Item
1. Business.
General
Overview
We
are a fintech pioneer and a leading developer of cutting-edge secure cashless payment solutions providing global enterprises with
innovative technology for over two decades. We operate in two main segments: (1) Retail and Mass Transit Ticketing; and (2) Petroleum.
In addition to our two reportable segments, certain products for the medical industry and other secure smart card solutions are
classified under “Other” in segment analysis appearing in this Annual Report.
Our
vision is to strengthen our global presence with innovative solutions and provide our customers with the best possible support
in superior service and reliable advanced products.
OTI
continually strives to discover the technology of the future and keep abreast of new developments in the fintech marketplace.
At this time, we are trying to develop Bitcoin capability in the Crypto-currency marketplace and we intend to become Bitcoin acceptable
in transactions via NFC, Bluetooth or QR code.
Our
IP portfolio includes registered patents and patent applications worldwide. Since our incorporation in 1990, we have built an
international reputation for reliability and innovation, deploying many solutions for unattended retail, mass transit, banking,
medical smart card, Internet of Payment Things, or IoPT, and the petroleum management industries.
We
operate a global network of regional offices, distributors and partners to support various solutions deployed across the globe.
We
focus on our core business of providing innovative cashless payment solutions based, among other things, on our contactless NFC
technology.
We
continue to focus our efforts to further develop new and unique product solutions, including by the introduction of our new products
and solutions for the unattended payment market and IoPT technology.
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 traded in the Nasdaq Capital Market, or Nasdaq,
under the symbol OTIV.
Our
Markets
We
provide cashless payment solutions for three major vertical markets:
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1.
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Retail
and Mass Transit Ticketing
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a.
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Self-Service
(Unattended) Retail, Internet of Payment Things (IoPT) and Wearables
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Self-Service (Unattended)
Retail
- NFC and contactless technologies are embraced globally to create cashless retail environments known as self-service
or unattended - a type of retail business where customers help themselves with respect to the products or services they wish to
purchase, using NFC and contactless to accept the payment. Examples of business models that permit their customers an aspect of
self-service include vending, laundromats, kiosks, gaming, banking, mass transit, electric vehicle charging points and self-service
(self-checkout).
As one of the pioneers
of cashless payment technology, we have been working closely with companies in diverse industries and markets to design industry-tailored
solutions that enable our customers to achieve their goals more efficiently.
Internet of Payment
Things (IoPT) and Wearables
– Wearable fintech technologies have become a modern trend. Today, it is common to find wearable
technologies such as wristbands, watches or jewelry that are not only fashion garments but can also be linked to a smartphone and
can measure a person’s heartbeat and footsteps.
We believe that the
next development of wearables will also allow cashless payment. Our expertise in minimizing the foot print of NFC payment devices
allows us to offer manufacturers a way to easily turn their existing product into a pay enabled cashless device. We call this unique
capability “PayEnable” and we intend to market products that include our technology with the “PayEnabled by OTI”
mark.
Our goal is that pay-enabling
a product will be cost-effective and will require no expertise or special tooling from the merchant or the consumer. PayEnabled
devices will support contactless payment similar to pre-paid, debit and credit cards. Additionally, PayEnabled products will also
be able to support mass transit ticketing, e-coupons, loyalty programs and healthcare applications, and could also be used for
proximity marketing (in-store promotions) and product authenticating (brand anti-counterfeiting).
We manage our cashless payment solutions for the retail market worldwide from our headquarters in Israel.
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b
.
Mass Transit Ticketing
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Mass Transit Ticketing
– The constantly growing need for mass transit ticketing systems and services, together with the migration to contactless
smart cards for mass transit payments, has led to the development of a ticket sales unattended and attended mass transit ticketing
system by our wholly-owned Polish subsidiary ASEC S.A. (which does business under the name OTI Europa), or ASEC, initially for
the market in Poland.
The system is comprised
of attended and unattended point-of-sales, or POS, including ticket vending machines and terminals, and is fully managed by a back-office
solution. ASEC provides system design, installation, management and on-going system maintenance services on a full end-to-end turn-key
service basis.
Our solutions for the mass transit ticketing market in Europe are managed by ASEC
.
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2. Petroleum
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Volatile fuel costs
mean customers from all commercial areas are more cost-conscious when fueling and look to find smart fuel management solutions.
Commercial organizations with multiple vehicles are especially sensitive to the impact of fuel expenses on their profitability.
Our petroleum payment
solutions enable customers to precisely and effortlessly control and manage refueling operations, including automatic payments
for less gas station downtime, complete remote transaction and fuel usage reporting, and tracking of the odometer and/or engine
operating hours.
Easily deployed and
seamlessly integrated with existing gas station infrastructure, our
EasyFuel Plus
® solution is a wireless, cashless,
cardless and paperless refueling tracking and payment solution, providing customers with maximum flexibility and security.
Our solutions for the petroleum market are managed by OTI PetroSmart (PTY) Ltd. (formerly named OTI Africa
(PTY) Ltd.), or OTI PetroSmart, a wholly-owned subsidiary based in South Africa.
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Our
Products
Below are the details of our portfolio for each of the above
mentioned vertical markets.
OTI
Readers – UNO + TRIO
We supply NFC and
contactless payment reader products and solutions. Our products and solutions are approved by Underwriters Laboratories, Inc.,
or UL, and the U.S. Federal Communications Commission, or FCC, and certified by MasterCard TQM (Terminal Quality Management). Our
reliability and performance are based on more than a quarter of a century of experience with NFC and contactless solutions.
Our readers are
certified by the leading card associations, including, amongst others, EMVCo, Visa, MasterCard, Amex and Discover Interac, and
are compatible as well for use with various NFC mobile payments solutions such as Apple Pay™, Google Pay™
(previously known as Android Pay), Samsung Pay™, MIFARE™, FeliCa™ and others. EMVCo modular meets the
requirements of different applications and platforms, and saves certification implementation and reduces the cost and time of
any EMVCo project.
Below
you can find a description of our principal OTI Readers:
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OTI
UNO Series
–
UNO-6, UNO-8, UNO-Plus
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OTI
UNO
is a single interface and contactless reader packed in an ultra-compact form-factor.
Uno
is the ideal solution for meeting the complete range of NFC cashless payment
industry requirements. The reader, which supports the major card associations’
applications as well as wallets such as Apple Pay™, Google Pay™, Samsung
Pay™ and was designed specifically for attended and unattended retail environments.
Uno
’s unique form-factor and features enable easy integration and installation
in unattended self-service payment stations, including Automatic Teller Machines, or
ATMs, Automatic Vending Machines, or AVMs, electric vehicle charging stations ticket
vending machines, toll roads, gaming machines, kiosks, access control, mass transit gates
and more.
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The OTI UNO range is currently available in 3 models:
●
UNO-6
– EMV
●
UNO-8
– EMV modular + FeliCa + P2P
●
UNO-Plus
– EMV modular + FeliCa + P2P + Display
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OTI
Trio
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OTI TRIO
is an NFC and contactless reader built specifically for the unattended machine market, such as vending machines, and provides quick
and easy support for cashless payments.
OTI TRIO
offers convenient three-in-one cashless payment card options: magnetic stripe (swipe), contact (chip) and contactless (tap), in
one small and stylish package. With modular design for easy installation and multiple connection options, the
OTI TRIO
is
ideal for vending, pay-at-the-pump, and unattended payment services.
The
OTI TRIO
is optimized to read data from a variety of sources, including NFC enabled phones, all types of credit cards, contactless key fobs
and smart stickers that comply with ISO/IEC 14443 type A, B and MIFARE™.
The reader’s LCD display, LEDs and buzzer provide users with on-the-spot transaction confirmation
and clear interactive feedback.
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T
he
OTI TRIO
is also available in partial configurations including:
● Tap
+ Swipe (Contactless + MagStripe)
● Tap
only (Contactless)
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OTI
Interno
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The
OTI Interno
global original equipment manufacturer, or OEM, reader module with integrated antenna is a compact and cost-effective
contactless card reader board, designed for easy integration into mass transit validators and terminals.
Designed for seamless
and simple OEM integration, the
OTI Interno
includes a full-featured development environment, preloaded on-board
payment applications (MasterCard, PayPass, Visa, PayWave, etc.) and smart or transparent mode options. Delivering price-performance,
the
OTI Interno
supports contactless payments and loyalty programs.
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Payment Gateways and Machine-to-Machine (M2M) Controllers
Controllers and gateways
are hardware devices that manage or direct the flow of data between two machines and are used to “control” a peripheral
device (
e.g.
, a vending machine). OTI has a range of controllers and gateways that provide secured and certified access
to payment service providers which enable cashless payment acceptance, connectivity and cloud-based management for machines.
OTI TeleBox
– M2M Telemetry
Controller
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The
OTI TeleBox
is a machine-to-machine, or M2M, controller designed to enable communication between machines, particularly vending machines,
kiosks and meters via various optional communication methods, allowing operators to easily remotely manage and be notified about
a specific machine or the entire fleet.
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The
OTI TeleBox
serves three main functionalities:
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M2M
connectivity using cellular modem, Ethernet or
WiFi
;
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Host
for connected devices such as card readers, PIN pad, camera, barcode reader, etc.; and
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A
c
ommunication channel to the vending machine controller using the major protocols that are in
use by the unattended vending, kiosk and pulse machine industries.
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The
OTI TeleBox
supports a wide range of configurations while supporting optional
hardware like backup batteries, external memory extension using SD card, mini USB connection,
onboard memory and more.
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OTI
GoBox
- Gateway, Payment and Multimedia Services Enabler for Machines
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OTI
GoBox
is a highly modular, powerful and scalable M2M cashless payment and telemetry
gateway, featuring advanced connectivity, processing power and multimedia functionality.
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OTI GoBox
is designed for
unattended retail machine operators who require a modular and powerful M2M gateway with enough processing power to stream Full-HD
media and run either Linux or Android.
GoBox
is one of the most versatile and easy-to-integrate M2M gateway units available
today.
OTI GoBox
can collect and
transmit inputs from different components of the machine such as sensors, all types of serial payment acceptance devices like
readers, security devices such as PIN pads, inventory events, security and anti-vandalism events, operation transaction events,
and data collection devices like QR-Code scanners and more.
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Payment and Management Solutions for Vending, Kiosk
and Coin-op Pulse Machines
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otiMetry
– Vending Telemetry Solution
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otiMetry
is a modular and cost-effective telemetry solution for smart vending which also enables cashless payments. It is a complete system
designed for the unattended vending machine market.
otiMetry
incorporates
telemetry, sales, operations, and marketing into an affordable all-inclusive solution that makes any vending business a smart
and interactive one, with real-time online management capabilities and alerts.
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OTI’s
otiMetry
solution is a modular telemetry system which includes:
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Cashless
Reader Hardware
–
OTI UNO
or
OTI Trio
readers
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M2M
Controller/Gateway
– enables connectivity and M2M communications (TeleBox/GoBox)
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TMS
(Terminal
Management System) – a pre-integrated cloud service that is responsible for remote
terminal management
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Telemetry
– Cloud-based software which provides all the data insights required to turn a vending operation into a smart vending
business
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otiMetry
supports the entire business lifecycle management and includes:
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Cashless
payment
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Online
terminal and vending machine remote management
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Telemetry
information such as cash, stock levels, alerts, route planning, and business optimization.
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otiMetry
offers
a modular and scalable approach supporting an easy method for adding and removing modules.
Another unique feature is that the system is based on an open platform allowing integrators
to add their own modules into the system.
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otiKiosk
– Unattended Self-Checkout Kiosk Payment Solution
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otiKiosk
is
a cashless payment acceptance and remote management solution for kiosks and self-service environments.
otiKiosk
provides kiosk operators with an easy and affordable way to integrate a pre-certified EMV payment acceptance solution into their
system, which includes remote management of the kiosk’s hardware and software.
otiKiosk
combines
the following components into an integrated solution:
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Cashless Reader Hardware
–
OTI UNO
or
OTI Trio
readers
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otiKiosk
Client
– Windows-based application
integrating between kiosk software, gateway, and the cashless reader to support the payment
process and the payment functionality for the kiosk system integrator
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otiKiosk
TMS
(Terminal Management System)
– a pre-integrated cloud service that is responsible for remote terminal management
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otiPulse
– Cashless Payment Solution for Coin-Operated Pulse Machine
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otiPulse
is a modular and cost-effective cashless payment solution for pulse operated
machines, such as:
●
Laundromats
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Game & Prize Machines
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Air and Vacuum machines
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Lockers and restrooms
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Car wash
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Amusement rides
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Massage chairs
otiPulse
is a complete system for the unattended pulse machine market.
otiPulse
adds cashless payment to coin-operated machines.
It turns coin-only machines into smart connected machines capable of accepting cashless payments.
otiPulse
system components include:
●
Cashless Reader Hardware
–
OTI
Uno
or
OTI Trio
readers
●
Controller
– enables connectivity and communications (
TeleBox
)
●
Control Cable
– compatible with pulse machine operational activities
●
TMS
(Terminal Management System) – a pre-integrated cloud service that is responsible for remote terminal
management
otiPulse
connectivity supports the entire business lifecycle management and provides real-time online management capabilities and alerts
including:
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Logging and reports for both cash and cashless sales
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Payment terminal online management (
e.g.
, price updates)
●
Elimination of unnecessary visits and service time
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Optimization of field staff productivity
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Decreasing machine downtime (
i.e.
, power status alerts)
●
Remote configuration of system parameters (price, pulse duration, etc.)
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Mass Transit Ticketing Market
Our wholly-owned subsidiary, ASEC, is
a leading provider of contactless ticket selling systems for public transport in Poland. ASEC’s system for public transportation
(metro, tramways, buses) and parking is installed in the city of Warsaw and an additional major city, as well as in one of the
largest passenger railways in Poland – the Mazovia Railway. ASEC is a leading provider of electronic ticketing card systems
in Poland and card management systems for ticketing applications. ASEC is also a provider in Poland of services enabling loading
of contactless prepaid cellular telephone cards based on Global System for Mobile Communications, or GSM, installed on ticket
vending machines and in press kiosks in major cities and in the Mazovia region, which is the most populated region of Poland.
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ASEC’s ticket vending machines, or
TVM, are highly specialized devices, the main functions of which are encoding and loading electronic card tickets for the public
transport and selling paper tickets. The system’s software is provided by
ASEC
and may be adjusted to the customer’s
requirements.
TVM Functionalities:
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Loading of electronic contactless cards for public transport with seasonal tickets, zone tickets, etc. (local city transport, buses, metro, railway, etc.)
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Distribution of tickets cards
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Loading of electronic parking fees on contactless cards
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Loading of pre-paid cellular phone cards
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Advertising on TVMs’ screens and machines’ casing
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Other
possible functionalities include issuing city resident cards, tourist cards, and social
benefit cards
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ASEC also resells
tickets through a sales network of point of sale, or POS, terminals located at kiosks and other retail outlets. The distributor
receives a commission on the sale of each ticket.
The Company delivers,
sets, installs, activates and retains ownership of the devices and of the system.
POS Functionalities:
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Loading
of electronic contactless cards for public transport (season tickets, zone tickets, one-time tickets, etc.)
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Loading
of electronic parking fees on contactless cards
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Servicing
city resident cards, tourist cards, social benefit cards and other
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Petroleum
Management Market
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EasyFuel
Plus®
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Our petroleum payment
solutions enable large and small customers to effortlessly control and manage refueling operations – including automatic
payments for less gas station downtime, complete remote transaction and fuel usage reporting, and tracking of the odometer and/or
engine operating hours.
Easily deployed and
seamlessly integrated with existing refueling station infrastructure, our
EasyFuel Plus
® solution is a wireless, cashless,
cardless and paperless refueling tracking and payment solution, providing customers with maximum flexibility and security.
EasyFuel
Plus
is a modular and scalable fuel management solution, that is perfect for:
●
Commercial and Homebase Sites
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Retail Petroleum
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Industrial and Mining Sites
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Construction Sites
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Mobile Refueling Operations
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Corporate Fleet Fuel Management
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MediSmart®
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Our
MediSmart
®
solution is an information management and claims submission system for the medical sector. MediSmart cards validate the identity
of a patient by using biometric technology, offering faster treatment of patients, access to medical information and reduction
in medical errors, adverse events and reduction of fraudulent transactions.
The solution enables
digitized secure access at point of service through use of biometrics and a smart card that interfaces with the health care provider
to securely identify the member, automatically provide cover information, manage benefit and cover rules, capture and transmit
the electronic claim enabling online processing, reporting, visibility and analytics for the member, health care provider, medical
administrator and associated stakeholders.
To date, MediSmart
has been deployed at more than 4,200 points of service locations throughout 5 countries.
There are approximately one million cards issued for which OTI PetroSmart generates recurring revenues.
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Industry
Background
Under
certain regulations and credit card anti-fraud legislations, the use of contactless payment technologies has become an essential
requirement for both consumers and retailers. Various market sectors have begun to massively adopt contactless payments and are
constantly looking for ways to make the adoption process as convenient as possible for both merchants and customers. Millions
of contactless debit and credit cards are issued annually by leading financial institutions to various consumers, and merchants
are looking to install contactless payment readers that can be easily integrated into their existing unattended point of sale
locations.
The
world's leading smartphone manufacturers are either including or are expected to include NFC support in their upcoming handset
upgrades, which will enhance the technology adoption lifecycle. Whether it is a standard contactless travel card, or EMV contactless
card, or an NFC mobile phone, the main motive is to provide quick and efficient payment solutions. Leading smartphone manufacturers
have also introduced and are actively pushing the use of their own contactless payment solutions such as Apple Pay™, Android
Pay™ and Samsung Pay™, all of which require a contactless reader to be available at the merchant countertop.
Strategy
Our
goal is to maintain our status as a leading developer of NFC and cashless payment technologies and our reputation as a manufacturer
of top quality products carrying the highest certification standards.
Key
elements of our strategy for achieving this goal include:
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Expanding
our global market presence.
We market our products through a global network of subsidiaries in the United States,
Europe, Africa and our headquarters in Israel. We are using these entities to strengthen our presence in existing markets,
penetrate new markets, provide local customer service and technical support, and adapt our products to our local customers’
specific needs. We continue to expand our market presence via strategic distributors around the globe.
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Increasing
our focus on generating high-margin, recurring revenues
. We currently derive most of our revenues from one-time payments
for our products and technologies. We intend to generate additional recurring revenues by receiving service fees for ongoing
customer services and transaction fees from our customers.
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Enhancing
our technological position
. We intend to continue to invest in research and development in order to develop new technologies,
extend the functionality of our products and services, and offer innovative products and services to our customers.
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Customer
Service and Technical Support
We
provide our customers with training, installation support, ongoing customer service and technical support through our global network
of subsidiaries, distributors and local services providers, including employees located in our corporate headquarters in Rosh
Pina, Israel, as well as employees located in our subsidiaries in Europe, South Africa and the United States. Our customer service
teams in Rosh Pina provide central services to our global network. Our subsidiaries, distributors and local providers, in turn,
provide customer service and technical support by telephone and email.
Sales
and Marketing
In
addition to selling our products through our distributors, we sell and market our products directly and through our global network
of subsidiaries. We have also engaged consultants to market and sell our products in the Asia-Pacific region. We market and sell
our products in the Americas through our U.S.-based subsidiary, OTI America. In Africa, our subsidiary in South Africa, OTI PetroSmart,
and in Europe, ASEC, our Polish subsidiary. In Israel and in regions where we do not have local subsidiaries or representatives,
we market and sell through our main headquarters in Rosh Pina, Israel. Our marketing and sales staff implement marketing campaigns
to promote our products and services to enhance our global brand recognition. Our current marketing efforts include participation
in trade shows, conferences, press releases, brand websites, social media, client/ distributor meetings and advertising in local
and global industry publications. We also conduct technical seminars to inform customers, distributors, business partners and
other industry contributors of our unique products and innovative technologies.
Some customers also
act as distributors for our products and have been granted exclusive distributors rights within a country or region. We generally
guarantee exclusivity only against certain minimum volume commitments or other commercial conditions determined on a per case basis.
Manufacturing
We
outsource all our manufacturing and product assemblies to third-party vendors. Whenever possible, our policy is to use more than
one supplier and manufacturing subcontractor for each part of our production process in order to limit dependence on any one manufacturer
or supplier.
We
are ISO 9001:2015 certified. We require that our suppliers and subcontractors be ISO 9001 certified. ISO 9001 is an international
standard which specifies requirements for a quality management system and provides guidance and tools for companies to ensure
that their products and services consistently meet customer and regulatory requirements. This standard is updated from time to
time pursuant to the international authorization requirements.
Government
Regulation
Most
of our products are subject to local electromagnetic compliance, or EMC/Radio regulations such as radiation, conducted emission
and immunity, and safety regulations such as fire and electrical hazards, governed by low voltage standards for our regular readers
and hazardous areas standards for our petroleum products, relevant in the countries in which they are used. In the United States,
EMC/Radio testing and certification for such products are governed by Federal Communications Commission, or FCC, Part 15 while
safety testing and certification fall under the standards set by Underwriters Laboratories, LLC, a public safety and testing certification
organization, or UL. In the rest of the world, where FCC and UL rules do not apply, we follow various international and local
standards for EMC/Radio and safety. The compliance with these standards is assured by testing and certifying our products at various
accredited labs and/or notified bodies located both in Israel and other countries (e.g., United States, Germany, South Africa,
India, China, Brazil and more). Our products are in compliance with the foregoing regulations.
Research
and Development
We
believe that our future success depends on, among other things, our ability to maintain our technological leadership, enhance
our existing products and develop new products technologies and solutions. Accordingly, we intend to continue devoting substantial
resources to research and development.
The
following table describes our expenditures from research and development activities during each of the past three years:
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2017
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2016
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2015
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Our expenditures (in millions)
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$
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3.3
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$
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2.8
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$
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3.4
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Our expenditures as a percentage of annual revenues
|
|
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15
|
%
|
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14
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%
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19
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%
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Our
research and development activities focus mainly on two major areas:
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developing
new innovative technologies related to the cashless payment solutions market; and
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enhancing
the functionality of our components and expanding the range of our products to serve new markets.
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Our
main research and development facilities are located at our headquarters in Rosh Pina, Israel. We believe that our success is
based on our experienced team of senior engineers and technicians who have extensive experience in their respective fields. Our
research and development facilities are ISO 9001:2008 certified.
Proprietary
Technologies and Intellectual Property
Our
success and ability to compete depend in large part upon protecting our proprietary technology and IP. We rely on a combination
of patent, trademark, copyright and trade secret law, as well as know-how, confidentiality agreements and other contractual relationships
with our employees, affiliates, agents, consultants, distributors and others.
Our
IP portfolio includes issued patents with respect to our contactless technology, as well as trademarks and designs. While we have
continued to seek new patents and to support pending applications, we have, as part of our efficiency program, reduced our investment
in non-core patents and registrations. The expiration dates for our granted patents range between 2027 to 2033.
We
cannot be certain that patents will be issued with respect to any of our pending or future patent applications. In addition, we
do not know whether any issued patents will be enforceable against alleged infringers or will be upheld if their validity is challenged.
We generally enter into non-disclosure agreements with our customers, partners, employees, consultants, suppliers, subcontractors,
and generally control access to the distribution of our products, documentation and other proprietary information.
Competition
Our
competition is technology vendors that provide cashless payments solutions products and technologies:
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In
the Retail Market,
our competition includes unattended payment solution and technology providers such as ID Tech, Nayax,
Ingenico, Televend and Verifone.
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In
the Petroleum Market,
we compete with fueling and fleet management end-to-end solution vendors such as Orpak and Hectronic.
As this domain has high entrance barriers, competition in this field is limited.
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Employees
Following
is the number of our employees during each of the past three years:
Total
Number of employees as of December 31,
|
2017
|
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2016
|
|
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2015
|
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120
|
|
|
120
|
|
|
|
130
|
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We operate in accordance
with the applicable law and the provisions of the general extension orders applying to labor and employment relations in Israel.
These provisions principally concern the length of the working day, minimum wages for employees, contributions to pension funds
or managers’ insurance, contribution to work disability insurance, convalescence, travel expenses, holidays and other conditions
of employment. We provide our employees with benefits and working conditions above the required minimum and which we believe are
competitive with benefits and working conditions provided by similar companies in our industry in Israel. Our employees are not
represented by a labor union. We have written employment agreements with substantially all of our employees. Competition for qualified
personnel in our industry is intense, and it may be difficult to attract or maintain qualified personnel to our offices. We dedicate
significant resources to employee retention and have never experienced work stoppages, and we believe that our relations with our
employees are good. Our subsidiaries located outside Israel operate in accordance with the local applicable labor laws and have
written employment agreements with substantially all their employees.
Organizational
Structure
We
have three wholly-owned subsidiaries:
ASEC
(a Polish corporation d/b/a OTI Europa),
OTI America
(a Delaware corporation),
and
OTI PetroSmart
(a South African corporation).
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ASEC
S.A. (Spolka Akcyjna)
, our wholly-owned Polish subsidiary, is headquartered in Krakow, Poland. ASEC provides marketing,
distribution, and customer support for our products in Europe. We have the right to appoint all of the members of its board
of directors.
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OTI
America Inc.
, our wholly-owned U.S. subsidiary, was headquartered in Iselin, New Jersey and is incorporated in Delaware.
OTI America is in the process of relocating to Austin, Texas. OTI America provides marketing and customer support for our
products in the Americas. We have the right to appoint all of the members of its board of directors.
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OTI
PetroSmart (Pty) Ltd.
(formerly named OTI Africa (PTY) Ltd.), our wholly-owned South African subsidiary, is headquartered
and incorporated in Cape Town, South Africa, and provides marketing, distribution and customer support for our products in
Africa. We have the right to appoint all of the members of its board of directors.
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Item
1A. Risk Factors.
The
following risk factors, among others, could in the future affect our actual results of operations and could cause our actual results
to differ materially from those expressed in forward-looking statements made by us in this Annual Report, press releases, SEC
filings or elsewhere. Before you decide to buy, hold, or sell our Ordinary Shares, you should carefully consider the risks described
below, in addition to the other information contained elsewhere in this Annual Report. The following risk factors are not the
only risk factors facing our Company. Additional risks and uncertainties not presently known to us or that we currently deem immaterial
may also affect our business. Our business, financial condition and results of operations could be seriously harmed if any of
the events underlying any of these risks or uncertainties actually occurs. In that event, the market price for our Ordinary Shares
could decline, and you may lose all or part of your investment.
Risks
Related to Our Business
We
have a history of losses, and we may continue to incur full-year losses in 2018 and in subsequent years.
We
have incurred losses in each year since we commenced operations in 1990. We reported net losses attributable to shareholders of
$7.2 million in 2015, $828,000 in 2016 and $598,000 in 2017. We may continue to incur full-year losses in 2018 and afterwards,
as we invest in the expansion of our global sales and marketing network, reduce our product prices in return for future transaction
fees based on the volume of transactions in systems that contain our products, invest in fixed assets that may generate revenues
more slowly than expected, and enhance our research and development capabilities to develop existing and new products.
We
depend on a small number of large customers and the loss of one or more of them would lower our revenues.
Our
customer base is concentrated among a limited number of large customers. Our revenues may continue to depend on a limited number
of major customers. The customers we consider to be our major customers and the percentage of our revenue represented by each
major customer vary from period to period. In 2015, 2016 and 2017, our customer related to mass transit in Poland provided 16%,
15% and 14%, respectively, of our total revenues for such periods. In addition, another customer in North America accounted for
9%, 8% and 12% of our total revenues for 2015, 2016 and 2017, respectively. If we were to lose any one of our major customers,
or if any of our customers were to have difficulty meeting their financial obligations to us for any reason, our financial condition
and results of operations would be adversely affected.
If
the markets for our products do not grow, sales of our products may not grow and may even decline.
The
success of our products depends on the continuing adoption of cashless payment solutions within a broad spectrum of industries
including unattended retail, mass transit, and fueling. Such continuing adoption of cashless payment solutions and technologies
also depends on the enactment and implementation of regulations and industry standards regarding secure cashless payment. Should
such industries fail to adopt cashless payment technologies or solutions or experience any economic downturn or should regulations
fail to support such solutions, the markets for our products may not grow or actually meet our current predictions.
Additionally,
potential customers in developed countries, such as the United States and others, may already have installed systems that are
based on technologies different from ours and therefore may be less willing to incur the capital expenditures required to install
or upgrade to our products. As a result, we cannot assure that there will be sufficient market opportunities for our products.
New technologies for payments different than ours might also be adopted by the markets and could override the need for our payment
solutions.
We
face intense competition. If we are unable to compete successfully, our business prospects will be impaired.
We
face intense competition from developers of contact and contactless payments products that use similar and other technologies
than ours. We compete on the basis of a range of competitive factors including price, compatibility with the products of other
manufacturers, and the ability to support new industry standards and introduce new reliable technologies. Many of our competitors
have greater market recognition, larger customer bases, and substantially greater financial, technical, marketing, distribution,
and other resources than we possess. As a result, they may be able to introduce new products, respond to customer requirements
and adapt to evolving industry standards more quickly than we can.
From
time to time, we or one or more of our present or future competitors may announce new or enhanced products or technologies that
have the potential to replace or shorten the life cycles of our existing products. The announcement of new or enhanced products
may cause customers to delay or alter their purchasing decisions in anticipation of such products, and new products developed
by our competitors may render our products obsolete or achieve greater market acceptance than our products.
If
we cannot compete successfully with our existing and future competitors, we could experience lower sales, price reductions, loss
of revenues, reduced gross margins and reduced market share.
If
we fail to develop new products or adapt our existing products for use in new markets, our revenue growth may be impeded and we
may incur significant losses.
Although
we are devoting significant resources to develop new products and adapting our existing products for use in new markets, such
as cashless payment solutions, mass transit ticketing solutions and petroleum solutions, if we fail to develop our new products
or adapt our existing products for existing or new markets, we may not recoup the expenses incurred in our efforts to do so, our
revenue growth may be impeded and we may incur significant losses.
Our
revenue growth may be impaired if we are unable to maintain our current, and establish new, strategic relationships.
The
markets for our products are usually highly specialized and sometimes require us to enter into strategic relationships in order
to facilitate or accelerate our penetration into existing or new markets. We consider a relationship to be strategic when we integrate
our technology into some of the product offerings of a business partner or engage a distributor that has a significant position
in a specified market. Failure of our strategic partners to perform in a satisfactory manner or to meet their undertakings in
the penetration of new markets, or the termination of any of our strategic relationships or our failure to develop additional
relationships in the future may limit our ability to expand the markets in which our products are deployed or to sell particular
products.
We
may desire to exit certain product lines or businesses or to restructure our operations, but may not be successful in doing so.
Our
Board has been identifying and assessing possible alternative strategies to maximize value for our shareholders. Such process
may result in a decision to divest certain product lines and businesses or restructure our current corporate structure or current
operations, including, without limitation, through the contribution of assets to joint ventures or sale of some assets to third
parties. However, our ability to successfully exit product lines and businesses, or to close or consolidate operations, or to
sell some of our assets successfully, depends on a number of factors, many of which are outside of our control. For example, if
we are seeking a buyer for a particular business line, none may be available, or we may not be successful in negotiating satisfactory
terms with prospective buyers or a buyer may not meet its obligations under the applicable purchase agreement. If we are unable
to exit a product line or business in a properly or timely manner, or to restructure our current corporate structure or our operations
in a manner we deem to be advantageous, or to enforce that a buyer meets its contractual obligations, this could have a material
adverse effect on our business, financial condition and results of operations. Even if a divestment is successful, among others,
we may face indemnity and other liability claims by the acquirer or other parties.
We
may pursue acquisitions of other companies or new or complementary products, technologies and businesses, which could harm our
operating results, may disrupt our business and could result in unanticipated accounting charges.
We
may pursue acquisitions of other companies or new or complementary products, technologies and businesses in the future. Acquisitions
create risks for our business that could cause our results to differ materially and adversely from our expected or projected results.
Such risks include the effects of possible disruption to the continued expansion of our product lines, potential changes in our
customer base and changes to the total available market for our existing products, reduced demand for our products, the impact
of any such acquisition on our financial results, negative customer reaction to any such acquisition and our ability to successfully
integrate an acquired company's operations with our operations. Acquisitions create additional risks for our business that could
cause our results to differ materially and adversely from our expected or projected results. Such risks include: difficulties
in integrating the operations, systems, technologies, products and personnel of the acquired companies, particularly companies
with large and widespread operations and/or complex products; the diversion of management’s attention from normal daily
operations of the business and the challenges of managing larger and more widespread operations resulting from acquisitions; possible
disruption to the continued expansion of our product lines; potential changes in our customer base and changes to the total available
market for our products; reduced demand for our existing products; the use of a substantial portion of our cash resources and
incurrence of significant amounts of debt; significant increases to our interest expense, leverage and debt service requirements
as a result of incurring debt; the impact of any such acquisition on our financial results; internal controls may become more
complex and may require significantly more resources to ensure they remain effective; negative customer reaction to any such acquisition;
assuming the liabilities of the acquired company; and dilution to our shareholders if we make these acquisitions in exchange for
our shares.
The
terms of certain of our agreements may restrict our ability to take actions that we believe to be desirable.
Certain
agreements that we have entered into with our distributors provide exclusivity for different time periods, ranging from several
months to several years, or with respect to specific regions and/or products. For example, in certain markets, we sell our products
through distributors who, in certain cases, have exclusive distribution rights in that market or certain territories if specified
minimum volume commitments are met. The foregoing could have a material adverse effect on our business, operating results and
financial condition if these partners do not perform in a satisfactory manner.
Our
products may have long development and sales cycles and we may expend significant resources in relation to a specific project
without realizing any revenues.
The
development and sales cycles for our products vary from project to project. Typically, the projects in which we are involved are
complex and require that we customize our products to our customers’ needs and specifications. We then conduct evaluation,
testing, implementation and acceptance procedures and sometimes we are required to perform a long certification process for our
products. Only after successful completion of these procedures and certifications will customers place orders for our products
in commercial quantities. In addition, our sales contracts sometimes do not include minimum purchase commitments. We therefore
cannot always ensure that product development will result in commercial sales. Our average development cycle is typically between
six and 18 months from initial contact with a potential customer until we deliver commercial quantities to the customer and recognize
significant revenues. As a result, we may expend financial, management and other resources to develop customer relationships before
we recognize revenues, if any.
Fluctuations
in our quarterly financial performance may create volatility in the market price of our shares and may make it difficult to predict
our future performance.
Our quarterly revenues
and operating results have varied substantially in the past and may continue to vary in the future. These fluctuations may be driven
by various factors which are beyond our control, are difficult to predict and may not meet the expectations of analysts and investors.
As a result, the market price of our Ordinary Shares may drop. In addition, our revenues and operating results in any quarter may
not be indicative of our future performance, and it may be difficult to evaluate our prospects.
Delays
or discontinuance of the supply of components or manufacturing and assembly of our products may hamper our ability to produce
our products on a timely basis and cause short-term adverse effects.
Some
of the components we use in our products are supplied by third-party suppliers and manufacturers. Some of these suppliers are
single source manufacturers. Termination of manufacturing of a certain product, provision of services or support (commonly referred
to as “end of life”), allocations due to high demand, or delays or shortages could interrupt and delay the supply
of our products to our customers, and may result in cancellation of orders for our products. Similarly, we do not always have
long-term supply contracts under which our suppliers are committed to supply us with components at fixed or defined prices. Suppliers
sometimes may increase component prices significantly without advance warning or could discontinue the manufacturing or supply
of components used in our products. In addition, third party suppliers may face other challenges in fulfilling their contractual
obligations with us which are beyond our control. Although we make efforts to identify and retain second source manufacturers
and vendors, we may not always be able to develop alternative sources of supply and services. Even if we are able to identify
such alternative sources, we may need to modify our products to render them compatible with other components. This may cause delays
in product shipments, increase manufacturing costs and increase product prices.
Some
of our suppliers and vendors are located in different countries and, therefore, we may experience logistical difficulties in our
supply chain, including long lead times for receipt of products or components and shipping delays. In addition, our subcontractors
may, on occasion, feel the impact of potential economic or political instability in their regions, which could affect their ability
to supply us with components for our products in a timely manner.
If
we fail to hire, train and retain qualified research and development personnel, our ability to enhance our existing products,
develop new products and compete successfully may be materially and adversely affected.
Our
success depends, in part, on our ability to hire and train qualified research and development personnel. Individuals who have
expertise in research and development in our industry are scarce. Competition for such personnel is intense, particularly in Israel.
Consequently, hiring, training and retaining such personnel is time-consuming and expensive. In addition, it may be difficult
to attract qualified personnel to Rosh Pina, which is located in the northern part of Israel. If we fail to hire, train and retain
employees with skills in research and development, we may not be able to enhance our existing products or develop new products.
If
we are unable to protect or assert our intellectual property rights, our business and results of operations may be harmed.
Our
success and ability to compete depend considerably on using our IP and proprietary rights to protect our technology and products.
We rely on a combination of patent, trademark, design, copyright, and trade secret laws, confidentiality agreements and other
contractual relationships with our employees, customers, affiliates, distributors, suppliers and others. While substantially all
of our employees are subject to non-compete agreements, these agreements may be difficult to enforce as a result of Israeli law
limiting the scope of employee non-competition undertakings. We further note that the Israeli Supreme Court noted (in an obiter
dictum) in 2012, without making any decisive ruling, that an employee who contributes to an invention during his employment could
be allowed to seek compensation for it from their employer, even if the employee’s contract of employment specifically states
otherwise and the employee has transferred all intellectual property rights to the employer. The Israeli Supreme Court considered
the possibility that a contract that revokes the employee’s right for royalties and compensation may not necessarily foreclose
the right of the employee to claim a right for royalties. As a result, even if the Company believes that none of its employees
has any rights in any of the Company’s intellectual property, or to receive royalties, it is unclear if, and to what extent,
our employees may be able to claim compensation with respect to our future revenue. As a result, we may receive less revenue from
future products if such claims are successful, or incur additional royalty expenses, which in turn could impact our future profitability.
Our
patent portfolio includes registered patents and pending patents applications worldwide encompassing, among others, product applications,
system and product architecture and product concepts. We cannot be certain that patents will be issued with respect to any of
our pending or future patent applications or that the scope of our existing patents, or any future patents that are issued to
us, will provide us with adequate protection for our technology and products. Others may challenge our patents or patent applications
as well as our registered trademarks and other intellectual property rights. We do not know whether any of them will be upheld
as valid or will be enforceable against alleged infringers. Thus we do not know whether they will enable us to prevent or hinder
the development of competing products or technologies. Moreover, patents provide legal protection only in the countries where
they are registered and the extent of the protection granted by patents varies from country to country.
The
measures we have taken to protect our technology and products may not be sufficient to prevent their misappropriation by third
parties or their independent development by others of similar technologies or products. If our patents and other intellectual
property rights do not adequately protect our technology, competitors may be able to offer products similar to our products more
easily. Our competitors may also develop competing technology by designing around our patents and thereafter manufacturing and
selling products that compete directly with ours, which would harm our business, financial position and results of operations.
In
order to protect our technology and products and enforce our patents and other proprietary rights, we may need to initiate, prosecute
or defend litigation and other proceedings before courts and patent and trademark offices in multiple countries. Significant resources
may be required to support such litigation.
Security
breaches and system failures could expose us to liability, harm our business or result in the loss of customers.
We
retain sensitive data, including intellectual property, books of record and personally identifiable information, on our networks.
It is critical to our business strategy that our infrastructure and other infrastructure we use to host our solutions remain secure,
do not suffer system failures and are perceived by customers and partners to be secure and reliable. Despite our security measures,
our infrastructure and the third party infrastructure we use to host our solutions may be vulnerable to attacks by hackers or
other disruptive problems. Any security breach or system failure may compromise information stored on our networks. Such an occurrence
could negatively affect our reputation as a trusted provider of the affected solutions.
If
we fail to adhere to regulations and security standards imposed by credit card networks, or if our products are not certified
or otherwise fail to comply with such regulations and security standards (such as payment card industry standards, etc.) or if
our customers fail to take proper protective measures and hold OTI liable for the consequences, our results of operations could
be adversely affected.
Some
of our products are designed to collect, store, and route certain personal identifiable information from our clients and/or from
end-users, as well as processing such clients’ and/or end-users payments using payment information. In addition, we may
store such information on our servers.
We
are required by some of our customers to meet industry standards imposed by payment systems standards-setting organizations such
as EMV, credit card associations such as Visa, MasterCard, Discover and other credit card associations and standard-setting organizations
such as the Payment Card Industry Security Standards Council, or PCI SSC, and other local organizations. Furthermore, some of
our offerings are subject to the Payment Card Industry Data Security Standards, or PCI DSS, which is a set of multifaceted security
standards that are designed to protect credit card and personal information as mandated by payment card industry entities. Even
though we attempt to protect our company through our contracts with our customers, we have limited oversight or control over the
actions and practices of our clients and other third-party service providers.
New
standards are continually being adopted or proposed as a result of worldwide anti-fraud initiatives, encryption of cardholder
or personal information, the increasing need for system compatibility and technology developments such as wireless, optical fiber
infrastructure, telecommunication, virtual private network, or VPN, VPN infrastructure, satellite-based communication and another
wireline IP communication. We cannot ensure that we will be able to design our solutions to comply with future standards or regulations
on a timely basis, if at all. Compliance with these standards could increase the cost of developing or producing our products,
while non-compliance may harm our reputation or result in customer and client claims. New products designed to meet any new standards
need to be introduced to the market and ordinarily need to be certified by the credit card associations and our customers before
being purchased. The certification process is costly and time-consuming and increases the amount of time and resources it takes
to sell our products, as well as the product development cycle time and cost. Selling products that are non-compliant may result
in fines against us or our customers, which we may be liable to pay. After selling and/or installation of a system or a product,
the customer is responsible for any operational aspect of such system or product ensuring them from unexpected crashes.
In
addition, even if our products are designed to be compliant, compliance with certain security standards is determined on the basis
of the network environment in which our customers and service providers install our products. Therefore, such compliance depends
upon additional factors such as the proper installation of the components of the environment (including our systems, compliance
of software and system components provided by other vendors), implementation of compliant security processes and business practices
and adherence to such processes and practices.
Our
business and financial condition could be adversely affected if we do not comply with new or existing industry standards and regulations,
or obtain or retain necessary regulatory approval or certifications in a timely fashion, or if compliance results in increasing
the cost of our products.
Our
products may infringe on the IP rights of others.
It
is not always possible to know with certainty whether or not the manufacture and sale of our products or the licenses we are granted
from third parties infringe patents or other IP rights owned by third parties. Third parties may, from time to time, claim that
our products infringe on their patent or other IP rights. In addition, if third parties claim that our customers are violating
their IP rights, our customers may seek indemnification from us or may terminate their relationships with us.
IP
rights litigation is complex and costly, and we cannot be sure of the outcome of any litigation. Even if we prevail, the cost
of litigation could harm our results of operations. In addition, litigation is time-consuming and could divert our management’s
attention and resources away from our business. If we do not prevail in such litigation, in addition to any damages we might have
to pay, we might be required to discontinue the use of certain processes, cease the manufacture, use and sale of infringing products
and solutions, and expend significant resources to develop non-infringing technology or obtain licenses on unfavorable terms.
In addition, some licenses are non-exclusive and, therefore, our competitors may have access to the same technology licensed to
us.
Changes
in international markets and difficulties with international operations could harm our business.
We
derive revenues from different geographical areas. Our ability to maintain our position in existing markets and/or to penetrate
new, regional and local markets is dependent, in part, on the stability of regional and local economies. Our regional sales may
continue to fluctuate widely and may be adversely impacted by future political or economic instability in these or other foreign
countries or regions.
In
addition, there are inherent risks in these international operations which include, among others:
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changes
in regulatory requirements and communications standards;
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changes
in external political policies, such as embargos based on manufacturing origin;
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political
and economic instability;
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required
licenses, tariffs and other trade barriers;
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difficulties
in enforcing IP rights across, or having to litigate disputes in, various jurisdictions;
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difficulties
in staffing and managing international operations;
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potentially
adverse tax consequences;
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the
burden of complying with a wide variety of complex laws and treaties in various jurisdictions; and
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business
interruptions resulting from geopolitical actions, including war and terrorism, or natural disasters including earthquakes,
typhoons, floods, and fires.
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If
we are unable to manage the risks associated with our focus on international sales, our business may be harmed.
Currency
fluctuations could adversely affect our results of operations.
We
generate a significant portion of our revenues in U.S. Dollars, but we incur some of our expenses in other currencies. Our principal
non-U.S. Dollar expenses are for Israeli employees’ salaries, which are in New Israeli Shekels, or NIS. Our subsidiary in
Poland, ASEC, incurs expenses in Polish Zloty and our subsidiary in South Africa, OTI PetroSmart, incurs expenses in South African
Rand. To the extent that we and our subsidiaries conduct our business in different currencies, our revenues and expenses and,
as a result, our assets and liabilities, are not necessarily accounted for in the same currency. We are therefore exposed to foreign
currency exchange rate fluctuations. These fluctuations may negatively affect our results of operations. Our operations could
also be adversely affected if we are unable to limit our exposure to currency fluctuations in the future.
To
mitigate the risk of financial exposure to fluctuations in the exchange rate of the U.S. Dollar against the NIS or other currencies,
we may enter into currency hedging transactions. However, these measures may not adequately protect us from material adverse effects
resulting from currency fluctuations. In addition, if we wish to maintain the U.S. Dollar-denominated value of sales made in other
currencies, any devaluation of the other currencies relative to the U.S. Dollar would require us to increase our other currency
denominated selling prices which could negatively affect our sales.
Our
international sales and operations are subject to complex laws relating to foreign corrupt practices and bribery, among many other
subjects. A violation of, or change in, these laws could adversely affect our business, financial condition or results of operations.
Our
operations in countries outside the U.S. are subject, among others, to the Foreign Corrupt Practices Act of 1977 as amended from
time to time, or FCPA, which prohibits U.S. companies or foreign companies which their shares are traded on a U.S. stock exchange,
or their agents and employees from providing anything of value to a foreign public official as defined in the FCPA for the purposes
of influencing any act or decision of these individuals in their official capacity to help obtain or retain business, direct business
to any person or corporate entity, or obtain any unfair advantage. We have internal control policies and procedures with respect
to the FCPA. However, we cannot assure that our policies and procedures will always protect us from reckless or criminal acts
that may be committed by our employees or agents. Violations of the FCPA may result in severe criminal or civil sanctions, and
we may be subject to other liabilities, which could have a material adverse effect on our business, consolidated results of operations
and consolidated financial condition. In addition, investigations by governmental authorities as well as legal, social, economic,
and political issues in countries where we operate could have a material adverse effect on our business and consolidated results
of operations. We are also subject to the risks that our employees or agents outside of the U.S. may fail to comply with other
applicable laws. The costs of complying with these and similar laws may be significant and may require significant management
time and focus. Any violation of these or similar laws, intentional or unintentional, could have a material adverse effect on
our business, financial condition or results of operations.
We
are using third parties’ goods and services from time to time. Although we make efforts to ensure the service quality, we
cannot control the actions of such third parties, and therefore we may be subject to claims and risks.
We
depend on third-party service providers, suppliers, and licensors to supply some of the services, hardware, software and operational
support necessary to provide some of our services. If these vendors experience operating or financial difficulties or are otherwise
unable to provide the equipment or services we need fully or in a timely manner, at our specifications and at reasonable prices,
our ability to provide some services might be materially adversely affected, or the need to procure or develop alternative sources
of the affected materials or services might delay our ability to serve our customers. These events could materially and adversely
affect our ability to retain and attract customers, and have a material negative impact on our operations, business, financial
results and financial condition.
We
may have to adapt our products in order to integrate them into our customers’ systems if new government regulations or industry
standards are adopted or current regulations or standards are changed.
Some
of our products and/or future products under development are or may be subject to government or international regulation in the
countries in which they are used. Some of our systems are also required to meet safety regulation standards. In addition, governmental
or international certification for the systems into which our products are integrated may be required. If there is a change in
government regulations or industry standards, we may have to make significant modifications to our products and, as a result,
could incur significant costs and may be unable to deploy our products in a timely manner.
In addition, prior
to purchasing our products, some customers may require us to receive or obtain a third-party certification, or occasionally certify
our products by ourselves, that our products can be integrated successfully into their systems or comply with applicable regulations.
In some cases, in order for our products, or for the system into which they are integrated, to be certified, we may have to make
significant product modifications. Furthermore, receipt of third party certifications may not occur in a timely manner or at all.
Failure to receive third-party certifications could render us unable to deploy our products in a timely manner or at all, which
may adversely affect our operations, business, financial results and financial condition.
Defects
in our products could harm our reputation, result in loss of customers and revenues or subject us to product liability claims.
Our
products are highly technical and deployed as part of large and complex projects. As a result of the nature of our products, they
can only be fully tested when fully deployed. Any defects in our products could result in harm to our reputation; loss of, or
delay in, revenues; loss of customers and market share; failure to attract new customers or achieve market acceptance for our
products; unexpected expenses to remedy such defects; and/or exposure to potential product liability claims.
While
we currently maintain product liability insurance, we cannot be certain that this insurance will be sufficient to cover any successful
product liability claim. Any product liability claim could result in changes to our insurance policies, including premium increases
or the imposition of a large deductible or co-insurance requirements. Any product liability claim in excess of our insurance coverage
would have to be paid out of our cash reserves. Furthermore, the assertion of product liability claims, regardless of the merits
underlying the claim, could result in substantial costs to us, divert management’s attention away from our operations and
damage our reputation.
We
have certain operations in countries that may be adversely affected by political or economic instability.
We
are a global company with worldwide operations. In addition to being headquartered in Israel, we derive a certain portion of our
sales and future growth from regions such as Latin America, Eastern Europe and Africa, which may be more susceptible to political
or economic instability.
Certain portions of
our operations are conducted outside the markets in which our products are sold, and accordingly, we often import a substantial
number of products into such markets. We may, therefore, be denied access to our customers or suppliers or denied the ability to
ship products from any of our sites as a result of a closing of the borders of the countries in which we sell our products, or
in which our operations are located, due to economic, legislative or political conditions. This could have a material negative
impact on our operations, business, financial results and financial condition.
The
general economic outlook may adversely affect our business.
Our
operations and performance depend on worldwide economic conditions and their impact on levels of business and public spending.
Fluctuations or downturns in global or regional economies may adversely affect the budgeting and purchasing behavior of our customers
and our potential customers, including shifting customers, purchasing patterns to lower-cost options, which could adversely affect
our product sales.
In
addition, uncertainties in financial and credit markets may adversely affect the ability of our customers, suppliers, distributors
and resellers to obtain financing for significant purchases and operations and to fulfill their contractual obligations with us.
As a result, we could encounter, among other adverse effects, a decrease in or cancellation of orders for our products, and an
increase in additional reserves for uncollectible accounts receivable being required.
We
derive a portion of our revenues from sales to resellers that are not the end-users of our products. We are dependent, to a certain
extent, on the ability of these resellers to maintain their existing business and secure new business.
Some
of our revenues are derived from sales to customers and distributors that incorporate our products into systems which they supply
and install for use by their end-use customers. While we view such resellers as our final customers, our revenues may decline
if the efforts of these resellers fail in their efforts to sell their products or to resell our products. Further, the faulty
or negligent implementation and installation of our products by our customers or their end-use customers may harm our reputation
and dilute our brand name. We are one step removed from the end-users of our products, and therefore it may be more difficult
for us to rectify damage to our reputation caused by resellers that have direct contact with end-users. In addition, termination
of agreements with resellers or revocation of exclusive distribution rights within certain countries might be difficult. If we
are unable to maintain our current relationships with resellers or develop relationships with new resellers, we may not be able
to sell our products, and our results of operations could be impaired.
While
we also sell directly to end-users, our future success will depend upon the timing and size of future purchases by resellers and
the success of their products and services for which they use our products.
We
are exposed to credit risk with some of our customers and to credit exposures and currency controls, which could result in material
losses.
A
significant portion of our net revenues is on an open credit basis that we provide to our customers. While we assess collectability
for revenue recognition purposes on a regular basis, credit risks may be higher and collections may be more difficult to enforce,
and future losses due to inability to collect some or a major part of future revenues, if incurred, could harm our business and
have a material adverse effect on our operating results and financial condition. Additionally, to the extent that any uncertainty
in the global economy makes it more difficult for some customers to obtain financing, our customers’ ability to pay could
be adversely impacted, which in turn could have a material adverse impact on our business, cash flows, operating results, and
financial condition.
We
may face SEC enforcement risks with respect to conflict minerals obligations.
The
SEC has adopted disclosure requirements under section 102 of the Dodd-Frank Wall Street Reform and Consumer Protection Act regarding
the source of certain minerals for which such conflict minerals are necessary to the functionality or production of a product
manufactured, or contracted to be manufactured which are mined from the Democratic Republic of Congo, and adjoining countries,
including Sudan, Uganda, Burundi, United Republic of Tanzania, Zambia, Angola, and the Central African Republic. These rules require
reporting companies to file a conflict minerals report as an exhibit to a Form SD report with the SEC, which we did as required
in 2017. The conflict minerals report is required to set out the due diligence efforts and procedures exercised on the source
and chain of custody of such conflict minerals, in accordance with internationally recognized due diligence framework, and a description
of the Company’s products containing such conflict minerals. Although we expect that we will be able to continue to comply
with the requirements of the applicable rules, we have incurred, and expect to continue to incur costs to conduct a country of
origin inquiries and to exercise such due diligence. In addition, in preparing to do so, the Company is dependent upon the implementation
of new systems and processes and information supplied by certain suppliers of products that contain, or potentially contain conflict
minerals. To the extent that the information that it receives from its suppliers is inaccurate or inadequate or its processes
in obtaining that information do not fulfill the SEC’s requirements, the Company could face SEC enforcement risks.
Risks
Related to Our Ordinary Shares
Our
share price has fluctuated in the past and may continue to fluctuate in the future.
The
market price of our Ordinary Shares has fluctuated significantly and may continue to do so. The market price of our Ordinary Shares
may be significantly affected by factors such as the announcements of new products or product enhancements by us or our competitors,
technological innovations by us or our competitors or periodic variations in our results of operations. In addition, any statements
or changes in estimates by analysts covering our shares or relating to the industries in which we operate could result in an immediate
effect that may be adverse to the market price of our shares.
Trading
in shares of companies listed on Nasdaq in general, and trading in shares of technology companies in particular, has been subject
to extreme price and volume fluctuations that have been unrelated or disproportionate to operating performance. These factors
may depress the market price of our Ordinary Shares, regardless of our actual operating performance.
Securities
litigation has also often been brought against companies following periods of volatility in the market price of its securities.
In the future, we may be the target of similar litigation that could result in substantial costs and diversion of our management’s
attention and resources.
We
may not be able to meet Nasdaq continued listing standards, which require a minimum closing bid price of $1.00 per share, which
could result in our delisting and negatively impact the price of our Ordinary Shares and our ability to access the capital markets.
Our
Ordinary Shares are listed on the Nasdaq Capital Market.
N
asdaq
provides
various continued listing requirements that a company must meet in order for its stock to continue trading on the N
asdaq
Capital Market. Among these requirements is the requirement that the Company’s stock
trades at a minimum bid price of $1.00 per share.
On October 14, 2015, we received a written notice from Nasdaq indicating
that we were not in compliance with Nasdaq listing requirements, as our closing bid price for our Ordinary Shares was below $1.00
per share for the previous 30 consecutive trading days. On July 25, 2016, following a transfer from the Nasdaq Global Market to
the Nasdaq Capital Market and a period in which our minimum bid price exceeded $1.00 per share, we regained compliance with Nasdaq’s
minimum listing requirements. There is no assurance that our share price will continue to trade
at
or above a minimum bid price of $1.00 per share and if we again fail to meet minimum listing requirements
there can be no
assurance that we will be able to regain compliance with the minimum bid price requirement or will otherwise be in compliance with
other Nasdaq listing criteria. Any such delisting could adversely affect our ability to obtain financing for the continuation of
our operations and could result in the loss of confidence by investors, customers and employees.
We
may need additional funds in the future and our share price could be adversely affected by future sales of our Ordinary Shares.
As
of December 31, 2017, we had 41,174,378 outstanding Ordinary Shares, 1,178,699 Ordinary Shares that were repurchased by us and
are held as dormant shares, 40,000 warrants to purchase additional Ordinary Shares at a weighted average exercise price of $0.95
per share and 1,495,000 options to purchase additional Ordinary Shares at a weighted average exercise price of $1.27 per share.
On October 20, 2017, we filed a shelf registration statement on Form S-3 with the SEC, or Shelf Registration, which was declared
effective on November 15, 2017, under which we may, from time to time, sell up to an aggregate of $50 million of our securities,
subject to limitations, based on the value of our shares held by non-affiliates. We have implemented certain cost reduction initiatives
and have reached certain arrangements and agreements that we expect will provide additional cash resources and are constantly
looking for ways to increase our cash resources to fund our operating expenses and capital requirements. However, there is no
assurance we will not need additional funds in the future to meet our operating expenses and capital requirements, and we may
use the Shelf Registration in the future to raise funds by additional public offerings or issue additional Ordinary Shares. The
market price of our Ordinary Shares could drop as a result of sales of substantial amounts of our Ordinary Shares in the public
market or the perception that such sales may occur, including sales or perceived sales by our directors, officers or principal
shareholders. These factors could also make it more difficult to raise additional funds through future offerings of our Ordinary
Shares or other securities. Also if we are unable to obtain additional funds on terms favorable to us, or at all, we may be required
to cease or reduce our operating activities.
Our
shareholders could experience dilution of their ownership interest by reason of our issuing more shares.
Under
Israeli law, shareholders in public companies do not have preemptive rights. This means that our shareholders do not have the
legal right to purchase shares in a new issue before they are offered to third parties. In addition, our Board may approve in
the future the use of the Shelf Registration and the issuance of shares in many instances without shareholder approval. As a result,
our shareholders could experience dilution of their ownership interest by reason of our raising additional funds through the issuance
of Ordinary Shares. In addition, we may choose to acquire companies or businesses in exchange for our shares, resulting in further
dilution.
The
number of our authorized and unissued share capital may not be sufficient to allow us to raise additional capital or to otherwise
issue equity securities that our Board may deem are in our best interest.
As
of December 31, 2017, we have only 5,488,424 authorized but unissued and unreserved Ordinary Shares. The current number of these
unissued and unreserved shares may not be sufficient to allow us to conduct future offerings of our equity securities to raise
capital, to grant options or to conduct other strategic transactions with our Ordinary Shares. Under Israeli corporate law, any
increase in our authorized share capital requires the approval of our shareholders. Obtaining shareholder approval may delay or
otherwise interfere with conducting transactions of the type mentioned above. Furthermore, there is no assurance that our shareholders
will approve a proposal to increase our share capital.
We
do not anticipate paying cash dividends in the foreseeable future.
We
have never declared or paid cash dividends on our Ordinary Shares, and we do not anticipate paying cash dividends in the foreseeable
future. Any return to investors is expected to come, if at all, only from potential increases in the price of our Ordinary Shares.
The payment of any dividends by the Company is solely at the discretion of our Board and based on the conditions set forth in
the Israeli Companies Law, or the Companies Law.
We
may fail to maintain effective internal control in accordance with Section 404 of the Sarbanes-Oxley Act of 2002.
The
Sarbanes-Oxley Act of 2002 imposes certain duties on us and our executives and directors. Our efforts to comply with the requirements
of the Sarbanes-Oxley Act, and in particular with Section 404, have resulted in increased general and administrative expenses
and a diversion of management time and attention, and we expect these efforts to require the continued commitment of resources.
If we fail to maintain the adequacy of our internal controls, we may not be able to ensure that we can conclude on an ongoing
basis that we have effective internal control over financial reporting. Although our management has determined that we had effective
internal control over financial reporting as of December 31, 2017, we may identify material weaknesses or significant deficiencies
in our future internal control over financial reporting. In addition, as a smaller reporting company, our internal control over
financial reporting is not required to be audited by our independent registered public accounting firm. Failure to maintain effective
internal control over financial reporting could result in investigation or sanctions by regulatory authorities and could have
a material adverse effect on our operating results, investor confidence in our reported financial information, and the market
price of our Ordinary Shares.
Risks
Related to Conducting Business in Israel
Security,
political and economic instability in the Middle East may harm our business.
We
are incorporated under the laws of the State of Israel, and our principal offices and research and development facilities are
located in Israel. Accordingly, security, political and economic conditions in the Middle East in general, and in Israel in particular,
may directly affect our business.
Over
the past several decades, a number of armed conflicts have taken place between Israel and its Arab neighbors and a state of hostility,
varying in degree and intensity, has led to security and economic problems for Israel. From time to time since late 2000, there
has also been a high level of violence between Israel and the Palestinians. Any armed conflicts or political instability in the
region, including acts of terrorism or any other hostilities involving or threatening Israel, would likely negatively affect business
conditions and could make it more difficult for us to conduct our operations in Israel, which could increase our costs and adversely
affect our financial results.
Furthermore,
some countries, as well as certain companies and organizations, participate in a boycott of Israeli firms and others doing business
with Israel or with Israeli companies. Restrictive laws, policies or practices directed towards Israel or Israeli businesses could
have an adverse impact on the expansion of our business. In addition, we could be adversely affected by the interruption or curtailment
of trade between Israel and its trading partners, a significant increase in the rate of inflation, or a significant downturn in
the economic or financial condition of Israel.
Our
operations could be disrupted as a result of the obligation of key personnel to perform Israeli military service.
Our
employees are required to perform annual military reserve duty in Israel and may be called to active duty at any time under emergency
circumstances. Our operations could be disrupted by the absence for a significant period of one or more of our executive officers
or other key employees due to military service. Any disruption to our operations would harm our business.
The
Israeli government programs in which we currently participate, and the Israeli tax benefits we are currently entitled to, require
us to meet several conditions, and they may be terminated or reduced in the future. This could increase our costs and/or our taxes.
We
are entitled to certain tax benefits under Israeli government programs, largely as a result of the “Approved Enterprise”
status granted to some of our capital investment programs by the Israeli Ministry of Finance, and due to eligibility of tax benefits
under the “Preferred Enterprise” routes. These benefits include tax exemption or reduced tax rates. Without such benefits,
our taxable income would be taxed at the regular corporate tax rate (24% in 2017). To maintain our eligibility for these tax benefits,
we must continue to meet conditions, including making specified investments in property, plant, and equipment and maintaining
a certain minimum level of export sales. We cannot assure that we will continue to be eligible for these tax benefits at the same
rate or at all. The termination or reduction of these programs and tax benefits could increase our taxes, once we become profitable,
and could have a material adverse effect on our business.
Because
we received grants from the Israeli Innovation Authority, we are subject to ongoing restrictions relating to our business.
In
the past, we have received royalty-bearing grants from the Israeli Innovation Authority (formerly the Office of the Chief Scientist
of the Israeli Ministry of Economy), or the IIA, for research and development of certain of our products. We are obligated to
pay royalties with respect to the grants that we received. In addition, the terms of the IIA grants limit our ability to manufacture
products or transfer technologies outside of Israel if such products or technologies were developed using know-how developed with
or based upon IIA grants. Pursuant to the Israeli Encouragement of Research and Development in the Industry Law, we and any non-Israeli
who becomes a holder of 5% or more of our share capital are generally required to notify the IIA and such non-Israeli shareholder
is required to undertake to observe the law governing the grant programs of the IIA, the principal restrictions of which are the
transferability limits described above.
The
terms of grants we received from the Israeli government for certain of our research and development activities may require us,
in addition to the payment of royalties, to satisfy specified conditions in order to manufacture products or transfer technologies
outside of Israel. We may also be required to pay penalties in addition to repayment of the grants.
Our
research and development efforts, during the period between 1999 and 2006, were financed in part through royalty-bearing grants
that we received from the IIA. As of December 31, 2017, we received a total of approximately $7 million from the IIA. The total
amount of grants received until December 31, 2017, net of royalties paid, was approximately $3.7 million (including accrued interest).
With respect to such grants, we are committed to pay the IIA royalties at a rate of 3%-3.5% from the sales of products developed
with grant funds, up to the total amount of grants received, linked to the dollar and bearing interest at an annual rate of LIBOR
applicable to dollar deposits. Even following full repayment of the IIA grants, we are required to comply with the requirements
of the Israeli Encouragement of Industrial Research and Development Law, 5744-1984, and related regulations, or the Research Law.
When a company develops know-how, technology or products using IIA grants, the terms of these grants and the Research Law restrict
the transfer of such know-how, and the transfer of manufacturing or manufacturing rights of such products, technologies or know-how
outside of Israel, without the prior approval of the IIA. Therefore, if aspects of our technologies are deemed to have been developed
with IIA funding, the discretionary approval of an IIA committee would be required for any transfer to third parties outside of
Israel of IIA-supported know-how or manufacturing or manufacturing rights related to those aspects of such technologies, and may
result in payment of increased royalties (both increased royalty rates and increased royalties ceilings) and/or payment of additional
amounts to the IIA. We may not receive such approvals. Furthermore, the IIA may impose certain conditions on any arrangement under
which it permits us to transfer technology or development out of Israel (including for the purpose of manufacturing). Licensing
IIA-supported technologies may, under certain circumstances, be considered a transfer of know-how and therefore may require approval
as aforementioned.
The
transfer of IIA-supported technology, manufacturing or manufacturing rights or know-how outside of Israel may involve the payment
of additional amounts depending upon the value of the transferred technology or know-how, the amount of IIA support, the time
of completion of the IIA-supported research project and other factors up to a maximum of six times the amount of the grants received.
These restrictions and requirements for payment may impair our ability to sell our technology assets outside of Israel or to outsource
or transfer development or manufacturing activities with respect to any product or technology outside of Israel.
Furthermore,
the consideration available to our shareholders in a transaction involving the transfer outside of Israel of technology or know-how
developed with IIA funding (such as a merger or similar transaction) may be reduced by any amounts that we are required to pay
to the IIA.
Our
obligations and limitations pursuant to the Research Law are not limited in time and may not be terminated by us at will.
It
may be difficult to enforce a U.S. judgment against us, our officers and directors or to assert U.S. securities law claims in
Israel.
We
are incorporated in Israel. Some of our executive officers are not residents of the United States, and a substantial portion of
our assets is located outside of the United States. Therefore, it may be difficult for an investor, or any other person or entity,
to enforce a U.S. court judgment based upon the civil liability provisions of the U.S. federal securities laws in an Israeli court
against us or any of these persons or to affect service of process upon these persons in the United States. Additionally, it may
be difficult for an investor, or any other person or entity, to enforce civil liabilities under U.S. federal securities laws in
original actions instituted in Israel.
Provisions
of Israeli law may delay, prevent or make undesirable an acquisition of all or a significant portion of our shares or assets.
The Companies Law regulates
acquisitions of shares through tender offers, requires special approvals for transactions involving shareholders holding 25% or
more of a company’s capital, and regulates other matters that may be relevant to these types of transactions. These provisions
of Israeli law could have the effect of delaying or preventing a change in control and may make it more difficult for a third party
to acquire us, even if doing so would be beneficial to our shareholders. These provisions may limit the price that investors may
be willing to pay in the future for our Ordinary Shares. Furthermore, Israeli tax considerations may make potential transactions
undesirable to us or to some of our shareholders.