ON TRACK INNOVATIONS LTD Management’s Discussion and Analysis of Financial Condition and Results of Operations. (Form 10-K)

This discussion and analysis should be read in conjunction with our consolidated financial statements and accompanying notes contained in “Item 8. Financial Statements and Supplementary Data” of this Annual Report.


Overview


We are a leading developer of NFC-based contactless payment solutions for the unattended market. We’ve been a technology leader since 1990, providing systems, devices and services to operators and integrators with easy-to-implement solutions and components.

To date, we have deployed more than one million payment solutions in our targeted unattended markets: self-service kiosk, micro-markets and vending machines, entertainment and games, ATMs, transit ticket validation and fuel payments.

We operate through regional offices, supporting customers and payment industry partners with its unique contactless payment solutions.



On April 21, 2021, we sold our Polish subsidiary, ASEC S.A., or ASEC, including
our Mass Transit Ticketing activity in Poland. 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.

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 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.



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On January 27, 2022, we entered into a definitive agreement and debenture
relating to 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, in exchange for $4,500,000 in cash.



We were incorporated under the laws of the State of Israel on February 15, 1990,
under the name of De-Bug Innovations Ltd., with unlimited duration. Our name was
changed to On Track Innovations Ltd. on July 8, 1991. We are registered with the
Israeli Registrar of Companies, under registration number 52-004286-2 and our
Ordinary Shares are currently quoted on the OTCQX® market, or OTCQX, under
the
symbol OTIVF.


Year ended December 31, 2021compared to the year ended December 31, 2020


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 the Americas increased by $2.6 million, or 57%, in
2021 compared to 2020, mainly due to an increase in Retail sales to the United
States market. Our revenues from sales in Europe increased by $102,000, or 2%,
in 2021 compared to 2020, mainly due to an increase in Retail sales. Our
revenues from sales in Africa 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 from territories outside United Stateswhich are mainly received in currencies other than the WE dollar, have a variable impact on our total revenues, due to fluctuations in the exchange rates of these currencies against the WE Dollar.


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Due to the conflict between Russia and Ukraineand given the sanctions imposed by some countries on Russia, our board guided our management to stop sales to Russian customers. Therefore, our revenues will be negatively affected.

The following table shows our revenues, in dollars (thousands) and as a percentage of annual revenues by segment, over 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 and Europe. Revenues in 2021 from the Petroleum segment decreased
by $84,000, or 3%, compared to 2020, mainly due to a decrease in Petroleum
sales
in Africa.


Revenue Cost 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 decline in gross margin in 2021 compared to 2020 is mainly attributed to an increase in the cost of components due to a global shortage of components amid 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.



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Sale and marketing. Our sales and marketing expenses consist primarily of salaries and substantially all of our sales and marketing and office expenses in United States, South Africa, Europe and Israel, as well as expenses related to advertising, professional expenses and participation in exhibitions and fairs and charges for bad debts. The decrease in
$340,000or 11%, in 2021 compared to 2020, mainly due to lower employment-related expenses and the allowance for doubtful accounts.

General and administrative. Our general and administrative expenses consist primarily of the salaries and related expenses of our general management and our financial and administrative staff. These expenses also include the costs of our professional advisers (such as legal and accounting services), office costs and insurance. The raise of $366,000i.e. 12%, in 2021 compared to 2020, is mainly attributable to an increase in professional expenses.


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 advantage, net, of $3,000or 30%, in 2021 compared to 2020 is mainly attributable to tax savings due to prior years as recorded by our South African subsidiary in 2020.

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 $10,089 $5,040



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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 was as follows (in thousands):



                                          Year ended December 31,
                                            2021             2020

Net loss from discontinued operations $(1,570) $(1,093)




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 with Merwell Inc. and SuperCom Ltd.



Net loss


Our net loss for each of the last two years was 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.

Significant Accounting Policies and Estimates



We prepare our consolidated financial statements in conformity with accounting
principles generally accepted in the 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.



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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 disposal of the SmartID division and the Mass Transit Ticketing business are considered discontinued operations and have therefore been presented as such.

The results of businesses classified as discontinued operations have been presented as such for all reporting periods. The results of discontinued operations include all income and expenses directly derived from these activities; General corporate overhead costs are 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 from 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.



Cash 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 of December 31, 2021. As of December
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. 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 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 in Poland 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. On April 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 of December 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 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 December 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.



From December 31, 2021we have granted a guarantee to the lessor of our head office to Israel in quantity of $112,540 whose expiry date is May 2024.

For the years ended December 31, 2021 and December 31, 2020we had negative cash flow from continuing operations of $5.6 million and $1.9 millionrespectively.


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Operating activities related to continuing operations

For the year ended December 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 ended December 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 December 31, 2021the net cash used in continuing investing activities was $247,000due to acquisitions of tangible and intangible fixed assets.



For the year ended December 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 ended December 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 ended December 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 on April 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.



On March 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 December 31, 2021net cash used in discontinued operating activities has been $2.1 millionmainly related to a payment of $2.0 million for
Merwell inc.as part of a settlement agreement.



For the year ended December 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 ended December 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 December 31, 2020net cash used in discontinued investing activities has been $948,000mainly related to the purchase of property, plant and equipment for the Mass Transit Ticketing activity.



For the year ended December 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 December 31, 2020the net cash provided by discontinued financing activities was $1.2 millionmainly related to loans received for the Mass Transit Ticketing activity.


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 of December 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 the U.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 than the 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 in Israel. The annual rate of deflation in Israel
was 0.7% in 2020. The NIS revaluated against the U.S. Dollar by approximately
3.0% and 7.0% in 2021 and 2020, respectively.



Israeli government 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 of December 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 after
January 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 of December 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 in Israel 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 of
Israel, 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 from Israel 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 of Israel. Transfer of IIA funded know-how outside of Israel 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 of Israel.



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.



Authorization to manufacture products outside Israel or consent to the transfer of The IIA-funded know-how, if requested, is at The IIA’s discretion. In addition, The IIA may impose certain conditions on any agreement under which it authorizes us to transfer The IIA-funded know-how or manufacturing out of
Israel.



The consideration available to our shareholders in a future transaction
involving the transfer outside of Israel 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




Other IIA Grants Updates



We have a dispute with the IIA in the amount of approximately NIS 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 information on market risk.

Not applicable.

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