the closing of the Nayax Loan Agreement and we are not permitted to prepay it. At any time after the earlier of (i) an Event of Default (as defined under the Nayax Loan Agreement) or (ii) the completion of the Merger Agreement, and prior to the repayment of the Nayax Loan, Nayax is entitled, at its sole discretion, to convert the Nayax Loan into our ordinary shares at a price per share equal to$0.043 . OnMarch 1, 2022 , we received the U-Bank Loan in the amount of$2 million for which Nayax provided us with a full guarantee, which bears an annual interest rate of a SOFR plus 2.45%, which is being rolled over on a monthly basis (i.e., repaid and re-provided on a monthly basis).
Operating, Investing and financing activities related to discontinued operations
For the year ended
For the year endedDecember 31, 2020 , net cash used in discontinued operating activities was$2.1 million , mainly related to the Mass Transit Ticketing operation, as well as an amount of$482,000 derived from a payment to Harel, an insurance company, due to a legal proceeding. For the year endedDecember 31, 2021 , net cash provided by discontinued investing activities was$2.9 million , mainly related to$1.6 million derived from a settlement with SuperCom Ltd., including earn-out consideration, and$2.7 million consideration for the sale of ASEC, partially offset by cash and cash equivalents as held by ASEC at the closing date of its sale. 29
For the year ended
For the year endedDecember 31, 2021 , net cash used in discontinued financing activities was$380,000 , related to repayment of a short-term bank loan for the Mass Transit Ticketing operations.
For the year ended
Market Risks Market risks relating to our operations result primarily from changes in interest rates and currency fluctuations. In order to limit our exposure, we may enter, from time to time, into various non-speculative derivative transactions. Our objective is to reduce exposure and fluctuations in earnings and cash flows associated with changes in interest rates and foreign currency rates. We do not use financial instruments for trading purposes. Interest Rate Risks We are exposed to market risks resulting from changes in interest rates, primarily in connection with our loan obligations to banks. We do not currently use derivative financial instruments to limit exposure to interest rate risks. As ofDecember 31, 2021 , we had a short and long term loan obligations of$2,090,000 and$26,000 , respectively, the vast majority of which are subject to variable interest rates. The carrying values of the loans are equivalent to or approximate their fair market value as they bear interest at approximate market rates.
Impact of Inflation and Currency Fluctuations
Our functional and reporting currency is theU.S. Dollar. We generate a certain portion of our revenues, and we incur some of our expenses in other currencies. As a result, we are exposed to the risk that the rate of inflation in countries in which we are active other thanthe United States will exceed the rate of devaluation of such countries' currencies in relation to the dollar or that the timing of any such devaluation will lag behind inflation in such countries. To date, we have been affected by changes in the rate of inflation or the exchange rates of other countries' currencies compared to the dollar, and we cannot assure you that we will not be adversely affected in the future. The inflation was 2.8% in 2021 inIsrael . The annual rate of deflation inIsrael was 0.7% in 2020. The NIS revaluated against theU.S. Dollar by approximately 3.0% and 7.0% in 2021 and 2020, respectively.
Government of Israel Support Programs
Until 2005, we participated in programs offered by the IIA that supports research and development activities. From our inception through 2007, we received grants totaling approximately$7.0 million (excluding accrued interest) from the IIA, and as ofDecember 31, 2021 , we repaid approximately$6.0 million in respect of refundable projects. Under the terms of these programs, a royalty of 3%-3.5% of the sales of products must be paid to the IIA, beginning with the commencement of sales of products developed with grant funds and ending when the dollar value of the grant (including interest based on annual rate of LIBOR applicable to dollar deposits) is repaid. In 2006, we decided to cease our participation with the IIA. Royalties payable with respect to grants received under programs approved afterJanuary 1, 1999 , however, will be subject to interest on the dollar-linked value of the total grants received at an annual rate of LIBOR applicable to dollar deposits. As ofDecember 31, 2021 , we have received a total of$3.4 million from the IIA net of royalties paid to it (or accrued for). 30
Local Manufacturing Obligation
The terms of the Encouragement of Research, Development and Technological Innovation in the Industry Law, 5744-1984 (formerly known as the Law for the Encouragement of Research and Development in Industry 5744-1984), and the regulations, guidelines, rules, procedures and benefit tracks thereunder, collectively, the Innovation Law, also require that the manufacturing of products developed with government grants be performed inIsrael unless the IIA has granted special approval. Such approval is not required for the transfer of up to 10% of the manufacturing capacity in the aggregate, in which case a notice must be provided to the IIA and not objected to by the IIA within 30 days of such notice. If the IIA consents to the manufacture of the products outside ofIsrael , we may be required to pay increased royalties, ranging from 120% to 300% of the amount of the IIA grant, depending on the percentage of foreign manufacture. These restrictions continue to apply even after we have paid the full amount of royalties payable with respect of the grants. Based upon the aggregate grants received to date, we expect that we will continue to pay royalties to the IIA to the extent of our sales of our products and related services for the foreseeable future. Separate IIA consent is required to transfer to third-parties technologies developed through projects in which the government participates. These restrictions do not apply to exports fromIsrael of products developed with these technologies. Know-How Transfer Limitation
The Innovation Law restricts the ability to transfer know-how funded by the IIA outside ofIsrael . Transfer of IIA funded know-how outside ofIsrael requires prior approval of the IIA and may be subject to payments to the IIA, calculated according to formulae provided under the Innovation Law. The redemption fee is subject to a cap of six times the total amount of the IIA grants, plus interest accrued thereon (i.e. the total liability to the IIA, including accrued interest, multiplied by six). If we wish to transfer IIA funded know-how, the terms for approval will be determined according to the nature of the transaction and the consideration paid to us in connection with such transfer. Approval of transfer of IIA funded know-how to another Israeli company may be granted only if the recipient abides by the provisions of the Innovation law and related regulations, including the restrictions on the transfer of know-how and manufacturing rights outside ofIsrael . Change of Control Any non-Israeli citizen, resident or entity that, among other things, (i) becomes a holder of 5% or more of our share capital or voting rights, (ii) is entitled to appoint our directors or our chief executive officer or (iii) serves as one of our directors or as our chief executive officer (including holders of 25% or more of the voting power, equity or the right to nominate directors in such direct holder, if applicable) is required to notify the IIA and undertake to comply with the rules and regulations applicable to the grant programs of the IIA, including the restrictions on transfer described above.
Approval to manufacture products outside of
The consideration available to our shareholders in a future transaction involving the transfer outside ofIsrael of know-how developed with IIA funding (such as a merger or similar transaction) may be reduced by any amounts that we are required to pay to the IIA. 31
Further Updates Relating to the IIA Grants
We have a dispute with the IIA in the amount of approximatelyNIS 3.6 million ($1.1 million ) including accrued interest (while the current debt to the IIA as presented in our financial statements amounts to approximately$180,000 ) due to a claim of the IIA about miscalculations in the amount of royalties paid by us and the revenues on which we must pay royalties. We have not yet completed our discussions with the IIA and intend to exhaust all options in order to resolve this matter in a favorable manner. We believe that, at the current stage, it is more likely than not that a positive resolution will be applied to this dispute. Accordingly, no additional accrual has been recorded in the financial statements in respect of this matter.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
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