SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 20-F
| ☐ | REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 |
OR
| ☒ | | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2020 |
For the fiscal year ended December 31, 2018
OR
☐
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from __________ to __________
| ☐ | SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of event requiring this shell company report................. |
Date of event requiring this shell company report.................
Commission file number: 0-28950
MER TELEMANAGEMENT SOLUTIONS LTD.
(Exact Name of Registrant as specified in its charter
and translation of Registrant’s name into English)
Israel
(Jurisdiction of incorporation or organization)
1514 Hatidhar Street, P.O. Box 2112 Ra’anana 4366517, Israel
(Address of principal executive offices)
Ofira Bar (Chief Financial Officer), +972-9-7777-540 (phone), +972-9-7777-566 (fax)
1514 Hatidhar Street, P.O. Box 2112 Ra’anana 4366517, Israel
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of each class | | Trading Symbol(s) | | Name of each exchange on which registered |
Ordinary Shares, NIS 0.03 Par Value | NASDAQ | MTSL | | Nasdaq Capital Market |
Securities registered or to be registered pursuant to Section 12(g) of the Act: None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None
Indicate the number of outstanding shares of each of the issuer'sissuer’s classes of capital or common stock as of the close of the period covered by the annual report:
4,424,991 Ordinary Shares par value NIS 0.03 per share…………… 3,294,323
(as of December 31, 2018)2020.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ☐ No ☒
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
| | | |
Large accelerated filer ☐ | Accelerated filer ☐ | Non-accelerated filer ☒ | Emerging growth company ☐ |
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act. ☐
† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
| | |
U.S. GAAP ☒ | International Financial Reporting Standards as issued by the International Accounting Standards Board ☐ | Other ☐ |
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow:
Item 17 ☐ Item 18 ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
This Report on Form 20-F is incorporated by reference into our Form S-8 Registration Statements File Nos. 333-123321 and 333-180369.
INTRODUCTION
We are a global provider of solutions for telecommunications expense management, or TEM, enterprise mobility management, or EMM, call usage and accounting software, or CAOur TEM solutions allow enterprises and organizations to make smarter choices with their telecommunications spending at each stage of the service lifecycle, including allocation of cost, proactive budget control, fraud detection, processing of payments and spending forecasting.
In June 2018, we sold the assets relating to our former online video advertising solution business that was provided through Vexigo Ltd., a wholly-owned subsidiary of our company, to an unaffiliated third party for $250,000. Following the sale on June 1, 2018, Vexigo Ltd ceased its business operations.
Since our public offering in May 1997, our ordinary shares have been listed on the NASDAQ Stock Market (symbol: MTSL) and are presently listed on the NASDAQ Capital Market. As used in this annual report, the terms “we,” “us”, “our” and “our”“MTS” mean Mer Telemanagement Solutions Ltd. and its subsidiaries, unless otherwise indicated. As used in this annual report, “MTS IntegraTRAK” means MTS IntegraTRAK Inc., our wholly-owned U.S. subsidiary.
We own U.S. trademark rights for CALLTRAC®, ANCHORPOINT®, MAP-TO-WIN® and TOTAL-e™ and have common law rights in the trademarks TABS.IT, PMSI, TELSOFT SOLUTIONS, TELSOFT, MEGACALL and CALLTRAC LITE, based on use of the marks in the United States. All other trademarks and trade names appearing in this annual report are owned by their respective holders.
Our consolidated financial statements appearing in this annual report are prepared in U.S. dollars and in accordance with generally accepted accounting principles in the United States, or U.S. GAAP. All references in this annual report to “dollars” or “$” are to U.S. dollars and all references in this annual report to “NIS” are to New Israeli Shekels.
Statements made in this annual report concerning the contents of any contract, agreement or other document are summaries of such contracts, agreements or documents and are not complete descriptions of all of their terms. If we filed any of these documents as an exhibit to this annual report or to any registration statement or annual report that we previously filed, you may read the document itself for a complete description of its terms.
Except for the historical information contained in this annual report, the statements contained in this annual report are “forward‑looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and the Private Securities Litigation Reform Act of 1995, as amended, with respect to our business, financial condition and results of operations. Such forward-looking statements reflect our current view with respect to future events and financial results. We urge you to consider that statements which use the terms “anticipate,” “believe,” “do not believe,” “expect,” “plan,” “intend,” “estimate,” “anticipate” and similar expressions are intended to identify forward‑looking statements. We remind readers that forward-looking statements are merely predictions and therefore inherently subject to uncertainties and other factors and involve known and unknown risks that could cause the actual results, performance, levels of activity, or our achievements, or industry results, to be materially different from any future results, performance, levels of activity, or our achievements expressed or implied by such forward-looking statements. Such forward-looking statements are also included in Item 4 – “Information on the Company” and Item 5 – “Operating and Financial Review and Prospects.” Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. Except as required by applicable law, including the securities laws of the United States, we undertake no obligation to publicly release any update or revision to any forward‑looking statements to reflect new information, future events or circumstances, or otherwise after the date hereof. We have attempted to identify significant uncertainties and other factors affecting forward-looking statements in the Risk Factors section that appears in Item 3D. “Key Information - Risk Factors.”
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
A. Selected Financial Data
The following selected consolidated financial data for and as of the five years ended December 31, 20182020 are derived from our audited consolidated financial statements, which have been prepared in accordance with U.S. GAAP. Our audited consolidated financial statements for the three years ended December 31, 20182020 and as of December 31, 20172019 and 20182020 appear elsewhere in this annual report. Our selected consolidated financial data as of December 31, 2014, 20152016, 2017 and 20162018 and for the years ended December 31, 20142015 and 20152016 have been derived from audited consolidated financial statements not included in this annual report. In June 2018, we sold the assets relating to our former Vexigo online video advertising solution business to an unaffiliated third party for $250,000. Following the sale on June 1, 2018, Vexigo Ltd ceased its business operations. The results of the discontinued operations including prior periods' comparable results, assets and liabilities have been retroactively included in discontinued operations.The selected consolidated financial data set forth below should be read in conjunction with and are qualified entirely by reference to Item 5. “Operating and Financial Review and Prospects,” and our consolidated financial statements and notes thereto included elsewhere in this annual report.
Statement of Operations Data:
| | Year Ended December 31, | |
| | 2018 | | | 2017 | | | 2016 | | | 2015 | | | 2014 | |
| | (U.S. dollars in thousands, except share and per share data) | |
Revenues | | $ | 5,861 | | | $ | 6,773 | | | $ | 7,551 | | | $ | 7,695 | | | $ | 7,066 | |
Cost of revenues | | | 2,149 | | | | 2,058 | | | | 2,708 | | | | 3,068 | | | | 2,893 | |
Gross profit | | | 3,712 | | | | 4,715 | | | | 4,843 | | | | 4,627 | | | | 4,173 | |
Research and development | | | 825 | | | | 1,645 | | | | 1,754 | | | | 1,278 | | | | 1,868 | |
Selling and marketing | | | 1,471 | | | | 1,529 | | | | 1,765 | | | | 2,005 | | | | 1,387 | |
General and administrative | | | 2,239 | | | | 1,966 | | | | 2,207 | | | | 2,583 | | | | 2,459 | |
Operating loss | | | (823 | ) | | | (425 | ) | | | (883 | ) | | | (1,239 | ) | | | (1,541 | ) |
| | | | | | | | | | | | | | | | | | | | |
Financial income (expenses), net | | | (17 | ) | | | | | | | 2 | | | | 6 | | | | (95 | ) |
Loss before taxes on income | | | (840 | ) | | | (411 | ) | | | (881 | ) | | | (1,233 | ) | | | (1,636 | ) |
Taxes on income (benefit), net | | | 46 | | | | (9 | ) | | | 63 | | | | 66 | | | | 54 | |
| | | (886 | ) | | | (402 | ) | | | (944 | ) | | | (1,299 | ) | | | (1,690 | ) |
Net income (loss) from discontinued operations | | | (284 | ) | | | (1,366 | ) | | | (4,277 | ) | | | (3,440 | ) | | | 80 | |
Net loss | | $ | (1,170 | ) | | $ | (1,768 | ) | | $ | (5,221 | ) | | $ | (4,739 | ) | | $ | (1,610 | ) |
Basic and diluted net loss per share from continuing operations | | $ | (0.26 | ) | | $ | (0.13 | ) | | $ | (0.33 | ) | | $ | (0.54 | ) | | $ | (1.08 | ) |
Basic and diluted net loss per share from discontinued operations | | $ | (0.08 | ) | | $ | (0.46 | ) | | $ | (1.52 | ) | | $ | (1.44 | ) | | $ | 0.06 | |
Basic and diluted net loss per share | | $ | (0.34 | ) | | $ | (0.59 | ) | | $ | (1.85 | ) | | $ | (1.98 | ) | | $ | (0.14 | ) |
Weighted average number of ordinary shares used in computing basic net loss per share | | | 3,435,161 | | | | 2,991,547 | | | | 2,817,427 | | | | 2,391,664 | | | | 1,556,988 | |
Weighted average number of ordinary shares used in computing diluted net loss per share | | | 3,435,161 | | | | 2,991,547 | | | | 2,817,427 | | | | 2,391,664 | | | | 1,556,988 | |
Statement of Operations Data: | | | | | | | | | | | | | | | |
| | | |
| | | | | | | | | | | | | | | |
| | (U.S. dollars in thousands, except share and per share data) | |
Revenues | | | 4,018 | | | $ | 5,193 | | | $ | 5,861 | | | $ | 6,773 | | | $ | 7,551 | |
Cost of revenues | | | | | | | | | | | | | | | | | | | | |
Gross profit | | | 2,223 | | | | 3,336 | | | | 3,712 | | | | 4,715 | | | | 4,843 | |
Research and development | | | - | | | | 545 | | | | 825 | | | | 1,645 | | | | 1,754 | |
Selling and marketing | | | 752 | | | | 817 | | | | 1,471 | | | | 1,529 | | | | 1,765 | |
General and administrative | | | 1,867 | | | | 1,890 | | | | 2,239 | | | | 1,966 | | | | 2,207 | |
Goodwill impairment | | | | | | | | | | | | | | | | | | | | |
Operating loss | | | (2,119 | ) | | | (170 | ) | | | (823 | ) | | | (425 | ) | | | (883 | ) |
Financial income (expenses), net | | | 16 | | | | (18 | ) | | | (17 | ) | | | 14 | | | | 2 | |
Loss before taxes on income | | | (2,103 | ) | | | (188 | ) | | | (840 | ) | | | (411 | ) | | | (881 | ) |
Taxes on income (benefit), net | | | | | | | | | | | | | | | | | | | | |
Net loss from continuing operations | | | | | | | | | | | | | | | | | | | | |
Net income (loss) from discontinued operations | | | | | | | | | | | | | | | | | | | | |
Net loss | | | | | | | | | | | | | | | | | | | | |
Basic and diluted net loss per share from continuing operations | | | | | | | | | | | | | | | | | | | | |
Basic and diluted net loss per share from discontinued operations | | | | | | | | | | | | | | | | | | | | |
Basic and diluted net loss per share | | | | | | | | | | | | | | | | | | | | |
Weighted average number of ordinary shares used in computing basic net loss per share | | | | | | | | | | | | | | | | | | | | |
Weighted average number of ordinary shares used in computing diluted net loss per share | | | | | | | | | | | | | | | | | | | | |
Balance Sheet Data:
| | As of December 31, | | | | |
| | 2018 | | | 2017 | | | 2016 | | | 2015 | | | 2014 | | | | | | | | | | | | | | | | |
| | (in thousands) | | | (in thousands) | |
Working capital (deficiency)* | | $ | (376 | ) | | $ | (1,474 | ) | | $ | (2,736 | ) | | $ | (737 | ) | | $ | 2,090 | | | 685 | | | $ | 503 | | | $ | (376 | ) | | $ | (1,474 | ) | | $ | (2,736 | ) |
Total assets | | | 7,487 | | | | 8,646 | | | | 12,288 | | | | 22,024 | | | | 10,892 | | | 5,51 | | | 8,043 | | | 7,523 | | | 8,646 | | | 12,288 | |
Shareholders’ equity | | | 2,403 | | | | 1,712 | | | | 1,860 | | | | 6,149 | | | | 5,632 | | | 2,021 | | | 3,105 | | | 2,403 | | | 1,712 | | | 1,860 | |
_____________
| * | Working capital deficiency excludes discontinued operations. |
B. Capitalization and Indebtedness
Not applicable.
C. Reasons for the Offer and Use of Proceeds
Not applicable.
D. Risk Factors
Investing in our ordinary shares involves a high degree of risk and uncertainty. You should carefully consider the risks and uncertainties described below before investing in our ordinary shares. If any of the following risks actually occurs, our business, prospects, financial condition and results of operations could be harmed. In that case, the value of our ordinary shares could decline, and you could lose all or part of your investment.
Risks Relating to Our BusinessFinancial Condition
Our auditors have expressed substantial doubt about our ability to continue as a going concern, which may hinder our ability to obtain further financing.
We have incurred operating losses in each of the past six years and may not regain profitability in the future. We anticipate that we will need additional funding. If we are unable to raise capital or close the Merger Agreement, we will be forced to reduce or eliminate certain of our operations.
The spread of COVID-19 may adversely affect our business operations and financial condition.
Risks Related to the TEM Business
We derive a significant portion of our revenues from TEM call accounting solutions, whose revenues have declined in recent years.
The operating expenses associated with our TEM call accounting solutions are mostly fixed expenses. If our TEM call accounting revenues decline, our operating results will be adversely affected.
Our semi-annual and annual results have fluctuated significantly in the past and are likely to fluctuate significantly in the future
We are subject to risks associated with rapid technological change and risks associated with new versions, offerings, products and industry standards.
The market for our TEM and call accounting solutions may be adversely affected by intense competition.
The impairment of intangible assets and goodwill arising from our acquisitions could continue to negatively impact affect our net income and shareholders’ equity
We depend on business telephone system manufacturers, vendors and distributors for our sales.
We are subject to risks relating to proprietary rights and risks of infringement.
Because we collect and recognize revenue from services over the term of our customer agreements, the lack of customer renewals or new customer agreements may not be immediately reflected in our operating results.
We are subject to risks associated with international operations.
Breaches of network or information technology security, natural disasters or terrorist attacks could have an adverse effect on our business.
We are subject to risks arising from product defects and potential product liability.
We depend upon the continued retention of certain key personnel. Turnover in the ranks of our executive officers in recent years could adversely affect our growth strategy and the execution of our business plans.
We are subject to ESG risks.
Risks Related to the Pending Merger
Our proposed merger may not be completed.
SharpLink Stockholders will Exercise Significant Control over MTS as a Result of the Merger
Future Issuances Of MTS Shares Could Dilute Current Stockholders Or Adversely Affect The Market.
SharpLink May Not Generate an Operating Profit.
SharpLink May Require Additional Capital For Its Operations And Obligations, Which It May Not Be Able To Raise Or, Even It If Does, Could Have Dilutive And Other Negative Effects On Its Stockholders.
SharpLink’s Markets Are Evolving And Characterized By Rapid Technological Change, Which It May Not Be Able To Keep Pace With.
SharpLink’s Success Depends On Its Key Personnel Whom It May Not Be Able To Retain, And It May Not Be Able To Recruit Additional Qualified Personnel To Meet Its Needs, Which Would Harm Its Business.
SharpLink Depends On a Limited Number Of Customers For A Substantial Portion Of Its Revenues. The Loss Of Any Key Customer Without Replacement Could Substantially Reduce SharpLink’s Future Revenues.
SharpLink May Face Intellectual Property Infringement Or Other Claims Against It Or Its Customers That Could Be Costly To Defend And Result In Loss Of Significant Rights.
SharpLink May Ultimately Be Unable To Compete In The Markets For The Products And Services It Offers.
SharpLink could in the future be subject to a variety of U.S. and foreign laws, many of which are unsettled and still developing and which could subject us to claims or otherwise harm their business. Any change in existing regulations or their interpretation, or the regulatory climate applicable to its products and services, or changes in tax rules and regulations or interpretation thereof related to their products and services, could adversely impact SharpLink’s ability to operate its business as currently conducted or as we seek to operate in the future, which could have a material adverse effect on SharpLink’s financial condition and results of operations.
If the Merger is not completed, we will lose all of the funds expended in connection with the pending merger.
Risk Related to Our Ordinary Shares
If we fail to maintain compliance with NASDAQ’s continued listing requirements, our shares may be delisted from the NASDAQ Capital Market.
A few of our shareholders who are also members of our Board, may have a significant influence over our business prospects.
Our share price has been volatile in the past and may decline in the future.
Risks Related to Operations in Israel
Political, economic and military instability in Israel may disrupt our operations and negatively affect our business condition, harm our results of operations and adversely affect our share price.
Our financial results may be adversely affected by inflation and currency fluctuations.
Service and enforcement of legal process on us and our directors and officers may be difficult to obtain.
Provisions of Israeli law may delay, prevent or make difficult our acquisition by a third-party, which could prevent a change of control and therefore depress the price of our shares.
The rights and responsibilities of our shareholders are governed by Israeli law and differ in some respects from the rights and responsibilities of shareholders under U.S. law.
As a foreign private issuer, whose shares are listed on the NASDAQ Capital Market, we may follow certain home country corporate governance practices instead of certain NASDAQ requirements.
Our results of operations may be negatively affected by the obligation of our personnel to perform military service.
Risks Related to Our Financial Condition
Our auditors have expressed substantial doubt about our ability to continue as a going concern, which may hinder our ability to obtain further financing.
Our audited financial statements for the year ended December 31, 2018,2020, were prepared under the assumption that we would continue our operations as a going concern. Our independent registered public accounting firm has included a “going concern” explanatory paragraph in its report on our financial statements for the year ended December 31, 2018,2020, indicating that we have suffered recurring losses from operations and have a net capital deficiency, which raises substantial doubt about our ability to continue as a going concern. The inclusion of this “going concern” paragraph in our financial statements and the uncertainty concerning our ability to continue as a going concern may adversely affect our ability to obtain future financing and, if obtained, the terms of such financing. Our financial statements do not include any adjustments that may result from the outcome of this uncertainty. As of December 31, 2018,2020, we had cash and cash equivalents of $1.2$1.5 million and a working capital deficiency of $376,000.$685,000. We expect to report a loss for the first quarter of 2019 and that our cash position will be reduced further.during the first quarter of 2021. Without additional funds from private or public offerings of debt or equity securities, sales of assets, sales or licenses of intellectual property or technologies, or other transactions, we will exhaust our resources and will be unable to continue operations. If we cannot continue as a viable entity, our shareholders would likely lose most or all of their investment in us.
We have incurred operating losses in each of the past foursix years and may not regain profitability in the future. We anticipate that we will need additional funding. If we are unable to raise capital or close the Merger Agreement, we will be forced to reduce or eliminate certain of our operations.
We have incurred operating losses in each of the last foursix years and may not be able to regain profitable operations in the future or generate positive cash flows from operations. Our continued losses have resulted in our having a working capital deficiency in the past threefour years. To the extent that we incur operating losses in the future or are unable to generate free cash flows from our business, we may not have sufficient working capital to fund our operations in the future, and as a result, there is substantial doubt about our ability to continue as a going concern. During 2018,2020, we had negative operating cash flows and as of December 31, 2018,2020, our cash and cash equivalents were $1.2 million and we had a working capital deficiency of $400,000.$1.5 million.
During 2018,2018-2020, we implementedcontinued to implement a significant cost reduction program, mainly by employee layoffs and expect to reduce our lease expensesa reduction in the near term.number of employees and educed lease expenses. In addition, we are exploring various linescontinued our efforts to identify and approach a potential M&A candidate in order to enhance shareholder value, efforts that ultimately resulted in entering into a definitive Merger Agreement (see below for “Risks Related to the Possible Merger”).
The Merger Agreement is subject to the approval of businessour shareholders at a meeting of shareholders that is expected to either develop organicallybe held in the second quarter of 2021, along with the satisfaction or acquire.
Such developmentwaiver of other customary conditions. If the Merger Agreement is not consummated for any number of reasons or acquisition maywe do not be available to us, or, if available, may not be on terms satisfactory to us. If adequate funds are not available to us,find another M&A opportunity, our results of operations and financial condition will be adversely affected and we will be forced to reduce the scope of, or eliminate certain of our operations. Even if we are able to continue to finance our business, the sale
The spread of additional equity will result in dilution to our current shareholders and the incurrence of debt could require us to grant a security interest in our assets. If we raise additional funds through the issuance of debt securities, these securitiesCOVID-19 may have rights senior to those of our ordinary shares and could contain covenants that could restrict our operations. In addition, we may require additional capital beyond our currently forecasted amounts to achieve profitability.
We failed to realize any financial or strategic benefits from the Vexigo acquisition and may be unable to realize any benefits from any other future transactions.
Mergers and acquisitions of companies are inherently risky and subject to many factors outside of our control and no assurance can be given that acquisition of companies in the future will be successful and will not adversely affect our business operating results, oroperations and financial condition. We were unable to capitalize on our acquisition of Vexigo and as a result we recorded impairment charges with respect to the entire amount recorded as goodwill and technology in connection its acquisition. Subsequently, Vexigo sold its assets in 2018 to an unaffiliated third party for a substantial loss. In the future, we may seek to acquire or make strategic investments in complementary businesses, technologies, services or products, or enter into strategic partnerships or alliances with third parties in the future in order to expand our business. Failure to manage and successfully integrate acquisitions could materially harm our business and operating results.
Our efforts to reduce expenses, could disrupt our business and may not be successful.
As partIn December 2019, an outbreak of COVID-19 was reported in Wuhan, China. On March 11, 2020, the World Health Organization declared COVID-19 a global pandemic. This highly contagious disease has spread to over 180 countries in the world and throughout both Israel and the United States, seriously impacting our workforce, customers and suppliers, disrupting economies and financial markets, and potentially leading to a world-wide economic downturn. It has caused a disruption of the normal operations of many businesses, including the temporary closure or scale-back of business operations and the imposition of either quarantine or remote work or meeting requirements for employees, either by government order or on a voluntary basis. The pandemic may adversely affect our customers’ ability to perform their missions and is in many cases disrupting their operations. It may also impact the ability of our strategysubcontractors, partners, and suppliers to returnoperate and fulfill their contractual obligations, and result in an increase in their costs and cause delays in performance. These supply chain effects, and the direct effect of the virus and the disruption on our operations, may negatively impact both our ability to profitable operations, we determined to reducemeet customer demand and our operational expenses across the companyrevenue and profit margins. The COVID-19 pandemic is continuously evolving, and to eliminatedate has led to both Israel and the United States imposing quarantines and restrictions on travel and mass gatherings and curtailed and limited non-essential work in an attempt to slow the spread of the virus. Some of our non-profitable operations.employees are quarantined and in some cases, are working remotely and using various technologies to perform their functions. We may encounter delays or changes in customer demand, particularly if government funding priorities change. Additionally, the disruption and volatility in the global and domestic capital markets may increase the cost of capital and limit our ability to access capital. The COVID-19 pandemic has adversely impacted our operations in various ways. Our marketing of the Omnis product was delayed by the onset of the pandemic and it resulted in a disruption in our operations and may negatively impact our revenue and profit during this period of uncertainty. While the ultimate impact of the spread of COVID-19 remains highly uncertain and is subject to change, if additional protective or preventative measures are now focusedimposed, on our core businesses, TEMbusiness operations, revenues and call accounting. We must manage our employees, operations, finances, research and development and capital investments efficiently. If we fail to appropriately coordinate across our executive, engineering, finance, human resources, legal, marketing, sales, operations and customer support teams, our productivity and the quality of our solutionsfinancial condition may be adversely affected and our results of operation will be negatively impacted.
Risks Related to the TEM Business
We derive a significant portion of our revenues from TEM call accounting solutions, whose revenues have declined in recent years.
A significant portion of our revenues is derived from our TEM call accounting solutions, the sales of which have stable in the past years and call accounting solutions, whose revenues have declined each year from 2006 through 2014 and from 2016 through 2018.2020. Revenues for these products may not grow or stabilize in the future. If the market for our TEM solutions fails to grow or stabilize in the future, our business, operating results and financial condition would be adversely affected. Our future financial performance will be dependent to a substantial degree on the successful introduction, marketing and customer acceptance of our current and future TEM call accounting solutions.
The operating expenses associated with our TEM call accounting solutions are mostly fixed expenses. If our TEM call accounting revenues decline, our operating results will be adversely affected.
Our expense levels are substantially based on our expectations for future revenues and are therefore relatively fixed. If revenue levels fall below expectations, our quarterly results are likely to be disproportionately adversely affected because a proportionately smaller amount of our expenses varies with our revenues. Our operating results are generally not characterized by a seasonal pattern, except that our sales in Europe are generally lower in the summer months.
We typically ship orders for our CA products shortly after receipt of a purchase order and, consequently, order backlog at the beginning of any quarter has in the past represented only a small portion of that quarter’s revenues. As a result, license revenues from our CA product in any quarter depend substantially on orders for CA products that have been booked and shipped in that quarter. We cannot predict whether revenues from our TEM will be recognized in any quarter because the delivery and, in some cases, the implementation of all the components of the TEM (including among, other things, customer training) are dependent on the individual timing requirements of our customers, which can delay the completion of these orders.
Our semi-annual and annual results have fluctuated significantly in the past and are likely to fluctuate significantly in the future
Our semi-annual and annual results have fluctuated significantly in the past and are likely to fluctuate significantly in the future. Our future operating results will depend on many factors, including, but not limited to the following:
| · | demand for our products; |
demand for our products;
| · | ability to retain existing customers; |
ability to retain existing customers;
| · | changes in our pricing policies or those of our competitors; |
changes in our pricing policies or those of our competitors;
| · | new product announcements by us and our competitors; |
new product announcements by us and our competitors;
| · | the number, timing and significance of product enhancements; |
the number, timing and significance of product enhancements;
| · | our ability to develop, introduce and market new and enhanced products on a timely basis; |
our ability to develop, introduce and market new and enhanced products on a timely basis;
| · | changes in the level of our operating expenses; |
changes in the level of our operating expenses;
| · | budgeting cycles of our customers; |
budgeting cycles of our customers;
| · | customer order deferrals in anticipation of enhancements or new products that we or our competitors offer; |
customer order deferrals in anticipation of enhancements or new products that we or our competitors offer;
| · | changes in our strategy; |
changes in our strategy;
| · | seasonal trends and general domestic and international economic and political conditions, among others; and |
seasonal trends and general domestic and international economic and political conditions, among others; and
| · | currency exchange rate fluctuations and economic conditions in the geographic areas where we operate. |
currency exchange rate fluctuations and economic conditions in the geographic areas where we operate.
Due to the foregoing, our quarterly financial performance has varied significantly in the past and our semi-annual financial performance may vary significantly in the future. Our revenues and operating results in any interim period may not be indicative of our future performance, and it may be difficult for investors to evaluate our prospects. In some future quarter or six-month period, our operating results may be below the expectations of public market analysts and investors. In such event, it is likely that the price of our ordinary shares would be adversely affected. Accordingly, quarterly or semi-annual revenues and operating results are difficult to forecast, and it is likely that our future operating results will be adversely affected by these or other factors. We believe that period-to-period comparisons of our operating results are not necessarily meaningful and you should not rely upon them as indications of future performance.
We are subject to risks associated with rapid technological change and risks associated with new versions, offerings, products and industry standards.
The telecommunication service providers market in which we compete is characterized by rapid technological change, introductions of new products, changes in customer demands and evolving industry standards. Our future success will depend upon our ability to keep pace with the technological developments and to timely address the increasingly sophisticated needs of our customers by supporting existing and new telecommunication technologies and services and by developing and introducing enhancements to our current and new products. We may not be successful in developing and marketing enhancements to our products that will respond to technological change, evolving industry standards or customer requirements. We may experience difficulties that could delay or prevent the successful development, introduction and sale of such enhancements or such enhancements may not adequately meet the requirements of the marketplace and achieve any significant degree of market acceptance. If release dates of any new products or enhancements are delayed, or if when released, they fail to achieve market acceptance, our business, operating results and financial condition would be materially and adversely affected. In addition, the introduction or announcement of new product offerings or enhancements by us or our competitors may cause customers to defer or forgo purchases of current versions of our products, which could adversely affect our business, operating results and financial condition.
The market for our TEM and call accounting solutions may be adversely affected by intense competition.
The market for TEM and call accounting solutions is fragmented and is intensely competitive. Competition in the industry is generally based on product performance, depth of product line, technical support and price. We compete both with international and local competitors (including providers of telecommunications services), many of whom have significantly greater financial, technical and marketing resources than we do. We anticipate continuing competition in the TEM and call accounting markets and the entrance of new competitors into the market. Our existing and potential customers, including business telephone switching system manufacturers and vendors, may be able to develop products and services that are as effective as, or more effective or easier to use than, those offered by us. Such existing and potential competitors may also enjoy substantial advantages over us in terms of research and development expertise, manufacturing efficiency, name recognition, sales and marketing expertise and distribution channels. We may not be able to compete successfully against current or future competitors and that competition may adversely affect our future revenues and, consequently, our business, operating results and financial condition.
The impairment of intangible assets and goodwill arising from our acquisitions could continue to negatively impact affect our net income and shareholders’ equity
When we acquire a business, a substantial portion of the purchase price of the acquisition may be allocated to goodwill and other identifiable intangible assets. The amount of the purchase price which is allocated to goodwill and other intangible assets is determined by the excess of the purchase price over the net identifiable assets acquired. The current accounting standards require that goodwill and intangible assets should be deemed to have indefinite lives, which should be tested for impairment at least annually (or more frequently if impairment indicators arise). Other intangible assets are amortized over their useful lives. In light of changes that occurred in the online advertising market during the latter part of 2015 and during 2016, which resulted in reduced revenues and gross margins, we recorded, during 2015 and 2016, a non-cash impairment of the entire amount recorded as goodwill and technology in connection with our acquisition of Vexigo.
Based on the impairment analysis conducted in connection with our TEM business, we did not identify any impairment losses for the goodwill assigned to the Enterprise reporting unit for the year ended December 31, 2018, however, future declines in the results of this segment and other factors could cause us to record an impairment of all or a portion of the relevant goodwill in the future. We may not be able to achieve our business targets for businesses we previously acquired or will acquire in the future, which could result in our incurring additional goodwill and other intangible assets impairment charges. Further declines in our market capitalization increase the risk that we may be required to perform another goodwill impairment analysis, which could result in an impairment of up to the entire balance of our goodwill and other identifiable intangible assets.
We depend on business telephone system manufacturers, vendors and distributors for our sales.
Historically, one of the primary distribution channels for our call accounting management products has been private branch exchange, or PBX, original equipment manufacturers, or OEMs, and vendors who market our products to end-users in conjunction with their own products. We are dependent upon the active marketing and distribution efforts of our PBX, OEMs and local master distributors.
Sales of call accounting solutions by PBX manufacturers and vendors have declined markedly in the recent past, and sales through this channel may continue to decline. Our future success will be dependent to a substantial degree on the marketing and sales efforts of such third parties in marketing and integrating our products. These third parties may not give priority to the sale of our products as an enhancement to their products. Although most of the major business telephone switching systems manufacturers and vendors currently rely on third party suppliers to provide call accounting and other telemanagement products, these manufacturers and vendors, including our current customers, may develop their own competing products or purchase competing products from others.
Because we sell our products through local master distributors in countries where we do not have a marketing subsidiary, we are highly dependent upon the active marketing and distribution efforts of our distributors. We also depend in large part upon our distributors for product maintenance and support. Our distributors may not continue to provide adequate maintenance and support to end-users or provide maintenance and support for new products, which might cause us to seek new or additional distributors or incur additional service and support costs. The distributors to whom we sell our products are generally not contractually required to make future purchases of our products and could, therefore, discontinue carrying our products at any time. None of our distributors or resellers is subject to any minimum purchase requirements under their agreements with us.
We may not be able to continue our relationships with our OEM customers or, if such relationships are not maintained, we may not be able to attract and retain comparable PBX OEMs. The loss of any of our major reseller or OEM relationships, either to competitive products offered by other companies or products developed by such resellers, would adversely affect our business, financial condition and results of operations. Our future performance will depend, in part, on our ability to attract additional PBX manufacturers and vendors that will be able to market and support our products effectively, especially in markets in which we have not previously distributed our products.
We are subject to risks relating to proprietary rights and risks of infringement.
Due to the rapid pace of technological change in the communications industry, we believe that the most significant factors in our intellectual property rights are the knowledge, ability and experience of our employees, the frequency of product enhancements and the timeliness and quality of support services provided by us. In addition, we rely upon a combination of security devices, copyrights, trademarks, patents, trade secret laws, confidentiality procedures and contractual restrictions to protect our rights in our products. We try to protect our software, documentation and other written materials under trade secret and copyright laws, which afford only limited protection. It is possible that others will develop technologies that are similar or superior to our technology. Unauthorized parties may attempt to copy aspects of our products or to obtain and use information that we regard as proprietary. It is difficult to police the unauthorized use of our products, and we expect software piracy to be a persistent problem, although we are unable to determine the extent to which piracy of our software products exists. In addition, the laws of some foreign countries do not protect our proprietary rights as fully as do the laws of the United States. Our means of protecting our proprietary rights in the United States or abroad may not be adequate or our competition may independently develop similar technology.
Unfavorable national and global economic conditions could adversely affect our business, operating results and financial condition.
Worsening economic conditions, such as the continued European sovereign debt uncertainty, may result in diminished demand for our products and in decreased sales volumes. Although global economic conditions have stabilized or improved since the 2008 financial crisis, many of the markets in which we operate have not fully recovered. If the economies in the countries in which we operate continue to be uncertain or weaken further, the demand for our products and technology may decrease because of constraints on capital spending by our customers. In addition, this could result in longer sales cycles and increased price competition for our products. Any of these events would likely harm our business, operating results and financial condition.
The UK's decision to exit the European Union (referred to as Brexit) has caused additional volatility in the markets and currency exchange rates. Market conditions and exchange rates could continue to be volatile in the near term as this decision is implemented. The impacts of Brexit are still uncertain while the UK’s future trading and transition relationship with the EU is determined. There is the potential for our costs to increase, for example through any changes required to our systems to reflect new taxes or customs duties or other processes. Our regulatory risk could increase if there were to be future divergence with the EU regime. Our suppliers may face disruption because of challenges in their own organizations and supply chains. Also, delivering a great customer experience and great network will become more challenging if it is harder for us to recruit and retain skilled talent and to source sufficient construction workforce. The UK economy may also suffer because of this uncertainty.
In the United States, market volatility accelerated during the second quarter of 2018, resulting from increasing concerns about global trade wars, the slowing pace of global growth, inflation and more aggressive monetary policy in the U.S. U.S. and global equity markets were mixed, with U.S. markets trading higher while global and emerging markets traded in negative territory. The U.S. Federal Reserve, based on strong economic data and low unemployment, increased interest rates in 2018. As a result, the U.S. dollar strengthened against the Euro and most other currencies. In China, the industrial sector slowed and the risk of decreased growth rose as the U.S. and China each imposed tariffs on various goods and services.
These developments, or the perception that any of them could occur, could have a material adverse effect on global economic conditions and the stability of global financial markets, and could significantly reduce global market liquidity and restrict the ability of key market participants to operate in certain financial markets. Asset valuations, currency exchange rates and credit ratings may be especially subject to increased market volatility.
If global economic and market conditions, or economic conditions in the United States, Europe or Asia or other key markets, remain uncertain or weaken further, our business, operating results and financial condition may be adversely affected.
Because we collect and recognize revenue from services over the term of our customer agreements, the lack of customer renewals or new customer agreements may not be immediately reflected in our operating results.
We collect and recognize revenue from our customers in service agreements over the term of their agreements with us. As a result, the aggregate effect of a decline in new or renewed customer agreements in any one quarter would not be fully recognized in our revenue for that quarter, but would negatively affect our revenue in future quarters. Consequently, the aggregate effect of significant upturns or downturns in sales of our solution would not be fully reflected in our results of operations until future periods.
We are subject to risks associated with international operations.
We are based in Israel and generate a large percentage of our sales in the United States. Our sales in the United States accounted for 77.7%81.3%, 78.7%83% and 81.3%83% of our total revenues for the years ended December 31, 2016, 20172018, 2019 and 2018,2020, respectively (excluding our discontinued operations). We may not be able to maintain or increase international market demand for our products. To the extent that we cannot do so in a timely manner, our business, operating results and financial condition will be adversely affected.
International operations are subject to inherent risks, including the following:
| · | the impact of recessionary environments in multiple foreign markets; |
the impact of recessionary environments in multiple foreign markets;
| · | costs of localizing products for foreign markets; |
costs of localizing products for foreign markets;
| · | foreign currency exchange rate fluctuations |
foreign currency exchange rate fluctuations
| · | longer receivables collection periods and greater difficulty in accounts receivable collection; |
longer receivables collection periods and greater difficulty in accounts receivable collection;
| · | unexpected changes in regulatory requirements; |
unexpected changes in regulatory requirements;
| · | difficulties and costs of staffing and managing foreign operations; |
difficulties and costs of staffing and managing foreign operations;
| · | reduced protection for intellectual property rights in some countries; |
| · | potentially adverse tax consequences; and |
| · | political and economic instability. |
potentially adverse tax consequences; and
political and economic instability.
The foregoing factors may adversely affect our future revenues from international operations and, as a result, adversely affect our business, operating results and financial condition.
The base erosion and profit shifting, or BEPS, project undertaken by the Organization for Economic Cooperation and Development, or OECD, may have adverse consequences on our tax liabilities. The BEPS project contemplates changes to numerous international tax principles, as well as national tax incentives, and these changes, if adopted by individual countries, could adversely affect our provision for income taxes. It is hard to predict how the principles and recommendations developed by the OECD in the BEPS project will translate into specific national laws, and therefore we cannot predict at this stage the magnitude of the effect of such rules on our financial results.
In the United States, the new Trump Administration has called for substantial change to fiscal, tax and trade policies that may adversely affect our business. We cannot predict the impact, if any, of these changes to our business. However, it is possible that these changes could adversely affect our business.
We may be adversely affected by fluctuations in currency exchange rates.
While our revenues are generally denominated in U.S. dollars and Euros, a significant portion of our expenses, primarily salaries, is incurred in NIS. From time to time, we may enter into hedging transactions in order to mitigate such fluctuations. Any hedging transactions that we enter into may not materially reduce the effect of fluctuations in foreign currency exchange rates on our results of operations. In addition, if, for any reason, exchange or price controls or other restrictions on the conversion of foreign currencies into NIS were imposed, our business could be adversely affected. Currency fluctuations in the future may adversely affect our revenues from international sales and, consequently, on our business, operating results and financial condition.
Breaches of network or information technology security, natural disasters or terrorist attacks could have an adverse effect on our business.
Cyber-attacks or other breaches of network or information technology, or IT, security, natural disasters, terrorist acts or acts of war may cause equipment failures or disrupt our systems and operations. In particular, both unsuccessful and successful cyber-attacks on companies have increased in frequency, scope and potential harm in recent years. Such an event may result in our inability to operate our facilities, which, even if the event is for a limited period of time, may result in significant expenses and/or loss of market share to other competitors in the market for TEM and call accounting solutions.
A party who is able to compromise the security measures on our networks or the security of our infrastructure could, among other things, misappropriate our proprietary information and the personal information of our customers and employees, cause interruptions or malfunctions in our or our customers’ operations, cause delays or interruptions to our ability to meet customer needs, cause us to breach our legal, regulatory or contractual obligations, create an inability to access or rely upon critical business records or cause other disruptions in our operations. These breaches may result from human errors, equipment failure, or fraud or malice on the part of employees or third parties. Our exposure to cybersecurity threats and negative consequences of cybersecurity breaches will likely increase as we store increasing amounts of customer data. Additionally, as we increasingly market the security features in our data centers, our data centers may be targeted by computer hackers seeking to compromise data security.
We expend significant financial resources to protect against such threats and may be required to further expend financial resources to alleviate problems caused by physical, electronic, and cyber security breaches. As techniques used to breach security are growing in frequency and sophistication and are generally not recognized until launched against a target, regardless of our expenditures and protection efforts, we may not be able to implement security measures in a timely manner or, if and when implemented, these measures could be circumvented. Any breaches that may occur could expose us to increased risk of lawsuits, loss of existing or potential future customers, harm to our reputation and increases in our security costs, which could have a material adverse effect on our financial performance and operating results.
In the event of a breach resulting in loss of data, such as personally identifiable information or other such data protected by data privacy or other laws, we may be liable for damages, fines and penalties for such losses under applicable regulatory frameworks despite not handling the data. Furthermore, if a high-profile security breach or cyber-attack occurs with respect to another provider of mission-critical data center facilities, our customers and potential customers may lose trust in the security of these business models generally, which could harm our reputation and brand image as well as our ability to retain existing customers or attract new ones. In addition, the regulatory framework around data custody, data privacy and breaches varies by jurisdiction and is an evolving area of law. We may not be able to limit our liability or damages in the event of such a loss.
While we maintain insurance coverage for some of these events, the potential liabilities associated with these events could exceed the insurance coverage we maintain. A failure to protect the privacy of customer and employee confidential data against breaches of network or IT security could result in damage to our reputation. Any of these occurrences could result in a material adverse effect on our results of operations and financial condition.
We are continuously working to upgrade our information technology systems and provide employee awareness training around phishing, malware, and other cyber risks to protect our client, employee, and company data against cyber risks and security breaches. Despite these efforts, we have experienced cybersecurity attacks in the past, most recently a ransomware attack that did not have a material effect on our company or its operations, and there is no guarantee that the procedures that we have implemented to protect against unauthorized access to secured data are adequate to safeguard against future data security breaches. While past cybersecurity attacks have not resulted in material losses, and with the most recent ransomware attack still being investigated, a data security breach or any failure by us to comply with applicable privacy and information security laws and regulations could materially impact our business and our results of operations.
We rely heavily on IT systems to manage critical functions such as media campaign management and operations, data storage and retrieval, revenue recognition, budgeting, forecasting, financial reporting and other administrative functions. Certain of these IT services are provided by third parties, including communications lines.
We are subject to risks arising from product defects and potential product liability.
In the TEM business, we may generally provide a warranty for up to three months for end-users and, in limited instances, up to twelve months. Our sales agreements typically contain provisions designed to limit our exposure to potential product liability or related claims. The limitation of liability provisions contained in our agreements may not be effective. Our products are used by businesses to reduce communication costs, recover charges payable by third parties, prevent abuse and misuse of telephone networks and converged billing solutions for information and telecommunication service providers, and as a result, the sale of products by us may entail the risk of product liability and related claims. A product liability claim brought against us could adversely affect our business, operating results and financial condition. Products such as those offered by us may contain undetected errors or failures when first introduced or when new versions are released. Despite our testing and testing by current and potential customers, errors may be found in new products or releases after commencement of commercial shipments. The occurrence of these errors could result in adverse publicity, loss of or delay in market acceptance or claims by customers against us, any of which could adversely affect our business, operating results and financial condition.
We depend upon the continued retention of certain key personnel. Turnover in the ranks of our executive officers in recent years could adversely affect our growth strategy and the execution of our business plans.
We depend to a significant extent on the efforts and abilities of our senior management team and on our skilled professional and technical employees. The competition for these employees is intense. We may not be able to retain our present employees, or recruit additional qualified employees as we require them. The loss of any key member of our management team might significantly delay or prevent the achievement of our business or development objectives. Any failure to attract and retain key managerial, technical and research and development personnel could adversely affect our ability to generate sales, deploy our products or successfully develop new products and enhancements. In addition, the loss, for any reason, of the services of any of these key individuals and any negative market or industry perception arising from such loss, could damage our business and harm our reputation.
In October 2017,Increasing scrutiny and changing expectations from investors, lenders, customers and other market participants with respect to our Environmental, Social and Governance, or ESG, policies may impose additional costs on us or expose us to additional risks.
Companies across all industries are facing increasing scrutiny relating to their ESG policies. Investors, lenders and other market participants are increasingly focused on ESG practices and in recent years have placed increasing importance on the implications and social cost of their investments. The increased focus and activism related to ESG may hinder our access to capital, as investors and lenders may reconsider their capital investment allocation as a result of their assessment of our ESG practices. If we announceddo not adapt to or comply with investor, lender or other industry shareholder expectations and standards, which are evolving, or which are perceived to have not responded appropriately to the appointmentgrowing concern for ESG issues, regardless of Roy Hess as our chief executive officer. Mr. Hess replaced Mr. Alon Mualem who served as interim chief executive officer since February 2017. In February 2017, we announced the departure of Orey Gilliam as our chief executive officerwhether there is a legal requirement to do so, may suffer from reputational damage and the appointmentbusiness, financial condition and price our company’s shares could be materially and adversely affected.
Risks Related to the Pending Merger
Our proposed merger may not be completed.
On April 15, 2021, we entered into an Agreement and Plan of Alon Mualem as interim chief executive officer. In June 2016, Mr. Gilliam replaced Lior Salansky, who had served as our chief executive officer since January 2015. Mr. Salansky replaced Alon Mualem who served as interim chief executive officer afterMerger (the “Merger Agreement”) with SharpLink, Inc. (“SharpLink”), pursuant to which SharpLink would merge with a subsidiary of MTS and become a wholly-owned subsidiary of MTS, the departureshareholders of Eytan Bar in May 2014. Ofira Bar replaced Alon Mualem as our Chief Financial Officer in May 2018. The turnover inSharpLink would become the majority owners of MTS, and MTS would changes its name and pursue the business of SharpLink under SharpLink management and any future turnover could hinder our strategic planning, execution and future performance.board control (the “Merger”).
Actual results could differ However, there is no assurance that the pending Merger with SharpLink will ever be consummated or if it is consummated, that it will be pursuant to the terms set forth in the Merger Agreement. In addition to the risks relating to the business of MTS which are described above, you should carefully consider the following risk factors relating to the pending Merger.
Due to the change in the management, ownership and asset structure and location of MTS as a result of the Merger, it is currently expected that the combined company will cease to be a “foreign private issuer,” which would subject the combined company to increased regulatory requirements under the U.S. securities laws and would subject the combined company’s affiliates to the beneficial ownership reporting, short-swing trading and other requirements of Section 16 of the Exchange Act.
We currently qualify as a foreign private issuer, as defined under the Exchange Act. As a foreign private issuer, MTS is permitted by the SEC to file an annual report on Form 20-F and copies of certain home country materials on Form 6-K in lieu of filing annual, quarterly and current reports on Forms 10-K, 10-Q and 8-K. MTS is exempt from the estimatesSEC proxy statement requirements and assumptions that we usecertain SEC tender offer requirements and is permitted to prepare our financial statements.
In order to prepare our financial statements in conformity with accounting principles generally accepted insell securities outside the United States orwithout resale restrictions under the U.S. GAAP, our management is requiredSecurities Act. U.S. holders of MTS restricted securities may resell such securities to make estimatespersons outside the United States who receive such securities without resale restrictions under the U.S. Securities Act and assumptions, asMTS’s affiliates are exempt from Section 16 of the dateExchange Act. It is currently expected that due to the change in the management, ownership and asset structure and location as a result of the financial statements, which affecttransaction, the reported values of assetscombined company will cease to be a foreign private issuer and liabilities, revenuescease to be eligible for the foregoing exemptions and expenses, and disclosures of contingent assets and liabilities. Areas that require significant estimates by our management include contract costs and profits, application of percentage-of-completion accounting, provisions for uncollectible receivables and customer claims, impairment of long-term assets, goodwill impairment, valuation of assets acquired and liabilities assumed in connection with business combinations, accruals for estimated liabilities, including litigation and insurance reserves, and stock-based compensation. Our actual results could differ from, and could require adjustments to, those estimates.
We may fail to maintainprivileges effective internal control over financial reporting in accordance with Section 404January 1, 2022 (assuming the closing of the Sarbanes-Oxley ActMerger is on or before June 30, 2021. We expect that any loss of 2002, which couldour status as a foreign private issuer would have an adverse effect on our ability to raise funds through the sale of securities, on the cost of our compliance with U.S. securities law requirements and on the ability of U.S. holders of our restricted securities to resell such securities outside the United States. In addition, the combined company would become subject to the beneficial ownership reporting, short-swing trading and other requirements of Section 16 of the U.S. Exchange Act.
Maintaining and improving the combined company’s financial resultscontrols and the market pricerequirements of our ordinary shares.being a public company may strain the combined company’s resources, divert management’s attention and affect its ability to attract and retain qualified board members.
As a public company, the combined company will be subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act and Nasdaq rules. The requirements of these rules and regulations will impact the combined company’s legal and financial compliance costs, make some activities more difficult, time-consuming or costly and place strain on its personnel, systems and resources. As noted above, it is expected that as a result of the Transaction MTS will cease to be a “foreign private issuer”. Therefore, under the Exchange Act the combined company will be initially be required to file annual and current reports and once it loses its foreign private issuer status will be required to file annual, quarterly and current reports with respect to its business and financial condition. The Sarbanes-Oxley Act of 2002 imposes certain duties on us and our executives and directors. Our efforts to comply withrequires, among other things, that the requirements of Section 404(a) of the Sarbanes-Oxley Act of 2002 governing internal controlcombined company maintain effective disclosure controls and procedures for financial reporting have resulted in increased general and administrative expense and a diversion of management time and attention, and we expect these efforts to require the continued commitment of significant resources. We may identify material weaknesses or significant deficiencies in our assessments of our internal control over financial reporting. FailureEnsuring that the combined company will have adequate internal financial and accounting controls and procedures in place is a costly and time-consuming effort that needs to be re-evaluated frequently. We do not expect that the combined company will initially have an internal audit group, and the combined company may need to hire additional accounting and financial staff with appropriate public company experience and technical accounting knowledge. Implementing any appropriate changes to the combined company’s internal controls may require specific compliance training for the combined company’s directors, officers and employees, entail substantial costs, and take a significant period of time to complete. Such changes may not, however, be effective in maintaining the adequacy of the combined company’s internal controls and any failure to maintain that adequacy, or consequent inability to produce accurate financial statements on a timely basis, could increase the combined company’s operating costs and could materially impair its ability to operate its business. Moreover, effective internal control overcontrols are necessary for the combined company to produce reliable financial reporting couldreports and are important to help prevent fraud.
In accordance with Nasdaq rules, unless the combined company is eligible for an exemption, it will be required to maintain a majority of independent directors on the board. The various rules and regulations applicable to public companies make it more difficult and more expensive for the combined company to maintain directors’ and officers’ liability insurance, and the combined company may be required to accept reduced coverage or incur substantially higher costs to maintain coverage. If the combined company is unable to maintain adequate directors’ and officers’ insurance, its ability to recruit and retain qualified officers and directors will be significantly curtailed.
We expect that the rules and regulations applicable to public companies will result in investigationthe combined company incurring substantial additional legal and financial compliance costs. These costs will decrease the combined company’s net income or sanctions by regulatory authoritiesincrease its net loss and may require it to reduce costs in other areas of its business.
Management of the businesses after the pending merger
In accordance with the terms of the Merger Agreement with SharpLink, the directors and executive officers of SharpLink will become the directors and executive officers of the combined entity. The new directors and executive officers of SharpLink may not have the expertise or capacity to effectively manage the combined businesses after the Merger. If they are unable to operate the new combined businesses at a profit or if substantial costs are incurred in managing the merging of the businesses, either of such eventualities could materially and adversely affect our business, results of operations and financial condition.
SharpLink stockholders will exercise significant control over MTS as a result of the pending merger.
Under the terms of the Merger Agreement, SharpkLink’s stockholders will own approximately 86% of the outstanding equity of the combined company just after the Merger. As a result, the stockholders of SharpLink will have the ability to control MTS.
SharpLink’s limited operating history makes it difficult to evaluate its future prospects and the risks and challenges the combined company may encounter.
SharpLink operates in a highly competitive market characterized by rapid technological advances, frequent new product introductions, evolving industry and legal standards and changing customer preferences. SharpLink’s limited operating history makes it difficult to evaluate its future prospects and ability to respond to competitors, changes in its market and the risks and challenges it may encounter as it expands its business operations. If SharpLink fails to address the risks, uncertainties and difficulties that its faces, including those described elsewhere in this “Risk Factors” section, the combined company’s business, financial condition and results of operations could be adversely affected.
SharpLink has incurred significant losses since inception, and expects to incur significant losses in the future and may not be able to generate sufficient revenue to achieve and maintain profitability.
SharpLink expects to continue to incur significant losses for the foreseeable future as it expands its business operations, continue to develop products and implement its business plans and strategies. SharpLink’s net loss for the years ended December 31, 2019 and 2020 was $0.1 million and $1.8 million, respectively. SharpLink expect that its losses will continue for the foreseeable future as it continues to invest significant funds toward its business. SharpLink experienced these losses primarily due to the investments it made in developing its proprietary technologies and products, building its team and for professional expenses related to fund raising and preparing for the merger. Over the next several years, SharpLink expects to continue to incur significant expenses in developing its software products. Additionally, SharpLink may encounter unforeseen expenses, product development delays, declines in revenue or other unknown factors that may result in losses in future periods. Moreover, as a public company, SharpLink will incur significant legal, accounting, administrative, insurance and other expenses that it did not incur as a private company. To date, SharpLink has financed its operations principally from the sale of convertible preferred stock. There can be no assurance that its revenue and gross profit will increase sufficiently such that its net losses will decrease, or that it will attain profitability, in the future. Further, SharpLink’s limited operating history makes it difficult to effectively plan for and model our operating expenses and our ability to generate revenue. SharpLink’s ability to achieve and then sustain profitability is based on numerous factors, many of which are beyond our control, including the impact of market acceptance of our products, product development results and timing, offerings or actions taken by our competitors, our market penetration and margins and current and future litigation. The combined company may never be able to generate sufficient revenue to achieve or sustain profitability, which could negatively impact the value of the Ordinary Shares.
SharpLink may require additional capital for its operations and obligations, which it may not be able to raise or, even it if does, could have dilutive and other negative effects on its stockholders.
Any projection of future long-term cash needs and cash flows are inherently subject to substantial uncertainty. There is no assurance that SharpLink’ current level of liquid assets will be sufficient for anticipated or unanticipated working capital and capital expenditure requirements during the next 12 months. SharpLink may need, or find it advantageous, to raise additional funds in the future to fund SharpLink’s growth, pursue sales opportunities, develop new or enhanced products and services, respond to competitive pressures or acquire complementary businesses, technologies or services.
If SharpLink raises additional funds through the issuance of equity or convertible debt securities, the percentage ownership of SharpLink’s stockholders (including the retained ownership of the current MTS shareholders) will be reduced and stockholders will experience additional dilution. These new securities may also have powers, preferences and rights that are senior to those of the rights of SharpLink’s common stock. SharpLink cannot be certain that additional financing will be available on terms favorable to it, if at all. If adequate funds are not available or not available on acceptable terms, SharpLink may be unable to fund its operations adequately, take advantage of acquisition opportunities, develop or enhance products or services or respond to competitive pressures. Any inability to do so may require SharpLink to delay or abandon some or all of its development and expansion plans and may threaten SharpLink’s ability to continue business operations.
The markets in which SharpLink operates are evolving and characterized by rapid technological change, which it may not be able to keep pace with.
The markets for SharpLink’s products and services are evolving and characterized by rapid technological change, changing customer needs, evolving industry standards and frequent new product and service announcements. The introduction of products employing new technologies and emerging industry standards could render SharpLink’s existing products or services obsolete or unmarketable. If SharpLink is unable to respond to these developments successfully or does not respond in a cost-effective way, its business, financial condition and operating results investor confidencewill suffer. To be successful, SharpLink must continually improve and enhance its products and service offerings and introduce and deliver new product and service offerings and improvement to existing products and services. SharpLink may fail to improve or enhance its products and services or introduce and deliver new products or services on a timely and cost-effective basis or at all. If SharpLink experiences delays in our reportedthe future with respect to its products or services, it could experience a loss of revenues and customer dissatisfaction.
SharpLink’s success depends on its key personnel whom it may not be able to retain, and it may not be able to recruit additional qualified personnel to meet its needs, which would harm its business.
SharpLink believes that its success depends on the continued employment of its senior management team and key developers and engineers. SharpLink’s executive officers have important relationships with its key customers. If one or more of these executive officers were unable or unwilling to continue in their present positions, SharpLink’s business, financial informationcondition and operating results could be materially adversely affected. SharpLink’s success also depends on having a highly trained technical staff of software experts. SharpLink will need to continue to hire personnel with the skill sets necessary to develop new applications for its software and hardware and to adapt its products and services to the needs of its potential clients. Competition for personnel, particularly for employees with technical expertise, is intense. Experienced software and technical experts often command sizeable compensation packages, including signing bonuses and stock options. A shortage in the number of trained technical personnel could limit SharpLink’s ability to design, develop and implement its products, increase sales of its existing products and services and make new sales as it offers new products and services. Ultimately, if SharpLink cannot hire and retain suitable personnel, or if it is unable to hire such persons on satisfactory financial terms, SharpLink’s business, financial condition and operating results will be impaired.
SharpLink depends on a limited number of customers for a substantial portion of its revenues. the loss of any key customer without replacement could substantially reduce SharpLink’s future revenues.
During the fiscal years ended 2019 and 2020, SharpLink’s revenues were largely derived from a limited number of customers. In the year ended December 31, 2019, five customers accounted for 11% or more of Sharplink’s revenues (84% in the aggregate) and in the year ended December 31, 2020, four customers accounted for 11% or more of SharpLink’s revenues (69% in the aggregate). The loss of any of these customers and the inability to replace them with equally important new customers could substantially reduce SharpLink’s future revenues and result in a material adverse effect on its business.
SharpLink may face intellectual property infringement or other claims against it or its customers that could be costly to defend and result in loss of significant rights.
SharpLink has not conducted any patent or technology searches and there may be other technology which infringes upon its technology or which it may be infringing upon. A patent search will not disclose unpublished applications that are currently pending in the United States Patent Office, and there may be one or more such unpublished pending applications that would take precedence over SharpLink’s applications. Even if SharpLink were to be granted patent protection for some or all of its technology, there can be no assurance that these patents will afford SharpLink any meaningful protection. SharpLink intends to rely primarily on a combination of trade secrets, technical measures, copyright protection and nondisclosure agreements with its employees to establish and protect the ideas, concepts and documentation of software and trade secrets developed by SharpLink. Such methods may not afford complete protection, and there can be no assurance that third parties will not independently develop such technology or obtain access to the software SharpLink has developed. Although SharpLink believes that use of the technology and products it has developed and other trade secrets used in its operations does not infringe upon the rights of others, its use of the technology and trade secrets SharpLink develops may infringe upon the patents or intellectual property rights of others. In the event of infringement, SharpLink could, under certain circumstances, be required to obtain a license or modify aspects of the technology and trade secrets it developed or refrain from using same. SharpLink may not have the necessary financial resources to defend any infringement claim made against it or be able to successfully terminate any infringement in a timely manner, upon acceptable terms and conditions or at all. Failure to do any of the foregoing could have a material adverse effect on SharpLink. Moreover, if the patents, technology or trade secrets SharpLink developed or uses in its business is deemed to infringe upon the rights of others, SharpLink could, under certain circumstances, become liable for damages, which could have a material adverse effect on SharpLink. As SharpLink continues to market priceits products, it may encounter patent barriers that are not known today.
SharpLink may ultimately be unable to compete in the markets for the products and services it offers.
The markets for SharpLink’s products and services are intensely competitive. Increased competition may adversely affect SharpLink’s ability to enter into agreements with new customers or strategic partners and may result in reduced margins, any of which could seriously harm SharpLink’s business. Many of SharpLink’s competitors have longer operating histories, greater brand recognition and greater financial, technical, marketing and other resources than it does, and may have well-established relationships with its existing and prospective customers. This may place SharpLink at a disadvantage in responding to its competitors’ pricing strategies, technological advances, advertising campaigns, strategic partnerships and other initiatives. SharpLink’s competitors may also develop products or services that are superior to, or have greater market acceptance than, the products and services that SharpLink is able to develop. If SharpLink is unable to compete successfully against its competitors, its business, financial condition and operating results would be negatively impacted.
SharpLink could in the future be subject to a variety of U.S. and foreign laws, many of which are unsettled and still developing and which could subject us to claims or otherwise harm their business. any change in existing regulations or their interpretation, or the regulatory climate applicable to its products and services, or changes in tax rules and regulations or interpretation thereof related to their products and services, could adversely impact SharpLink’s ability to operate its business as currently conducted or as it seeks to operate in the future, which could have a material adverse effect on SharpLink’s financial condition and results of operations.
SharpLink provides services related to the U.S. fantasy sports and sports betting market. As a result, SharpLink is subject to laws and regulations relating to fantasy sports, sports betting and iGaming in the jurisdictions in which it conducts its business or in some circumstances, of those jurisdictions in which it offers its services or those are available, as well as the general laws and regulations that apply to all e-commerce businesses, such as those related to privacy and personal information, tax and consumer protection. These laws and regulations vary from one jurisdiction to another and future legislative and regulatory action, court decisions or other governmental action, which may be affected by, among other things, political pressures, attitudes and climates, as well as personal biases, may have a material impact on their operations and financial results. In particular, some jurisdictions have introduced regulations attempting to restrict or prohibit online gaming, while others have taken the position that online gaming should be licensed and regulated and have adopted or are in the process of considering legislation and regulations to enable that to happen. Additionally, some jurisdictions in which SharpLink operates could presently be unregulated or partially regulated and therefore more susceptible to the enactment or change of laws and regulations.
If the Merger is not completed, we will lose all of the funds expended in connection with the pending merger.
We have expended a significant amount of funds and expect to expend additional funds in connection with the pending Merger. Merger-related costs include charges related to professional services, registration and other regulatory costs. In the event that the Merger is not consummated all such expenses will have been spent without any benefit to our ordinary shares.company.
Risk Factors Related to Our Ordinary Shares
If we fail to maintain compliance with NASDAQ’s continued listing requirements, our shares may be delisted from the NASDAQ Capital Market.
Our ordinary shares are listed on the NASDAQ Capital Market under the symbol “MTSL.” To continue to be listed on the NASDAQ Capital Market, we need to satisfy a number of conditions, including a minimum closing bid price per share of $1.00 for 30 consecutive business days and shareholders’ equity of at least $2.5 million. In February 2017, we were notified that that we were not in compliance with NASDAQ’s requirement that listed securities maintain a minimum bid price of $1.00 per share. As a result of our reverse split in September 2017, we were able to achieve compliance by meeting the applicable standard for a minimum of ten consecutive business days. In April 2017, we received a NASDAQ Staff Determination letter indicating that we failed to comply with the continued listing requirement that we maintain either a minimum of $2,500,000 in stockholders’ equity or $35,000,000 market value of listed securities or $500,000 of net income from continuing operations for the most recently completed fiscal year or two of the three most recently completed fiscal years, as set forth in NASDAQ Marketplace Rule 5550(b)(1), and that the Staff is therefore reviewing our eligibility for continued listing on The NASDAQ Capital Market. In August 2017, following the implementation of the Vexigo debt conversion and a private placement of our ordinary shares, we regained compliance with the NASDAQ’s minimum stockholders’ equity requirement and accordingly we received a conditional notice of regaining listing compliance from the NASDAQ.
In May 2018,past, we received a NASDAQ Staff determination letter indicating that we again failed to comply with the continued listing requirement that we maintain a minimum of $2.5 million in stockholders’ equity. In June 2018,While we submitted a plan to NASDAQ to regain compliance with NASDAQ Listing Rule 5550 (b)(1) requiring minimum stockholders’ equity of $2,500,000. Our plan to regain compliance was based in part on various cost-cutting measures, including a reduction in number of personnel that was implemented in the second quarter of 2018 and other steps to regain profitability in 2018. In addition, we entered into a letter of intent with an institutional investor pursuant to which it invested $1,500,000 in consideration for issuing a new class of convertible preferred stock. The investor also invested an additional $200,000 in consideration for the issuance of 175,439 of our Ordinary Shares.
After submitting our plan to regain compliance with the minimum $2,500,000 in stockholders’ equity requirement as set forth in NASDAQ Listing Rule 5550 (b)(1), we received a notice of extension from the Listing Qualifications Department of NASDAQ advising that we had until November 5, 2018 to regain compliance. In November 2018, we completed the steps to regain compliance and in December 2018, we received written notice from the NASDAQ Stock Market indicating that we have regained compliance with the minimum $2.5 million stockholders’ equity requirement for continued listing on The Nasdaq Capital Market. Our stockholders’ equity as of December 31, 2018 was $2,403,000 which is below the $2,500,000 level requirement for continued listing on The Nasdaq Capital Market. Alpha Capital Anstalt exercised its green shoe option in part on March 29, 2019 and purchased 109,649 convertible preferred shares in consideration of $125,000. This increase our stockholders’ equity prior to publication ofcured this annual report is expected to assist us in regaining compliance with The Nasdaq Capital Market minimum stockholders’ equity continued listing requirement.
NASDAQ has advised usdeficiency in the past, NASDAQ advised us that it willwould continue to monitor our ongoing compliance with the shareholders’ equity requirement and, if atin the time of our next periodic reportfuture, we fail to evidence compliance, we may be subject to delisting. We could in the future fail to meet this or other NASDAQ continued listing requirements and fail to cure such noncompliance, resulting in the delistingAs of December 31, 2020, our ordinary shares from NASDAQ.shareholders’ equity is below $2.5 million. If we are delisted from NASDAQ, trading in our ordinary shares would be conducted on a market where an investor would likely find it significantly more difficult to dispose of, or to obtain accurate quotations as to the value of, our ordinary shares.
A few of our shareholders who are also members of our Board, may have a significant influence over our business prospects. Future disagreements among these Board members may delay or prevent certain business developments.
Mr. Haim Mer, the Chairman of our Board of Directors, and his wife, Mrs. Dora Mer, currently beneficially own approximately 15.6%11.35% of our outstanding ordinary shares. Following its investment in our Ordinary Shares and Preferred Shares, Alpha Capital currently holds 9.99% of the voting rights at meetings of our shareholders (due to a blocker implemented in our Articles as more fully explained herein), but did not appoint any of its representatives to our Board. As a result, each of these shareholders has a significant influence over the election of our Board of Directors. Any future disagreements between our board members in connection with our business and affairs, including with respect to any determinations relating to potential mergers or other business combinations involving us, our acquisition or disposition of assets, our incurrence of indebtedness, our issuance of any additional ordinary shares or other equity securities, our repurchase or redemption of ordinary shares and our payment of dividends, may delay or prevent certain of these developments and thereby harm our future prospects and results of operations. This concentration of ownership may also adversely affect our share price, especially if these shareholders sell substantial amounts of our ordinary shares. Our current officers and directors beneficially own, collectively, 540,641 ordinary shares, or approximately 15.6%11.35% of our outstanding shares.
If securities or industry analysts do not publish research or publish unfavorable research about the combined company’s business, its share price and trading volume could decline.
The trading market for the combined company’s securities will depend in part on the research and reports that securities or industry analysts publish about the combined company. The combined company may never obtain sufficient research coverage by securities and industry analysts. If no sufficient securities or industry analysts commence coverage of the combined company, the trading price for the combined company’s shares could be negatively impacted. If the combined company obtains sufficient securities or industry analyst coverage and if one or more of the analysts who covers it downgrades the combined company’s shares or publishes inaccurate or unfavorable research about the combined company’s business, its share price would likely decline. If one or more of these analysts ceases coverage of the combined company or fails to publish reports regularly, demand for the combined company’s shares could decrease, which could cause its share price and trading volume to decline.
Failure to maintain effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002 could have a material adverse effect on the combined company’s share price.
Section 404 of the Sarbanes-Oxley Act of 2002 and the related rules and regulations of the SEC require an annual management assessment of the effectiveness of our internal control over financial reporting. SharpLink is currently a private company with limited accounting personnel to adequately execute accounting processes and other supervisory resources with which to address internal control over financial reporting and, as a result, the combined company may experience difficulty in meeting these reporting requirements in a timely manner. To date, SharpLink has never conducted a review of internal controls over financial reporting for the purpose of providing the reports required by the Sarbanes-Oxley Act. During review and testing, SharpLink may identify deficiencies and be unable to remediate them on a timely basis.
If the combined company fails to maintain the adequacy of its internal control over financial reporting as such standards are modified, supplemented or amended from time to time, it may not be able to ensure that it can conclude on an ongoing basis that it has effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002 and the related rules and regulations of the SEC. If the combined company cannot in the future favorably assess the effectiveness of its internal control over financial reporting, investor confidence in the reliability of its financial reports may be adversely affected, which could have a material adverse effect on the combined company’s share price.
Sales of a substantial number of shares of the combined company in the public market by its existing shareholders could cause its share price to decline.
Sales of a substantial number of shares of the combined company in the public market, including shares that will be registered for resale under a registration statement that MTS undertook to file prior to the consummation of the Transaction, or the perception that these sales might occur, could depress the market price of its securities and could impair its ability to raise capital through the sale of additional equity securities. MTS is not able to predict the effect that sales may have on the prevailing market price of the combined company’s securities.
Future sales and issuances of the combined company’s ordinary shares or other securities or rights to purchase ordinary shares by it, including pursuant to its equity incentive plans, and future issuances or adjustments in connection with the MTS Preferred B Shares to be issued to Alpha Capital in connection with the Transaction could result in additional dilution of the percentage ownership of its shareholders and could cause its share price to decline.
The combined company will not be generally restricted from issuing additional ordinary shares or preferred shares that are included in its authorized but unissued share capital, including any securities that are convertible into or exchangeable for, or that represent the right to receive, such shares. The market price of the combined company’s ordinary shares could decline as a result of sales of shares or securities that are convertible into or exchangeable for, or that represent the right to receive, shares of the combined company or the perception that such sales could occur.
We expect that additional capital will be needed in the future to continue the combined company’s planned operations and growth and to fund the costs associated with operating as a public company. To the extent the combined company raises additional capital by issuing equity or convertible securities, its existing shareholders may experience substantial dilution. The combined company may sell ordinary shares, convertible securities or other equity securities in one or more transactions at prices and in a manner determined from time to time by its board of directors. If the combined company sells ordinary shares, convertible securities or other equity securities, investors may be materially diluted. Such sales may also result in material dilution to its existing shareholders, and new investors could gain rights superior to its existing shareholders.
In addition, the combined company may grant or provide for the grant of rights to purchase shares of its ordinary shares pursuant to the combined company’s equity incentive plans, including the new Company Share Option Plan that is presented for approval by MTS’s shareholder at the Meeting. Increases in the number of shares available for future grant or purchase pursuant to the combined company’s equity incentive plans may result in additional dilution, which could cause the combined company’s share price to decline.
Moreover, in connection with the Transaction, Alpha Capital will receive MTS Preferred B Shares that are entitled, among other rights, to an 8% annual dividend for a period of two years, that may be paid in cash or in MTS Preferred A-1 Shares and to anti-dilution protection in the event the combined company issues ordinary shares or other securities convertible into ordinary shares at a price per share lower than the price per share of the MTS Preferred B Shares, subject to certain exceptions. Any future issuances of Preferred A-1 Shares as dividends or adjustments to the conversion rate of the Preferred B Shares as a result of future issuances of equity by the combined company, will result in additional dilution, which could cause the combined company’s share price to decline.
The combined company does not anticipate paying any cash dividends on the combined company’s ordinary shares in the foreseeable future.
Neither MTS nor SharpLink have ever declared or paid cash dividends on their respective ordinary shares. Neither MTS nor SharpLink anticipate paying any cash dividends on the combined company’s ordinary shares in the foreseeable future. It is anticipated that the combined company will retain all available funds and any future earnings to fund the development and growth of its business. As a result, capital appreciation, if any, of the combined company’s ordinary shares will be the combined company’s shareholders’ sole source of gain for the foreseeable future.
Risks Relating to Our Ordinary Shares
Our share price has been volatile in the past and may decline in the future.
Our ordinary shares have experienced significant market price and volume fluctuations in the past and may experience significant market price and volume fluctuations in the future in response to factors such as the following, some of which are beyond our control:
| · | quarterly variations in our operating results; |
quarterly variations in our operating results;
13operating results that vary from the expectations of securities analysts and investors;
| · | operating results that vary from the expectations of securities analysts and investors; |
| · | changes in expectations as to our future financial performance, including financial estimates by investors; |
changes in expectations as to our future financial performance, including financial estimates by investors;
| · | announcements of technological innovations or new products by us or our competitors; |
announcements of technological innovations or new products by us or our competitors;
| · | announcements by us or our competitors of significant contracts, acquisitions, strategic partnerships, joint ventures or capital commitments; |
announcements by us or our competitors of significant contracts, acquisitions, strategic partnerships, joint ventures or capital commitments;
| · | announcements by third parties of significant claims or proceedings against us; |
announcements by third parties of significant claims or proceedings against us;
| · | changes in the status of our intellectual property rights; |
changes in the status of our intellectual property rights;
| · | additions or departures of key personnel; |
additions or departures of key personnel;
| · | future sales of our ordinary shares; and |
future sales of our ordinary shares; and
| · | general stock market prices and volume fluctuations. |
general stock market prices and volume fluctuations.
Domestic and international stock markets often experience extreme price and volume fluctuations. Market fluctuations, as well as general political and economic conditions, such as a recession or interest rate or currency rate fluctuations or political events or hostilities in or surrounding Israel, could adversely affect the market price of our ordinary shares.
In the past, securities class action litigation has often been brought against a company following periods of volatility in the market price of its securities. We may in the future be the target of similar litigation. Securities litigation could result in substantial costs and divert management’s attention and resources.
We do not expect to distribute cash dividends.
We do not anticipate paying cash dividends in the foreseeable future. According to the Israeli Companies Law, 1999-5759, or the Israeli Companies Law, a company may generally distribute dividends only out of its retained earnings (within the meaning of the Israeli Companies Law), so long as the company reasonably believes that such dividend distribution will not prevent the company from paying all its current and future debts. The declaration of dividends is subject to the discretion of our Board of Directors and will depend on various factors, including our operating results, financial condition, future prospects and any other factors deemed relevant by our board of directors. You should not rely on an investment in our company if you require dividend income from your investment in our company. The success of your investment will likely depend entirely upon any future appreciation of the market price of our ordinary shares, which is uncertain and unpredictable and there is no guarantee that our ordinary shares will appreciate in value or even maintain the price at which you purchased your ordinary shares.
We may be classified as a passive foreign investment company, or PFIC, which will subject our U.S. investors to adverse tax rules.
For U.S. federal income tax purposes, we may be classified as a PFIC for any taxable year in which either: (i) 75% or more of our gross income is passive income or (ii) at least 50% of the average quarterly value of our assets (which may be determined in part by the market value of our ordinary shares, which is subject to change) for the taxable year produce or are held for the production of passive income. We believe that we were not a PFIC in 2018 and we do not expect to become a PFIC in future years. If we are classified as a PFIC for U.S. federal income tax purposes, highly complex rules would apply to U.S. holders owning our ordinary shares and such U.S. holders could suffer adverse U.S. tax consequences. Accordingly, you are urged to consult your tax advisors regarding the application of such rules. For more information please see “Item 10. Additional Information – E. Taxation - United States Federal Income Taxation – Passive Foreign Investment Companies.”
Risks Relating to Operations in Israel
Political, economic and military instability in Israel may disrupt our operations and negatively affect our business condition, harm our results of operations and adversely affect our share price.
We are incorporated under the laws of, and our principal executive offices, production or manufacturing and research and development facilities are located in, the State of Israel. As a result, political, economic and military conditions affecting Israel directly influence us. Any major hostilities involving Israel, a full or partial mobilization of the reserve forces of the Israeli army, the interruption or curtailment of trade between Israel and its present trading partners, or a significant downturn in the economic or financial condition of Israel could adversely affect our business, financial condition and results of operations.
In recent years, there have been hostilities between Israel and Hezbollah in Lebanon and Hamas in the Gaza strip, both of which resulted in rockets being fired into Israel causing casualties and disruption of economic activities. In addition, Israel faces threats from more distant neighbors, in particular, Iran. Also, in recent years riots and uprisings in several countries in the Middle East and neighboring regions have led to severe political instability in several neighboring states and to a decline in the regional security situation. Such instability may affect the local and global economy, could negatively affect business conditions and, therefore, could adversely affect our operations. To date, these matters have not had any material effect on our business and results of operations; however, the regional security situation and worldwide perceptions of it are outside our control and there can be no assurance that these matters will not negatively affect our business, financial condition and results of operations in the future.
Furthermore, there are a number of countries, primarily in the Middle East, as well as Malaysia and Indonesia, that restrict business with Israel or Israeli companies, and we are precluded from marketing our products to these countries. Restrictive laws or policies directed towards Israel or Israeli businesses may have an adverse impact on our operations, our financial results or the expansion of our business.
Our financial results may be adversely affected by inflation and currency fluctuations.
We report our financial results in dollars, while a significant portion of our expenses, primarily salaries, are paid in NIS. Therefore, our NIS related costs, as expressed in U.S. dollars, are influenced by the exchange rate between the U.S. dollar and the NIS. The appreciation of the NIS against the U.S. dollar will result in an increase in the U.S. dollar cost of our NIS expenses. We are also influenced by the timing of, and the extent to which, any increase in the rate of inflation in Israel over the rate of inflation in the United States is not offset by the devaluation of the NIS in relation to the dollar. Our dollar costs in Israel will increase if inflation in Israel exceeds the devaluation of the NIS against the dollar or if the timing of such devaluation lags behind inflation in Israel. In the past, the NIS exchange rate with the dollar and other foreign currencies had fluctuated, generally reflecting inflation rate differentials. We cannot predict any future trends in the rate of inflation in Israel or the rate of devaluation or appreciation of the NIS against the dollar. The current COVID-19 outbreak and government programs related to the outbreak may also affect the rate of inflation. If the U.S. dollar cost of our operations in Israel increases, our dollar measured results of operations will be adversely affected. From time to time, we engage in currency-hedging transactions intended to reduce the effect of fluctuations in foreign currency exchange rates on our financial position and results of operations. However, any such hedging transaction may not materially reduce the effect of fluctuations in foreign currency exchange rates on such results.
Service and enforcement of legal process on us and our directors and officers may be difficult to obtain.
Service of process upon our directors and officers, most of whom reside outside the United States, may be difficult to obtain within the United States. Furthermore, since substantially all of our assets, and the assets of most of our directors and officers, are located outside the United States, any judgment obtained in the United States against us or these individuals or entities may not be collectible within the United States.
There is doubt as to the enforceability of civil liabilities under the Securities Act and the Exchange Act in original actions instituted in Israel. However, subject to certain time limitations and other conditions, Israeli courts may enforce final judgments of United States courts for liquidated amounts in civil matters, including judgments based upon the civil liability provisions of those Acts.
Provisions of Israeli law may delay, prevent or make difficult our acquisition by a third-party, which could prevent a change of control and therefore depress the price of our shares.
Provisions of Israeli corporate and tax law may have the effect of delaying, preventing or making more difficult a merger with us or other acquisition of our shares or assets. This could cause our ordinary shares to trade at prices below the price for which third parties might be willing to pay to gain control of us. Third parties who are otherwise willing to pay a premium over prevailing market prices to gain control of us may be unable or unwilling to do so because of these provisions of Israeli law.
The rights and responsibilities of our shareholders are governed by Israeli law and differ in some respects from the rights and responsibilities of shareholders under U.S. law.
We are incorporated under Israeli law. The rights and responsibilities of holders of our ordinary shares are governed by our memorandum of association, articles of association and Israeli law. These rights and responsibilities differ in some respects from the rights and responsibilities of shareholders in typical U.S. corporations. In particular, each shareholder of an Israeli company has a duty to act in good faith in exercising his or her rights and fulfilling his or her obligations toward the company and other shareholders and to refrain from abusing his power in the company, including, among other things, in voting at the general meeting of shareholders on certain matters. Israeli law provides that these duties are applicable in shareholder votes on, among other things, amendments to a company’s articles of association, increases in a company’s authorized share capital, mergers and interested party transactions requiring shareholder approval. In addition, a controlling shareholder of an Israeli company or a shareholder who knows that it possesses the power to determine the outcome of a shareholder vote or who has the power to appoint or prevent the appointment of a director or officer in the company has a duty of fairness toward the company. However, Israeli law does not define the substance of this duty of fairness. Because Israeli corporate law has undergone extensive revision in recent years, there is limited case law available to assist in understanding the implications of these provisions that govern shareholder behavior.
As a foreign private issuer, whose shares are listed on the NASDAQ Capital Market, we may follow certain home country corporate governance practices instead of certain NASDAQ requirements. We follow Israeli law and practice instead of NASDAQ Stock Market Rules regarding the requirement to maintain a majority of independents directors, the director nomination process and the requirement to obtain shareholder approval for certain dilutive events.
As a foreign private issuer whose shares are listed on the NASDAQ Capital Market, we are permitted to follow certain home country corporate governance practices instead of certain requirements of the NASDAQ Stock Market Rules. We follow Israeli law and practice instead of the NASDAQ Stock Market Rules regarding the requirement to maintain a majority of independents directors and the director nomination process. Although we have on occasion sought and obtained shareholder approval as required under NASDAQ Stock Market Rules for certain dilutive events (such as for the establishment or amendment of certain equity based compensation plans, an issuance that will result in a change of control of the company, certain transactions other than a public offering involving issuances of a 20% or more interest in the company and certain acquisitions of the stock or assets of another company), we may in the future exercise our right to follow Israeli law and practice in connection with these matters. As a foreign private issuer listed on the NASDAQ Capital Market, we may also follow home country practice with regard to, among other things, compensation of officers and quorum at shareholders’ meetings. A foreign private issuer that elects to follow a home country practice instead of NASDAQ requirements must submit to NASDAQ in advance a written statement from an independent counsel in such issuer’s home country certifying that the issuer’s practices are not prohibited by the home country’s laws. In addition, a foreign private issuer must disclose in its annual reports filed with the Securities and Exchange Commission, or the SEC, each such requirement that it does not follow and describe the home country practice followed by the issuer instead of any such requirement. Accordingly, our shareholders may not be afforded the same protection as provided under NASDAQ’s corporate governance rules.
Our results of operations may be negatively affected by the obligation of our personnel to perform military service.
Some of our directors, officers and employees in Israel are obligated to perform annual reserve duty in the Israeli Defense Forces and they may be called for active duty under emergency circumstances at any time. If a military conflict or war arises, these individuals could be required to serve in the military for extended periods of time. Our operations could be disrupted by the absence for a significant period of one or more of our executive officers or key employees or a significant number of other employees due to military service. Any disruption in our operations could adversely affect our business.
ITEM 4. INFORMATION ON THE COMPANY
A. | History and Development of the Company |
Our company was incorporated under the laws of the State of Israel in December 1995. We are a public limited liability company under the Israeli Companies Law and operate under such law and associated legislation. Our registered offices and principal place of business are located at 15 14 Hatidhar Street, P.O. Box 2112 Ra΄anana 4366517, Israel, and our telephone number is +972-9-7777-555. Our website address is www.mtsint.com. The information on our website is not incorporated by reference into this annual report.
We are a worldwide providerfocused on innovative products and services for enterprises in the area of TEM solutions. Our TEMtelecom expense management (TEM), call accounting and contact center software. Headquartered in Israel, We markets our solutions assist enterprisesthrough wholly-owned subsidiaries in Israel, the U.S and organizations in making smarter choices with their telecommunications spending at each stage of the service lifecycle, including allocation of cost, proactive budget control, fraud detection, processing of payments and spending forecasting. Our converged billing solutions include applications for charging and invoicing customers, interconnect billing and partner revenue management using pre-pay and post-pay schemes.
On December 30, 2008, we completed the acquisition of certain assets and liabilities of AnchorPoint, a Massachusetts-based provider of TEM solutions. This acquisition has enabled us to expand our product offerings. The aggregate consideration paid for the acquisition at the closing date was the issuance of 24.4% of our outstanding shares on a post-transaction basis.
Hong Kong, as well as through distribution channels. In April 2015, we acquired 100% of the outstanding shares of Vexigo, a privately-held Israeli-based software company supporting video advertising over the internet and mobile devices. As a result of the continuing weakness in the Vexigo business unit and the industry in which it operated, Vexigo sold its operation in June 2018 to an unaffiliated third party for $250,000.
In September 2018, we entered into a Securities Purchase Agreement, or the Alpha Capital SPA, with Alpha Capital Anstalt, or Alpha Capital, an institutional investor, for the investment in a newly-created class of convertible preferred shares, at a price per preferred share of $1.14. The price per share was determined based on a 15% discount to the volume weighted average price of our ordinary shares for the three trading days preceding the signing of the term sheet with Alpha Capital in June 2018. In June 2018, Alpha Capital invested $200,000 in consideration for the issuance of 175,439 of our Ordinary Shares. In October 2018, our shareholders approved the Alpha Capital SPA and the transactions contemplated thereby and the adoption of amended and restated articles of association and certain changes to the structure of our board of directors.
The Alpha Capital SPA includesincluded a greenshoegreen shoe option for further investments by Alpha Capital of up to $1.5 million in the newly created preferred shares at a price per preferred share of $1.14 during the 12 months period following the closing date of the Alpha Capital SPA. On March 29, 2019, Alpha Capital exercised such option in part and purchased an additional 109,649 convertible preferred shares for $125,000. On June 17, 2019, Alpha Capital exercised its green shoe option in part and purchased 438,597 additional convertible preferred shares in consideration of $500,000. The Board later approved the extension of the term of the green shoe option until April 30, 2020 and then again until July 31, 2020. On December 31, 2019, Alpha Capital exercised its green shoe option in part and purchased 144,737 additional convertible preferred shares in consideration of $165,000. On June 23, 2020, Alpha Capital exercised its green shoe option in part and purchased 622,807 convertible preferred shares in consideration of $710,000. In addition, it converted 600,000 and 200,000 preferred shares into ordinary shares at a 1:1 ratio on June 22, 2020 and June 14, 2020, respectively. The green shoe option has been exercised in full.
Subsequent to entering into the Alpha Capital SPA we been actively to seek a potential candidate for either a merger or asset acquisition to allow us to continue in business.
On April 15, 2021, we entered into a Merger Agreement with SharpLink Inc., an online technology company that works with sports leagues, fantasy sports sites and sports media companies to connect fans to betting content sourced from its sportsbook partners. Upon the closing of the merger, which is conditioned upon approval of our shareholders and other standard closing items, MTS will change its name and pursue the business of SharpLink under new management and Board control.
Under the terms of the Merger Agreement, the holders of SharpLink’s outstanding common stock and preferred stock immediately prior to the merger will receive ordinary shares and preferred shares, as applicable, of MTS in the merger. On a pro forma and fully-diluted basis for the combined company, SharpLink shareholders are expected to own approximately 86% of the combined company (inclusive of a stock option pool of 10% of the fully-diluted outstanding share capital of the combined company).
The closing of the Merger Agreement is also conditioned on the investment of $5 million in SharpLink’s equity immediately prior to the consummation of the Merger by Alpha Capital in consideration for SharpLink preferred B stock. Alpha Capital previously undertook to provide financing to support the Merger and the expected listing of the Ordinary Shares on the Nasdaq Capital Market following the Closing. The closing financing is in addition to Alpha Capital’s $2 million investment in SharpLink’s preferred A stock following the execution of the letter of intent in connection with the Merger between the Company and SharpLink in December 2020.
We may be unsuccessful in our efforts to consummate the Merger Agreement, or complete another business combination. If we do not complete a business combination in a timely manner, we may be unable to support our current business or maintain our listing on the NASDAQ Capital market.
B. Business Overview
Industry Background
We are a global provider of solutions for telecommunications expense management (TEM), CA and enterprise mobility management (EMM).contact center software. Our TEM Suite helps organizations reduce operational expenses, improve productivity and optimize networks and services associated with communications networks and information technology.
TEM Industry
The advances in communications technologies and the proliferation of mobile devices have greatly increased the financial and personnel resources required by an enterprise to operate and manage its communications environment. The communications industry has also undergone significant regulatory changes that have resulted in the expansion of the number of service providers and available products. Public cloud IaaS (Infrastructure as a Service) consumption and spending continue to grow. Cloud leaders responsible for IaaS spending need to get ahead of spending and waste through the emerging practice of cloud service expense management, and to take advantage of the emerging tools. Enterprises need to manage an increasing number of service options and a growing volume and complexity of communications contracts and billing arrangements. Inefficient management of these expenses, including overpayments as a result of billing errors, get visibility and control over resources for expense reduction which often results in enterprises incurring significant unnecessary expenses.
Enterprises are increasingly seeking solutions to effectively and efficiently manage, control and optimize their expanding communications assets, services, usage and associated expenses. The TEM market provides solutions to help meet this demand. A number of trends have increased the demand for TEM solutions, such as the growing complexity of communications service plans, large volume and complexity of communications bills and the globalization of business that require corporations to manage their communications assets and services in a centralized fashion across carriers, countries of origin and languages.
Unified Communication & Collaboration products, which are fundamental management tools, record, retrieve and process data received from a PBX or other Unified Communication and Collaboration, or UC&C, systems. This information provides a telecommunications manager with information on telephone usage, instant messaging, application sharing, presence, video and enables the management of internal billing, fraud detection, compliance and optimizes an enterprise’s telecommunications resources.
We recently entered the field of Omnichannel Contact Center Software ("Omnis"). Omnis provides both a reporting tools and additional connectivity features allowing the customer also to manage their Call Center operations while using a wide variety of communications channels (voice, emails, chat, social media and more.). Managing real-time, multi-channel interaction is simple with the Omnis Unified Interface, allowing employees to handle different interactions under one Omnichannel Desktop with real-time visibility into customer information, customer journey and previous interactions. Omnis is our brand and although it is not our in-house development, it must be customized by us to each of our clients in order for them to use it with their business processes.
Products
Call Accounting and Telecommunications Expense Management Solutions for Enterprises
TEM Suite
Our TEM Suite is a solution that assists organizations to reduce their telecom and cloud spending, manage their IT assets, bill internal and external customers, and monitor the quality of service of their telecom and cloud networks. Our TEM Suite includes several modules that can be delivered as a SaaS. The TEM Suite software platform encompasses the business processes conducted by IT and finance departments in acquiring, provisioning and supporting corporate telecommunications assets. Solutions include software suites and the outsourcing of specific tasks to third-party service providers. At the heart of any TEM offering is an automated software platform used by the business or by an external service provider managing a company’s telecom invoices and assets. In 2017,2018, our TEM Suite won an award from TEMIA, Communications Solutions Products of the Year Award from TMC, and from Internet Telephony.
Our TEM Suite enables IT managers and finance teams to monitor, control and save IT and communication expenses by utilizing the following features and functions:
| · | Invoice Management - Provides enterprises with a simplified and automated tool for monitoring, managing, verifying and routing invoices for payment or correction. Invoice items originate from various sources, which include the telecommunication service provider, the devices used such as calling cards, mobile lines, landlines, circuits as well as services and equipment provided. Our solution provides an analysis of all invoice data against the agreement between the enterprise and the service provider, real device usage, online inventory, as well as additional equipment or services. This reduces overhead costs caused by invoice and contract discrepancies, disputes and errors. |
| · | UC&C Analytics (eXsight) - Collection of call data records, Instant messaging, app sharing, video, presence information directly from the UC&C provider, including rates and pricing of calls, serviceability, employee productivity, and generation of insights.
|
UC&C Analytics (eXsight) - Collection of call data records, Instant messaging, app sharing, video, presence information directly from the UC&C provider, including rates and pricing of calls, serviceability, employee productivity, and generation of insights.
Additional features and functions of our TEM Suite include:
·•Asset Management
·•Cable Management
·Private Calls Management
·•Quality of Service
·•Contact Center Analysis
·•Provision Engine
·•VOIP Quality of Service
·•Proactive Alerts
·• Procurement Management
Cloud Expense Management – Empowers organizations to monitor cloud spend, optimize cloud efficiency, resource re-sizing recommendations, cost allocation, cloud governance for eliminates barriers without sacrificing control.
TEM Services
Map-to-Wins. Customer engagements begin with Map-to-Wins, which is a strategic consulting approach for our TEM solution. Map-to-Wins enables organizations to effectively align their business goals with their people, processes and technology investments to assure that their expense management initiatives will be successful. Our proprietary Map-to-Wins approach ensures that proven business processes are used to define both the customer’s and our responsibilities during setup and implementation. This enables our customers to maximize any process improvement opportunities and ensures that nothing is overlooked during this process.
Consulting Services. Consulting services for our TEM solution are designed to assist companies to develop a strategic telecom plan that is right for their needs and to address their tactical requirements as they arise. Our consulting services work closely with internal IT/telecom and finance teams to ensure a successful TEM solution from start to finish. Our TEM consultants support every stage of the TEM lifecycle, using best-practices-based analysis and processes to help leverage the customers’ internal processes and technology. The end result is a long-term, measurable TEM strategy. Our consulting services include:
| · | invoice and inventory audit and recovery; |
invoice and inventory audit and recovery;
| · | contract negotiations and strategic sourcing; |
contract negotiations and strategic sourcing;
| · | discovery and road mapping services; |
discovery and road mapping services;
| · | process diagnosis and solution design; |
process diagnosis and solution design;
| · | wireless optimization; and |
wireless optimization; and
| · | creation and implementation of IT governance, risk and compliance policies. |
creation and implementation of IT governance, risk and compliance policies.
Cloud and Managed Services
Our Call Accounting and TEM solutions are offered either as a perpetual license or as a managed service. Our operation in the U.S. provides cloud based call accounting, TEM managed services and MVNE services.
Implementation and Maintenance Service
We provide customer support to end-users and channels (distributors and business partners) through support centers located in the United States, Israel and Hong Kong on both a service contract and a per-incident basis. Our technical support engineers answer support calls directly and generally seek to provide same-day responses. We provide updated telephone rate tables to customers on a periodic basis under annual service contracts. The rate tables are obtained from third-party vendors who provide this data for all major long-distance service providers. Our distributors provide a full range of service and technical support functions for our products, including rate tables, to their respective end-user customers.
19Omnis - Contact Center Software with “Out-Of-The-Box”
“The “Out-Of-The Box” multi channel capabilities and Open Channel Architecture of Omnis provides customers with the ability to connect whenever and however they choose; voice, emails, chat, social media and more.
Managing real-time, multi-channel interaction is simple with the Omnis Unified Interface, allowing employees to handle different interactions under one Omnichannel Desktop with real-time visibility into customer information, customer journey and previous interactions.
Ease of use / easy to deploy
Vexigo’s solutions were built for brand advertisersSelf-service using advanced AI bots and professional digitalautomation
WhatsApp and Facebook integration
Real time monitoring with analytics and reporting
Omnichannel Modules – (voice, sms, social media, property owners that produce contentweb, chat, email, fax…)
Real-time mobile push notification using Microsoft Flow
Contact management – ability to track all interactions across the different channels
Open channel APIs and applications. In June 2018, Vexigo sold certain assetsOut-Of-The-Box integrations to an unaffiliated third party. The consideration forSalesforce, Dynamics365, ServiceNow, Freshdesk, Microsoft Teams
Agent unified interface – agents can manage tasks and status across the sale of assets was $250,000 receivable in three (3) installments, which have been fully paid.different channels
Custom dashboard per Agent / Supervisor and BI integration
Sales and Marketing
We rely on business partners, our existing customer base and new direct customers for our sales activities. We believe that partnering with business partners is the most advantageous means to generate new sales of our solutions. In addition, our broad base of previously installed solutions, primarily in the United States, provides us with opportunities to offer and sell any new products, solutions and services.
We sell our solutions worldwide through OEMs, distribution channels and our own direct sales force in the United States, Israel and Hong Kong, and through a network of local distributors in these and various other countries.
We employed 3 persons in sales and marketing and 10 persons in support as of December 31, 2020, as compared to 4 persons in sales and marketing and 15 persons in support as of December 31, 2019 and 6 persons in sales and marketing and 16 persons in support as of December 31, 2018, as compared to 10 persons in sales and marketing and 27 persons in support as of December 31, 2017 and 14 persons in sales and marketing and 26 persons in support as of December 31, 2016.2018.
We conduct a wide range of marketing activities aimed at generating awareness and leads. We maintain our websiteswebsite (www.mtsint.com), allowing for correspondence and queries from new potential customers as well as promoting support for our existing customer base. The information on our websites is not incorporated by reference into this annual report. In addition, we participate in certain tradeshows in order to increase our exposure to other market participants and potential customers.
Competition
The global TEM solution and services market is highly competitive and includes recognized leaders such as Tangoe, Inc. and Calero Software LLC that are covered by industry analysts such as Gartner. As an outcome, we focus on our existing installed base and partnerships to grow our business. We invest in the robustness of our products and the professionalism of our managed service team, to increase our value to our customers. There can be no assurance that we will be able to compete successfully against current or future competitors or that competition will not adversely affect our future revenues and, consequently, on our business, operating results and financial condition.
Intellectual Property Rights
We believe that, because of the rapid pace of technological change in the communication industry, the most significant factors in our intellectual property rights are the knowledge, ability and experience of our employees, the frequency of product enhancements and the timeliness and quality of support services provided by us. In addition, we rely upon a combination of security devices, copyrights, trademarks, patents, trade secret laws, confidentiality procedures and contractual restrictions to protect our rights in our products. In 2005, we filed an international patent application (PCT application), relating to a mobile verification technique that verifies mobile phone usage against the bill received from the service provider. Our policy has been to pursue copyright protection for our software and related documentation and trademark registration of our product names. Some of our products have the added protection afforded by a hardware component which has embedded software that it is difficult to misappropriate. In addition, our key employees and independent contractors are required to sign non-disclosure and confidentiality agreements.
Our trademark rights include rights associated with the use of our trademarks and rights obtained by registration of our trademarks in Israel and the United States. We have also acquired rights in certain registered trademarks and common law trademarks and service marks in past acquisitions. The use and registration rights of our trademarks does not ensure that we have superior rights over other third parties that may have registered or used identical related marks on related goods or services. Trademark rights are territorial in nature; therefore, we do not have rights in all jurisdictions.
C. Organizational Structure
Our wholly-owned subsidiaries in the United States, Hong Kong and the Netherlands, MTS IntegraTRAK Inc., MTS Asia Ltd. and Bohera B.V., respectively, act as marketing and customer service organizations in those countries.
D.Property, Plants and Equipment
Our executive offices and research and development facilities arewere located at 1514 Hatidhar Street, Ra’anana P.O. Box 2112, Israel. In February 2018, we entered into an extension of a lease for 4,583 square feet that expired in February 2019 at an annual rental charge of approximately $93,000. During February 2019, we entered into all included month-to-month basis lease contract withUntil July 31, 2020 We paid a monthly rental chargefee of an approximately $9,700.$9,700 and Due to the COVID19 pandemic we closed the offices and started working remotely in Israel.
OurWe have not yet extended the lease agreement for the offices of our U.S. subsidiary, MTS IntegraTRAK occupies approximatelyand we are currently in a month-to-month tenancy We previously paid a monthly rental fee of $5,100 for 2,944 square feet of space in River Edge, New Jersey for a monthly rental fee of approximately $5,100 under a lease terminating in February 2019. We also had an office in Glendale, California, where we occupied approximately 400 square feet of space, under a month-to-month lease for a monthly rental fee of approximately $750 and which we closed in2018.Jersey. In addition, we have an office in Powder Springs, Georgia, where we occupy approximately 4,800 square feet of space under a month-to-month lease for a monthly rental fee of approximately $4,700.$4,700 and since November 2020, we have reduced the rented space and accordingly the monthly rental fee was decreased to approximately $3,000.
ITEM 4A. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
A. Operating Results
The following discussion of our results of operations should be read together with our audited consolidated financial statements and the related notes, which appear elsewhere in this annual report. The following discussion contains forward-looking statements that reflect our current plans, estimates and beliefs and involve risks and uncertainties. Our actual results may differ materially from those discussed in the forward-looking statements. Our past results may not be indicative of future results. Factors that could cause or contribute to such differences include those discussed below and elsewhere in this annual report.
Background
We were organized under the laws of the State of Israel in December 1995, as a subsidiary of C. Mer Industries Ltd., an Israeli public company (TASE: MER).1995. Since our initial public offering in May 1997, our ordinary shares have been listed on the NASDAQ Stock Market (symbol: MTSL) and are presently listed on the NASDAQ Capital Market.
During 20182020 we operated in one business segments the Enterprise (TEM) Division which relates to the telecom business and includes TEM solutions, CA and services. Due to the significant decline of our Billing business and our focus on the TEM business, at the beginning of 2018 we decided to cease billing activity which was part of the service provider segment till the end of 2017.
Following the acquisition of Vexigo in April 2015, we operated in another operation-based segment of video advertising . Vexigo sold itsadvertising. Vexigo’s business operations were sold to an unaffiliated third party in June 2018.
We have wholly-owned subsidiaries in Israel, the United States, Hong Kong and the Netherlands, which act as marketing and customer service organizations in those countries.
21Following the possible Merger Agreement, the combined company is expected to mostly deal with the new business of online technology related to betting content whereas the MTS business will be a smaller legacy segment within the combined entity.
General
Our consolidated financial statements appearing in this annual report are prepared in U.S. dollars and in accordance with generally accepted accounting principles in the United States, or U.S. GAAP. Transactions and balances originally denominated in dollars are presented at their original amounts. Transactions and balances in other currencies are re-measured into dollars in accordance with the principles set forth in Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, Topic 830, “Foreign Currency Translation.” The majority of our sales are made outside Israel in dollars. In addition, substantial portions of our costs are incurred in dollars. Since the dollar is the primary currency of the economic environment in which we and certain of our subsidiaries operate, the dollar is our functional and reporting currency and, accordingly, monetary accounts maintained in currencies other than the dollar are re-measured using the foreign exchange rate at the balance sheet date. Operational accounts and non‑monetary balance sheet accounts are measured and recorded at the exchange rate in effect at the date of the transaction. The financial statements of certain subsidiaries, whose functional currency is not the dollar, have been translated into dollars. All balance sheet accounts have been translated using the exchange rates in effect at the balance sheet date. Statement of operations amounts have been translated using the average exchange rate for the period. The resulting translation adjustments are reported as a component of shareholders’ equity in accumulated other comprehensive income (loss).
Our audited financial statements for the year ended December 31, 2018,2020 were prepared under the assumption that we would continue our operations as a going concern. Our independent registered public accounting firm has included a “going concern” explanatory paragraph in its report on our financial statements for the three years ended December 31, 2018,2020, which raises substantial doubt about our ability to continue as a going concern. The inclusion of this “going concern” paragraph in our financial statements and the uncertainty concerning our ability to continue as a going concern may adversely affect our ability to obtain future financing and, if obtained, the terms of such financing. Our financial statements do not include any adjustments that may result from the outcome of this uncertainty. Without additional funds from private or public offerings of debt or equity securities, sales of assets, sales or licenses of intellectual property or technologies, or other transactions, we will exhaust our resources and will be unable to continue operations. If we cannot continue as a viable entity, our shareholders would likely lose most or all of their investment in us.
In June 2018, we sold the assets relating to our former Vexigo online video advertising solution business to an unaffiliated third party for $250,000. Following the sale on June 1, 2018, Vexigo Ltd ceased its business operations. The results of the discontinued operations including prior periods' comparable results, assets and liabilities have been retroactively included in discontinued operations.
Overview
We are a worldwide provider of TEM solutions which assist enterprises and organizations to make smarter choices with their telecommunications spending at each stage of the service lifecycle, including allocation of cost, proactive budget control, fraud detection, processing of payments and spending forecasting.
Our converged billing solutions have been implemented worldwide by wireless providers, Voice over Internet Protocol, or VOIP, Internet Protocol Television, or IPTV, MVNOWe recently entered the field of Omnichannel Contact Center Software ("Omnins"). Omnis provides both reporting tools and content service providers. Our converged billing solutions include applicationsadditional connectivity features allowing customers to manage their call center operations while using a wide variety of communications channels (voice, emails, chat, social media and more.). While not developed in-house but purchased from an outside vendor, we must customize it for charging and invoicing customers, interconnect billing and partner revenue management using pre-pay and post-pay schemes.each of our clients in order for them to use it with their business processes.
Key Factors Affecting Our TEM and BillingBusinesses
Our operations and the operating metrics discussed below have been, and will likely continue to be, affected by certain key factors as well as certain historical events and actions. The key factors affecting our business and our results of operations include, among others, competition, government regulation, the build out of infrastructures, macro‑economic and political risks, churn, seasonality, impact of currency fluctuations and inflation, effective corporate tax rate, conditions in Israel and trade relations. For further discussion of the factors affecting our results of operations, see “Risk Factors.”
TEM Call Accounting Solutions
The majority of our TEM (Enterprise) revenues are derived from our TEM solutions, the sales of which have been stable in the past years and call accounting, whose revenues have declined each year since 2006 and revenues for this products may not grow in the future. If the market for our TEM solutions fails to grow or stabilize in the future, our business, operating results and financial condition would be adversely affected. Our future financial performance will be dependent to a substantial degree on the successful introduction, marketing and customer acceptance of our TEM call accounting solutions.
Competition
The market for telemanagement products and invoice management solutions is fragmented and is intensely competitive. Competition in the industry is generally based on product performance, depth of product line, technical support and price. We compete both with international and local competitors (including providers of telecommunications services), many of whom have significantly greater financial, technical and marketing resources than us. We anticipate continuing competition in the telemanagement products and invoice management solution market and the entrance of new competitors into the market. Our existing and potential customers, including business telephone switching system manufacturers and vendors, may be able to develop telemanagement products and services that are as effective as, or more effective or easier to use than, those offered by us. Such existing and potential competitors may also enjoy substantial advantages over us in terms of research and development expertise, manufacturing efficiency, name recognition, sales and marketing expertise and distribution channels. We may not be able to compete successfully against current or future competitors and that competition may adversely affect our future revenues and, consequently, on our business, operating results and financial condition.
Proprietary Rights and Risks of Infringement
We believe that, because of the rapid pace of technological change in the communications industry, the most significant factors in our intellectual property rights are the knowledge, ability and experience of our employees, the frequency of product enhancements and the timeliness and quality of support services provided by us. We rely upon a combination of security devices, copyrights, trademarks, patents, trade secret laws, confidentiality procedures and contractual restrictions to protect our rights in our products. We try to protect our software, documentation and other written materials under trade secret and copyright laws, which afford only limited protection. It is possible that others will develop technologies that are similar or superior to our technology. Unauthorized parties may attempt to copy aspects of our products or to obtain and use information that we regard as proprietary. It is difficult to police the unauthorized use of our products, and we expect software piracy to be a persistent problem, although we are unable to determine the extent to which piracy of our software products exists. In addition, the laws of some foreign countries do not protect our proprietary rights as fully as do the laws of the United States. Our means of protecting our proprietary rights in the United States or abroad may not be adequate or our competition may independently develop similar technology.
It is possible that third parties will claim infringement by us of their intellectual property rights. We believe that software product developers will increasingly be subject to infringement claims as the number of products and competitors in our industry segment grows and the functionality of products in different industry segments overlaps. Any such claims, with or without merits, could: (i) result in costly litigation; (ii) divert management’s attention and resources; (iii) cause product shipment delays; or (iv) require us to enter into royalty or licensing agreements. Such royalty or licensing agreements, if required, may not be available on terms acceptable to us, if at all. If there is a successful claim of product infringement against us and we are not able to license the infringed or similar technology, our business, operating results and financial condition would be adversely affected. We are not aware that we are infringing upon any proprietary rights of third parties.
Seasonality
Our operating results from our TEM and Billingcall accounting solutions business are generally not characterized by a seasonal pattern except that our volume of sales in Europe is generally lower in the summer months. SharpLink’s products and services are tied to specific sporting events and seasons. Accordingly, its operations are subject to seasonal fluctuations that may result in revenue and cash flow volatility between fiscal quarters.
Results of Operations
The following table presents certain financial data expressed as a percentage of total revenues for the periods indicated:
| | Year Ended December 31, | | | | |
| | 2018 | | | 2017 | | | 2016 | | | | | | | | | | |
Revenues: | | | | | | | | | | | | | | | | | | |
Telecom Product sales | | | 17.4 | % | | | 19.3 | % | | | 20.7 | % | | 15.8 | % | | 17.8 | % | | 17.4 | % |
Telecom Services | | | 82.6 | | | | 80.7 | | | | 79.3 | | | 84.2 | % | | 82.2 | % | | 82.6 | |
Total revenues | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
Cost of revenues: | | | | | | | | | | | | | | | | | | | | | |
Telecom Product sales | | | 7.3 | | | | 6.1 | | | | 6.1 | | | 7.1
| | | 7.1 | | | 7.3 | |
Telecom Services | | | 29.3 | | | | 24.3 | | | | 29.8 | | | | | | | | | | | | | |
| | | | | | | | | | |
Total cost of revenues | | | 36.7 | | | | 30.4 | | | | 35.9 | | | 44.7 | | | 35.7 | | | 36.7 | |
Gross profit | | | 63.3 | | | | 69.6 | | | | 64.1 | | | 55.3 | | | 64.2 | | | 63.3 | |
Selling and marketing | | | 25.1 | | | | 22.6 | | | | 23.4 | | | 18.7 | | | 15.7 | | | 25.1 | |
Research and development | | | 14.1 | | | | 24.3 | | | | 23.2 | | | - | | | 10.5 | | | 14.1 | |
General and administrative | | | 38.2 | | | | 29.0 | | | | 29.2 | | | 46.4 | | | 36.4 | | | 38.2 | |
Goodwill impairment | | | | | | | | | | | | | |
Operating loss | | | (14.0 | ) | | | (6.3 | ) | | | (11.7 | ) | | (52.7 | ) | | (3.3 | ) | | (14.0 | ) |
Financial income (expenses), net | | | (0.3 | ) | | | 0.2 | | | | 0.0 | | | | | | | | | | | | | |
Loss before taxes on income | | | (14.3 | ) | | | (6.1 | ) | | | (11.7 | ) | | (52.3 | ) | | (3.6 | ) | | (14.3 | ) |
Taxes on income (tax benefit) | | | 0.8 | | | | (0.1 | ) | | | (0.8 | ) | | | | | | | | | | | | |
Loss from continuing operations | | | (15.1 | ) | | | (5.9 | ) | | | (12.5 | ) | | | | | | | | | | | | |
Net loss from discontinued operations | | | (4.8 | ) | | | (20.2 | ) | | | (56.6 | ) | | | | | | | | | | | | |
Loss | | | (20.0 | ) | | | (26.1 | ) | | | (69.1 | ) | | | | | | | | | | | | |
Year Ended December 31, 20182020 Compared with Year Ended December 31, 20172019
Revenue. Revenues from products and services consist primarily of software license fees, advertising campaigns sales and revenues from services, including managed services, hosting, consulting, maintenance, training, professional services and support. Revenues decreased by 13%23% to $5.9$ 4 million for the year ended December 31, 20182020 from $6.8$5.2 million for the year ended December 31, 2017.2019. Revenues from products and services from our wholly-owned U.S. subsidiary, MTS IntegraTrak decreased by 9%23% to $4.8$3.3 million, or 81%83% of our total revenues, for the year ended December 31, 20182020 from $5.3$4.3 million, or 78%83% of our total revenues, for the year ended December 31, 2017.2019.
The decrease in our total revenues in 20182020 is mainly attributedattributable to the close oftechnological and market changes we face, In addition, to the COVID-19 pandemic delayed our service providers business inmarketing efforts for the beginning of 2018.OMNIS product.
Cost of revenues. Cost of revenues increaseddecreased by 5%5.3% to $2.1$1.8 million for the year ended December 31, 20182020 from $2$1.9 million for the year ended December 31, 2017.2019. Cost of revenues consist primarily of (i) production costs and payments to subcontractors; (ii) certain royalties and licenses payable to third parties (including Asentinel and the Israel Innovation Authority, formerly known as the Office of the Chief Scientist, of the Ministry of Industry, Trade and Labor of the State of Israel, or the IIA), (iii) professional services costs; and (iv) support costs. In order to maintain our operating margins in light of the business pressures that we face we substantially reduced our operating expenses during 2019 2018-and 2020. Cost of revenues increaseddecreased in 20182020 mainly due to a onetime adjustment relatedthe layoff of employees, reduction in associated travel expenses due to the cancellation of a historical provision for legal expenses as a result of applicabilityCOVID19 and finalization of the statuteamortization of limitations.intangible assets. as part of the cost reduction plan we continued to implement during 2020.
Research and Development. Research and development expenses consist primarily of salaries of employees engaged in on-going research and development activities, outsourced subcontractor development and other related costs. Research and development expenses decreased by 50%100% to $800,000$ 0 for the year ended December 31, 20182020 from $1.6 million$500,000 for the year ended December 31, 2017.2019. The decrease in research and development expenses is primarily attributable to a cost reduction plan that we implementedcontinued to implement during 20182020 which included a reduction in the numberclosing of our research and development personnel and subcontractor.department in Israel effective January 1, 2020. No research and development expenses were capitalized in 20172019 and 2018. We expect that our research and development expenses will decrease in 2019 compared to 2018.
Selling and Marketing. Selling and marketing expenses consist primarily of costs relating to sales representatives, their travel expenses, trade shows and marketing exhibitions and presales support. Selling and marketing expenses were $1.5$0.8 million for the year ended December 31, 20182020 and 2017. We expect that our$0.8 million for the year ended December 31,2019. Selling and marketing expenses have not changed due to a decrease in selling and marketing expenses will decreaseattributed to the layoff of employees, which was offset by the reversal of a provision in 2019 comparedrelating to 2018.grants for participation in foreign marketing expenses due to the statute of limitations.
General and Administrative. General and administrative expenses consist primarily of compensation costs for administrative, finance and general management personnel, professional fees and office maintenance and administrative costs. General and administrative expenses increased by 10% to $2.2 million for the year ended December 31, 2018 from $2.0were $1.9 million for the years ended December 31, 2017. The increase in general2020 and December 31, 2019. General and administrative expenses is primarily attributablehave not changed due to a decrease in the overhead charges that we used to charge the Vexigo operationlayoff of employees and a reduction in management personnel.associated travel expenses due to the COVID19 pandemic, which decrease were primarily offset by an increase in our D&O insurance premium.
Goodwill and Technology Impairment, Net of Evaluation of Contingent Consideration. Based on the impairment analysis conducted by management, we did not identify anyidentified impairment losses of $1.7 million for the goodwill assigned to the Enterprise (TEM) reporting unit in 2017 or 2018.2020. In 2019 we identified impairment losses of $254,000 for the goodwill assigned to the Enterprise (TEM) reporting unit.
Financial Income (Expenses), Net. Financial income (expenses), net consists primarily of interest income on bank deposits, foreign currency translation adjustments, other interest charges and the financial income (expenses) from option contracts or other foreign hedging arrangements. We recorded financial expenses of $17,000 for the year ended December 31, 2018 as compared to financial income of $14,000 for the year ended December 31, 2017. Our financial income (expense) in 2018 and 2017 were primarily attributable to exchange rate and foreign currency translation adjustments.
Taxes on Income (Benefit). We recorded a tax expense of $46,000 for the year ended December 31, 2018, compared to a tax benefit of $9,000 for the year ended December 31, 2017. Our tax expenses for the year ended December 31, 2018 and our tax benefit for the year ended December 31, 2017 are primarily attributable to changes in the deferred tax liability related to our U.S. subsidiary.
Net Loss from Discontinued Operations. We recorded a net loss from discontinued operations of $284,000 in the year ended December 31, 2018, compared to a net loss from discontinued operations of $1.37 million in the year ended December 31, 2017. The decrease in net loss from discontinued operations is attributed to the sale of Vexigo’s operations in June 2018.
Year Ended December 31, 2017 Compared with Year Ended December 31, 2016
Revenue. Revenues from products and services consist primarily of software license fees, advertising campaigns sales and revenues from services, including managed services, hosting, consulting, maintenance, training, professional services and support. Revenues decreased by 10.5% to $6.8 million for the year ended December 31, 2017 from $7.6 million for the year ended December 31, 2016. Revenues from products and services from our wholly-owned U.S. subsidiary decreased by 10.2% to $5.3 million, or 80% of our total revenues, for the year ended December 31, 2017 from $5.9 million, or 77.6% of our total revenues, for the year ended December 31, 2016.
Cost of revenues. Cost of revenues decreased by 22.2% to $2.1 million for the year ended December 31, 2017 from $2.7 million for the year ended December 31, 2016. Cost of revenues consist primarily of (i) production costs and payments to subcontractors; (ii) certain royalties and licenses payable to third parties (including Asentinel and the IIA), (iii) professional services costs; and (iv) support costs. The decreases is mainly due to reduced revenues in 2017 and a reduction in our provision for royalties due to the passage of the statute of limitation with respect to such provision.
Research and Development. Research and development expenses consist primarily of salaries of employees engaged in on-going research and development activities, outsourced subcontractor development and other related costs. Research and development expenses decreased by 6% to $1.65 million for the year ended December 31, 2017 from $1.75 million for the year ended December 31, 2016. The decrease in research and development expenses is attributable to a decrease in personnel.
Selling and Marketing. Selling and marketing expenses consist primarily of costs relating to sales representatives, their travel expenses, trade shows and marketing exhibitions and presales support. Selling and marketing expenses decreased by 13.6% to $1.53 million for the year ended December 31, 2017 from $1.77 million for the year ended December 31, 2016. The decrease in selling and marketing expenses is attributable to a decrease in personnel.
General and Administrative. General and administrative expenses consist primarily of compensation costs for administrative, finance and general management personnel, professional fees and office maintenance and administrative costs. General and administrative expenses decreased by 9% to $2 million for the year ended December 31, 2017 from $2.2 million for the years ended December 31, 2016. The decrease in general and administrative expenses is primarily attributable to decrease in management personnel during 2017.
Financial Income (Expenses), Net. Financial income (expenses), net consists primarily of interest income on bank deposits, foreign currency translation adjustments, other interest charges and the financial income (expenses) from option contracts or other foreign hedging arrangements. We recorded financial income of $14,000$16,000 for the year ended December 31, 20172020 as compared to financial incomeexpenses of $2,000$18,000 for the year ended December 31, 2016.2019. Our financial income (expense) in 20172020 and 20162019 were primarily attributable to exchange rate and foreign currency translation adjustments.
Taxes on Income.Income (Benefit). We recorded a tax benefit of $9,000$325,000 for the year ended December 31, 20172020, compared to a tax expensesexpense of $63,000$4,000 for the year ended December 31, 2016. Our2019. The decrease in tax benefit and expenses for the years ended December 31, 2017 and 2016, respectively, areis primarily attributable to changes in the deferred tax liabilityrevenues related to our U.S. subsidiary.
Net Loss from Discontinued Operations. We recorded a net loss from discontinued operations of $1,366,000$37,000 in the year ended December 31, 2017,2020 compared to a net lossincome from discontinued operations of $4,277,000$57,000 in the year ended December 31, 2016. Our net losses from discontinued operations are primarily attributable to2019.
Year Ended December 31, 2019 Compared with Year Ended December 31, 2018
Please see Item 5A of our Form 20-F for the Vexigo operation that was sold during 2018. The decrease in net loss between 2016 and 2017 is mainly attributed to goodwill and technology impairments, net of change in contingent consideration payable to the former shareholders of Vexigo following a re-evaluation of such commitment.
Year ended December 31, 2019 filed on March 26, 2020 for this comparison.
Impact of Currency Fluctuation and of Inflation
We report our financial results in dollars and receive payments in dollars for most of our sales, while a portion of our expenses, primarily salaries, are paid in NIS. Therefore, the dollar cost of our operations in Israel is influenced by the extent to which any increase in the rate of inflation in Israel is not offset, or is offset on a lagging basis, by a devaluation of the NIS in relation to the dollar. When the rate of inflation in Israel exceeds the rate of devaluation of the NIS against the dollar, the dollar cost of our operations in Israel increase. If the dollar cost of our operations in Israel increases, our dollar-measured results of operations will be adversely affected. We cannot assure you that we will not be materially and adversely affected in the future if inflation in Israel exceeds the devaluation of the NIS against the dollar or if the timing of the devaluation lags behind inflation in Israel.
The following table presents information about the rate of inflation in Israel, the rate of devaluation or appreciation of the NIS against the dollar, and the rate of inflation in Israel adjusted for the devaluation:
Year ended December 31, | | Israeli inflation rate % | | | NIS devaluation (appreciation) rate % | | | Israeli inflation adjusted for devaluation (appreciation) % | | | | | NIS devaluation (appreciation) rate % | | Israeli inflation adjusted for devaluation (appreciation) % |
2014 | | | (0.2 | ) | | | 12.0 | | | | (12.2 | ) | |
2015 | | | (1.0 | ) | | | 0.3 | | | | (1.3 | ) | |
2016 | | | (0.2 | ) | | | (1.5 | ) | | | 1.3 | | | (0.2) | | (1.5) | | 1.3 |
2017 | | | 0.4 | | | | (9.0 | ) | | | 9.4 | | | 0.4 | | (9.0) | | 9.4 |
2018 | | | 0.8 | | | | 8.1 | | | | (7.3 | ) | | 0.8 | | 8.1 | | (7.3) |
2019 | | | 0.6 | | (7.7) | | 7.1 |
2020 | | | (0.7) | | (7.0) | | 6.3 |
A depreciation of the NIS in relation to the dollar has the effect of reducing the dollar amount of any of our expenses or liabilities which are payable in NIS, unless those expenses or payables are linked to the dollar. This depreciation of the NIS in relation to the dollar also has the effect of decreasing the dollar value of any asset which consists of NIS or receivables payable in NIS, unless the receivables are linked to the dollar. Conversely, any increase in the value of the NIS in relation to the dollar has the effect of increasing the dollar value of any unlinked NIS assets and the dollar amounts of any unlinked NIS liabilities and expenses.
In 2020 and 2019, the NIS depreciated against the dollar by approximately 7.0% and approximately 7.7%, respectively, while in 2018 the NIS depreciated against the dollar by approximately 8.1%. In 2017, the NIS appreciated against the dollar by 1.5%9.0% and in 2016 the NIS appreciated against the dollar by 9.0%1.5%. In the year ended December 31, 2020 there was annual deflation in Israel of 0.7%. In the years 2019, 2018 and 2017, the inflation rate in Israel was 0.6%, 0.8% and 0.4%, respectively. In 2016, annual deflation was 0.2%. Therefore, the U.S. dollar cost of our Israeli operations decreased in 2018 and increased in 2020, 2019, 2017 and by 8.1% in 2018.2016.
If the dollar cost of our operations in Israel increases, our dollar-measured results of operations will be adversely affected. Our operations also could be adversely affected if we are unable to effectively hedge against currency fluctuations in the future.
Because exchange rates between the NIS and the dollar fluctuate continuously, exchange rate fluctuations, particularly larger periodic devaluations, may have an impact on our profitability and period-to-period comparisons of our results. We cannot assure you that in the future our results of operations will not be materially adversely affected by currency fluctuations.
In 2018,2020, we entered into forward call and put option contracts in the amount of $2.1$1.2 million that converted a portion of our floating currency liabilities to a fixed rate basis, which reduced the impact of the currency changes on our cash flow. The purpose of our foreign currency hedging activities is to protect us from the risk that the eventual dollar cash flows from international activities will be adversely affected by changes in the exchange rates. Our put option contracts did not qualify as hedging instruments under ASC 815. Changes in the fair value of put option contracts are reflected in the consolidated statement of comprehensive incomeoperations as financial income or expense.expense, when they occur. In 2018,2020, we recorded approximately $8,900$4,000 of financial incomeexpenses with respect to such transactions in our consolidated statements of operations.
In 2017,2019, we entered into forward call and put option contracts in the amount of $900,000$2.2 million that converted a portion of our floating currency liabilities to a fixed rate basis, which reduced the impact of the currency changes on our cash flow. The purpose of our foreign currency hedging activities is to protect us from the risk that the eventual dollar cash flows from international activities will be adversely affected by changes in the exchange rates. Our put option contracts did not qualify as hedging instruments under ASC 815. Changes in the fair value of put option contracts are reflected in the consolidated statement of comprehensive incomeoperations as financial income or expense.expense, when they occur. In 2017,2019, we recorded approximately $8,000$3,700 of financial incomeexpenses with respect to such transactions in our consolidated statements of operations.
Conditions in Israel
We are incorporated under the laws of, and our principal executive offices and manufacturing and research and development facilities are located in, the State of Israel. See Item 3D. “Key Information – Risk Factors – Risks RelatingRelated to Operations in Israel” for a description of governmental, economic, fiscal, monetary or political polices or factors that have materially affected or could materially affect our operations.
Trade Relations
Israel is a member of the United Nations, the International Monetary Fund, the International Bank for Reconstruction and Development and the International Finance Corporation. Israel is a member of the World Trade Organization and is a signatory to the General Agreement on Tariffs and Trade, which provides for reciprocal lowering of trade barriers among its members. Israel is also a member of the OECD, an international organization whose members are governments of mostly developed economies. The OECD’s main goal is to promote policies that will improve the economic and social well-being of people around the world. In addition, Israel has been granted preferences under the Generalized System of Preferences from the United States, Australia, Canada and Japan. These preferences allow Israel to export products covered by such programs either duty‑free or at reduced tariffs.
Israel and the European Union Community concluded a Free Trade Agreement in July 1975, which confers certain advantages with respect to Israeli exports to most European countries and obligates Israel to lower its tariffs with respect to imports from these countries over a number of years. In 1985, Israel and the United States entered into an agreement to establish a Free Trade Area. The Free Trade Area has eliminated all tariff and specified non‑tariff barriers on most trade between the two countries. On January 1, 1993, an agreement between Israel and the European Free Trade Association, known as EFTA, established a free‑trade zone between Israel and the EFTA nations. In November 1995, Israel entered into a new agreement with the European Union, which includes re-defining of rules of origin and other improvements, including providing for Israel to become a member of the research and technology programs of the European Union. In recent years, Israel has established commercial and trade relations with a number of other nations, including China, India, Russia, Turkey and other nations in Eastern Europe and Asia.
Effective Corporate Tax Rate
The Israeli corporatecompanies are generally subject to income tax rate which was 25% in 2013, increased to 26.5% in 2014 and 2015 and was reduced to 25% as of January 1, 2016. The Israeli Parliament on December 22, 2016, approvedtheir taxable income under the Israeli Budgetary Law for 2017 and 2018, or the Budget Law.Income Tax Ordinance, 5721-1961. The Budget Law reduced the regular corporate tax rate from 25% to 24% in 2017Israel for 2018, 2019 and 23% in 2018. The Budget Law also introduces two new tax incentive regimes for companies with qualifying operations under the Investment Law in addition to several changes to the current tax incentive regimes.
Certain of our activities have been granted “Approved Enterprise” status under the Law for the Encouragement of Capital Investments, 1959, as amended, commonly referred to as the Investment Law, and, consequently, are eligible, subject to compliance with specified requirements, for tax benefits beginning when such facilities first generate taxable income. Subject to certain restrictions, we are entitled to a tax exemption in respect of income derived from our approved facilities for a period of two years, commencing in the first year in which such income2020 is earned, and will be entitled to a reduced tax rate of 10%-25% for an additional five to eight years if we qualify as a foreign investors’ company. If we do not qualify as a foreign investors’ company, we will instead be entitled to a reduced rate of 25% for an additional five, rather than eight, years. In December 2010, the "Knesset" passed the Investment Law for Economic Policy for 2011 and 2012 (Amended Legislation), 2011, which prescribes, among other things, amendments to the Investment Law. The amendment became effective as of January 1, 2011. According to the amendment, the benefit tracks in the Law were modified and a flat tax rate applies to the company's entire preferred income. Vexigo chose to adopt this amendment and we believe it is entitled to benefit from a reduced corporate tax rate under the amendment. The company will be able to opt to apply (the waiver is non-recourse) the amendment and from then on it will be subject to the amended tax rates that are 2011, 2012 and 2013 - 15% (in development area A - 10%); 2014 and thereafter - 16% (in development area A - 9%)23%.
Our taxes outside Israel are dependent on our operations in each jurisdiction as well as relevant laws and treaties. Under Israeli tax law, the results of our foreign consolidated subsidiaries cannot be consolidated for tax purposes. Our effective corporate tax rate may substantially exceed the Israeli tax rate since our U.S.-based subsidiary may be subject to applicable federal, state, local and foreign taxation, and we may also be subject to taxation in the other foreign jurisdictions in which we own assets, have employees or conduct activities. Because of the complexity of these local tax provisions, it is not possible to anticipate the actual combined effective corporate tax rate, which will apply to us.
Certain of our past activities were granted “Approved Enterprise” status under the Law for the Encouragement of Capital Investments, 1959, as amended, commonly referred to as the Investment Law, and, consequently, were eligible, subject to compliance with specified requirements, for tax benefits beginning when such facilities first generated taxable income. None of our current activities qualify for Approved Enterprise status.
B. Liquidity and Capital Resources
As of December 31, 2018,2020, we had $1.2$1.5 million in cash and cash equivalents and working capital of $685 compared to $1.7 million in cash and cash equivalents and a working capital deficiency of $376,000, compared to $1.2 million in cash and cash equivalents and a working capital deficiency of $1.5 million$503,000, as of December 31, 2017.2019. The decreaseincrease in our working capital deficiency is attributedattributable to a decrease in ouraccrued expenses including related to employees accruals and due to decreased in deferred revenues balance.revenues.
Cash Flows
The following table summarizes our cash flows for the periods presented:
| | Year ended December 31, | |
| | 2018 | | | 2017 | | | 2016 | |
| | (in US$ thousands) | |
Net cash (used in) operating activities from continuing operations | | | (1,598 | ) | | | (384 | ) | | | (233 | ) |
Net cash provided by (used in) investing activities | | | (14 | ) | | | 91 | | | | (97 | ) |
Net cash provided by financing activities | | | 1,541 | | | | 400 | | | | 700 | |
Net increase (decrease) in cash and cash equivalents | | | (15 | ) | | | 66 | | | | (569 | ) |
Cash and cash equivalents at beginning of period | | | 1,165 | | | | 1,099 | | | | 1,668 | |
Cash and cash equivalents at end of period | | | 1,150 | | | | 1,165 | | | | 1,099 | |
| | | |
| | | | | | | | | |
| | (in US$ thousands) | |
Net cash (used in) operating activities from continuing operations | | | (1,331 | ) | | | (46 | ) | | | (1,276 | ) |
Net cash (used in) investing activities | | | (5 | ) | | | (60 | ) | | | (14 | ) |
Net cash provided by financing activities | | | (710 | ) | | | 790 | | | | 1,541 | |
Net increase (decrease) in cash and cash equivalents and restricted cash | | | (689 | ) | | | 666 | | | | 307 | |
Cash and cash equivalents and restricted cash at beginning of period | | | 3,196 | | | | 2,530 | | | | 2,223 | |
Cash and cash equivalents and restricted cash at end of period | | | 2,507 | | | | 3,196 | | | | 2,530 | |
Net cash used in operating activities from continuing operations was approximately $1.6$1.3 million for the year ended December 31, 2018,2020, compared to net cash used in operating activities from continuing operations of $384,000$46,000 for the year ended December 31, 2017.2019.
The cash used in operating activities in 2020 is primarily attributable to the goodwill impairment assigned to the Enterprise (TEM) reporting unit and offset by an increase in deferred taxes related to our goodwill. The cash used in operating activities in 2019 is primarily attributable to the goodwill impairment assigned to the Enterprise (TEM) reporting unit and decrease in trade receivables offset by an increase in in prepaid expenses and decrease in accrued expenses and deferred revenues.Net cash used in operating activities from continuing operations was approximately $1.3 million for the year ended December 31, 2018. The cash used in operating activities in 2018 is primarily attributable to the loss incurred during the year in addition to the decrease in deferred revenues and trade payables. The cash used in operating activities in 2017 is primarily attributable to the loss incurred during the year.
Net cash used in operating activities from continuing operations was approximately $384,000 for the year ended December 31, 2017, compared to net cash used in operating activities from continuing operations of $233,000 for the year ended December 31, 2016. The cash used in operating activities in 2017 is primarily attributable to the loss incurred during the year. The cash used in operating activities in 2016 is primarily attributable to the loss incurred during the year and to the increase in accrued expenses and other liabilities
Net cash used in investing activities was approximately $14,000$(5,000) for the year ended December 31, 2020, primarily attributable to purchase of property and equipment. Net cash used in investing activities was approximately $(60,000) for the year ended December 31, 2019, primarily attributable to purchase of property and equipment. Net cash used in investing activities was approximately $(14,000) for the year ended December 31, 2018, primarily attributable to purchase of property and equipment. Net cash provided by investing activities was approximately $91,000 for the year ended December 31, 2017, primarily attributable to proceeds from sales of marketable securities. Net cash used in investing activities was approximately $97,000 for the year ended December 31, 2016, and was attributable to the purchase of property and equipment and the investment in available-for-sale marketable securities offset by proceeds from the sale of available-for-sale marketable securities.
Net cash provided by financing activities was approximately $1.5 million for the year ended December 31, 2018, which is attributable to proceeds from the issuance of shares. Net cash provided by financing activities was approximately $400,000 for the year ended December 31, 2017, which is attributable to proceeds from the private placement consummated in August 2017. Net cash provided by financing activities was approximately $700,000 for the year ended December 31, 2016, which is attributable to proceeds from the private placement consummated in May 2016.
In April 2015, we acquired 100% of the outstanding shares of Vexigo, a privately-held Israeli-based software company supporting video advertising over the internet and mobile devices, which continues to operate as our wholly-owned subsidiary. We paid cash consideration of $3 million at closing. According to the original terms of the Vexigo SPA, we agreed to pay the former Vexigo shareholders two installments of $500,000 each on July 1, 2015 (that was initially postponed to August 15, 2015) and on October 1, 2015 and to distribute to the former shareholders the net working capital of Vexigo as of the closing of the acquisition. In September 2015, the former Vexigo shareholders agreed that payment of the two remaining installments would be postponed until January 1, 2016, conditioned on the payment to the former Vexigo shareholders of $200,000 in September 2015 and of $100,000 on the 10th day of each of October, November and December 2015, or $500,000 in the aggregate, on account of the pre-closing obligation of Vexigo to pay the previously declared dividend to its shareholders. The Vexigo SPA also provided for earn-out payments equal to 45% of the EBITDA from the Vexigo Products Line, over a 5.5 year period from the closing date, up to a cap of $16 million.
In February 2016, we renegotiated and extended again the payment schedule for the consideration due to be paid to the former shareholders of Vexigo. The agreed upon extension provides for the payment of $400,000 in February 2016, additional payments of $100,000 on the 10th day of each month commencing in April 2016 and ending in March 2017 ($1.2 million in the aggregate), a payment of $300,000 on May 10, 2017, a payment of $400,000 on July 10, 2017, and the remaining balance, including a final payment of $300,000 and any earn out payment on October 10, 2017. The agreement also provided that, in the event that we would have a cash balance (not including any draw down from our bank credit line) as of July 10, 2016, or on the 10th day of any succeeding month, in excess of: (i) $3.3 million, we would pay a one-time pre-payment of $300,000 on account of the payments scheduled to be made in 2017; or (ii) if the cash balance was equal to or exceeded $4.0 million, we would pay a one-time pre-payment of the lesser of $900,000 or the remaining balance that is owed to the former Vexigo shareholders. The parties also agreed that if, at any time, our cash balance was lower than $2.5 million, we would stop all payments until our cash balances return to that level.
Under the Vexigo Payment Plan, a payment of $400,000 was made in February 2016, and additional payments of $100,000 were scheduled to be paid on the 10th day of each month commencing in April 2016 and ending in March 2017 ($1.2 million in the aggregate). In addition, the Vexigo Payment Plan contemplated a payment of $300,000 on May 10, 2017, a payment of $400,000 on July 10, 2017, and a payment of the remaining balance, including a final payment of $300,000 and any earn out payments, on October 10, 2017.
As part of our efforts to improve our financial position, we included an option in the Vexigo Payment Plan for the former Vexigo shareholders to participate in a private placement of our ordinary shares, or the 2016 Private Placement. The Vexigo Payment Plan provided that in the event the 2016 Private Placement was consummated, we would accelerate the payment of $500,000 to the former Vexigo shareholders on account of the pre-closing obligation of Vexigo and FPSV to pay a previously declared dividend to them. The former Vexigo shareholders participating in the 2016 Private Placement agreed to invest the net amount (after tax deductions in accordance with applicable law) of that payment in the 2016 Private Placement.
Following our discussions with the former Vexigo shareholders concerning the Vexigo Payment Plan and the terms of the 2016 Private Placement, they requested that other members of management also participate in the 2016 Private Placement as a vote of confidence in our company. Mr. Haim Mer, our Chairman of the Board, Mr. Roger Challen, a member of our Board of Directors, and Mr. Lior Salansky, our former CEO, agreed to participate in the 2016 Private Placement, under the same terms negotiated by us and the former Vexigo shareholders. In May 2016, we completed the 2016 Private Placement consisting of 216,158 ordinary shares, constituting approximately 7.5% of our then outstanding ordinary shares, for an aggregate investment of approximately $700,000. The price paid per share of $3.24 was equal to the closing price of an ordinary share on the NASDAQ Capital Market on Tuesday, May 17, 2016. The 2016 Private Placement was approved by our shareholders at the Extraordinary General Meeting of Shareholders held on May 16, 2016. The shares were sold to the former shareholders of Vexigo and to Mr. Haim Mer, (our Chairman of the Board), Mr. Roger Challen (a member of the Board) and Mr. Lior Salansky (our former CEO). The proceeds from the 2016 Private Placement provided us with additional working capital and were used to reduce the amounts due to the former shareholders of Vexigo.
During 2016 (through August 10, 2016), we paid $900,000 to the former Vexigo shareholders in accordance with the Vexigo Payment Plan. In addition, during May 2016, $400,000 (net amount after tax of an aggregate amount of $500,000 owed to the former Vexigo shareholders) was invested in MTS shares, as part of the 2016 Private Placement. In September 2016, we informed the former Vexigo shareholders that we are stopping payments under the Vexigo Payment Plan as, pursuant to the terms of such plan, we are entitled to stop all payments in the event our cash balance is lower than $2.5 million.
In August 2017, we converted approximately $1.2 million of debt incurred in connection with the acquisition of Vexigo into warrants to acquire 400,000 of our ordinary shares. The warrants have a term of five years and are exercisable without any additional consideration commencing on the second anniversary of their issuance. During the two year period following issuance, we have an option to purchase all or a portion of such warrants at a price per share of $3. Following such conversion, we currently do not have any outstanding debt in connection with the Vexigo acquisition.
In August 2017, we also completed a private placement of 200,803 ordinary shares, constituting approximately 6.4% of our then outstanding ordinary shares, for an aggregate investment of approximately $400,000, or the 2017 Private Placement. The price paid per share paid in the 2017 Private Placement was $1.992, which is equal to the average closing price of our ordinary shares on the NASDAQ Capital Market during the 30 trading days prior to the date of the Audit Committee and Board of Directors’ meetings that approved the 2017 Private Placement (held on June 21, 2017), plus a premium of 20%. The ordinary shares issued in connection with the 2017 Private Placement were issued to: (1) certain of the former shareholders of Vexigo and FPSV Holdings, including Mr. Tzvika Friedman, a then member of our Board of Directors and Mr. Kobi Ram, the former CEO of Vexigo Ltd., (2) Mr. Haim Mer, our Chairman of the Board, (3) Mr. Roger Challen, a then member of our Board of Directors, and (4) Mr. Lior Salansky, our former CEO.
We were introduced to Vexigo by an independent business consultant. In connection with the execution of the Vexigo acquisition, we agreed to pay the consultant 2% of the consideration paid or issued by us in connection with the Vexigo acquisition. Accordingly, upon closing of the Vexigo acquisition and payment of the consideration, we paid the consultant 2% of the cash consideration, and 2% of the equity consideration (20,767 ordinary shares, representing approximately 0.8% of our outstanding shares following the closing, which was made by the issuance of a five-year warrant having a $0 exercise price). We have also undertaken to pay the consultant 2% of any future Earn-out Payments.
In addition, Mr. Lior Salansky, our former chief executive officer who acted as a consultant to our Board of Directors in connection with prospective acquisitions, received a warrant to acquire 2% of our outstanding ordinary shares (based on the number of shares outstanding prior to the closing of the Vexigo acquisition), with an exercise price equal to the market price of our ordinary shares at the signing of the Vexigo SPA ($2.88 per share), having a term five years and which may be exercised on a cashless basis.
The consummation of the Vexigo acquisition significantly decreased our cash reserves. Vexigo sold certain assets to an unaffiliated third party during 2018 for aggregate consideration of $250,000 which was paid in three installments.
In September 2018, we entered into the Alpha Capital SPA with Alpha Capital, an institutional investor, for the investment in a newly-created class of convertible preferred shares, at a price per preferred share of $1.14. The price per share was determined based on a 15% discount to the volume weighted average price of our ordinary shares for the three trading days preceding the signing of the term sheet with Alpha Capital in June 2018. In June 2018, Alpha Capital invested $200,000 in consideration for the issuance of 175,439 of our Ordinary Shares. In October 2018, our shareholders approved the Alpha Capital SPA and the transactions contemplated thereby and the adoption of amended and restated articles of association and certain changes to the structure of our board of directors.
The Alpha Capital SPA includesincluded a greenshoe option for a future investment by Alpha Capital Anstalt of up to $1.5 million in the newly created preferred shares at a price per preferred share of $1.14 during the 12 months period following the closing date of the Alpha Capital SPA. On March 29, 2019, Alpha Capital exercised its option in part and purchased 109,649 convertible preferred shares in consideration of $125,000. On June 17, 2019, Alpha Capital exercised its greenshoe option in part and purchased 438,597 additional convertible preferred shares in consideration of $500,000. In October 2019, our Board approved the extension of the term of the greenshoe option by six months until April 30, 2020. On December 31, 2019, Alpha Capital purchased 144,737 additional convertible preferred shares in consideration of $165,000 pursuant to its greenshoe option. On June 23, 2020, Alpha Capital exercised its greenshoe option in part and purchased 622,807 convertible preferred shares in consideration of $710,000. In addition, it converted 200,000 and 600,000 preferred shares into ordinary shares at a 1:1 ratio on June 14, 2020 and June 22, 2020, respectively. The greenshoe option has been exercised in full.
Our capital expenditures for the years ended December 31, 2016, 20172018, 2019 and 20182020 were approximately $1.9 million, $1.7 million$840,000,$605,000 and $840,000,$5, respectively. These expenditures were principally for research and development equipment, office furniture and equipment and leasehold improvements. The decrease in 2020 is attributable to the closing of our research and development department in Israel.
As we were not successful in generating sufficient cash from our current operations or from Vexigo’s operations, we will require financing from outside sources. We expect to explore various financing alternatives to raise additional funds to support itsour operations in 2019. There can be no assurance that additional financing will be available on satisfactory terms, or at all.2021, and our current goal is to consummate the Merger Agreement with SharpLink. If the Company iswe are unable to secure needed financing or consummate the Merger Agreement, management may be forced to take additional actions, which may include significantly reducing its anticipated level of expenditures and might not have sufficient resources to enable it to continue as a going concern.
Discussion of Critical Accounting Policies and Estimations
The preparation of financial statements in conformity with generally accepted accounting principles requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and the use of different assumptions would likely result in materially different results of operations.
Critical accounting policies are those that are both most important to the portrayal of a company’s financial position and results of operations, and require management’s most difficult, subjective or complex judgments. Although not all of our significant accounting policies require management to make difficult, subjective or complex judgments or estimates, the following policies and estimates are those that we deem most critical:
Revenue Recognition. We generate revenues mainly from licensing the rights to use our software products and from providing maintenance, hosting and managed services, support and training. Certain software licenses require significant customization. we sellsWe sell our products directly to end-users and indirectly through resellers and OEMs (who are considered end users).
OEMs.
We recognize revenue under the five-step methodology required under ASC 606, “Revenue from Contracts with Customers”, which requires us to identify the contract with the customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations identified, and recognize revenue when (or as) each performance obligation is satisfied.
As of January 1, 2018, we adopted the new standard using the modified retrospective transition approach. Our primary revenue categories, related performance obligations, and associated recognition patterns are as follows:
Revenue Recognition for software license fee - software license fee revenue is recognized when the customer has access to the license and the right to use and benefit from the license. In cases when the conditions require delivery, then delivery must have occurred for purposes of revenue recognition.
Revenue Recognition for managed services arrangement - Managed services arrangements include management application and ongoing support.
The revenue from managed services arrangement is recognized over the time of the service.
Revenue Recognition for maintenance - Maintenance revenue is recognized ratably over the term of the maintenance agreement.
Arrangements with multiple performance obligations - Many of the Company’s agreements include software license bundled with maintenance and supports. weWe allocate the transaction price for each contract to each performance obligation identified in the contract based on the relative standalone selling price (SSP). The Company determinesWe determine SSP for the purposes of allocating the transaction price to each performance obligation by considering several external and internal factors including, but not limited to, transactions where the specific element sold separately, historical actual pricing practices accordance with ASC 606. The determination of SSP requires the exercise of judgement. For maintenance and support, the Company determineswe determine the SSP based on the price at which the Company sells swe sell renewal contract.
Allowances for Doubtful Accounts. We perform ongoing credit evaluations of our customers’ financial condition and we require collateral as deemed necessary. We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make payments. In judging the adequacy of the allowance for doubtful accounts, we consider multiple factors including the aging of our receivables, historical bad debt experience and the general economic environment. Management applies considerable judgment in assessing the realization of receivables, including assessing the probability of collection and the current credit worthiness of each customer. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.
Contingent earn-out consideration. The terms of the Vexigo SPA, required us to pay the former Vexigo shareholders Earn-out Payments, equal to 45% of the EBITDA from the Vexigo Products Line for a period of 5.5 years from the closing date of the Vexigo acquisition, subject to certain limitations and up to a cap of $16 million. We performed a valuation study as of December 31, 2017 and December 31, 2016 and as a result, we reduced the contingent earn-out liability by $2.8 million, resulting (taking into account a write-off of $4.3 million in the year ended December 31, 2015) in the write-off/elimination of the entire amount recorded as contingent earn-out in connection with our acquisition of Vexigo.
Income Taxes. Estimates and judgments are required in the calculation of certain tax liabilities and in the determination of the recoverability of certain of the deferred tax assets, which arise from net operating losses tax carryforwards and temporary differences between the tax and financial statement recognition of revenue and expense. FASB ASC Topic 740, “Income Taxes” also requires that the deferred tax assets be reduced by a valuation allowance, if based on the weight of available evidence, it is more likely than not that some portion or all of the recorded deferred tax assets will not be realized in future periods.
In evaluating our ability to recover our deferred tax assets, in full or in part, we consider all available positive and negative evidence including our past operating results, the existence of cumulative losses in the most recent fiscal years and our forecast of future taxable income on a jurisdiction by jurisdiction basis. In determining future taxable income, we are responsible for assumptions utilized, including the amount of Israeli and international pre-tax operating income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates we use to manage the underlying businesses.
Based on estimates of future taxable profits and losses in the tax jurisdictions that we operate, we determined that a valuation allowance of $6.7$6.1 million is required for tax loss carryforwards and other temporary differences as of December 31, 2018.2020. If these estimates prove inaccurate, a change in the valuation allowance could be required in the future.
Business Combinations. We allocate the fair value of purchase consideration to the tangible assets acquired, liabilities assumed and intangible assets acquired based on their estimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. When determining the fair values of assets acquired and liabilities assumed, management perform significant estimates and assumptions, especially with respect to intangible assets.
Critical estimates in valuing certain intangible assets include but are not limited to future expected cash flows from developed technology; and discount rates. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates.
Other estimates associated with the accounting for acquisitions may change as additional information becomes available regarding the assets acquired and liabilities assumed, as more fully discussed in Note 3 of the Financial Statements.
Goodwill. Goodwill represents the excess of the purchase price in a business combination over the fair value of the net tangible and intangible assets acquired. Under ASC 350, "Intangibles—Goodwill and Other," goodwill is subject to an annual impairment test, or more frequently if impairment indicators are present. Goodwill impairment is deemed to exist if the net book value of a reporting unit exceeds its estimated fair value. All goodwill balances are assigned to our Enterprise and Video Advertising reporting units.unit.
Under ASU 2011-08, "Intangibles Goodwill and Other" (Topic 350), or ASU 2011-08, which amended the rules for testing goodwill for impairment, an entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. Alternatively, ASC 350 permits an entity to bypass the qualitative assessment for any reporting unit and proceed directly to performing the first step of the goodwill impairment test.
WeSince June 2018, we operate in one operating segments,segment, which comprise of our Enterprise (TEM) reporting units. Our goodwill balance is assigned only to our Enterprise reporting units.
In light of the decrease in our share price in the NASDAQ Capital Market and negative changes in the Video Advertising market through 2016 that continued into the first months of 2017, we performed an impairment test as of December 31, 2016. Consequently, we concluded that the carrying value of the Video Advertising reporting unit exceeded its fair value, and therefore, an impairment of goodwill existed and the second step of the goodwill impairment test was required. As a result of the impairment test to the Video Advertising reporting unit, we recorded an impairment charge of technology of $3.7 million (before tax affect) and a goodwill impairment charge of $4.8 million in 2016 (before a $4.3 million decrease in contingent consideration payable to the former shareholders of Vexigo following a re-evaluation of this contingent liability).unit.
Based on an annual impairment test preformed toperformed on our Enterprise reports units, we identified impairment losses of $1.7 million and $0.3 million in 2020 and in 2019, respectively(see also note 2h to our financial statements). We did not identify any impairment in our Enterprise reporting unit in 2018, 2017 or 2016. Based upon the 2018 annualprior three years. The impairment analysis of the Enterprise reporting unittests were performed using the income approach with five (5) years of projected cash flows and a discount rate of 19.0%, the estimated fair value of the reporting unit was not substantially in excess of its respective carrying value. Therefore, in the event of unfavorable changes in forecasted cash flows, terminal value multiples and/or weighted-average cost of capital, the Enterprise reporting unit will be at risk of failing step one of the goodwill impairment test.25.0%-26%.
Critical estimates in valuing our reporting units include, but are not limited to, future expected cash flows from each reporting unit and discount rates. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates.
Other intangible assets and long-lived assets.We are required to assess the impairment of tangible and intangible long-lived assets subject to amortization, under ASC 360 "Property, Plant and Equipment", on a periodic basis and when events or changes in circumstances indicate that the carrying value may not be recoverable. Impairment indicators include any significant changes in the manner of our use of the assets or the strategy of our overall business, significant negative industry or economic trends and significant decline in our share price for a sustained period.
Upon determination that the carrying value of a long-lived asset may not be recoverable based upon a comparison of aggregate undiscounted projected future cash flows from the use of the asset or asset group to the carrying amount of the asset, an impairment charge is recorded for the excess of carrying amount over the fair value. We measure fair value using discounted projected future cash flows. We base our fair value estimates on assumptions we believe to be reasonable, but these estimates are unpredictable and inherently uncertain. If these estimates or their related assumptions change in the future, we may be required to record impairment charges for our tangible and intangible long-lived assets subject to amortization. During 2016, as a result of the impairment test to the Video Advertising reporting unit, we recorded an impairment charge of technology of $3.7 million (before tax affect). During 2017 and 2018, we did not identify any impairment in our Enterprise reporting unit.
Contingencies. We are involved in legal proceedings and other claims from time to time. We are required to assess the likelihood of any adverse judgments or outcomes to these matters, as well as potential ranges of probable losses. A determination of the amount of reserves required, if any, for any contingencies are made after careful analysis of each individual claim. The required reserves may change due to future developments in each matter or changes in approach, such as a change in the settlement strategy in dealing with any contingencies, which may result in higher net loss. If actual results are not consistent with our assumptions and judgments, we may be exposed to gains or losses that could be material. See “Item 8A. Financial Information – Consolidated Statements and Other Financial Information – Legal Proceedings.”
Stock based compensation. We apply ASC 718 "Compensation - Stock compensation," and ASC 505-50 "Equity-Based Payments to Non-Employees," with respect to options and warrants issued to non-employees.. ASC 718 requires companies to estimate the fair value of stock-based awards on the date of grant using an option-pricing model, where applicable. Stock-based compensation expense recognized in our consolidated statements of operations for the three years ended December 31, 20182020 include compensation expense for stock-based awards granted based on the grant date fair value estimated in accordance with the provisions of ASC 718.
We recognize these compensation costs net of a forfeiture rate and recognize the compensation costs for only those shares expected to vest on a straight-line basis over the requisite service period for each separately vesting portion of the award, which is the option vesting term of four years. ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. We estimate the fair value of stock options granted using the Black-Scholes-Merton option pricing model. Stock-based compensation expense recognized under ASC 718 and ASC 505-50 were approximately $223,000, $1,000$90,000, $47,000 and $90,000$21,000 for the years ended December 31, 2018, 2019 and 2020, respectively.
Recently Adopted Accounting Standards
In June 2016, 2017the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (ASU) No. 2016-13, Financial Instruments - Credit Losses (Topic 326):
Measurement of Credit Losses on Financial Instruments. The FASB subsequently issued amendments to ASU 2016-13, which have the same effective date and 2018, respectively.transition date of January 1, 2020. This standard requires entities to estimate an expected lifetime credit loss on financial assets ranging from short-term trade accounts receivable to long-term financings and report credit losses using an expected losses model rather than the incurred
losses model that was previously used, and establishes additional disclosures related to credit risks.
We adopted Topic 326 using the effective date of January 1, 2020, based on the composition of our trade receivables, investment portfolio and other financial assets, current economic conditions and historical credit loss activity. The adoption of this standard did not have a material effect on our consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The amended guidance simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. Under the amended guidance, an entity should perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying value, and an impairment charge is recognized for the amount by which the carrying value exceeds the reporting unit’s fair value, not to exceed the total amount of goodwill allocated to that reporting unit. Additionally, the amount of goodwill allocated to each reporting unit with a zero or negative carrying amount of net assets should be disclosed. We adopted this standard prospectively effective January 1, 2020. The adoption of this standard did not have a material impact on our consolidated financial statements.
Recently Issued Accounting Standards
In February 2016,December 2019, the FASB issued ASU 2016‑02 - Leases (ASC 842)No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes” (“ASU 2020-12”), which sets outsimplifies the principlesaccounting for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e. lessees and lessors). The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight line basis over the term of the lease, respectively. A lessee is also required to record a right‑of‑use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales‑type leases, direct financing leases and operating leases. Theincome taxes. ASU is expected to impact our consolidated financial statements as we have certain operating lease arrangements. ASC 842 supersedes the previous leases standard, ASC 840 Leases. The standard2019-12 is effective on January 1, 2019.for annual reporting periods, and interim periods within those years, beginning after December 15, 2020. We completed our evaluation of the Standard and do not expect a material change in the pattern of leases recognition.
In March 2016, the FASB issued ASU 2016-09 "Improvements to Employee Share-Based Payment Accounting". This ASU affects entities that issue share-based payment awards to their employees. The ASU is designed to simplify several aspects of accounting for share-based payment award transactions which include the income tax consequences, classification of awards as either equity or liabilities, classification on the statement of cash flows and forfeiture rate calculations. ASU 2016-09 will become effective for us in the annual period ending August 31, 2018. Early adoption is permitted in any interim or annual period. We are currently in the process of evaluating the impact of the adoption of this standardnew guidance on itsthe our consolidated financial statements.
On May 28, 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, requiring an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The updated standard will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective and permits the use of either the retrospective or cumulative effect transition method.
In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing. ASU 2016-10 covers two specific topics: performance obligations and licensing. This amendment includes guidance on immaterial promised goods or services, shipping or handling activities, separately identifiable performance obligations, functional or symbolic intellectual property licenses, sales-based and usage-based royalties, license restrictions (time, use, geographical) and licensing renewals. In addition, in May 2016, FASB issued ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, which is intended to not change the core principle of the guidance in Topic 606, but rather affect only the narrow aspects of Topic 606 by reducing the potential for diversity in practice at initial application and by reducing the cost and complexity of applying Topic 606 both at transition and on an ongoing basis.
On January 1, 2018, we adopted ASC 606 using the modified retrospective method for contracts which were not completed as of January 1, 2018. Under the modified retrospective method, we recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of accumulated deficit and deferred revenues in the amount of $230,000.
The impact of the ASC 606 adoption on the consolidated statement of operations for the year ended December 31, 2018, was an increase in revenues amounting to $27,000, resulting in total revenues of $5,861,000, while under ASC 605 our revenues would have been $5,834,000.
The impact on the loss of operations was also $27,000.
This relates to our accounting for arrangements that include software licenses bundled with maintenance and support. Under ASC 606, the revenue attributable to these software licenses was recognized ratably over the term of the arrangement because VSOE did not exist or the undelivered maintenance and support element as it was not sold separately. The requirement to have VSOE for undelivered elements to enable the separation of revenue for the delivered software licenses is eliminated under the new standard. Accordingly, under the ASC 606 we required to recognize as revenue a portion of the arrangement fee upon delivery of the software license.
In August 2016, FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230) Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 eliminates the diversity in practice related to the classification of certain cash receipts and payments for debt prepayment or extinguishment costs, the maturing of a zero coupon bond, the settlement of contingent liabilities arising from a business combination, proceeds from insurance settlements, distributions from certain equity method investees and beneficial interests obtained in a financial asset securitization. ASU 2016-15 designates the appropriate cash flow classification, including requirements to allocate certain components of these cash receipts and payments among operating, investing and financing activities. The retrospective transition method, requiring adjustment to all comparative periods presented, is required unless it is impracticable for some of the amendments, in which case those amendments would be prospectively as of the earliest date practicable. The standard is effective on January 1, 2019. We are currently assessing the impact of the adoption of this standard on its consolidated financial statements and footnote disclosures.
C. Research and Development
Our product development plans are market-driven and address the major, fast-moving trends that are influencing the telecommunications industry. We intend to expand upon our existing family of TEM solutions by adding new features and functions to address evolving market needs.
Our research and development staff evaluates approaches to solutions that will permit an information technology manager to effectively measure the quality of the services received from their service providers and to ensure that the users within the organization received such services according to their needs and the overall policy and priorities of the organization.
We work closely with our customers and prospective customers to determine their requirements and design enhancements and develop new releases to meet their needs. Research and development activities taketook place in our facilities in Israel. We employed five0 persons in research and development as of December 31, 2018, compared to nine2020, and 5 persons as of December 31, 20172019 and 29 persons2018. Effective January 1, 2020, we closed the R&D department in Israel as part of December 31, 2016.our cost reduction program and we are focused on implementing and increasing the revenues from our existing technology and on identifying the right potential M&A candidate.
We have committed substantial financial resources to research and development for our TEM and billing activities. Among our various development plans, our roadmap includes the integration of our TEM products with our other complementary TEM products within the next few years. Development activities included a plan or design for the production of new or substantially improved products and processes. Development expenditure wereare capitalized only if development costs can be measured reliably, the product or process is technically and commercially feasible, future economic benefits are probable, and the Company intends to and has sufficient resources to complete development and to use or sell the asset. The expenditure capitalized includes the cost of materials and direct labor costs that are directly attributable to preparing the asset for its intended use. Other development expenditure is recognized in profit or loss as incurred. Capitalized development expenditure is measured at cost less accumulated amortization and accumulated impairment losses. During 2016, 20172018, 2019 and 2018,2020, our research and development expenditures were $1.8 million, $1.6 million$800,000, $500,000 and $800,000,$0, respectively. Research and development expenses are presented net of capitalized expenses in the amount to zero for the years ended December 31, 20182020, 2019 and 2017, compared to $380,000 for the year ended December 31, 2016.2018.
In light of the decrease in our share price and negative changes in the Video Advertising market in 2016 that continued into the first months of 2017, we performed an impairment test as of December 31, 2016. Consequently, we concluded that the carrying value of the Video Advertising reporting unit exceeded its fair value, and therefore, an impairment of goodwill and technology existed. As a result of the impairment test to the Video Advertising reporting unit, we recorded a technology impairment loss in the amount of $3.7 million (before tax affect) that includes the acquired technology as well as capitalized technology. In the past, we received funding from the IIA for selected research and development projects. During January and February 2017 and during December 2017, due to the slow activity Vexigo had at the beginning of 2017 and at the later stage of the year, we decided to downsize Vexigo’s ongoing research and development program.
Under the terms of research and development grants that we have received from the IIA, we are required to pay royalties on the revenues derived from products incorporating know-how developed with such grants and ancillary services in connection therewith, up to 100% to 150% of the dollar-linked value of the total grants, plus interest. We are required to pay royalties at a rate of 3%-5%. The obligation to pay these royalties is contingent on actual sales of the products and in the absence of such sales, no payment is required. Since June 1997, we have paid the IIA royalties on all call accounting product sales at the applicable rates at the time of payment. See Item 10E. “Additional Information - Taxation - Grants under the Law for the Encouragement of Industrial Research and Development, 1984.” As of December 31, 2018,2020, we had a contingent obligation to pay royalties to the IIA in the amount of approximately $8.3$8.15 million plus interest at a rate equal to the 12 month LIBOR rate for grants received after January 1999.
On July 27, 2017, the Chief Executive of the U.K. Financial Conduct Authority (the “FCA”), which regulates the LIBOR rate, announced that the FCA will no longer persuade or compel banks to submit rates for the calculation of the LIBOR benchmark after 2021. This announcement indicates that the continuation of LIBOR on the current basis cannot be guaranteed after 2021. Therefore, after 2021 LIBOR may cease to be calculated. The Bank of England and the FCA are working with market participants to catalyze a transition to using the Sterling Overnight Index Average (Sonia). In addition, the Alternative Reference Rates Committee, a group of private-market participants and official-sector entities convened by the Federal Reserve Board and the Federal Reserve Bank of New York, has recommended that the Secured Overnight Financing Rate (SOFR) replace U.S. dollar LIBOR. Many unresolved issues remain, such as the timing of the successor benchmarks introduction and the transition of a particular benchmark to a replacement rate, which could result in widespread dislocation in the financial markets, engender volatility in the pricing of securities, derivatives and other instruments, and suppress capital markets activities. For example, SOFR and other alternate reference rates have compositions and characteristics that differ significantly from the benchmarks they may replace, have limited history, and may demonstrate less predictable performance over time than the benchmarks they replace. Our quality management system has been ISO 9001:2000 certified since the beginning of 2006, and prior thereto was ISO 9001:1994 certified.
37D.
D. Trend Information
As a result of a less predictable business environment, we are unable to provide any guidance as to current sales and profitability trends for our TEM solutions but expect that our call accounting solutions revenues will continue their decline in 2019. 2021. We expect that our results will be positively/negativelypositively impacted by the cost reduction program that we implemented in 2018.during 2018, 2019 and 2020.
E. Off-Balance Sheet Arrangements
We are not a party to any material off-balance sheet arrangements. In addition, we have no unconsolidated special purpose financing or partnership entities that are likely to create material contingent obligations.
F. Tabular Disclosure of Contractual Obligations
The following table summarizes our minimum contractual obligations and commercial commitments as of December 31, 20182020 and the effect we expect them to have on our liquidity and cash flow in future periods.
Contractual Obligations | | Payments due by period | | | | |
| | Total | | | Less than 1 year | | | 1-3 years | | | 3-5 years | | | More than 5 years | | | | | | | | | | | | | | | | |
| | (U.S. dollars in thousands) | | | (U.S. dollars in thousands) | |
Operating lease obligations | | | 25 | | | | 25 | | | | - | | | | - | | | | - | | |
Accrued severance pay* | | | 722 | | | | - | | | | - | | | | - | | | | 722 | | | | | | | | | | | | | | | | | | | | | |
Total | | | 747 | | | | 25 | | | | | | | | - | | | | 1,073 | | | 306 | | | - | | | - | | | - | | | 306 | |
__________
* See Item 6D. “Directors, Senior Management and Employees - Employees.”
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. Directors and Senior Management
Set forth below are the name, age, principal position and a biographical description of each of our directors and executive officers:
| | | | Position with the Company |
Haim Mer | | 7173 | | Chairman of the Board of Directors |
Roy Hess | | 5759 | | Chief Executive Officer |
Ofira Bar | | 3840 | | Chief Financial Officer |
Oren Kaplan | | 47 | | VP Sales and Marketing |
Scott Burell (1) (2) | | 5456 | | Director |
Isaac Onn | | 6769 | | Director |
Ronen Twito (1) (2) | | 4446 | | Outside Director |
Varda Trivaks (1) (2) | | 6264 | | Outside Director |
__________________
(1) Member of our audit committee
(2) Member of our compensation committee
Mr. Adi Orzel resigned from the Board of Directors, as well as from the position of Chairman of the Board of Vexigo effective March 31, 2018.
Ms. Ofira Bar would was appointed as our Chief Financial Officer on April 30, 2018 on an interim basis and was appointed as CFO on July 1, 2018.
Mr. Tzvika Friedman resigned from the Board of Directors in June 2018 subsequent to the sale of the business of Vexigo and Mr. Yaacov Goldman resigned from the Board of Directors in October 2018.
In connection with the closing of the Alpha Capital SPA in October 2018, two of our Board members, Mr. Roger Challen and Mr. Steven J. Glusband, resigned as Board members. As part of its investment, Alpha Capital designated two nominees for election to our Board of Directors, each to serve for a single two year term. Alpha designated Scott Burrell and Isaac Onn as its designees. Mr. Scott Burell was also appointed to the Audit Committee and Compensation Committee. Both such persons are independent directors within the meaning of applicable Nasdaq corporate governance rules, and both such persons are otherwise not affiliates of Alpha Capital. There are no agreements or other arrangements between such designees and Alpha Capital with respect to voting on any matters that may come before the Board Ofof Directors.
Mr. Mer, our Chairman of the Board, will serve as director until our 2019 Annual General Meeting of Shareholders.. He was elected to serve as director by our shareholders at our 2018 Annual General Meeting of Shareholders.
Our currently serving outside directors are Varda Trivaks, whose service term is due to end in August 20202023 (following five terms) and Ronen Twito,, who was elected to the position in March 2019 and whose initial service term is due to end in March 2022. Mr. Eytan Barak resigned from his position as outside director in March 2019.
Effective July 1, 2019, Mr. Hess has devoted 50% of his time to the affairs of our company. Mr. Hess devotes rest of his business time to the affairs of C. Mer Industries, Ltd, a publicly traded company in Israel.
A shareholder meeting was held on May 5, 2021. The shareholder meeting was called at the request of Mr. David Elliot Lazar, Custodian Ventures LLC and Activist Investing LLC, together the Lazar Group, who as of the record date held, in the aggregate, more than 5% of the voting rights and issued and outstanding share capital of MTS. The Israeli Companies Law provides that our Board of Directors is required to convene an extraordinary meeting upon the written request of one or more shareholders holding, in the aggregate, either (a) 5% or more of our outstanding issued shares and 1% or more of our outstanding voting power, or (b) 5% or more of our outstanding voting power. Accordingly, our Board of Directors has called the shareholder meeting at the request of the Lazar Group. In the meeting, the Lazar Group attempted to elect its own candidates to the Board of Directors while our current Board recommended the re-election of Messrs. Scott Burell and Isaac Onn (the initial service terms of Mr. Scott Burrell and Mr. Isaac Onn expire at the end of the first general meeting to take place after October 31, 2020). The Lazar Group reported ownership of less than 1% of our ordinary shares on April 20, 2021 in a Schedule 13D/A.
At the shareholders meeting, our shareholders voted against the proposals of the Lazar Group and re-elected Messrs. Burell and Onn.
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Haim Mer has served as the Chairman of our Board of Directors and a director since our inception in December 1995. Mr. Mer has served as the Chairman of the Board of Directors of C. Mer Industries Ltd., a publicly traded company, since 1988 and served as its President and Chief Executive Officer from 1988 until January 2005. Mr. Mer holds a B.Sc. degree in Computer Sciences and Mathematics from the Technion - Israel Institute of Technology.
Roy Hess has served as our Chief Executive Officer since October 2017. Mr. Hess is a seasoned executive with over 20 years of experience building successful global businesses in the telecom and communication solutions and services sector. Prior to joining MTS, Mr. Hess served as the General Manager of Bioness Neuromodulation Ltd., a provider of medical devices, from 2012. Prior to that, Mr. Hess served as the CEO of Gilat Satcom Systems Ltd., a publicly traded company from 2007 until 2011, as the VP Business Development of C. Mer Industries Ltd. and the CEO of Mer Inc. from 2003 until 2007 and as the President of Mer Telemanagement Solutions Inc. from 1996 until 2003. Mr. Hess holds a B.Sc. degree in Physics and Computer Science from Ben Gurion University and M.B.A. degree from Tel Aviv University.
Ofira Bar has served as our Chief Financial Officer since May 2018. Prior to joining our company, Ms. Bar was chief financial officer of H.T.S Market, Ltd., an internet marketing firm and corporate controller of EZTD Inc. (OTCMKTS: EZTD). In addition, Ms. Bar served as an audit team manager of public and private companies at Kesselman and Kesselman, Certified Public Accountants (Isr.), a member firm of PricewaterhouseCoopers International Limited. Ms. Bar holds a B.A. degree in Accounting and Economics from Tel Aviv University and is licensed as a Certified Public Accountant in Israel.
Oren Kaplan has served as our VP Sales and Marketing since September 2019. As Vice President of Global Sales, Oren Kaplan is responsible for MTS’s global sales and marketing strategy. Oren brings 20 years of marketing, sales and operational leadership experience to his role at MTS. Oren specialized in performance-based marketing as well as leading high-performance sales teams in technology companies. Prior to that, Mr. Kaplan served as Israel Sales and Marketing Director of Seldat Distribution Inc., a logistics services company, from January 2017 until January 2018. He served as the VP Marketing of NETIC Systems Ltd., a software company, from August 2015 and January 2017, and served as Development Division Manager for NetSource Ltd., an IT service management company, from August 2009 until August 2015. . Mr. Kaplan studied Digital Media Communication at Camera Obscura from 1997 – 2000.
Isaac Onn has served as a director since October 31, 2018. Mr. Onn is a member of Eitan Onn Law Offices in Tel Aviv, Israel. Mr. Onn served as the Chief Executive Officer and a partner of E.P.A. Fuel Services Ltd., from 2001 to 2008. Mr. Onn is also currently an outside director of CYBRA Corporation and a board member of ActiveCare Inc. (OTCMKTS: ACARQ), Intellect Neurosciences, Inc. (OTCMKTS: ILNS), Ness Energy of Israel, See World Satellites, Naturalnano, Inc. and Harrison Vickers & Waterman Inc.. Mr. Onn received his degree in marketing management from the Tel-Aviv College of Management and his LLB, Bachelor of Law degree from Ono Academic Law School in Israel. Mr. Onn is a member of the Israel Bar Association.
Scott Burell has served as a director since October 31, 2018. Since August 2018, Mr. Burell is the Chief Financial Officer of Aivita Biomedical, Inc., an Irvine California-based immuno-oncology company focused on the advancement of commercial and clinical-stage programs utilizing curative and regenerative medicines. From November 2006, Mr. Burell served as Chief Financial Officer, Secretary and Treasurer of CombiMatrix Corporation (NASDAQ: CBMX), a publicly traded diagnostics laboratory, until it was acquired by Invitae Corporation (NYSE: NVTA) in November 2017. Prior to this, Mr. Burell had served as CombiMatrix’s Vice President of Finance and Controller since February 2001. From May 1999 to February 2001, Mr. Burell was the Controller for Network Commerce, Inc., (NASDAQ: SPNW), which was a publicly traded technology and information infrastructure company located in Seattle. Prior to this, Mr. Burell spent nine years with Arthur Andersen’s Audit and Business Advisory practice in Seattle. During his tenure in public accounting, Mr. Burell worked with many clients, both public and private, in the high-tech and healthcare markets, and was involved in numerous public offerings, spin-offs, mergers and acquisitions. Mr. Burell is also a member of the Board of Directors of Microbot Medical (NASDAQ: MBOT), an Israeli-based medical device company and CollPlant Holdings Ltd., (NASDAQ: CLGN), an Israeli-based regenerative medicine company. Mr. Burell obtained his Washington state CPA license in 1992 (currently inactive). He holds Bachelor of Science degrees in Accounting and Business Finance from Central Washington University.
Ronen Twito has served as an outside director since March 2019 and is a member of our audit and compensation committees. Mr. Twito is the founder of Amplify Capital Ltd., an Israeli private investmentcorporate finance services firm, and has worked there since its founding in 2017. Mr. Twito also serves as the Chairman of the Board of Kadimastem Ltd (TASE: KDST) since December 2020. Mr. Twito served as the deputy CEO & CFO of Cellect Biotechnology Ltd. (NASDAQ: APOP) from November 2015 to January 2017. Prior to that, he served as VP finance of BioBlast Pharma Ltd. (NASDAQ: ORPN) from April 2014 to November 2015. From July 2009 to April 2014 he served as the CFO of XTL Biopharmaceuticals Ltd. (NASDAQ; TASE: XTLB) and also served as its deputy CEO from April 2012 to April 2014. Mr. Twito served also as a deputy CEO of InterCure Ltd (TASE: INCR) since(XTL’s subsidiary) from November 2012 to July 2012 and CEO since November 2012.2013. Prior to that, heMr. Twito served as Corporate Finance Director at Leadcom Integrated Solutions Ltd., an international telecommunications company, specializing in management and implementation of network deployment services (then listed on the AIM and TASE), from November 2004 to May 2009. Previously he served as an Audit Manager at Ernst & Young (EY) from January 2000 to November 2004. Mr. Twito possesses over 1920 years of financefinancial and managementmanagerial experience, executive positions in both publicly tradedNASDAQ and privateTASE listed companies which includes. He has also led multiple IPOs dual listings, bonds placement, private placementsand follow on offerings, strategic licensing, collaboration agreements and M&As.&A transactions, mainly within the biotech and technology industries. Mr. Twito is an Israeli Certified Public Accountant and is a member of the Institute of CPAs in Israel. He holds a B.A. in Business & Management - Accounting, and a B.Ed. degree in teaching accounting, both from the Collman Management College.