SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 20-F
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☐ |
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
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OR
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☒ |
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2020
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OR
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☐ |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from __________ to __________
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☐ |
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.................
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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)
14 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)
14 Hatidhar Street, P.O. Box 2112 Ra’anana 4366517 , Israel
14 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:
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Title of each class
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Trading Symbol(s)
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Name of each exchange on which registered
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Ordinary Shares, NIS 0.03 Par Value
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MTSL
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Nasdaq Capital Market
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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’s classes of capital or common stock as of the close of the period covered by the annual
report: 4,424,991 Ordinary Shares as of December 31, 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 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):
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Large accelerated filer ☐
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Accelerated filer ☐
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Non-accelerated filer ☒
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Emerging growth company ☐
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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:
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U.S. GAAP ☒
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International Financial Reporting Standards as issued by the International Accounting Standards Board ☐
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Other ☐
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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.
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 “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.”
TABLE OF CONTENTS
Page
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4
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4
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4
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4
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A.
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Selected Financial Data
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4
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B.
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Capitalization and Indebtedness
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5
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C.
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Reasons for the Offer and Use of Proceeds
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5
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D.
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Risk Factors
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5
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19
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A.
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History and Development of the Company
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19
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B.
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Business Overview
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20
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C.
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Organizational Structure
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24
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D.
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Property, Plants and Equipment
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24
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25
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25
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A.
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Operating Results
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25
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B.
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Liquidity and Capital Resources
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31
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C.
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Research and Development
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35
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D.
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Trend Information
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36
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E.
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Off-Balance Sheet Arrangements
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36
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F.
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Tabular Disclosure of Contractual Obligations
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36
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37
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A.
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Directors and Senior Management
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37
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B.
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Compensation
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39
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C.
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Board Practices
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40
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D.
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Employees
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48
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E.
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Share Ownership
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50
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52
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A.
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Major Shareholders
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52
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B.
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Related Party Transactions
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53
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C.
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Interests of Experts and Counsel
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54
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54
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A.
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Consolidated Statements and Other Financial Information
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54
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B.
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Significant Changes
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55
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55
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A.
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Offer and Listing Details
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55
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B.
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Plan of Distribution
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55
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C.
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Markets
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55
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D.
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Selling Shareholders
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55
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E.
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Dilution
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55
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F.
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Expense of the Issue
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55
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56
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A.
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Share Capital
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56
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B.
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Memorandum and Articles of Association
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56
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C.
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Material Contracts
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57
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D.
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Exchange Controls
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59
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E.
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Taxation
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68
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F.
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Dividend and Paying Agents
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68
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G.
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Statement by Experts
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68
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H.
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Documents on Display
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68
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I.
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Subsidiary Information
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68
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68
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69
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ii
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69
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69
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69
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69
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70
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70
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70
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71
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71
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71
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71
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71
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72
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72
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72
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72
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73
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75
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iii
Not applicable.
Not applicable.
A.
Selected Financial Data
The following selected consolidated financial data for and as of the five years ended December 31, 2020 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, 2020 and as of December 31, 2019 and 2020 appear elsewhere in this
annual report. Our selected consolidated financial data as of December 31, 2016, 2017 and 2018 and for the years ended December 31, 2015 and 2016 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 $250,000. Following the sale on June 1, 2018, Vexigo Ltd ceased its business operations.
The results of the discontinued operations including prior periods' comparable results, assets and liabilities have been retroactively included in discontinued operations.The selected
consolidated financial data set forth below should be read in conjunction with and are qualified entirely by reference to Item 5. “Operating and Financial Review and Prospects,” and our consolidated financial statements and notes thereto included
elsewhere in this annual report.
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Statement of Operations Data:
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Year Ended December 31,
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2020
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2019
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2018
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2017
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2016
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(U.S. dollars in thousands, except share and per share data)
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Revenues
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4,018
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$
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5,193
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$
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5,861
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$
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6,773
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$
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7,551
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Cost of revenues
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1,795
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1,857
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2,149
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2,058
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2,708
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Gross profit
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2,223
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3,336
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3,712
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4,715
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4,843
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Research and development
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-
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545
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825
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1,645
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1,754
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Selling and marketing
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752
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817
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1,471
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1,529
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1,765
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|||||||||||||||
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General and administrative
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1,867
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1,890
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2,239
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1,966
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2,207
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|||||||||||||||
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Goodwill impairment
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1,723
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254
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||||||||||||||||||
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Operating loss
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(2,119
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)
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(170
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)
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(823
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)
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(425
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)
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(883
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)
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||||||||||
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Financial income (expenses), net
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16
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(18
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)
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(17
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)
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14
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2
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|||||||||||||
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Loss before taxes on income
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(2,103
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)
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(188
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)
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(840
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)
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(411
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)
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(881
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)
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||||||||||
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Taxes on income (benefit), net
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(325
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)
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4
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46
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(9
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)
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63
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|||||||||||||
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Net loss from continuing operations
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(1,778
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)
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(192
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)
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(886
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)
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(402
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)
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(944
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)
|
||||||||||
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Net income (loss) from discontinued operations
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(37
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)
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57
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(284
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)
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(1,366
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)
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(4,277
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)
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|||||||||||
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Net loss
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(1,815
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)
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$
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(135
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)
|
$
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(1,170
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)
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$
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(1,768
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)
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$
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(5,221
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)
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||||||
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Basic and diluted net loss per share from continuing operations
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$
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(0.29
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)
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$
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(0.04
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)
|
$
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(0.26
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)
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$
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(0.13
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)
|
$
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(0.33
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)
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|||||
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Basic and diluted net loss per share from discontinued operations
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$
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(0.01
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)
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$
|
0.01
|
$
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(0.08
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)
|
$
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(0.46
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)
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$
|
(1.52
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)
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||||||
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Basic and diluted net loss per share
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$
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(0.30
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)
|
$
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(0.03
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)
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$
|
(0.34
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)
|
$
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(0.59
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)
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$
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(1.85
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)
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|||||
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Weighted average number of ordinary shares used in computing basic net loss per share
|
5,954,795
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5,013,374
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3,435,161
|
2,991,547
|
2,817,427
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|||||||||||||||
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Weighted average number of ordinary shares used in computing diluted net loss per share
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5,954,795
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5,081,865
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3,435,161
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2,991,547
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2,817,427
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|||||||||||||||
4
Balance Sheet Data:
|
As of December 31,
|
||||||||||||||||||||
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2020
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2019
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2018
|
2017
|
2016
|
||||||||||||||||
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(in thousands)
|
||||||||||||||||||||
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Working capital (deficiency)*
|
685
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$
|
503
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$
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(376
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)
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$
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(1,474
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)
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$
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(2,736
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)
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||||||||
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Total assets
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5,51
|
8,043
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7,523
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8,646
|
12,288
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|||||||||||||||
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Shareholders’ equity
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2,021
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3,105
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2,403
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1,712
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1,860
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|||||||||||||||
_____________
*
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 Financial Condition
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• |
Our auditors have expressed substantial doubt about our ability to continue as a going concern, which may hinder our ability to obtain further financing.
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• |
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.
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• |
The spread of COVID-19 may adversely affect our business operations and financial condition.
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Risks Related to the TEM Business
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• |
We derive a significant portion of our revenues from TEM call accounting solutions, whose revenues have declined in recent years.
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• |
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.
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• |
Our semi-annual and annual results have fluctuated significantly in the past and are likely to fluctuate significantly in the future
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• |
We are subject to risks associated with rapid technological change and risks associated with new versions, offerings, products and industry standards.
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• |
The market for our TEM and call accounting solutions may be adversely affected by intense competition.
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• |
The impairment of intangible assets and goodwill arising from our acquisitions could continue to negatively impact affect our net income and shareholders’ equity
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5
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• |
We depend on business telephone system manufacturers, vendors and distributors for our sales.
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• |
We are subject to risks relating to proprietary rights and risks of infringement.
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• |
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.
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• |
We are subject to risks associated with international operations.
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• |
Breaches of network or information technology security, natural disasters or terrorist attacks could have an adverse effect on our business.
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• |
We are subject to risks arising from product defects and potential product liability.
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• |
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.
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• |
We are subject to ESG risks.
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Risks Related to the Pending Merger
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• | Our proposed merger may not be completed. |
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|
• |
SharpLink Stockholders will Exercise Significant Control over MTS as a Result of the Merger
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|
• |
Future Issuances Of MTS Shares Could Dilute Current Stockholders Or Adversely Affect The Market.
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|
• |
SharpLink May Not Generate an Operating Profit.
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• |
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.
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|
|
• |
SharpLink’s Markets Are Evolving And Characterized By Rapid Technological Change, Which It May Not Be Able To Keep Pace With.
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• |
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.
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|
• |
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.
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|
|
• |
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.
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|
• |
SharpLink May Ultimately Be Unable To Compete In The Markets For The Products And Services It Offers.
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|
• |
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.
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|
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• |
If the Merger is not completed, we will lose all of the funds expended in connection with the pending merger.
|
6
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.
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|
|
• |
A few of our shareholders who are also members of our Board, may have a significant influence over our business prospects.
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• |
Our share price has been volatile in the past and may decline in the future.
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Risks Related to Operations in Israel
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• |
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.
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|
• |
Our financial results may be adversely affected by inflation and currency fluctuations.
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• |
Service and enforcement of legal process on us and our directors and officers may be difficult to obtain.
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• |
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.
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|
• |
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.
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|
• |
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.
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|
|
• |
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, 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, 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, 2020, we had cash and cash equivalents of $1.5 million and a working capital of $685,000. We expect that our cash position will be reduced 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.
7
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.
We have incurred operating losses in each of the last six 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 four 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 2020, we had negative operating cash flows and as of
December 31, 2020, our cash and cash equivalents were $1.5 million.
During 2018-2020, we continued to implement a significant cost reduction program, mainly by a reduction in the number of
employees and educed lease expenses. In addition, we continued 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 our shareholders at a meeting of shareholders that is expected to be held in the
second quarter of 2021, along with the satisfaction or waiver of other customary conditions. If the Merger Agreement is not consummated for any number of reasons or we do not 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.
The spread of COVID-19 may adversely affect our business operations and financial condition.
In 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 subcontractors, partners, and suppliers to operate 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 meet customer demand and our revenue and profit margins. The COVID-19 pandemic is continuously evolving, and to date 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 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 imposed, on our business operations, revenues and financial condition may be adversely 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 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.
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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:
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demand for our products;
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ability to retain existing customers;
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changes in our pricing policies or those of our competitors;
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new product announcements by us and our competitors;
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the number, timing and significance of product enhancements;
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product life cycles;
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our ability to develop, introduce and market new and enhanced products on a timely basis;
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changes in the level of our operating expenses;
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budgeting cycles of our customers;
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customer order deferrals in anticipation of enhancements or new products that we or our competitors offer;
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changes in our strategy;
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seasonal trends and general domestic and international economic and political conditions, among others; and
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currency exchange rate fluctuations and economic conditions in the geographic areas where we operate.
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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.
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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.
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.
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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.
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 81.3%, 83% and 83%
of our total revenues for the years ended December 31, 2018, 2019 and 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:
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the impact of recessionary environments in multiple foreign markets;
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costs of localizing products for foreign markets;
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foreign currency exchange rate fluctuations
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longer receivables collection periods and greater difficulty in accounts receivable collection;
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unexpected changes in regulatory requirements;
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difficulties and costs of staffing and managing foreign operations;
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reduced protection for intellectual property rights in some countries;
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potentially adverse tax consequences; and
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political and economic instability.
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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.
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.
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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.
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 do 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 growing concern for ESG issues, regardless of whether there is a legal requirement to do so, may suffer from reputational damage and the business, 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 Merger (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 shareholders of SharpLink would become the majority owners of MTS, and MTS would changes its name and pursue the business of SharpLink under SharpLink management
and board control (the “Merger”).
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 SEC proxy statement requirements and certain
SEC tender offer requirements and is permitted to sell securities outside the United States without resale restrictions under the U.S. Securities Act. U.S. holders of MTS restricted securities may resell such securities to persons outside the
United States who receive such securities without resale restrictions under the U.S. Securities Act and MTS’s affiliates are exempt from Section 16 of the Exchange Act. It is currently expected that due to the change in the management,
ownership and asset structure and location as a result of the transaction, the combined company will cease to be a foreign private issuer and cease to be eligible for the foregoing exemptions and privileges effective January 1, 2022 (assuming
the closing of the Merger is on or before June 30, 2021. We expect that any loss of our 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.
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Maintaining and improving the combined company’s financial controls and the requirements of 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 requires, among other things, that the
combined company maintain effective disclosure controls and procedures and internal control over financial reporting. Ensuring 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 controls are necessary for the combined company to produce reliable financial reports 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 the combined company incurring substantial additional
legal and financial compliance costs. These costs will decrease the combined company’s net income or increase 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.
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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 will 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 the 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 condition 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 its products, it may encounter patent barriers that are not known today.
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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 company.
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.
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 the past, we received a NASDAQ Staff determination letter indicating that we failed to comply with the continued listing requirement that we maintain a minimum of $2.5 million in stockholders’
equity. While we cured this deficiency in the past, NASDAQ advised us that it would continue to monitor our ongoing compliance with the shareholders’ equity requirement and, if in the future, we fail to evidence compliance, we may be subject to
delisting. As of December 31, 2020, our 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 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 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.
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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:
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quarterly variations in our operating results;
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operating results that vary from the expectations of securities analysts and investors;
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changes in expectations as to our future financial performance, including financial estimates by investors;
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announcements of technological innovations or new products by us or our competitors;
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announcements by us or our competitors of significant contracts, acquisitions, strategic partnerships, joint ventures or capital commitments;
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announcements by third parties of significant claims or proceedings against us;
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changes in the status of our intellectual property rights;
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additions or departures of key personnel;
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future sales of our ordinary shares; and
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general stock market prices and volume fluctuations.
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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.
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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.
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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.
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History and Development of the Company
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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 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 focused on innovative products and services for enterprises in the area of telecom expense management (TEM), call accounting and contact center
software. Headquartered in Israel, We markets our solutions through wholly-owned subsidiaries in Israel, the U.S and 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.
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In September 2018
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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 included a green 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 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.
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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 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.
|
21
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
• Tenant Resale
• Work Order Management
• 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-Win
s
.
Customer engagements begin with
Map-to-Win
s
, which is a strategic consulting approach for our TEM solution.
Map-to-Win
s
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-Win
s
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;
|
|
|
• |
contract negotiations and strategic sourcing;
|
|
|
• |
discovery and road mapping services;
|
|
|
• |
process diagnosis and solution design;
|
|
|
• |
wireless optimization; and
|
|
|
• |
creation and implementation of IT governance, risk and compliance policies.
|
22
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.
Omnis - 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.
Omnis’ features include:
|
|
• |
Ease of use / easy to deploy
|
|
|
• |
Self-service using advanced AI bots and automation
|
|
|
• |
WhatsApp and Facebook integration
|
|
|
• |
Real time monitoring with analytics and reporting
|
|
|
• |
Omnichannel Modules – (voice, sms, social media, web, 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 Out-Of-The-Box integrations to Salesforce, Dynamics365, ServiceNow, Freshdesk, Microsoft Teams
|
|
|
• |
Agent unified interface – agents can manage tasks and status across the 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.
23
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.
We conduct a wide range of marketing activities aimed at generating awareness and leads. We maintain our website (
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 were located at 14 Hatidhar Street, Ra’anana P.O. Box 2112, Israel. Until July 31, 2020 We paid a monthly rental fee of
approximately $9,700 and Due to the COVID19 pandemic we closed the offices and started working remotely in Israel.
We have not yet extended the lease agreement for the offices of our U.S. subsidiary, MTS IntegraTRAK and 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. 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 and since November 2020, we have reduced the rented space and accordingly the monthly rental fee was decreased to approximately $3,000.
24
Not applicable.
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. 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 2020 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’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.
Following 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).
25
Our audited financial statements for the year ended December 31, 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, 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.
We recently entered the field of Omnichannel Contact Center Software ("Omnins"). Omnis provides both reporting tools and additional
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 each of our clients in order for them to use it with their business processes.
Key Factors Affecting Our
TEM
Businesses
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.
26
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 call 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,
|
||||||||||||
|
2020
|
2019
|
2018
|
||||||||||
|
Revenues:
|
||||||||||||
|
Telecom Product sales
|
15.8
|
%
|
17.8
|
%
|
17.4
|
%
|
||||||
|
Telecom Services
|
84.2
|
%
|
82.2
|
%
|
82.6
|
|||||||
|
Total revenues
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
||||||
|
Cost of revenues:
|
||||||||||||
|
Telecom Product sales
|
7.1
|
7.1
|
7.3
|
|||||||||
|
Telecom Services
|
37.6
|
28.6
|
29.3
|
|||||||||
|
Total cost of revenues
|
44.7
|
35.7
|
36.7
|
|||||||||
|
Gross profit
|
55.3
|
64.2
|
63.3
|
|||||||||
|
Selling and marketing
|
18.7
|
15.7
|
25.1
|
|||||||||
|
Research and development
|
-
|
10.5
|
14.1
|
|||||||||
|
General and administrative
|
46.4
|
36.4
|
38.2
|
|||||||||
|
Goodwill impairment
|
42.9
|
4.9
|
||||||||||
|
Operating loss
|
(52.7
|
)
|
(3.3
|
)
|
(14.0
|
)
|
||||||
|
Financial income (expenses), net
|
0.4
|
(0.3
|
)
|
(0.3
|
)
|
|||||||
|
Loss before taxes on income
|
(52.3
|
)
|
(3.6
|
)
|
(14.3
|
)
|
||||||
|
Taxes on income (tax benefit)
|
(8.1
|
)
|
0.08
|
0.8
|
||||||||
|
Loss from continuing operations
|
(44.2
|
)
|
(3.7
|
)
|
(15.1
|
)
|
||||||
|
Net loss from discontinued operations
|
(0.9
|
)
|
1.1
|
(4.8
|
)
|
|||||||
|
Loss
|
(45.1
|
)
|
(2.6
|
)
|
(20.0
|
)
|
||||||
27
Year Ended December 31, 2020 Compared with Year Ended December 31, 2019
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 23% to $ 4 million for
the year ended December 31, 2020 from $5.2 million for the year ended December 31, 2019. Revenues from products and services from our wholly-owned U.S. subsidiary, MTS IntegraTrak decreased by 23% to $3.3 million, or 83% of our total revenues,
for the year ended December 31, 2020 from $4.3 million, or 83% of our total revenues, for the year ended December 31, 2019.
The decrease in our total revenues in 2020 is mainly attributable to the technological and market changes we face, In addition, to the COVID-19 pandemic
delayed our marketing efforts for the OMNIS product.
Cost of revenues.
Cost of revenues decreased by 5.3% to $1.8 million for the year ended December 31, 2020 from $1.9 million for the year ended December 31,
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 decreased in 2020 mainly due to the layoff of employees, reduction in associated travel expenses due to COVID19 and finalization of the
amortization of 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 100% to $ 0 for the year
ended December 31, 2020 from $500,000 for the year ended December 31, 2019. The decrease in research and development expenses is primarily attributable to a cost reduction plan that we continued to implement during 2020 which included the closing
of our research and development department in Israel effective January 1, 2020. No research and development expenses were capitalized in 2019 and 2020.
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 $0.8 million for the year ended December 31, 2020 and $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 attributed to the layoff of employees, which was offset by the reversal of a provision in 2019 relating to 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 were $1.9 million for the years
ended December 31, 2020 and December 31, 2019. General and administrative expenses have not changed due to the layoff of employees and reduction in 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 identified impairment losses of $1.7 million for the goodwill assigned to the Enterprise (TEM) reporting unit in 2020. In 2019 we identified impairment losses of $254,000 for the goodwill assigned to the
Enterprise (TEM) reporting unit.
28
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 $16,000 for the year ended December 31, 2020 as compared to financial expenses of $18,000 for the year ended December 31, 2019. Our financial income (expense) in 2020 and 2019 were primarily attributable to exchange rate and
foreign currency translation adjustments.
Taxes on Income (Benefit).
We recorded a tax benefit of
$325,000 for the year ended December 31, 2020, compared to a tax expense of $4,000 for the year ended December 31, 2019. The decrease in tax expenses is primarily attributable to deferred tax revenues related to our U.S. subsidiary.
Net Loss from Discontinued Operations.
We recorded loss
of $37,000 in the year ended December 31, 2020 compared to net income from discontinued operations of $57,000 in the year ended December 31, 2019.
Year Ended December 31, 2019 Compared with Year Ended December 31, 2018
Please see Item 5A of our Form 20-F for the 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) %
|
|||
|
2016
|
(0.2)
|
(1.5)
|
1.3
|
|||
|
2017
|
0.4
|
(9.0)
|
9.4
|
|||
|
2018
|
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.
29
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 9.0% and in 2016 the NIS appreciated against the dollar by 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
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 2020, we entered into forward call and put option contracts in the amount of $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 operations as
financial income or expense, when they occur. In 2020, we recorded approximately $4,000 of financial expenses with respect to such transactions in our consolidated statements of operations.
In 2019, we entered into forward call and put option contracts in the amount of $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. 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 operations as financial income or expense, when they occur. In 2019, we recorded approximately $3,700 of financial expenses 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 Related 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.
30
Effective Corporate Tax Rate
Israeli companies are generally subject to income tax on their taxable income under the Income Tax Ordinance, 5721-1961. The regular
corporate tax rate in Israel for 2018, 2019 and 2020 is 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, 2020, we had $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 of $503,000, as of December 31, 2019. The increase in our working capital is attributable to decrease in accrued expenses including related to employees accruals and due to decreased in deferred revenues.
Cash Flows
The following table summarizes our cash flows for the periods presented:
|
Year ended December 31,
|
||||||||||||
|
2020
|
2019
|
2018
|
||||||||||
|
(in US$ 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 $1.3 million for the year ended December 31, 2020, compared to net cash
used in operating activities from continuing operations of $46,000 for the year ended December 31, 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.
31
Net cash used in investing activities was approximately $(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.
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 included 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, 2018, 2019 and 2020 were approximately $840,000,$605,000 and $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.
We expect to explore various financing alternatives to raise additional funds to support our operations in 2021, and our current goal is to
consummate the Merger Agreement with SharpLink. If we 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. We sell our products directly to end-users and indirectly through resellers and OEMs.
32
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. We allocate the transaction price for each contract to each performance obligation identified in the contract based on the relative standalone selling price (SSP). We 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, we determine the SSP based on the price at which we 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.
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 $6.1 million
is required for tax loss carryforwards and other temporary differences as of December 31, 2020. If these estimates prove inaccurate, a change in the valuation allowance could be required in the future.
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 reporting unit.
33
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.
Since June 2018, we operate in one operating segment, which comprise our Enterprise (TEM) reporting units. Our goodwill balance is assigned only to
our Enterprise reporting unit.
Based on an annual impairment test performed 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 impairment in our Enterprise reporting unit in the prior three years. The impairment tests were performed using the income approach with five (5) years of
projected cash flows and discount rate of 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.
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,". 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, 2020 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 $90,000, $47,000 and $21,000 for the years ended December 31, 2018, 2019 and 2020, respectively.
Recently Adopted Accounting Standards
In June 2016, the 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 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
34
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 December 2019, the FASB issued ASU No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes” (“ASU 2020-12”), which
simplifies the accounting for income taxes. ASU 2019-12 is effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2020. We currently evaluating the impact of the new guidance on the our
consolidated financial statements.
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 took place in our facilities in Israel. We employed 0 persons in research and development as of December 31, 2020, and 5 persons as of December 31, 2019 and 2018. Effective January 1, 2020, we
closed the R&D department in Israel as part of 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.
Development expenditure are 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 2018, 2019 and 2020, our research and development expenditures were $800,000, $500,000 and $0, respectively. Research and development expenses are presented net of capitalized expenses in the amount to zero for the years
ended December 31, 2020, 2019 and 2018.
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, 2020, we had a contingent obligation to pay royalties
to the IIA in the amount of approximately $8.15 million plus interest at a rate equal to the 12 month LIBOR rate for grants received after January 1999.
35
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.
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 2021. We expect that our results will be positively impacted by the cost reduction program that we implemented 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, 2020 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)
|
||||||||||||||||||||
|
Accrued severance pay*
|
306
|
-
|
-
|
-
|
306
|
|||||||||||||||
|
Total
|
306
|
-
|
-
|
-
|
306
|
|||||||||||||||
__________
*
See Item 6D. “Directors, Senior Management and Employees - Employees.”
36
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:
|
Name
|
Age
|
Position with the Company
|
||
|
Haim Mer
|
73
|
Chairman of the Board of Directors
|
||
|
Roy Hess
|
59
|
Chief Executive Officer
|
||
|
Ofira Bar
|
40
|
Chief Financial Officer
|
||
|
Oren Kaplan
|
47
|
VP Sales and Marketing
|
||
|
Scott Burell
(1) (2)
|
56
|
Director
|
||
|
Isaac Onn
|
69
|
Director
|
||
|
Ronen Twito
(1) (2)
|
46
|
Outside Director
|
||
|
Varda Trivaks
(1) (2)
|
64
|
Outside Director
|
__________________
(1) Member of our audit committee
(2) Member of our compensation committee
In connection with the closing of the Alpha Capital SPA in October 2018, 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 of Directors.
Our currently serving outside directors are Varda Trivaks, whose service term is due to end in August 2023 (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.
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.
.
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.
37
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. 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 corporate 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 CEO of InterCure Ltd (TASE: INCR) (XTL’s subsidiary) from November
2012 to July 2013. Prior to that, Mr. Twito served as Corporate Finance Director at Leadcom Integrated Solutions Ltd. (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 20 years of financial and managerial experience, executive positions in NASDAQ and TASE listed companies
. He
has also led multiple
IPOs and follow on offerings, strategic licensing, collaboration agreements and M&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.
38
Varda Trivaks
has served as an
outside director since August 2008 and is the chairwoman of our audit and compensation committees. Ms. Trivaks serves as the Managing Director and is one of the two founding partners of Mimtar Business Consulting, established in 2001. In that
position, Ms. Trivaks acts as an advisor to companies on investments, mergers, spin-offs, valuation, control, budgeting, with a special focus on advising global companies and management of companies during times of restructuring and recovery. Ms.
Trivaks serves as a member of the audit committee, board of directors and financial committee of Halamish - Municipal Government Company for housing and neighborhood renewal in Tel Aviv Jaffa Ltd. Previously served as a member of the board of
directors and audit, balance sheet and compensation committees of E. Schnapp & Co. Works and of Ginegar Plastic Products Ltd. From 1998 to 2004, Ms. Trivaks was a member of the Israel Accounting Institute’s communications committee for
Capital Markets and Insurance. From 1998 to 2001, Ms. Trivaks was a partner with the accounting and consulting firm, BDO, and served as the managing director of one of its subsidiaries. Ms. Trivaks is a Certified Public Accountant (Israel) since
1987 and holds a B.A. degree in Economics and Accounting from Tel Aviv University and a Master of Science in Management degree from Boston University.
B.
Compensation
The aggregate compensation paid and share-based compensation and other payments expensed by us and our subsidiaries to our directors and
executive officers with respect to the year ended December 31, 2020
was $855,000. This amount includes approximately $174,000 set aside or accrued to provide pension, severance,
retirement or similar benefits or expenses, but does not include business travel, relocation, professional and business association dues and expenses reimbursed to office holders, and other benefits commonly reimbursed or paid by companies in our
industry. As of December 31, 2020, options to purchase 116,667 ordinary shares granted to our current directors and executive officers were outstanding under our equity incentive plans at a weighted average exercise price of $2.16 per share.
For so long as we qualify as a foreign private issuer, we are not required to comply with the proxy rules applicable to U.S. domestic companies, including
the requirement to disclose information concerning the amount and type of compensation paid to our chief executive officer, chief financial officer and the three other most highly compensated executive officers. Nevertheless, Israeli Companies Law
requires us to disclose the annual compensation of our five most highly compensated officers and directors on an individual basis, rather than on an aggregate basis, as was previously permitted for Israeli public companies listed overseas. Under
the Israeli Companies Law regulations, this disclosure is required to be included in the notice of our annual meeting of shareholders each year or in a public document that accompanies such notice, which we furnish to the SEC under cover of a
Report of Foreign Private Issuer on Form 6-K. The Israeli Companies Law regulations permit us to refer to a report filed pursuant to the laws of the country in which our shares are listed for trading that includes the required information in lieu
of its inclusion in the notice of annual meeting. Because of that disclosure requirement under Israeli law, we are including such information in this annual report, pursuant to the disclosure requirements of Form 20-F.
The table below reflects the compensation granted to our five most highly compensated office holders during or with respect to the year ended
December 31, 2020. All amounts reported in the table reflect the cost to the company, as recognized in our financial statements for the year ended December 31, 2020
.
|
Name and Position
|
Salary & Social Benefits
(1)
|
Bonus
|
Share-Based Payment
(2)
|
Other Compensation
(3)
|
Total
|
|||||||||||||||
|
|
(U.S. Dollars)
(4)
|
|||||||||||||||||||
|
Roy Hess
, Chief Executive Officer
(5)
|
193,075
|
-
|
21,000
|
-
|
214,075
|
|||||||||||||||
|
Ofira Bar,
Chief Financial Officer
|
197,804
|
-
|
-
|
-
|
197,804
|
|||||||||||||||
|
Oren Kaplan,
VP Sales& Marketing
|
142,198
|
1,331
|
-
|
3,917
|
147,446
|
|||||||||||||||
|
Haim Mer,
Chairman of the board of directors
(8)
|
84,140
|
-
|
-
|
-
|
84,140
|
|||||||||||||||
|
Varda Trivaks,
Chairwoman
of the audit and compensation committees
|
12,982
|
-
|
-
|
-
|
12,982
|
|||||||||||||||
_________
|
|
(1)
|
Represents the office holder’s gross salary or consulting fees plus payment of mandatory social benefits made by the company on behalf of such office holder, to the extent applicable. Such benefits may include,
to the extent applicable to the executive, payments, contributions and/or allocations for savings funds (e.g., Managers’ Life Insurance Policy), education funds (referred to in Hebrew as “keren hishtalmut”), pension, severance, risk
insurances (e.g., life, or work disability insurance), payments for social security, tax gross-up payments, vacation, car, phone, convalescence pay and other benefits and perquisites consistent with our policies.
|
39
|
|
(2)
|
Represents the equity-based compensation expenses recorded in the company’s consolidated financial statements for the year ended December 31, 2020 based on the options’ grant date fair value in accordance with
accounting guidance for equity-based compensation.
|
|
|
(3)
|
Represents the other benefits to such officer, which includes car expenses, including lease costs, gas and maintenance, provided to the officers.
|
| (4) |
Translated from NIS into U.S. dollars based on the average representative rate of exchange between the NIS and the U.S. dollar as reported by the Bank of Israel in the year ended December 31, 2020.
|
| (5) |
The company and Mr. Hess agreed that effective July 1, 2019, he will devote 50% of his time to the affairs of our company.
|
| (8) |
In 2020, we paid Mr. Mer a monthly fee of $7,000 for his services as the Chairman of the Board. Mr. Mer devotes 20% of his time to our company.
|
As of December 31, 2020, Mr. Hess, held options to purchase an aggregate of 116,667 ordinary shares at an exercise price of $2.16 per share that
expired in March 2021. Such options were granted under our 2003 Israeli Share Option Plan. In 2020 and 2019, no options were exercised.
For more information, see Item 6E., “Directors, Senior Management and Employees – Share Ownership – Stock Option Plans.”
C.
Board Practices
Election of Directors
Our Board of Directors consists of five members, four of which are independent directors for NASDAQ corporate governance purposes.
Pursuant to our articles of association, all of our directors (and except the outside directors) are currently elected at our annual general meeting of
shareholders by a vote of the holders of a majority of the voting power represented and voting at such meeting and hold office until the next annual general meeting of shareholders and until their successors have been elected.
The Board of Directors, may, at any time from time to time, appoint any other person as a director, whether to fill a casual vacancy or to add to their
number.
All the members of our Board of Directors (except the outside directors whose re-election is governed by specific terms of the Israeli Companies Law) may
be re-elected upon completion of their term of office. Mr. Mer was elected by our shareholders at our annual general meeting of shareholders held in September 2020. The appointments of Messrs. Scott Burell and Isaac Onn were approved by our
shareholders in October 2018 and, as noted above, their initial service term ends at the end of the first general meeting to take place after October 31, 2020 and they are nominated for re-election in the shareholder meeting expected in May 2021.
We do not follow the requirements of the NASDAQ Stock Market Rules with regard to the nomination process of directors, and instead, we follow Israeli law
and practice, in accordance with which our directors are recommended by our board of directors for election by our shareholders. See below in this Item 16G. “Corporate Governance.”
40
Outside and Independent Directors
Outside Directors
. Under the Israeli Companies Law,
companies incorporated under the laws of the State of Israel whose shares have been offered to the public and are held by the public are required to appoint at least two outside directors. The Israeli Companies Law provides that a person may not
be appointed as an outside director if the person is a relative of the controlling shareholder of the company, or if the person, the person’s relative, partner, employer or an entity under that person’s control, has or had during the two years
preceding the date of appointment any affiliation with the company, the controlling shareholder of the company or its relative, or any entity controlling, controlled by or under common control with the company. The term “relative” means a
spouse, sibling, parent, grandparent, child or child, sibling or parent of a spouse or spouse of any of the foregoing. The term affiliation includes:
|
|
• |
an employment relationship;
|
|
|
• |
a business or professional relationship maintained on a regular basis;
|
|
|
• |
control; and
|
|
|
• |
service as an officer holder, excluding service as an outside director of a company that is offering its shares to the public for the first time.
|
In addition, no person may serve as an outside director if the person’s position or other activities create, or may create, a conflict of interest with the
person’s responsibilities as director or may otherwise interfere with the person’s ability to serve as director. If, at the time an outside director is appointed all members of the board of directors are of the same gender, then that outside
director must be of the other gender. A director of one company may not be appointed as an outside director of another company if a director of the other company is acting as an outside director of the first company at such time.
At least one of the outside directors elected must have “accounting and financial expertise” and any other outside director must have “accounting and
financial expertise” or “professional qualification,” as such terms are defined by regulations promulgated under the Israeli Companies Law.
Outside directors are elected by shareholders. In general, outside directors serve for a three-year term, which may be renewed for only two additional
three-year term. However, Israeli companies listed on certain stock exchanges outside Israel, including the NASDAQ Capital Market, such as our company, may appoint an outside director for additional terms of not more than three years each, subject
to certain conditions. Such conditions include the determination by the audit committee and board of directors that in view of the outside director’s professional expertise and special contribution to the company’s board of directors and its
committees, the appointment of the outside director for an additional term is in the best interest of the company. Based on this provision of the Israeli Companies Regulations (Relief for Public Companies with Shares Listed for Trading on a Stock
Market Outside of Israel), 5760-2000, or the Relief Regulations, our Board of Directors recommended the election of Ms. Varda Trivaks for a fifth three-year term at the annual general meeting of shareholders held in September 2020.
The election of an outside director for the initial three-year term requires the affirmative vote of a majority of the shares present, in person or by
proxy, and voting on the matter, provided that either: (i) at least a majority of the shares of non-controlling shareholders and shareholders who do not have a personal interest in the resolution (excluding a personal interest that is not related
to a relationship with the controlling shareholders) are voted in favor of the election of the outside director, or (ii) the total number of shares of non-controlling shareholders and of shareholders who do not have a personal interest in the
resolution (excluding a personal interest that is not related to a relationship with the controlling shareholders) voted against the election of the outside director does not exceed 2% of the outstanding voting power in the company.
An outside director may be re-elected to serve for additional three-year terms in one of the two following methods: (i) the board of directors proposed the
nomination of the outside director for an additional term and her or his appointment is approved by the shareholders in the manner required to appoint outside directors for an initial term as set forth above, or (ii) in the event a shareholder
holding 1% or more of the voting rights nominates the outside director for an additional term or if the outside director nominated her or himself for an additional term, the nomination is required to be approved by a majority of the votes cast by
the shareholders of the company; provided that: (x) the votes of controlling shareholders, the votes of shareholders who have a personal interest in the approval of the appointment of the outside director, other than a personal interest that is
not as a result of such shareholder’s connections to the controlling shareholder, and abstaining votes are excluded from the counting of votes and (y) the aggregate votes cast by shareholders in favor of the nomination that are counted for purposes
of calculating the majority exceed 2% of the voting rights in the company. The outside director nominated by shareholders may not be a related or competing shareholder or a relative of such shareholder at the date of appointment and may not have an
affiliation to a related or competing shareholder at the date of appointment or for the two year period prior to the appointment. A “related or competing shareholder” is defined by the Israeli Companies Law as the shareholder that proposed the
nomination or a significant shareholder (a shareholder holding five percent or more of the outstanding shares of a company or of the voting rights in a company), provided that at the date of appointment of the outside director such shareholder, its
controlling shareholder or a corporation controlled by either of them, have business connections with the company or are competitors of the company. The term “affiliation” is defined as set forth above.
41
Outside directors can be removed from office only by the same special percentage of shareholders as can elect them, or by a court, and then only if the
outside directors cease to meet the statutory qualifications with respect to their appointment or if they violate their duty of loyalty to the company.
Any committee of the board of directors exercising powers delegated by the Board must include at least one outside director and the audit committee and
compensation committee must include all of the outside directors. An outside director is entitled to compensation as provided in regulations adopted under the Israeli Companies Law and is otherwise prohibited from receiving any other compensation,
directly or indirectly, in connection with such service.
The Relief Regulations provide that a public company with securities listed on certain foreign exchanges, including the NASDAQ Capital Market, that has no
controlling shareholder and satisfies the applicable foreign country laws and regulations that apply to companies organized in that country relating to the appointment of independent directors and composition of audit and compensation committees,
is permitted not to comply with the requirements in connection with external directors, as well as the audit committee and compensation committee composition requirements set forth in the Israeli Companies Law. As we do not currently comply with
some of the NASDAQ Stock Market Rules set forth in the Relief Regulations, this relief is not currently applicable to our company. However, we may in the future elect to rely on this relief.
Independent Directors.
In general,
NASDAQ Stock Market Rules require that the board of directors of a NASDAQ-listed company have a majority of independent directors, within the meaning of the NASDAQ Stock Market Rules, and our audit committee
must have at least three members and be comprised only of independent directors, each of whom satisfies the respective “independence” requirements of the SEC and NASDAQ.
However, foreign private issuers,
such as our company, may follow certain home country corporate governance practices instead of certain requirements of the NASDAQ Stock Market Rules. A foreign private issuer that elects to follow a home country practice instead of such
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. On March 31, 2009, we provided
NASDAQ with a notice of non-compliance with respect to the requirement to maintain a majority of independent directors, within the meaning of the NASDAQ Stock Market Rules. Instead, under Israeli law and practice, we are required to appoint at
least two outside directors, within the meaning of the Israeli Companies Law, to our Board of Directors. In addition, in accordance with the rules of the SEC and NASDAQ, our audit committee is composed of three independent directors, as defined
by the rules of the SEC and NASDAQ.
Pursuant to the Israeli Companies Law, a director may be qualified as an independent director if such director is either (i) an outside director; or (ii) a
director that serves as a board member less than nine years (subject to the right to extend such period for additional three-year terms granted to certain companies, including companies whose shares are listed on NASDAQ) and the audit committee has
approved that he or she meets the independence requirements of an outside director. A majority of the members serving on the audit committee must be independent under the Israeli Companies Law. In addition, a publicly traded company may elect to
adopt a provision in its articles of association pursuant to which a majority of its board of directors will be independent. We have not included such a provision in our articles of association.
Our Board of Directors has determined that our outside directors, Mr. Ronen Twito and Ms. Varda Trivaks, both qualify as independent directors under the
rules of the SEC and NASDAQ. Our Board of Directors has further determined that Mr. Scott Burell qualifies as an independent director under the requirements of the SEC and NASDAQ.
42
Audit Committee
Our audit committee, which was established in accordance with Section 114 of the Israeli Companies Law and Section 3(a)(58)(A) of the Exchange Act, assists
our board of directors in overseeing the accounting and financial reporting processes of our company and audits of our financial statements, including the integrity of our financial statements, compliance with legal and regulatory requirements, our
independent public accountants’ qualifications and independence, the performance of our internal audit function and independent public accountants, finding any defects in the business management of our company and proposing to the board of
directors ways to correct such defects, and such other duties as may be directed by our board of directors. The Israeli Companies Law provides that the roles of an audit committee are: (i) monitoring deficiencies in the business management of a
company, including by consulting with the internal auditor or independent accountants and suggesting methods of correction of such deficiencies to the board of directors, (ii) determining whether or not certain related party actions and
transactions and actions taken by office holders that are “material actions” or “extraordinary transactions” in connection with their approval procedures as more fully described above, (iii) determining in connection with transactions with the
controlling shareholder or with a third party in which the controlling shareholder has a personal interest (event if they are not extraordinary transactions) and in connection with transactions with the controlling shareholder or its relative,
directly or indirectly, for the receipt of services or in connection with terms of employment or service, a duty to conduct a competitive process, supervised by the audit committee or anyone else appointed by the audit committee and based on
criteria determined by the audit committee, or to determine that other procedures determined by the audit committee will be conducted, prior to execution of such transactions, all based on the type of the transaction (the audit committee is
permitted to determine criteria for this matter once a year in advance), (iv) determining whether to approve actions and transactions that require audit committee approval under the Israeli Companies Law, (v) determining the method of approval of
non-negligible transactions (i.e. transactions of a company with a controlling shareholder or with a third party in which the controlling shareholder has a personal interest that the audit committee determined are not extraordinary but are
non-negligible), including to determine types of such transactions that will require the approval of the audit committee (the audit committee is permitted to determine a classification of transactions as non-negligible based on criteria determined
once a year in advance), (vi) in a company in which the work plan of the internal auditor is approved by the board – examining the work plan before it is submitted to the board and suggesting revisions, (vii) assessing the company’s internal audit
system and the performance of its internal auditor and whether the internal auditor has the resources and tools required for the performance of its role, taking into account, among others, the special needs and size of the company, (viii) examining
the scope of work and compensation of the company’s independent auditor and (ix) setting procedures in connection with the method of dealing with complaints of employees regarding defects in the management of the company’s business and with the
protection provided to such employees. Under Israeli law, an audit committee may not approve an action or a transaction with a controlling shareholder, or with an office holder, unless at the time of approval, two outside directors are serving as
members of the audit committee and it otherwise meets the composition requirements of the Israeli law.
Our audit committee is currently composed of Messrs. Ronen Twito and Scott Burell and Ms. Varda Trivaks, all of whom satisfy the applicable “independence”
requirements of the SEC, NASDAQ and the Israeli Companies Law for audit committee members. Our Board of Directors has determined that Mr. Ronen Twito qualifies as an audit committee financial expert. Our audit committee meets at least once each
quarter.
Compensation Committee
In accordance with the Israeli Companies Law, our compensation committee’s role is to: (i) recommend a compensation policy for office holders and to
recommend to the board, once every three years, concerning the approval of the continued validity of a compensation policy that was determined for a period exceeding three years; (ii) recommend an update to the compensation policy from time to time
and to examine its implementation; (iii) determine whether to approve the terms of service or employment, including the grant of an exemption, insurance, undertaking to indemnify or indemnification, retirement bonuses and any other benefit, payment
or undertaking to pay any such amounts, given due to service or employment, or, together, the Terms of Service and Employment, of office holders that require the committee’s approval; and (iv) determine whether certain transactions related to the
Terms of Service and Employment of office holders is exempt from the requirement for shareholders’ approval. The compensation committee also has oversight authority over the actual Terms of Service and Employment of directors and officers and may
make recommendations to the board of directors and the shareholders (where applicable) with respect to deviation from the compensation policy that was adopted by a company.
43
In accordance with the Israeli Companies Law, our compensation committee must consist of no less than three members, including all of our outside directors
(who must constitute a majority of its members of the committee), and the remainder of the members of the compensation committee are required to be directors whose terms of service and employment were determined pursuant to the regulations
applicable to the terms of service of outside directors. Similar restrictions to the restrictions on the actions and membership in the audit committee, as discussed above under “Audit Committee”, are imposed on the compensation committee, with
respect to, among other things, the requirement that an outside director serve as the chairman of the committee and the list of persons who may not serve on the committee. We have established a compensation committee that is currently composed of
our outside directors, Ms. Varda Trivaks, and Mr. Ronen Twito, and Mr. Scott Burell. The Israeli Companies Law provides that an audit committee that meets the criteria for the composition of a compensation committee, such as our Audit Committee,
can also act as the compensation committee.
Compensation Policy
In accordance with the Israeli Companies Law, in August 2013, our shareholders approved a compensation policy. The Israeli Companies Law requires that a
compensation policy must be approved at least once every three years.
The approval of the compensation policy by shareholders requires the affirmative vote of the holders of a majority of the shares present, in person or by
proxy, and voting on the matter provided that at least one of the following conditions is met: (i) the shares voting in favor of the matter include at least a majority of the shares voted by shareholders who are not controlling shareholders and who
do not have a personal interest in the approval of the compensation policy or (ii) the total number of shares voted against the compensation policy by shareholders referenced under (i) does not exceed 2% of the company’s outstanding voting rights.
We may approve a compensation policy even in the event it is rejected by the shareholders; provided that the compensation committee and thereafter the board of directors resolve that the approval of the compensation policy is for the benefit of our
company.
The board of directors is required to periodically examine the compensation policy and the need for adjustments based on the considerations in determining
a compensation policy in the event of a material change in the circumstances prevailing during the adoption of the compensation policy or for other reasons.
Our compensation policy is intended to assist our company to achieve its goals and its work plans with a long term view and to
ensure that:
|
|
• |
The interests of the directors and officers of our company will be as close as possible and in the closest possible conformity to the interests of our shareholders.
|
|
|
• |
We will be able to recruit and retain senior managers who have the ability to lead our company to business success and to confront the challenges we face.
|
|
|
• |
Our directors and officers will be motivated to achieve a high level of business performance without taking unreasonable risks;
|
|
|
• |
An appropriate balance will be created between the various components of compensation - fixed components vs. variable components, short-term vs. long-term, and compensation in cash vs. equity based compensation.
|
|
|
• |
The overall compensation of each employee and especially of our officers is based on a number of components, so that each component rewards the employee for a different aspect of his contribution to the company.
|
|
|
• |
Fixed base salary - intended to compensate the employee for the time spent in carrying out his work for the company and for execution of the ongoing tasks of his position on a daily basis. The base salary
represents the employees' skills on one hand (such as: experience, job knowledge, expertise, education, professional qualifications, etc.) and on the other hand, the job requirements and the scope of authority and responsibilities of the
employee.
|
44
|
|
• |
Social and Incidental Benefits - some of which are statutorily defined (pension savings, severance contributions, loss of work capacity insurance, vacation, sick leave, etc.), some of which reflect standard
work market practice (such as savings in education funds in Israel while maximizing the inherent advantages for the employee in the tax benefits offered by the State of Israel) and some of which are intended to supplement the fixed salary
and to compensate the employee for expenses incurred in the performance of his work (such as travel costs).
|
|
|
• |
Variable, Performance Based Rewards (Annual Bonus, Commissions and Grants) - Is intended to compensate the employee for his achievements and contribution to our company’s goals during the
period for which the variable compensation is paid. In general, the weight ascribed to this component as a part of the total compensation package increases as the employee is in a more senior position.
|
|
|
• |
Equity based compensation - is intended to tie between the maximization of shareholders’ value as expressed in the value of our shares in the long-term and the compensation given to
managers and employees of our company. We believe that this compensation creates proximity between the interests of our employees and managers and our shareholders, and thus assists in motivating and retaining the key positions holders in
our company.
|
In order to ensure consistency between all of the compensation components, in their approval deliberations for each of the components of compensation for
an office holder, the Compensation Committee and the Board of Directors will be presented with the entire compensation package of the office holder.
Our shareholders approved updated compensation policies on April 1, 2015 and on August 8, 2016. The changes in August 2016 allowed us to base the annual
bonuses of directors and CEO on non-measurable criteria up to the cap determined in the Israeli Companies Law and to base the bonuses of officers (other than the CEO) on non-measurable criteria. In addition, we adjusted the range of the
appropriate ratio between the components of the compensation package for a given year for our CEO.
An updated compensation policy was approved on December 26, 2019. The amendments implemented in updated policy are changes to the range of the
appropriate ratio between the components of the compensation package for a given year for our officers that report to our CEO and for the CEO of our U.S. subsidiary (which position is currently held by Roy Hess).
Internal Audit
Under the Israeli Companies Law, the board of directors of a public company must appoint an internal auditor nominated by the audit committee. A person
who does not satisfy the Israeli Companies Law’s independence requirements may not be appointed as an internal auditor. The role of the internal auditor is to examine, among other things, the compliance of the company’s conduct with applicable law
and orderly business practice. Mr. Doron Cohen of Fahn Kanne & Co., the Israeli member firm of Grant Thornton International Ltd., serves as our internal auditor.
Directors’ Service Contracts
There are no arrangements or understandings between us and any of our subsidiaries, on the one hand, and any of our directors, on the other hand, providing
for benefits upon termination of their employment or service as directors of our company or any of our subsidiaries.
Approval of Related Party Transactions Under Israeli Law
Fiduciary Duties of Office Holders
The Israeli Companies Law codifies the fiduciary duties that “office holders,” including directors and executive officers, owe to a company. An “office
holder” is defined in the Israeli Companies Law as a director, general manager, chief business manager, deputy general manager, vice general manager, other manager directly subordinate to the general manager or any other person assuming the
responsibilities of any of the foregoing positions without regard to such person’s title. An office holder’s fiduciary duties consist of a duty of care and a duty of loyalty. The duty of care requires an office holder to act at a level of care
that a reasonable office holder in the same position would employ under the same circumstances. This includes the duty to utilize reasonable means to obtain (i) information regarding the appropriateness of a given action brought for his approval
or performed by him by virtue of his position and (ii) all other information of importance pertaining to the foregoing actions. The duty of loyalty includes (i) avoiding any conflict of interest between the office holder’s position in the company
and any other position he holds or his personal affairs, (ii) avoiding any competition with the company’s business, (iii) avoiding exploiting any business opportunity of the company in order to receive personal gain for the office holder or others,
and (iv) disclosing to the company any information or documents relating to the company’s affairs that the office holder has received due to his position as an office holder.
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Disclosure of Personal Interests of an Office Holder
The Israeli Companies Law requires that an office holder promptly, and no later than the first board meeting at which such transaction is considered,
disclose any personal interest that he or she may have and all related material information known to him or her and any material documents in their possession, in connection with any existing or proposed transaction by us. In addition, if the
transaction is an extraordinary transaction, that is, a transaction other than in the ordinary course of business, other than on market terms, or that may have a material impact on the company’s profitability, assets or liabilities, the office
holder must also disclose any personal interest of the office holder’s “relative” (as defined above), or by any corporation in which the office holder or a relative is a 5% or greater shareholder, director or general manager or in which he or she
has the right to appoint at least one director or the general manager.
Approval of Transactions with Office Holders
Some transactions, actions and arrangements involving an office holder (or a third party in which an office holder has a personal interest) must be
approved by the board of directors and, in some cases, by the audit committee and by the board of directors, and under certain circumstances shareholder approval may also be required, provided, however, that each such transaction is required also
to be for the benefit of the company. A director who has a personal interest in a transaction may not be present during the discussions and may not vote on the transaction, unless the transaction does not pertain to Terms of Service and Employment
and is not an extraordinary transaction or unless the majority of the members of the board or the relevant committee has a personal interest. In the event the majority of the members of the board of directors or relevant committee have a personal
interest, they are entitled to participate in the meeting but the approval of the general meeting of shareholders is also required.
Approval Process of Terms of Service and Employment of Office Holders
The process for approval of Terms of Service and Employment of office holders is as follows:
•
With respect to our chief executive officer, a controlling
shareholder or a relative of a controlling shareholder, approval is required by the (i) compensation committee, (ii) board of directors and (iii) company’s shareholders with the “special majority” described above (in that order). Subject to
certain conditions, the Israeli Companies Law provides an exemption from the shareholder approval requirement in connection with the approval of the Terms of Service and Employment of a CEO candidate or a temporary exemption as described above in
connection with the terms of service of Mr. Hess, our current CEO.
•
With respect to a director, approval is required by the (i)
compensation committee, (ii) board of directors and (iii) company’s shareholders with a regular majority (in that order).
•
With respect to any other office holder, approval is required by
the Compensation Committee and the board of directors (in that order); however, in the event of an update of existing Terms of Service and Employment, which the Compensation Committee confirms is not material, Compensation Committee approval is
sufficient.
In the event the transaction with any office holder is not in accordance with the compensation policy, the approval of the company’s shareholders, by
“special majority,” is also required. In the event the company’s shareholders do not approve the compensation of the CEO or other office holders (who are not directors, controlling shareholders or relatives of the controlling shareholders), the
compensation committee and board of directors may, in special situations, approve the transaction, subject to their providing detailed reasons and after discussion and examination of the rejection by the company’s shareholders.
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Disclosure of Personal Interests of a Controlling Shareholder; Approval of Transactions with Controlling Shareholders
The disclosure requirements that apply to an office holder also apply to a transaction in which a controlling shareholder of the company has a personal
interest. The Israeli Companies Law provides that an extraordinary transaction with a controlling shareholder or an extraordinary transaction with another person in which the controlling shareholder has a personal interest or a transaction with a
controlling shareholder or his relative regarding Terms of Service and Employment, must be approved by the audit committee or the compensation committee, as the case may be, the board of directors and shareholders. The shareholders' approval of
such a transaction requires a simple majority approval and the fulfillment of one of the following conditions: (i) at least a majority of the votes cast by shareholders who have no personal interest in the transaction and who vote on the matter are
voted in favor of the transaction, or (ii) the votes cast by shareholders who have no personal interest in the transaction voted against the transaction do not represent more than two percent of the voting rights in the company. In addition, any
such transaction with a term that exceeds three years requires approval as described above every three years, unless (with respect only to extraordinary transactions and not to other transactions that require the special approval process) the audit
committee approves that a longer term is reasonable under the circumstances.
Under the Companies Regulations (Relief from Related Party Transactions), 5760-2000, promulgated under the Israeli Companies Law, as amended, certain
extraordinary transactions between a public company and its controlling shareholder(s) do not require shareholder approval. In addition, under such regulations, directors’ compensation and employment arrangements in a public company do not require
the approval of the shareholders if both the compensation committee and the board of directors agree that such arrangements are solely for the benefit of the company or if the directors’ compensation does not exceed the maximum amount of
compensation for outside directors determined by applicable regulations.
Exculpation, Indemnification and Insurance of Directors and Officers
Exculpation of Office Holders.
The Israeli Companies
Law provides that an Israeli company cannot exculpate an office holder from liability with respect to a breach of his or her duty of loyalty. If permitted by its articles of association, a company may exculpate in advance an office holder from
his or her liability to the company, in whole or in part, with respect to a breach of his or her duty of care. However, a company may not exculpate in advance a director from his or her liability to the company with respect to a breach of his
duty of care in connection with distributions.
Insurance of Office Holders
. Israeli law provides that
a company may, if permitted by its articles of association, enter into a contract to insure its office holders for liabilities incurred by the office holder with respect to an act or omission performed in his or her capacity as an office holder,
as a result of: (i) a breach of the office holders duty of care to the company or another person; (ii) a breach of the office holders duty of loyalty to the company, provided that the office holder acted in good faith and had reasonable cause to
assume that the act would not prejudice the company’s interests; and (iii) a financial liability imposed upon the office holder in favor of another person.
Indemnification of Office Holders
. Under Israeli law a
company may, if permitted by its articles of association, indemnify an office holder for acts or omissions performed by the office holder in such capacity for (a) monetary liability imposed upon the office holder in favor of another person
pursuant to a court judgment, including a settlement or an arbitration award approved by a court; (b) reasonable litigation expenses, including attorney’s fees, actually incurred by the office holder as a result of an investigation or proceeding
instituted against him or her by a competent authority, provided that such investigation or proceeding concluded without the filing of an indictment against the office holder or the imposition of any monetary liability in lieu of criminal
proceedings, or concluded without the filing of an indictment against the office holder and a monetary liability was imposed on him or her in lieu of criminal proceedings with respect to a criminal offense that does not require proof of criminal
intent; and (c) reasonable litigation expenses, including attorneys’ fees, actually incurred by the office holder or imposed upon the office holder by a court: (i) in an action, suit or proceeding brought against the office holder by or on behalf
of the company or another person, (ii) in connection with a criminal action in which the office holder was acquitted, or (iii) in connection with a criminal action in which the office holder was convicted of a crime that does not require proof of
criminal intent.
Israeli law provides that a company’s articles of association may permit the company to (a) indemnify an office holder retroactively, following a
determination to this effect made by the company after the occurrence of the event in respect of which the office holder will be indemnified; and (b) undertake in advance to indemnify an office holder, except that with respect to a monetary
liability imposed on the office holder by any judgment, settlement or court-approved arbitration award, the undertaking must be limited to types of occurrences, which, in the opinion of the company’s board of directors, are, at the time of the
undertaking, foreseeable due to the company’s activities and to an amount or standard that the board of directors has determined is reasonable under the circumstances.
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Limitations on Exculpation, Insurance and Indemnification
.
The Israeli Companies Law provides that a company may not exempt or indemnify an office holder nor enter into an insurance contract which would provide coverage for liability incurred as a result of any of the following: (a) a breach by the
office holder of his or her duty of loyalty (however, a company may insure and indemnify against such breach if the office acted in good faith and had reasonable cause to assume that his act would not prejudice the company’s interests); (b) a
breach by the office holder of his or her duty of care if the breach was done intentionally or recklessly, unless made in negligence only; (c) any act of omission done with the intent to derive an illegal personal benefit; or (d) any fine, civil
fine, monetary sanction or penalty levied against the office holder.
Pursuant to the Israeli Companies Law, exculpation of, procurement of insurance coverage for, and an undertaking to indemnify or indemnification of, our
office holders must be approved by our compensation committee and our board of directors and, if the office holder is a controlling shareholder, director or a chief executive officer, also by our shareholders.
Our Articles of Association allow us to insure, indemnify and exempt our office holders, to the fullest extent permitted by the provisions of the Israeli
Companies Law. We have provided several of our directors and officers a letter of indemnification for liabilities or expenses incurred as a result of their acts in their capacity as directors and officers of our company, in an aggregate amount not
to exceed $3 million.
Following the expiration of our previous policy, we acquired a new directors’ and officers’ policy with liability coverage of $5.0 million, commencing
August 1, 2020, at an annual premium of $380,000. Our shareholders approved the purchase of the new policy commencing August 1, 2020 and the terms and conditions for the purchase, renewal, extension and/or replacement, from time to time, of our
directors’ and officers’ liability insurance policy for all directors and officers of our company and its subsidiaries, who may serve from time to time (including our Chief Executive Officer), or the New Policy, as follows: (i) the coverage limit
per claim and in the aggregate under the New Policy may not exceed an amount representing an increase of 25% in any year, as compared to the previous year’s aggregate coverage limit; (ii) our Compensation Committee determines that the New Policy is
on market terms; and (iii) any New Policy may not be entered into after 2023. No further approval of our shareholders will be required in connection with any renewal and/or extension and/or purchase of the New Policy entered into in compliance
with the foregoing terms. and conditions.
Administrative Sanctions.
The Israeli Securities
Authority is authorized to impose administrative sanctions against companies like ours and their office holders for certain violations of the Israeli Securities Law or the Israeli Companies Law. These sanctions include monetary sanctions and
certain restrictions on serving as a director or senior officer of a public company for certain periods of time. The maximum amount of the monetary sanctions that could be imposed upon individuals is a fine of NIS 1.0 million (currently
equivalent to approximately $285,000), plus the greater of the following amounts payable to persons who suffered damages as a result of the violation: (i) the amount of profits earned or losses avoided by the violator as a result of the
violation, up to the amount of the applicable fine, or (ii) compensation for damages suffered by the injured persons, up to 20% of the fine imposed on the violator.
Only certain types of liabilities may be reimbursed by indemnification and insurance. Specifically, legal expenses (including attorneys' fees) incurred by
an individual in the applicable administrative enforcement proceeding and any compensation payable to injured parties for damages suffered by them (as described in clause (ii) of the immediately preceding paragraph) are permitted to be reimbursed
via indemnification or insurance, provided that such indemnification and insurance are authorized by the company's articles of association.
D.
Employees
As a result of our continued cost-cutting measures in recent years, we reduced our headcount and as of December 31, 2020, we and our consolidated
subsidiaries employed 24 persons, of which 0 persons were employed in research and development, 5 persons in professional services and technical support, 3 persons in sales and marketing and 16 in operations and administration. As of December 31,
2020, 7 of our employees were located in Israel, 16 of our employees were located in the United States and 1 of our employees were located in Hong Kong.
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As of December 31, 2019, we and our consolidated subsidiaries employed 34 persons, of which 5 persons were employed in research and development, 3 persons
in professional services and technical support, 4 persons in sales and marketing and 22 in operations and administration. As of December 31, 2019, 14 of our employees were located in Israel, 19 of our employees were located in the United States
and 1 of our employees were located in Hong Kong.
As of December 31, 2018, we and our consolidated subsidiaries employed 38 persons, of which 5 persons were employed in research and development, 3 persons
in professional services and technical support, 6 persons in sales and marketing and 24 in operations and administration. As of December 31, 2018, 14 of our employees were located in Israel, 22 of our employees were located in the United States
and 2 of our employees were located in Hong Kong.
Certain provisions of the collective bargaining agreements between the General Federation of Labor in Israel, or the Histadrut, and the Coordination Bureau
of Economic Organizations (including the Industrialists Association) are applicable to our employees by order of the Israeli Ministry of Labor. These provisions concern mainly the length of the workday, minimum daily wages for professional
workers, contributions to a pension fund, insurance for work-related accidents, procedures for dismissing employees, determination of severance pay and other conditions of employment. We generally provide our employees with benefits and working
conditions beyond the minimum requirements.
Cost of living adjustment of employees’ wages is determined on a nationwide basis and is legally binding, if and when applied. Israeli employers and
employees are required to pay predetermined amounts to the National Insurance Institute, which is similar to the United States Social Security Administration and additional sums towards compulsory health insurance. In 2020, payments to the
National Insurance Institute amounted to approximately 15% of wages, of which approximately two-thirds was contributed by employees with the balance contributed by the employer.
Pursuant to Israeli law, we are required to pay severance benefits upon certain circumstances, including the retirement or death of an employee or the
termination of employment of an employee without due cause. The severance pay obligation generally requires the payment of severance pay equal to one month’s salary, based on the most recent salary, for each year of employment or a prorated
portion thereof upon the termination of employment of an employee. Pursuant to an order issued in December 2007 by the Israeli Minister of Industry, Trade and Labor, new provisions relating to pension arrangements in the collective bargaining
agreements between the Histadrut and the Coordination Bureau of Economic Organizations apply to all employees in Israel. According to such provisions, all employees employed in Israel for at least six months are entitled to pension benefits to be
funded by preset monthly contributions of the employee and the employer and to certain severance benefits regardless of whether they or we terminated their employment. We partly satisfy this obligation by contributing approximately 8.3% of the
employee’s gross salary to a fund known as “Managers’ Insurance” or to pension fund. This fund provides a combination of savings plans, insurance and severance pay benefits to the employee, giving the employee a lump sum payment upon retirement
and a severance payment, if legally entitled, upon termination of employment. The remaining part of this obligation is presented in our balance sheet as the difference between the “accrued severance pay” and “severance pay fund.”
Certain employment agreements executed with some of our Israeli employees provide that the provisions of Section 14 of the Israeli Severance Pay Law, 1963,
or the Severance Pay Law, will apply to such employee. This section provides that our contributions for severance pay are in lieu of our severance liability and the relevant employee is entitled to receive such contributions whether her or his
employment is terminated by us or she or he resigns. Therefore, upon fulfillment of our obligation to make a monthly contribution to the managers’ insurance policies or similar financial instruments in the amount of 8.33% of the employee’s monthly
salary and of the other terms of the relevant governmental permit issued with respect to this arrangement, including monthly contributions to pension funds and/or managers’ insurance and disability insurance, no additional payments must later be
made to the employee on account of severance pay upon termination of the employment relationship. Under these circumstances, the related obligation and amounts deposited on behalf of the employee for such obligation are not stated on the balance
sheet, as we are released from the obligation to the employees once the amounts deposited have been paid.
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E.
Share Ownership
The following table sets forth certain information as of May 17, 2021 regarding the beneficial ownership of our ordinary shares by each of our
directors and all of our executive officers and directors as a group:
|
Name
|
Number of Ordinary Shares Beneficially Owned
(1)
|
Percentage of Outstanding Ordinary
Shares
(2)
|
||||||
|
Haim Mer and Dora Mer
|
540,641
|
(3) |
11.35
|
%
|
||||
|
All directors and executive officers as a group (8 persons)
|
540,641
|
11.35
|
%
|
|||||
__________
* Less than 1%.
| (1) |
Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. Ordinary shares relating to options currently exercisable or exercisable within 60
days of the date of this table are deemed outstanding for computing the percentage of the person holding such securities but are not deemed outstanding for computing the percentage of any other person. Except as indicated by footnote, and
subject to community property laws where applicable, the persons named in the table above have sole voting and investment power with respect to all shares shown as beneficially owned by them.
|
| (2) | The percentages shown are based on 4,734,323 ordinary shares (excluding 1,800 ordinary shares held as treasury stock) issued and outstanding as of May 17, 2021 and on 1,591,579 preferred shares held by Alpha Capital, which are currently convertible into ordinary shares, subject to a 9.99% ownership restriction currently included in our Articles. Pursuant to our Articles, Alpha may vote its preferred shares, on an as converted basis, subject to such 9.99% restriction. |
| (3) |
Based upon a Schedule 13D/A filed with the SEC on August 24, 2017 and other information available to us. Mr. Haim Mer and his wife, Mrs. Dora Mer, are the record holders of 247,960 ordinary shares and the beneficial owners of 290,742
ordinary shares through their controlling interest in Mer Ofekim Ltd., 1,923 ordinary shares through their controlling interest in Mer Services Ltd. and 16 ordinary shares through their controlling interest in Mer & Co. (1982) Ltd.
Mer Ofekim Ltd. is a private holding company, incorporated under the laws of the State of Israel. The address of its principal office is 25 Yoav Street, Tel Aviv, Israel. .Mr. Mer's business address is 5 Ha'tzoref Street, Holon, Israel.
|
Stock Option Plans
2003 Israeli Share Option Plan
In August 2013, our shareholders approved amendments to the 2003 Israeli Share Option Plan, or the 2003 Plan. Its term was extended by ten years so that
the 2003 Plan will expire on November 30, 2023, unless further extended. Options granted under the 2003 Plan are not assignable or transferable by an optionee, other than by will or by laws of descent and distribution, and during the lifetime of
an optionee may be exercised only by the optionee or by the optionee’s legal representative. Such options may be exercised as long as the optionee is employed by, or providing services to us or any of our affiliates, to the extent the options have
vested and, under certain circumstances set forth in the 2003 Plan, for a period of 90 days thereafter. The Board of Directors or the stock option committee, as the case may be, may permit options to continue to be in effect following the
termination of employment, so long as the resolution is adopted prior to expiration of the options as a result of termination and there is no change in the original expiration date of the options.
In each of August 2013 and August 2017, our shareholders approved an increase in the number of ordinary shares issuable under the 2003 Plan by an
additional 166,667 ordinary shares (i.e. an aggregate of 333,333 ordinary shares). As of December 31, 2020, the aggregate number of ordinary shares available for future option grants under the 2003 Plan was 327,310 shares.
During 2019 and 2020, no options were granted under the 2003 Plan and no options were exercised. As of December 31, 2020, options to purchase 116,667
ordinary shares were outstanding under the 2003 Plan, exercisable at an average exercise price of $2.16 per share.
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2006 Stock Option Plan
In June 2006, we adopted our 2006 Stock Option Plan, or the 2006 Plan, under which up to 200,000 ordinary shares may be issued (subject to standard
adjustments) to employees, officers and non-employee directors of ours and our affiliates. Ordinary shares as to which an option granted under the 2006 Plan has not been exercised at the time of its expiration, cancellation or forfeiture may again
be subject to new awards under the 2006 Plan. At our 2011 annual general meeting, our shareholders approved an amendment to our 2006 Stock Option Plan to provide for the issuance thereunder of an additional 200,000 ordinary shares and to increase
the total number of ordinary shares with respect to which options may be granted thereunder to any eligible employee during any 12 month period to 150,000 (instead of 50,000 according to the original 2006 Plan) ordinary shares, subject to
adjustment as provided in the 2006 Plan. At our 2013 annual general meeting, our shareholders approved an amendment to our 2006 Stock Option Plan to provide for the issuance thereunder of an additional 50,000 ordinary shares, such that we will be
entitled to issue options to purchase up to 183,333 ordinary shares under the 2006 Plan. At our 2017 annual general meeting, our shareholders approved an amendment to our 2006 Plan extending the period in which Incentive Stock Options (as such term
is defined in the 2006 Plan) may be granted until July 2026.
The 2006 Plan is administered by our Board of Directors or to the extent permitted by Israeli law, a Compensation Committee of our Board of Directors. All
references below to the “Committee” refer to the Board of Directors or compensation committee established by our Board of Directors, as applicable. The Committee will have the authority, in its discretion, to establish from time to time guidelines
or regulations for the administration of the 2006 Plan, to interpret the 2006 Plan, and to make all determinations it considers necessary or advisable for the administration of the 2006 Plan, in addition to the other responsibilities and powers
assigned to the Committee in the 2006 Plan. All decisions, actions or interpretations of the Committee under the 2006 Plan will be final, conclusive and binding upon all parties.
Each option granted under the 2006 Plan will be either an option intended to be treated as an “incentive stock option,” within the meaning of Section 422
of the Internal Revenue Code of 1986, as amended, or the Code, or an option that will be treated as a “non-qualified stock option.” No incentive stock may be granted to any individual who is not an eligible employee of our company or a
“subsidiary” within the meaning of the Code. No incentive stock option may be granted to an employee if, as of the date of grant of such option, such employee owns stock possessing more than ten percent of the total combined voting power of all
classes of stock of our company or any affiliated company, a “10% Holder,” unless (a) the exercise price per share under such option is at least 110% of the fair market value of an ordinary share determined as of the date of grant of such option,
and (b) such option is not exercisable after the expiration of five years from the date of grant of such option. In no event may the term of any option exceed ten years from the date of grant of the option. However, in no event may the term of
any option granted to a 10% Holder exceed five years from the date of grant of the option. No option may be exercised after its expiration.
Each option granted under the 2006 Plan will become exercisable, in whole or in part, at such time or times during its term as the instrument evidencing
the grant of such option may specify.
The price at which ordinary shares may be purchased upon any exercise of an option granted under the 2006 Plan will be the price per share determined by
the Committee, and specified in the instrument evidencing the grant of such option, but in no event may the exercise price per share be less than (i) the fair market value of an ordinary share determined as of the date of grant of the option, or
(ii), if greater, the par value of an ordinary share. However, with respect to an option granted to a 10% Holder, in no event may the exercise price per share be less than 110% of the fair market value of our ordinary shares determined as of the
date of grant of such option.
Options granted under the 2006 Plan are nontransferable, other than by will or the laws of descent and distribution and may be exercised during the
grantee’s lifetime only by the grantee. However, if the instrument evidencing the grant of an option other than an incentive stock option so provides, the grantee may transfer his or her rights with respect to such option or any portion thereof,
without consideration, to any “family member,” as such term is defined in the 2006 Plan.
The terms and conditions of an option grant may not be waived or amended without the consent of the grantee if it would adversely affect, to any material
extent, any of the rights or obligations of the grantee with respect to such grant, or in the case of any option that was intended to constitute an incentive stock option, if such waiver or amendment would cause such option to fail to be treated as
an incentive stock option.
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Our Board of Directors may, with prospective or retroactive effect, amend, suspend or terminate the 2006 Plan or any portion of the 2006 Plan at any time.
However, no amendment, suspension or termination of the 2006 Plan may adversely affect the rights of any grantee with respect to any options previously granted to the grantee without his or her written consent. In addition, no amendment which
constitutes a “material revision” of the 2006 Plan, within the meaning of such term under NASDAQ rules, may be effective unless approved by our shareholders in the manner required by such rules and by applicable law.
During 2020, no options were granted under the 2006 Plan and no options were exercised. As of December 31, 2020, there were no outstanding options to
purchase ordinary shares under the 2006 Plan.
| ITEM 7. |
MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
|
A.
Major Shareholders
The following table sets forth certain information as of May 17, 2021
regarding the beneficial ownership by all
shareholders known to us to own beneficially 5.0% or more of our ordinary shares:
|
Name
|
Number of
Ordinary Shares
Beneficially Owned
(1)
|
Percentage of
Outstanding Ordinary Shares (2) |
||||||
|
Haim Mer and Dora Mer
(3)
|
540,641
|
11.35
|
%
|
|||||
|
Roger Challen
(4)
|
462,054
|
9.70
|
%
|
|||||
|
Alpha Capital
(5)
|
475,663
|
9.99
|
%
|
|||||
|
L.I.A. Pure Capital Ltd
(6)
|
253,236
|
5.32
|
%
|
|||||
_______________________
|
|
(1) |
Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. Ordinary shares relating to options currently exercisable or exercisable within 60
days of the date of this table are deemed outstanding for computing the percentage of the person holding such securities but are not deemed outstanding for computing the percentage of any other person. Except as indicated by footnote, and
subject to community property laws where applicable, the persons named in the table above have sole voting and investment power with respect to all shares shown as beneficially owned by them.
|
|
|
(2) |
The percentages shown are based on 4,734,323 ordinary shares (excluding 1,800 ordinary shares held as treasury shares) and 1,591,579 preferred shares (on an as-converted basis, subject to a beneficial ownership limitation), outstanding
on May 17, 2021.
|
|
|
(3) |
Based upon a Schedule 13D/A filed with the SEC on August 24, 2017 and other information available to us. Mr. Haim Mer and his wife, Mrs. Dora Mer, are the record holders of 247,960 ordinary shares and the beneficial owners of 290,742
ordinary shares through their controlling interest in Mer Ofekim Ltd., 1,923 ordinary shares through their controlling interest in Mer Services Ltd. and 16 ordinary shares through their controlling interest in Mer & Co. (1982) Ltd.
|
|
|
(4) |
Based upon a Schedule 13D/A filed with the SEC on August 24, 2017, and other information available to us, Mr. Challen is the beneficial owner of 462,054 ordinary shares through his controlling interest in the Info Group, Inc., a
Massachusetts corporation.
|
|
|
(5) |
Based upon a Schedule 13G/A filed with the SEC on November 21, 2019 and other information known to us, Alpha Capital holds 208,600 ordinary shares and 1,831,579 preferred shares, which are currently subject to a beneficial ownership
limitation.
|
|
|
(6) | Based upon a Schedule 13G filed with the SEC on January 12, 2021. Mr. Kfir Silberman is the beneficial owner of 253,236 ordinary shares through his controlling interest and as officer, sole director and chairman of the board of L.I.A. Pure Capital Ltd., an Israeli company. As reported, L.I.A. Pure Capital’s address is 20 Raoul Wallenberg Street, Tel Aviv, Israel 6971916. |
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Significant Changes in the Ownership of Major Shareholders
Alpha Capital Anstalt became a major shareholder in October 2018, when we issued to them a newly-created class of 1,315,789 convertible preferred shares for an aggregate amount
of $1.353 million, an institutional investor, pursuant to a Purchase Agreement. Previously, in June 2018 we issued them 175,439 Ordinary shares in a private placement at a price per ordinary share of $1.14. On March 29, 2019 Alpha Capital Anstalt
exercised its greenshoe 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 additional 438,597 convertible preferred
shares in consideration of $500,000. On December 31, 2019, Alpha Capital exercised its greenshoe option in part and purchased 144,737 additional convertible preferred shares in consideration of $165,000.
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 600,000 and 200,000 preferred shares into ordinary shares at a 1:1 ratio on June 22, 2020 and June14, 2020, respectively. The greenshoe option has been exercised in full.
Alpha Capital holds 475,663 Ordinary Shares amounting to 9.99% of our ordinary shares This amount does not include additional
ordinary shares underlying 1,564,516 convertible Preferred Shares held by Alpha Capital that would be issuable to Alpha Capital upon conversion of the preferred shares held by it in the event the 9.99% holding limitation is removed. Such holding
limitation can be removed with a 61-day prior notice from Alpha Capital, however, the removal of the limitation could be subject to additional requirements under the Israeli Companies Law applicable to the acquisition of a “control stake” in a
public company, as more fully explained under Exhibit 2.2 to this Form 20-F. The transaction had a dilutive effect on the holdings of Mr. Haim Mer and Roger Challen.
Based upon a Schedule 13G filed with the SEC on January 12, 2021. Mr. Kfir Silberman is the beneficial owner of 253,236 ordinary
shares (or 5.32% of our equity), through his controlling interest and as officer, sole director and chairman of the board of L.I.A. Pure Capital Ltd., an Israeli company.
Major Shareholders Voting Rights
Generally, our major shareholders do not have different voting rights with respect to their Ordinary Shares. The Preferred Shares do not confer upon the
holders thereof any voting rights or any right to appoint directors or any other right with respect to general meetings, including without limitation, attending, voting at or requesting to convene, such general meetings or proposing matters for the
agenda of such general meetings. However, Alpha Capital Anstalt has certain veto rights as long it holds the Preferred Shares and can vote its Preferred Shares on an as converted basis up at our general meeting, up to the 9.99% holding limitation
described above. Please see “Alpha Capital Veto” below.
Record Holders
Based on a review of the information provided to us by our transfer agent, as of May 17, 2021, there were 30 holders of record of our ordinary shares,
of which 4 record holders holding approximately 86% of our ordinary shares had registered addresses in the United States. These numbers are not representative of the number of beneficial holders of our shares nor are they representative of where
such beneficial holders reside, since many of these ordinary shares were held of record by brokers or other nominees (including one U.S. nominee company, CEDE & Co., which held approximately 85% of our outstanding ordinary shares as of such
date).
B.
Related Party Transactions
C. Mer is a publicly traded company in which Mr. Haim Mer, our chairman of the Board, is a member of the controlling group. Mr. Mer has been the chairman
of the board of directors of C. Mer since 1988 and served as its President and Chief Executive Officer from 1988 until January 2005. Our CEO, Roy Hess currently shares his business time between our company and C, Mer. Presently, the only service
provided to us by C. Mer is our participation in its umbrella liability insurance coverage. We believe that the terms under which C. Mer provides such participation to us is on a basis no less favorable than could be obtained from an unaffiliated
third party.
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Our Board of Directors and shareholders approved the payment of fees to Mr. Roger Challen effective from January 1, 2012 and for the duration of his
service as a non-employee director. The fees are equivalent to the fees we pay to some of our other non-employee directors for their service in such capacity (an annual fee of $8,400 and a meeting attendance fee of $300). Mr. Challen also
received reimbursement of travel related expenses in connection with his attendance at Board of Directors’ meetings, pursuant to guidelines for reimbursement of director travel related expenses approved by our Audit Committee and Board of
Directors. In addition, in connection with our acquisition of AnchorPoint from a company controlled by Mr. Challen, we received certain services from Data Distributors, Inc., another company controlled by Mr. Challen. These services include
reimbursement for shared expenses, development and IT services and other administrative services. Expenses recognized with respect to the above mentioned services were approximately $10,000, $0 and $5,000 for the years ended December 31, 2018,
2019 and 2020, respectively. We also rent an office from Mr. Challen 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 and since
November 2020, we have reduced the rented space and accordingly the monthly rental fee was decreased to approximately $3,000.
. Mr. Challen is the controlling shareholder of the Info Group Inc., and is the beneficial owner of 9.7% of our ordinary shares.
In October 2018, we closed the Alpha Capital SPA which provides Alpha Capital Anstalt with rights related to its holdings of Preferred Shares, and
designation of two board members for two years. The Alpha Capital SPA also includes an undertaking of our company, subject to certain conditions and limitations, to indemnify and hold Alpha Capital and its directors, officers, shareholders,
members, partners, employees and agents, each person who controls Alpha Capital, and the directors, officers, shareholders, agents, members, partners or employees of such controlling persons, each, a Purchaser Party) harmless from certain losses
that they may suffer or incur directly as a result of or relating to (a) any material breach of any of the representations, warranties, covenants or agreements made us in the Alpha Capital SPA and certain related documents, or (b) subject to
certain exceptions, any action instituted against them in any capacity, or any of them or their respective affiliates, with respect to any of the transactions contemplated by the Alpha Capital SPA and related documents, by any of our shareholders
who is not an affiliate of such Purchaser Party, with respect to any of the transactions contemplated by the Alpha Capital SPA and certain related documents. The Alpha Capital SPA provides Alpha Capital with “piggyback” registration rights with
respect to ordinary shares issued upon conversion of the preferred shares that will be held by Alpha Capital. The Alpha Capital SPA includes provisions that may obligate us to pay Alpha Capital liquidated damages in the future in connection with
certain delays in removal of restrictive legends from ordinary shares held by Alpha Capital and certain failures of our company to satisfy the current public information requirement of Rule 144(c) promulgated under the Securities Act of 1933, as
amended.
C.
Interests of Experts and
Counsel
Not applicable.
A.
Consolidated Statements and
Other Financial Information
Financial Statements
See the consolidated financial statements, including the notes thereto included in Item 18.
Export Sales
See Note 14 of our consolidated financial statements.
Legal Proceedings
We are a party to various other claims that arise in the ordinary course of business. As of December 31, 2020, we recorded a provision of approximately
$89,000 in respect of such claims in accordance with ASC 450, “Contingencies,” based on the opinion of our management and legal advisors. We believe that there are no legal or arbitration proceedings, including those relating to bankruptcy,
receivership or similar proceedings and those involving any third party, which could have a significant effect on our financial position or profitability.
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Dividend Distribution Policy
We have never paid cash dividends to our shareholders. We intend to retain future earnings for use in our business and do not anticipate paying cash
dividends on our ordinary shares in the foreseeable future. Any future dividend policy will be determined by our Board of Directors and will be based upon conditions then existing, including our results of operations, financial condition, current
and anticipated cash needs, contractual restrictions and other conditions as the Board of Directors may deem relevant.
According to the Israeli Companies Law, a company may generally distribute dividends only out of its profits (as such term is defined in the Israeli
Companies Law), provided that there is no reasonable concern that payment of the dividend will prevent the company from satisfying all its current and foreseeable obligations, as they become due. Notwithstanding the foregoing, dividends may be
paid with the approval of a court, at the company’s request, provided that there is no reasonable concern that payment of the dividend will prevent the company from satisfying its current and foreseeable obligations, as they become due. In the
event cash dividends are declared, such dividends will be paid in NIS.
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Significant Changes
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Given the
likely negative impact of the outbreak and spread of COVID-19 on our operations, the values or the recoverable amounts of certain assets subsequent to the reporting date may be less than their carrying amounts as of December 31, 2020. The potential
decline in value is determined to be a non-adjusting event as management concluded that the cause of the shut down in the series of events that led to the disruptions in operations is not the outbreak itself, but rather the measures taken by the
government after December 31, 2020. Because the outbreak may also result in uncertainties in relation to the assumptions and estimations associated with the measurement of various assets and liabilities in the financial statements that we may not
have previously recognized, the occurrence of the outbreak has certainly added additional risks that the carrying amounts of assets and liabilities may require certain adjustments within the next financial year which financial effect cannot be
reasonably estimated at this stage.
The Merger Agreement with SharpLink was signed on April 15, 2021 (as discussed elsewhere in this Annual Report).
A.
Offer and Listing Details
Our ordinary shares are traded on the NASDAQ Capital Market under the ticker symbol “MTSL.”
B.
Plan of Distribution
Not applicable.
C.
Markets
Since our public offering in May 1997, our shares have been listed on the Nasdaq Stock Market.
D.
Selling Shareholders
Not applicable.
E.
Dilution
Not applicable.
F.
Expense of the Issue
Not applicable.
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A.
Share Capital
Not applicable.
B.
Memorandum and Articles of
Association
Set out below is a description of certain provisions of our Articles of Association and of the Israeli Companies Law related to such provisions. This
description is only a summary and does not purport to be complete and is qualified by reference to the full text of the Articles of Association, which are incorporated by reference as exhibits to this Annual Report, and to Israeli law.
Purposes and Objects of the Company
We are a public company registered under the Israeli Companies Law as MER Telemanagement Solutions Ltd., registration number 520042904.
Our objects and purposes, as provided by our Articles of Association, are to carry on any lawful activity.
The Powers of the Directors
Under the provisions of the Israeli Companies Law and our Articles of Association, a director cannot participate in a meeting nor vote on a proposal,
arrangement or contract in which he or she is materially interested, unless the majority of the Board of Directors or relevant committee, as the case may be, has a personal interest in the transaction. In addition, our directors cannot approve
compensation to themselves or any members of their body without the approval of our compensation committee and our shareholders at a general meeting. See Item 6C. “Directors, Senior Management and Employees – Board Practices – Compensation
Committee.”
The authority of our directors to enter into borrowing arrangements on our behalf is not limited, except in the same manner as any other transaction by us.
Under our Articles of Association, retirement of directors from office is not subject to any age limitation and our directors are not required to own
shares in our company in order to qualify to serve as directors.
Rights Attached to Shares
Annual and Extraordinary Meetings
Under the Israeli Companies Law a company must convene an annual meeting of shareholders at least once every calendar year and within 15 months of the last
annual meeting. Depending on the matter to be voted upon, notice of up to 35 days prior to the date of the meeting is required. Our board of directors may, in its discretion, convene additional meetings as “extraordinary general meetings.” In
addition, the board must convene a special general meeting upon the demand of two of the directors or 25% of the directors, one or more shareholders holding at least 5% of the outstanding share capital and at least 1% of the voting power in the
company, or one or more shareholders holding at least 5% of the voting power in the company.
The quorum required for an ordinary meeting of shareholders consists of at least two shareholders present in person or by proxy and holding Ordinary Shares
(on an as-converted basis) conferring in the aggregate more than twenty-five percent (25%) of the total voting power attached to the Ordinary Shares of the company. A meeting adjourned for lack of a quorum generally is adjourned to the same day in
the following week at the same time and place or any time and place as the directors designate in a notice to the shareholders. At the reconvened meeting, the required quorum consists of any two or more holders of Ordinary Shares (on an
as-converted basis).
A resolution, including, but not limited to, a resolution to amend the Articles and to approve a merger of the company, shall be deemed adopted at a
general meeting if the requisite quorum is present and the resolution is supported by holders of Ordinary Shares (on an as-converted basis) present, in person or by proxy, vested with more than fifty percent (50%) of the total voting power attached
to the Ordinary Shares (on an as-converted basis) whose holders were present, in person or by proxy, at such general meeting and voted thereon, or such other percentage as is required by these Articles or by the law.
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Pursuant to our Articles of Association, our directors (other than outside directors) are elected at our annual general meeting of shareholders by a vote
of the holders of a majority of the voting power represented and voting at such meeting and hold office until the next annual general meeting of shareholders and until their successors have been elected. All the members of our Board of Directors
(except the outside directors who generally have a limitation of three three-year terms) may be reelected upon completion of their term of office. For information regarding the election of outside directors, see Item 6C. “Directors, Senior
Management and Employees - Board Practices - Election of Directors - Outside and Independent Directors - Outside Directors.”
Please refer to Exhibit 2.2 for Items 10.B.3, B.4, B.6, B.7, B.8, B.9 and B.10.
C.
Material Contracts
On April 15, 2021, we announced our entry into a definitive Agreement and Plan of Merger, or the Merger Agreement, with SharpLink, Inc., a company incorporated under the
laws of the State of Minnesota and an online technology company that works with sports leagues, fantasy sports sites and media companies to connect fans to betting content sourced from its sportsbook partners, or SharpLink, and New SL Acquisition
Corp., a company incorporated under the laws of the State of Delaware and a wholly-owned subsidiary of MTS, or Merger Sub.
Merger Agreement
Upon the terms and subject to the satisfaction of the conditions described in the Merger Agreement, including approval of the transaction by our shareholders, Merger Sub will
be merged with and into SharpLink, with SharpLink surviving the possible merger, or the Merger, as a wholly-owned subsidiary of MTS.
At the effective time of the Merger: (a) each outstanding share of SharpLink common stock outstanding immediately prior to the effective time will be converted into the right
to receive a number of MTS ordinary shares, calculated pursuant to the exchange ratio described in the Merger Agreement, (b) each outstanding share of SharpLink preferred A stock and preferred A-1 stock will be converted into the right to receive
a number of MTS preferred A-1 shares, or Preferred A-1 Shares”), calculated pursuant to the exchange ratios described in the Merger Agreement, (c) each outstanding share of SharpLink preferred B stock will be converted into the right to receive a
number of MTS preferred B shares, or Preferred B Shares, calculated pursuant to the exchange ratio described in the Merger Agreement and (d) each outstanding SharpLink option will be assumed by MTS, based on the exchange ratio applicable to
SharpLink’s common stock. Under the exchange ratio formulas in the Merger Agreement, immediately following the closing of the Merger, or the Closing, the former SharpLink securityholders immediately before the Merger are expected to own
approximately 86% of the Ordinary Shares of MTS, on a fully-diluted, as-converted basis, or the SharpLink’s Holdings. Such percentage includes a stock option pool equal to 10% of the Ordinary Shares of MTS, on a fully-diluted, as-converted basis,
immediately following the Closing.
The Closing is conditioned, among other things, on the investment of $5 million in SharpLink’s equity immediately prior to the
consummation of the Merger, or the Closing Financing 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 a letter of intent in connection with the Merger in
December 2020. As the Closing Financing will be invested in SharpLink immediately prior to the Closing, our Preferred B Shares that will be issued at Closing to Alpha Capital in exchange for the SharpLink preferred B stock issued to Alpha Capital
in connection with the Closing Financing are included in the SharpLink’s Holdings and will not further dilute the holdings of MTS securityholders.
The preferred shares to be issued by MTS in connection with the Merger will be newly created classes of preferred shares as follows:
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Preferred A-1 Shares with equal rights to the Ordinary Shares and convertible into Ordinary Shares on a 1-for-1 basis (subject to customary
adjustments); provided, however, that we shall not effect any conversion of the Preferred A-1 Shares to the extent that, after giving effect to such conversion, the holder of the Preferred A-1 Shares (together with such holder’s
Affiliates and any Persons acting as a group together with such holder) would beneficially own in excess of the beneficial ownership cap, which is initially set at 9.99%, of the number of the Ordinary Shares outstanding immediately
after giving effect to the issuance of Ordinary Shares issuable upon conversion of the Preferred A-1 Shares held by the holder and provided that the Preferred A-1 Shares will only have the voting power of the number of Ordinary Shares
issuable upon conversion of such Preferred A-1 Shares (subject to the conversion cap); and
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Preferred B Shares, which shall be non-voting shares and convertible into Ordinary Shares on a 1-for-1 basis (subject to customary adjustments), subject to the beneficial ownership limitation above, and with the following additional
rights:
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a right to receive a dividend during the two-year period following the Closing, at a rate of 8% per year, which will be paid on a quarterly basis in cash, or at our option, by issuance of Preferred A-1 Shares in a number to be
calculated based on the purchase price of the Preferred B Shares, or a combination thereof;
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a right to receive from MTS an amount equal to the purchase price of each outstanding Preferred B Share, plus any accrued and unpaid dividends, fees or liquidated damages due thereon (in connection with delays in conversion of
Preferred B Shares), to be paid upon any liquidation, dissolution or winding-up of MTS, before any distribution to the other securityholders of MTS;
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a “full ratchet” anti-dilution adjustment to the conversion price of the Preferred B Shares in the event MTS issues or sells Ordinary Shares or Ordinary Share Equivalents for a consideration per share that is less than the conversion
price per share of the Preferred B Shares then in effect, subject to certain exceptions and to a minimum price equal to the higher of: (A) $0.10 and (B) 20% of the closing price on the trading day immediately prior to the Closing of the
Merger; and
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as long as a minimum percentage of Preferred B Shares remain outstanding, unless the holders of at least 50.1% of the Preferred B Shares shall otherwise consent in writing, MTS shall not, and shall not permit any of its subsidiaries
to, directly or indirectly: (A) amend charter documents in any manner that materially and adversely affects any rights of holders of the Preferred B Shares, (B) repay, repurchase or otherwise acquire more than a de minimis number of its
Ordinary Shares, Ordinary Share Equivalents or Junior Securities (as such terms are defined in our Articles to be adopted in connection with the Merger), subject to certain exceptions, (C) pay cash dividends or distributions to Junior
Securities unless MTS has paid all dividends on the Preferred B Shares and the Preferred B Shares will participate ratably (on an as-converted basis) in the dividends paid to the Ordinary Shares, (D) enter into any transaction with any
Affiliates of MTS which would be required to be disclosed in any public filing with the SEC, unless such transaction is made on an arms’-length basis and approved by a majority of the disinterested directors of MTS, or (E) enter into any
agreement with respect to any of the foregoing.
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Immediately following the Closing, the current majority shareholder of SharpLink, SportsHub Games Network, Inc., is expected to hold in excess of 50% of the voting rights in
MTS. It is currently expected that following the Closing, Rob Phythian, the current SharpLink CEO, will serve as our Chief Executive Officer. Additionally, at the Closing, all of the current members of the board of directors of MTS are expected
to resign and will be replaced by board members designated by SharpLink.
The Merger Agreement contains customary representations, warranties and covenants made by MTS and SharpLink, including covenants relating to obtaining the requisite approvals
of the shareholders of MTS, indemnification of directors and officers, and our and SharpLink’s conduct of their and their subsidiaries’ respective businesses between the date of signing of the Merger Agreement and the Closing.
In connection with the Merger, we will prepare and file a proxy statement and seek the approval of our shareholders with respect to certain actions, which approval is a
condition to the Closing of the Merger. The Closing is subject to satisfaction or waiver of certain additional conditions including, among other things, (i) the accuracy of the representations and warranties, subject to certain materiality and
other qualifications, (ii) compliance by the parties with their respective covenants, (iii) no law or order preventing the Merger and related transactions, (iv) the Closing Financing having been received by SharpLink concurrently with the
Closing, (v) the listing of the Ordinary Shares on Nasdaq, (vi) no Material Adverse Effect has occurred with respect to either us or SharpLink, (vii) the effectiveness of a registration statement to be filed by us, registering part of the
Ordinary Shares to be issued in connection with the Merger, and (viii) a requirement as to the Minimum Cash at Closing (as such term is defined in the Merger Agreement) to be held by us at the time of Closing.
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The Merger Agreement also includes termination provisions for both us and SharpLink, including termination provisions in connection with a Superior Offer and a related
Termination Fee (as such terms are defined in the Merger Agreement).
In connection with the Merger Agreement, each of Mr. Haim Mer, our chairman and a shareholder, Mr. Roy Hess, our CEO, and Ms. Ofira Bar, our CFO, executed a lock-up agreement,
pursuant to which they accepted certain restrictions on transfers of MTS shares beneficially owned by them until the earliest of (A) 90 days after the Closing, (B) 90 days after they cease to be directors or officers of MTS, as the case may be,
and (C) the termination of Merger Agreement. Mr. Mer also executed a shareholder support letter informing SharpLink, among other things, that he intends to vote all Ordinary Shares beneficially owned by him in favor of the Merger and related
matters.
The Ordinary Shares and Preferred Shares to be issued in the Merger will be offered and sold in reliance on an exemption from registration under Regulation D promulgated under
Section 4(a)(2) of the Securities Act of 1933, as amended.
D.
Exchange Controls
Israeli law and regulations do not impose any material foreign exchange restrictions on non-Israeli holders of our ordinary shares.
Non-residents of Israel who purchase our ordinary shares will be able to convert dividends, if any, thereon, and any amounts payable
upon our dissolution, liquidation or winding up, as well as the proceeds of any sale in Israel of our ordinary shares to an Israeli resident, into freely repatriable dollars, at the exchange rate prevailing at the time of conversion, provided that
the Israeli income tax has been withheld (or paid) with respect to such amounts or an exemption has been obtained.
E.
Taxation
The following is a discussion of Israeli and United States tax consequences material to our shareholders. To the extent that the discussion
is based on new tax legislation which has not been subject to judicial
or administrative interpretation, the views expressed in the discussion might not be accepted by the tax
authorities in question. The discussion is not intended, and should not be construed, as legal or professional tax advice and does not exhaust all possible tax considerations.
Israeli Tax Considerations
The following is a summary of the current tax structure applicable to companies in Israel, with special reference to its effect on us. The following also
contains a discussion of the material Israeli tax consequences to purchasers of our ordinary shares and Israeli government programs benefiting us. This summary does not discuss all the aspects of Israeli tax law that may be relevant to a particular
investor in light of his or her personal investment circumstances or to some types of investors subject to special treatment under Israeli law.
General Corporate Tax Structure
Israeli companies are generally subject to income tax on their taxable income. The regular corporate tax rate in
Israel for 2019, 2020 and 2021 is 23%. However, the effective rate of tax payable by a company which is qualified under Israeli law as an “Industrial Company” and/or which derives income from an “approved enterprise,” “benefited enterprise,”
“preferred enterprise” or “preferred technological enterprise” (as further discussed below) may be lower.
Controlled Foreign Companies
Under the controlled foreign companies rules an Israeli company may become subject to Israeli taxes (as deemed dividends) on non-distributed profits of a
non-Israeli subsidiary if the subsidiary’s primary source of income is passive income (such as interest, dividends, royalties, rental income or capital gains) and if the taxes imposed outside of Israel are no more than 15% of the profits.
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Tax Benefits for Research and Development
Israeli tax law allows, under specified conditions, a tax deduction for expenditures, including capital expenditures, in the year incurred relating to
scientific research and development projects, if the expenditures are approved by the IIA (formerly known as the Office of the Chief Scientist of the Israeli Ministry of Industry, Trade and Labor), determined by the field of research, and the
research and development is for the promotion of the company and is carried out by or on behalf of the company seeking such deduction. However, the amount of such deductible expenses shall be reduced by the sum of any funds received through
government grants for the finance of such scientific research and development projects. Expenditures not so approved are deductible over a three-year period.
Tax Benefits Under the Law for the Encouragement of Industry (Taxes), 1969
Under the Law for the Encouragement of Industry (Taxes), 1969, or the Industry Encouragement Law, Industrial Companies are entitled to
certain corporate tax benefits, including, among others:
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deduction, under certain conditions, of purchases of know-how and patents over an eight-year period for tax purposes;
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right to elect, under specified conditions, to file a consolidated tax return with additional related Israeli Industrial Companies; and
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deductions over a three-year period of expenses involved with the issuance and listing of shares on the Tel Aviv Stock Exchange or, on or after January 1, 2003, on a recognized stock market outside of Israel.
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Eligibility for benefits under the Industry Encouragement Law is not subject to receipt of prior approval from any governmental
authority. Under the Industry Encouragement Law, an “Industrial Company” is defined as a company resident in Israel, at least 90% of the income of which, in any tax year, determined in Israeli currency, exclusive of income from government loans,
capital gains, interest and dividends, is derived from an “Industrial Enterprise” owned by it. An “Industrial Enterprise” is defined as an enterprise owned by an Industrial Company, whose major activity in a given tax year is industrial production
activity.
We believe that we currently qualify as an Industrial Company within the definition of the Industry Encouragement Law. No assurance
can be given that we will continue to qualify as an Industrial Company or that the benefits described above will be available in the future.
Grants under the Law for the Encouragement of Industrial Research and Development, 1984
The Government of Israel encourages research and development projects through the IIA, pursuant to the Law for the Encouragement of
Industrial Research, Development and Innovation in the Industry, 1984, and the regulations promulgated thereunder, commonly referred to as the Research Law. Grants received under such programs are repaid through a mandatory royalty based on
revenues from products incorporating know-how developed with the grants. This government support is conditioned upon the ability of the participant to comply with certain applicable requirements and conditions specified in the IIA’s programs and
with the provisions of the Research Law.
Under the Research Law, research and development programs which meet specified criteria and are approved by a research committee of
the IIA are eligible for grants of up to 50% of certain of the project’s approved expenditure, as determined by the research committee.
In exchange, the recipient of such grants is required to pay the IIA royalties from the revenues derived from products incorporating
technology developed within the framework of the approved research and development program or derived from such program (including ancillary services in connection with such program), usually up to 100% of the U.S. dollar-linked value of the total
grants received in respect of such program, plus LIBOR interest.
60
The terms of the Israeli Government participation generally require that the products developed with such grants be manufactured in
Israel and that the know-how developed under an approved research and development program may not be transferred to any third party. However, the IIA may approve the transfer of manufacturing rights outside Israel in exchange for an import of
different manufacturing into Israel as a substitute or subject to increased royalties' payments. In addition, under certain circumstances and subject to the IIA’s prior approval, know-how that has been funded by the IIA may be transferred to a
third party. The approval for transferring the know-how outside of Israel, can be generally provided in the following cases: (a) the grant recipient pays to the IIA a portion of the consideration paid for such funded know-how (according to a
certain formulas), (b) the grant recipient receives know-how from a third party in exchange for its funded know-how, or (c) such transfer of funded know-how arises in connection with certain types of cooperation in research and development
activities. No approval is required for the sale or export of any products resulting from such research and development.
The Research Law imposes reporting requirements with respect to certain changes in the ownership of a grant recipient. The law
requires the grant recipient and its controlling shareholders and interested parties to notify the IIA of any change in control of the recipient or a change in the holdings of the means of control of the recipient that results in a non-Israeli
becoming an interested party directly in the recipient and requires the new interested party to undertake to the IIA to comply with the Research Law. In addition, the rules of the IIA may require prior approval of the IIA or additional information
or representations in respect of certain of such events. For this purpose, “control” is defined as the ability to direct the activities of a company other than any ability arising solely from serving as an officer or director of the company. A
person is presumed to have control if such person holds 50% or more of the means of control of a company. “Means of control” refers to voting rights or the right to appoint directors or the chief executive officer. An “interested party” of a
company includes a holder of 5% or more of its outstanding share capital or voting rights, its chief executive officer and directors, someone who has the right to appoint its chief executive officer or at least one director, and a company with
respect to which any of the foregoing interested parties owns 25% or more of the outstanding share capital or voting rights or has the right to appoint 25% or more of the directors. Accordingly, any non-Israeli who acquires 1% or more of our
ordinary shares will be required to notify the IIA that it has become an interested party and to sign an undertaking to comply with the Research Law. Additionally, procedures regulated under the Research Law require the grant recipient to obtain
the approval of the IIA prior to a change in the holdings of the recipient or change in the holdings of the means of control of the recipient if the recipient’s shares are being issued to a non-Israeli person or entity and require the new
non-Israeli party to undertake to the IIA to comply with the Research Law.
In the past, we received funding from the IIA for selected research and development projects. We did not apply for or receive any research and development
grants from the IIA during the three years ended December 31, 2020. See Item 5C. “Operating and Financial Review and Prospects - Research and Development” for additional details on the grants that we have received and our contingent liability to
the IIA.
Taxation of Dividends Paid on Our Ordinary Shares
Taxation of Non-Israeli Shareholders
Under Israeli tax law, a distribution of dividends from income attributable to an Approved Enterprise and Privileged Enterprise will be
subject to tax in Israel at the rate of 15%, which is withheld and paid by the company paying the dividend, if the dividend is distributed during the benefits period or within the following 12 years (but the 12-year limitation does not apply to a
Foreign Investors Company). Any distribution of dividends from income that is not attributable to an Approved Enterprise will be subject to tax in Israel at the rate of 25%, except that dividends distributed to an individual and an entity who is
deemed “a substantial shareholder”, at the time receiving the dividend or on any date in the 12 months preceding such date, which will be subject to tax at the rate of 30%.
If the
Shares are held by a nominee company, the nominee company or the financial institution will withhold at the source a tax of 25% whether the recipient is a substantial shareholder or not. Otherwise, the withholding at the source will be 25% or 30%
in accordance with the above, unless a lower tax rate is provided in a tax treaty between Israel and the shareholder’s country of residence.
Under the U.S.-Israel tax treaty, the maximum tax on dividends paid to a holder of ordinary shares who is a U.S. resident is 25%. Dividends received by a
U.S. company that holds at least 10% of our voting rights will be subject to withholding tax at the rate of 12.5%, provided certain other conditions in the tax treaty are met (or at the tax rate of 15% in respect of dividends paid from income
attributable to our Approved Enterprises and Privileged Enterprises).
Dividends paid out of income attributed to a Preferred Enterprise are generally subject to withholding tax at source at the rate of 20% or such lower rate
as may be provided in an applicable tax treaty.
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Taxation of Israeli Shareholders
Israeli resident individuals are generally subject to Israeli income tax on the receipt of dividends paid on our ordinary shares, other than
bonus shares (share dividends) or stock dividends, at the rate of 25%, or 30% for a shareholder that is considered a material shareholder (within the meaning of the Israeli Income Tax Ordinance) at any time during the 12-month period preceding
such distribution. Dividends paid on our ordinary shares to Israeli companies are exempt from such tax, except for dividends distributed from income derived outside of Israel, which are subject to the 25% tax rate.
As of January 1, 2013, an additional income tax at a rate of 2% is imposed on high earners whose annual income or gain, or the Income Celling, exceeds NIS 811,560. As of January 1, 2018 the rate
was increased to 3% and the Income Celling was dropped to a sum of NIS 640,000.
Dividends paid from income derived from attributable to an Approved Enterprise and Privileged Enterprise are subject to tax, which is
withheld at the source, at the rate of 15% or 20%.
However, if such dividends are paid to an Israeli company, no tax is required to be withheld (although, if such dividends are
subsequently distributed to individuals or a non-Israeli company, withholding tax at a rate of 20% or such lower rate as may be provided in an applicable tax treaty will apply). We cannot assure you that we will designate the profits that are
being distributed in a way that will reduce shareholders’ tax liability to this tax rate.
Taxation of Capital Gains
Taxation of Israeli Shareholders
Israeli law generally imposes a capital gains tax on the sale of any capital assets by residents of Israel, as defined for Israeli tax purposes, and on the
sale of assets located in Israel, including shares in Israeli companies, by both residents and non-residents of Israel, unless a specific exemption is available or unless a tax treaty between Israel and the shareholder’s country of residence
provides otherwise. The law distinguishes between real gain and inflationary surplus. The inflationary surplus is a portion of the total capital gain which is equivalent to the increase of the relevant asset’s purchase price which is attributable
to the increase in the Israeli consumer price index or, in certain circumstances, a foreign currency exchange rate, between the date of purchase and the date of sale. The real gain is the excess of the total capital gain over the inflationary
surplus.
As of January 1, 2006, the tax rate applicable to capital gains derived from the sale of shares, whether listed on a stock market or
not, is 20% for Israeli individuals, unless such shareholder claims a deduction for financing expenses in connection with such shares, in which case the gain will generally be taxed at a rate of 25%. The income tax rate applicable to Real Capital
Gain derived by an Israeli individual from the sale of shares which had been purchased after January 1, 2012, whether listed on a stock exchange or not, is 25%. Additionally, if such shareholder is considered a “material shareholder” at any time
during the 12-month period preceding such sale, i.e., such shareholder holds directly or indirectly, including with others, at least 10% of any means of control in the company, the tax rate shall be 30%. As of January 1, 2013, an additional income
tax at a rate of 2% is imposed on high earners whose Income Celling exceeds NIS 811,560. As of January 1, 2017 the rate was increased to 3% and the Income Celling was dropped to a sum of NIS 640,000.
As of January 1, 2017, an additional tax at a rate of 3% is imposed on high earners whose Income Celling exceed NIS 640,000. Moreover,
capital gains derived by a shareholder who is a dealer or trader in securities, or to whom such income is otherwise taxable as ordinary business income, are taxed in Israel at ordinary income rates (corporate tax rate for corporations and up to 50%
for individuals).
Israeli companies are subject to the corporate tax rate on capital gains derived from the sale of shares, unless such companies were not subject to the
Adjustments Law (or certain regulations) at the time of publication of the aforementioned amendment to the Tax Ordinance that came into effect on January 1, 2014, in which case the applicable tax rate is 26.5% and, commencing January 1, 2016, was
set at 25%. As of January 1, 2017 the corporate tax rate was reduced to 23%. However, during the period of January 1, 2017 until December 31, 2017 the tax rate was 24%. The foregoing tax rates do not apply to shareholders who acquired their
shares prior to an initial public offering (which shares may be subject to a different tax arrangement).
The tax basis of shares acquired prior to January 1, 2003 will be determined in accordance with the average closing share price in the three trading days
preceding January 1, 2003. However, a request may be made to the tax authorities to consider the actual adjusted cost of the shares as the tax basis if it is higher than such average price.
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Taxation of Non-Israeli Shareholders
Capital gains from the sale of our ordinary shares by non-Israeli shareholders are exempt from Israeli capital gains tax on any gains derived from the sale
of shares of Israeli companies publicly traded on a recognized stock exchange or regulated market outside of Israel, provided however that such capital gains are not derived from a permanent establishment or business activity of such shareholders
in Israel, such shareholders are not subject to the Adjustments Law, and such shareholders did not acquire their shares prior to an initial public offering. However, non-Israeli corporations will not be entitled to such exemption if an Israeli
resident (i) has a controlling interest of 25% or more in such non-Israeli corporation, or (ii) is the beneficiary or is entitled to 25% or more of the revenues or profits of such non-Israeli corporation, whether directly or indirectly.
Regardless of whether shareholders may be liable for Israeli income tax on the sale of our Shares, the payment of the consideration
may be subject to withholding of Israeli tax at the source. Accordingly, shareholders may be required to demonstrate that they are exempt from tax on their capital gains in order to avoid withholding at source at the time of sale.
Pursuant to the treaty between the government of the United States of America and the government of Israel with respect to taxes on income, as amended, or
the U.S.-Israel Tax Treaty, the sale, exchange or disposition of ordinary shares by a person who (i) holds the ordinary shares as a capital asset, (ii) qualifies as a resident of the United States within the meaning of the U.S.-Israel Tax Treaty
and (iii) is entitled to claim the benefits afforded to such person by the U.S.-Israel Tax Treaty, or Treaty U.S. Resident, generally, will not be subject to the Israeli capital gains tax. Such exemption will not apply if (i) the Treaty U.S.
Resident holds, directly or indirectly, shares representing 10% or more of our voting power during any part of the 12-month period preceding such sale, exchange or disposition, subject to certain conditions, or (ii) the capital gains from such
sale, exchange or disposition can be allocated to a permanent establishment in Israel. In such case, the sale, exchange or disposition of ordinary shares would be subject to Israeli tax, to the extent applicable; however, under the U.S.-Israel Tax
Treaty, such Treaty U.S. Resident would be permitted to claim a credit for such taxes against the U.S. federal income tax imposed with respect to such sale, exchange or disposition, subject to the limitations in U.S. laws applicable to foreign tax
credits. The U.S.-Israel Tax Treaty does not relate to U.S. state or local taxes.
Israeli Transfer Pricing Regulations
The Income Tax Regulations (Determination of Market Terms), November 2006, promulgated under Section 85A of the Tax Ordinance, generally require that all
cross-border transactions carried out between related parties be conducted on an arm’s length basis and be taxed accordingly.
United States Federal Income Taxation
The following is a general discussion of the material U.S. federal income tax consequences of the acquisition, ownership and
disposition of our Ordinary Shares. This description addresses only the U.S. federal income tax considerations that may be relevant to U.S. Holders (as defined below) who hold our Ordinary Shares as capital assets. This summary is based on the
U.S. Internal Revenue Code of 1986, as amended, (the “Code”) Treasury regulations promulgated thereunder, judicial and administrative interpretations thereof and the U.S.-Israel Tax Treaty (the “Treaty”), all as in effect on the date hereof and
all of which are subject to change either prospectively or retroactively or to differing interpretations. There can be no assurance that the U.S. Internal Revenue Service (“IRS”) will not take a different position concerning the tax consequences
of the acquisition, ownership or disposition of our Ordinary Shares or that such a position would not be sustained. This discussion does not address all tax considerations that may be relevant to a U.S. Holder of Ordinary Shares. In addition,
this description does not account for the specific circumstances of any particular investor, such as:
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broker-dealers;
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financial institutions or financial services entities;
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certain insurance companies;
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investors liable for alternative minimum tax;
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regulated investment companies, real estate investment trusts, or grantor trusts;
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dealers or traders in securities, commodities or currencies;
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tax-exempt organizations;
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retirement plans;
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S corporations:
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pension funds;
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certain former citizens or long-term residents of the United States;
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non-resident aliens of the United States or taxpayers whose functional currency is not the U.S. dollar;
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persons who hold Ordinary Shares through partnerships or other pass-through entities;
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persons who acquire their Ordinary Shares through the exercise or cancellation of employee stock options or otherwise as compensation for services;
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direct, indirect or constructive owners of investors that actually or constructively own at least 10% of the total combined voting power of our shares or at least 10% of our shares by
value; or
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investors holding Ordinary Shares as part of a straddle, appreciated financial position, a hedging transaction or conversion transaction.
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If a partnership or an entity treated as a partnership for U.S. federal income tax purposes owns our Ordinary Shares, the U.S.
federal income tax treatment of a partner in such a partnership will generally depend upon the status of the partner and the activities of the partnership. A partnership that owns our Ordinary Shares and the partners in such partnership should
consult their tax advisors about the U.S. federal income tax consequences of holding and disposing of Ordinary Shares.
This summary does not address the effect of any U.S. federal taxation (such as estate and gift tax) other than U.S. federal income
taxation. In addition, this summary does not include any discussion of state, local or non-U.S. taxation.
For purposes of this summary the term “U.S. Holder” means a person that is eligible for the benefits of the Treaty and is a
beneficial owner of Ordinary Shares who is, for U.S. federal income tax purposes:
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an individual who is a citizen or a resident of the United States;
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a corporation or other entity taxable as a corporation for United States federal income tax purposes, created or organized in or under the laws of the United States or any political
subdivision thereof;
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an estate the income of which is subject to U.S. federal income taxation regardless of its source; or
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a trust if the trust has validly elected to be treated as a U.S. person for U.S. federal income tax purposes or if (1) a court within the United States is able to exercise primary
supervision over the trust’s administration and (2) one or more U.S. persons have the authority to control all of the substantial decisions of the trust.
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Unless otherwise indicated, it is assumed for the purposes of this discussion that the Company is not, and will not become, a
“passive foreign investment company” (“PFIC”) for U.S. federal income tax purposes. See “—
Passive Foreign Investment Companies
” below.
Subject to the discussion below under the heading “—Passive Foreign Investment Companies,” the gross amount of any distributions
received with respect to our Ordinary Shares, including the amount of any Israeli taxes withheld therefrom, will constitute dividends for U.S. federal income tax purposes when such distribution is actually or constructively received, to the
extent such distribution is paid out of our current and accumulated earnings and profits, as determined for U.S. federal income tax purposes. Because we do not expect to maintain calculations of our earnings and profits under U.S. federal income
tax principles, you should expect that the entire amount of any distribution will be taxable to you as dividend income. Dividends are included in gross income at ordinary income rates, unless such dividends constitute “qualified dividend income,”
as set forth in more detail below. Distributions in excess of our current and accumulated earnings and profits would be treated as a non-taxable return of capital to the extent of your adjusted tax basis in our Ordinary Shares and any amount in
excess of your tax basis would be treated as gain from the sale of Ordinary Shares. See “—Sale, Exchange or Other Disposition of Ordinary Shares” below for a discussion of the taxation of capital gains. Our dividends would not qualify for the
dividends-received deduction generally available to corporations under section 243 of the Code.
Dividends that we pay in NIS, including the amount of any Israeli taxes withheld therefrom, will be included in your income in a
U.S. dollar amount calculated by reference to the exchange rate in effect on the day such dividends are received, regardless of whether the payment is in fact converted into U.S. dollars. A U.S. Holder who receives payment in NIS and converts NIS
into U.S. dollars at an exchange rate other than the rate in effect on such day may have a foreign currency exchange gain or loss that would generally be treated as U.S.-source ordinary income or loss. U.S. Holders should consult their own tax
advisors concerning the U.S. tax consequences of acquiring, holding and disposing of NIS.
Subject to complex limitations, some of which vary depending upon the U.S. Holder’s circumstances, any Israeli withholding tax
imposed on dividends paid with respect to our Ordinary Shares, may be a foreign income tax eligible for credit against a U.S. Holder’s U.S. federal income tax liability (or, alternatively, for deduction against income in determining such tax
liability). Israeli taxes withheld in excess of the applicable rate allowed by the Treaty (if any) will not be eligible for credit against a U.S. Holder’s federal income tax liability. The limitation on foreign income taxes eligible for credit is
calculated separately with respect to specific classes of income. Dividends paid with respect to our common stock generally will be treated as foreign-source passive category income or, in the case of certain U.S. Holders, general category income
for U.S. foreign tax credit purposes. Further, there are special rules for computing the foreign tax credit limitation of a taxpayer who receives dividends subject to a reduced tax rate. A U.S. Holder may be denied a foreign tax credit with
respect to Israeli income tax withheld from dividends received on our Ordinary Shares if such U.S. Holder fails to satisfy certain minimum holding period requirements or to the extent such U.S. Holder’s position in Ordinary Shares is hedged. An
election to deduct foreign taxes instead of claiming a foreign tax credit applies to all foreign taxes paid or accrued in the taxable year. The rules relating to the determination of the foreign tax credit are complex. You should consult with
your own tax advisors to determine whether and to what extent you would be entitled to this credit.
Subject to certain limitations (including the PFIC rules discussed below), “qualified dividend income” received by a non-corporate
U.S. Holder may be subject to tax at the lower long-term capital gain rates (currently, a maximum rate of 20%). Distributions taxable as dividends paid on our Ordinary Shares should qualify for a reduced rate if we are a “qualified foreign
corporation,” as defined in Code section 1(h)(11)(C). We will be a qualified foreign corporation if either: (i) we are entitled to benefits under the Treaty or (ii) our Ordinary Shares are readily tradable on an established securities market in
the United States and certain other requirements are met. We believe that we are entitled to benefits under the Treaty and that our Ordinary Shares currently are readily tradable on an established securities market in the United States. However,
no assurance can be given that our Ordinary Shares will remain readily tradable. The rate reduction does not apply unless certain holding period requirements are satisfied, nor does it apply to dividends received from a PFIC (see discussion
below), in respect of certain risk-reduction transactions, or in certain other situations. U.S. Holders of our Ordinary Shares should consult their own tax advisors regarding the effect of these rules in their particular circumstances.
Sale, Exchange or Other Disposition of Ordinary Shares
Subject to the discussion of the PFIC rules below, if you sell or otherwise dispose of our Ordinary Shares (other than with respect
to certain non-recognition transactions), you will generally recognize gain or loss for U.S. federal income tax purposes in an amount equal to the difference between the amount realized on the sale or other disposition and your adjusted tax basis
in our Ordinary Shares, in each case determined in U.S. dollars. Such gain or loss will generally be capital gain or loss and will be long-term capital gain or loss if you have held the Ordinary Shares for more than one year at the time of the
sale or other disposition. Long-term capital gain realized by a non-corporate U.S. Holder is generally eligible for a preferential tax rate (currently at a maximum of 20%). In general, any gain that you recognize on the sale or other disposition
of Ordinary Shares will be U.S.-source for purposes of the foreign tax credit limitation; losses will generally be allocated against U.S. source income. Deduction of capital losses is subject to certain limitations under the Code.
65
In the case of a cash basis U.S. Holder who receives NIS in connection with the sale or disposition of our Ordinary Shares, the
amount realized will be based on the U.S. dollar value of the NIS received with respect to the Ordinary Shares as determined on the settlement date of such exchange. A cash basis U.S. Holder who receives payment in NIS and converts NIS into U.S.
dollars at a conversion rate other than the rate in effect on the settlement date may have a foreign currency exchange gain or loss, based on any appreciation or depreciation in the value of NIS against the U.S. dollar, which would be treated as
ordinary income or loss.
An accrual basis U.S. Holder may elect the same treatment of currency exchange gain or loss required of cash basis taxpayers with
respect to a sale or disposition of our Ordinary Shares that are traded on an established securities market, provided that the election is applied consistently from year to year. Such election may not be changed without the consent of the IRS. In
the event that an accrual basis U.S. Holder does not elect to be treated as a cash basis taxpayer (pursuant to the Treasury regulations applicable to foreign currency transactions), such U.S. Holder is required to calculate the value of the
proceeds as of the “trade date” and may have a foreign currency gain or loss for U.S. federal income tax purposes in the event of any difference between the U.S. dollar value of NIS prevailing on the trade date and on the settlement date. Any
such currency gain or loss generally would be treated as U.S.- source ordinary income or loss and would be subject to tax in addition to the gain or loss, if any, recognized by such U.S. Holder on the sale or disposition of such Ordinary Shares.
Passive Foreign Investment Company Considerations
Based on the composition of our income, assets (including the value of our goodwill, going-concern value or any other unbooked
intangibles, which may be determined based on the price of the ordinary shares), and operations, we believe we will not be classified as a “passive foreign investment company”, or PFIC, for the 2020 taxable year. However, because PFIC status is
based on our income, assets and activities for the entire taxable year, it is not possible to determine whether we will be characterized as a PFIC for our current taxable year or future taxable years until after the close of the applicable
taxable year. Moreover, we must determine our PFIC status annually based on tests that are factual in nature, and our status in the current year and future years will depend on our income, assets and activities in each of those years and, as a
result, cannot be predicted with certainty as of the date hereof.
If we were a PFIC for any taxable year during which a U.S. Holder owned Ordinary Shares, certain adverse consequences could apply to
the U.S. Holder. Specifically, unless a U.S. Holder makes one of the elections mentioned below, gain recognized by the U.S. Holder on a sale or other disposition of Ordinary Shares would be allocated ratably over the U.S. Holder’s holding period
for the Ordinary Shares. The amounts allocated to the taxable year of the sale or other disposition and to any year before we became a PFIC would be taxed as ordinary income. The amount allocated to each other taxable year would be subject to tax
at the highest rate in effect for individuals or corporations, as appropriate, for that taxable year, and an interest charge would be imposed on the resulting tax liability. Further, any distribution in excess of 125% of the average of the annual
distributions received by the U.S. Holder on our Ordinary Shares during the preceding three years or the U.S. Holder’s holding period, whichever is shorter, would be subject to taxation as described immediately above. In addition, if we were a
PFIC for a taxable year in which we pay a dividend or the immediately preceding taxable year, the preferential dividend rates discussed above with respect to dividends paid to certain non-corporate U.S. Holders would not apply. If we were a PFIC
for any taxable year in which a U.S. Holder owned our shares, the U.S. Holder would generally be required to file annual returns with the IRS on IRS Form 8621.
If we are treated as a PFIC with respect to you for any taxable year, you will be deemed to own shares in any entities in which we
own equity that are also PFICs (“lower tier PFICs”), and you may be subject to the tax consequences described above with respect to the shares of such lower tier PFIC you would be deemed to own.
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Mark-to-market elections
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If we are a PFIC for any taxable year during which you hold ordinary shares, then instead of being subject to the tax and interest
charge rules discussed above, you may make an election to include gain on the ordinary shares as ordinary income under a mark-to-market method, provided that such ordinary shares are “marketable.” The ordinary shares will be marketable if they
are “regularly traded” on a qualified exchange or other market, as defined in applicable U.S. Treasury regulations, such as the New York Stock Exchange (or on a foreign stock exchange that meets certain conditions). For these purposes, the
ordinary shares will be considered regularly traded during any calendar year during which they are traded, other than in de minimis quantities, on at least 15 days during each calendar quarter. Any trades that have as their principal purpose
meeting this requirement will be disregarded. However, because a mark-to-market election cannot be made for any lower tier PFICs that we may own, you will generally continue to be subject to the PFIC rules discussed above with respect to your
indirect interest in any investments we own that are treated as an equity interest in a PFIC for U.S. federal income tax purposes. As a result, it is possible that any mark-to-market election with respect to the ordinary shares will be of limited
benefit.
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If you make an effective mark-to-market election, in each year that we are a PFIC, you will include in ordinary income the excess of
the fair market value of your ordinary shares at the end of the year over your adjusted tax basis in the ordinary shares. You will be entitled to deduct as an ordinary loss in each such year the excess of your adjusted tax basis in the ordinary
shares over their fair market value at the end of the year, but only to the extent of the net amount previously included in income as a result of the mark-to-market election. If you make an effective mark-to-market election, in each year that we
are a PFIC, any gain that you recognize upon the sale or other disposition of your ordinary shares will be treated as ordinary income and any loss will be treated as ordinary loss, but only to the extent of the net amount of previously included
income as a result of the mark-to-market election.
Your adjusted tax basis in the ordinary shares will be increased by the amount of any income inclusion and decreased by the amount
of any deductions under the mark-to-market rules discussed above. If you make an effective mark-to-market election, it will be effective for the taxable year for which the election is made and all subsequent taxable years unless the ordinary
shares are no longer regularly traded on a qualified exchange or the IRS consents to the revocation of the election. You should consult your tax advisor about the availability of the mark-to-market election, and whether making the election would
be advisable in your particular circumstances.
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ii.
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Qualified electing fund elections
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In certain circumstances, a U.S. equity holder in a PFIC may avoid the adverse tax and interest charge regime described above by
making a “qualified electing fund” election to include in income its share of the corporation’s income on a current basis. However, you may make a qualified electing fund election with respect to the ordinary shares only if we agree to furnish
you annually with a PFIC annual information statement as specified in the applicable U.S. Treasury regulations. We do not intend to provide the information necessary for you to make a qualified electing fund election if we are classified as a
PFIC. Therefore, you should assume that you will not receive such information from us and would therefore be unable to make a qualified electing fund election with respect to any of our ordinary shares were we to be or become a PFIC.
Additional Tax on Investment Income
In addition to the income taxes described above, U.S. Holders that are individuals, estates or trusts and whose income exceeds
certain thresholds may be subject to a 3.8% Medicare contribution tax on net investment income, which includes dividends and capital gains from the sale or exchange of our Ordinary Shares.
Backup Withholding and Information Reporting
Payments in respect of our Ordinary Shares may be subject to information reporting to the IRS and to U.S. backup withholding tax at
the rate (currently) of 24%. Backup withholding will not apply, however, if you (i) fall within certain exempt categories and demonstrate the fact when required or (ii) furnish a correct taxpayer identification number and make any other required
certification.
Backup withholding is not an additional tax. Amounts withheld under the backup withholding rules may be credited against a U.S.
Holder’s U.S. tax liability. A U.S. Holder may obtain a refund of any excess amounts withheld under the backup withholding rules by filing the appropriate claim for refund with the IRS.
U.S. citizens and individuals taxable as resident aliens of the United States that (i) own “specified foreign financial assets” (as
defined in Section 6038D of the Code and the regulations thereunder) with an aggregate value in a taxable year in excess of certain thresholds (as determined under rules in Treasury regulations) and (ii) are required to file U.S. federal income
tax returns generally will be required to file an information report with respect to those assets with their tax returns. IRS Form 8938 has been issued for that purpose. “Specified foreign financial assets” include any financial accounts
maintained by foreign financial institutions, foreign stocks held directly, and interests in foreign estates, foreign pension plans or foreign deferred compensation plans. Under those rules, our Ordinary Shares, whether owned directly or through
a financial institution, estate or pension or deferred compensation plan, would be “specified foreign financial assets.” Under Treasury regulations, the reporting obligation applies to certain U.S. entities that hold, directly or indirectly,
specified foreign financial assets. Penalties can apply if there is a failure to satisfy this reporting obligation. In addition, in the event a U.S. Holder that is required to file IRS Form 8938 does not file such form, the statute of limitations
on the assessment and collection of U.S. federal income taxes of such U.S. Holder for the related tax year may not close until three years after the date that the required information is filed. A U.S. Holder is urged to consult the U.S. Holder’s
tax advisor regarding the reporting obligation.
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Any U.S. Holder who acquires more than $100,000 of our Ordinary Shares or holds 10% or more of our Ordinary Shares by vote or value
may be subject to certain additional U.S. information reporting requirements.
The above description is not intended to constitute a complete analysis of all tax consequences relating to acquisition,
ownership and disposition of our Ordinary Shares. You should consult your tax advisor concerning the tax consequences of your particular situation.
F.
Dividend and Paying Agents
Not applicable.
G.
Statement by Experts
Not applicable.
H.
Documents on Display
We are subject to certain of the reporting requirements of the Exchange Act, as applicable to “foreign private issuers” as defined in Rule 3b-4 under the
Exchange Act. As a foreign private issuer, we are exempt from certain provisions of the Exchange Act. Accordingly, our proxy solicitations are not subject to the disclosure and procedural requirements of Regulation 14A under the Exchange Act, and
transactions in our equity securities by our officers and directors are exempt from reporting and the “short-swing” profit recovery provisions contained in Section 16 of the Exchange Act. In addition, we are not required under the Exchange Act to
file periodic reports and financial statements as frequently or as promptly as U.S. companies whose securities are registered under the Exchange Act. However, we file with the SEC an annual report on Form 20-F containing financial statements
audited by an independent accounting firm. We also submit to the SEC reports on Form 6-K containing (among other things) press releases and unaudited financial information. We post our annual report on Form 20-F on our website (
www.mtsint.com
)
promptly following the filing of our annual report with the SEC. The information on our website is not incorporated by reference into this annual report.
The SEC maintains an Internet website that contains reports and other information about issuers, like us, that file electronically with the SEC. The
address of that website is
www.sec.gov
. We make our reports available on our internet website, free of charge, as soon as reasonably practicable after such material is electronically filed with the SEC. The
documents concerning our company that are referred to in this annual report may also be inspected at our offices located at 15 Hatidhar Street, Ra’anana 4366517, Israel.
I.
Subsidiary Information
Not applicable.
| ITEM 11. |
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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Exposure to Market Risks
We may be exposed to a variety of risks, including changes in interest rates affecting primarily interest received on short-term deposits and foreign
currency fluctuations. In 2020, our principal market risk was our exposure to currency exchange fluctuations. We attempt to limit our exposure to currency exchange rate risk by using various hedging techniques, including forward and option
contracts. However, we cannot eliminate the effects of currency fluctuations altogether. Exchange rate fluctuations resulting in a devaluation of the U.S. dollar compared to the NIS could have a material adverse impact on our operating results
and share price.
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Foreign Currency Exchange Risk
We carry out transactions involving foreign currency exchange derivative financial instruments. The transactions are designed to hedge our exposure in NIS
against the U.S. dollar. We recognize derivative instruments as either assets or liabilities and measure those instruments at fair value in accordance with FASB ASC 815. If a derivative meets the definition of a cash flow hedge and is so
designated, changes in the fair value of the derivative are recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative designated as a hedge is recognized in earnings. If a
derivative does not meet the definition of a hedge, the changes in the fair value are included in earnings. Our call and put option contracts do not qualify as hedging instruments under ASC 815 “Derivatives and Hedging,” as amended.
As of December 31, 2020, we had $0 of outstanding call and put option contracts. Our accumulated other comprehensive income as of such date does not
include any unrealized gain on the call and put option contracts. In 2020, we entered into forward, call and put option contracts, in the amount of $1.2 million that converted a portion of our floating currency liabilities to a fixed rate basis,
thus reducing the impact of the currency changes on our cash flows. The purpose of our foreign currency hedging activities is to protect the Company from risk that the eventual dollar cash flows from international activities will be adversely
affected by changes in the exchange rates. Changes in the fair value of put option contracts are reflected in our consolidated statements of operations as financial income or expense. In 2020, we recorded financial income of approximately $4,000
with respect to the above transactions in our consolidated statements of operations.
We have operations in several countries in connection with the sale of our products. A substantial portion of our sales and expenditures are denominated
in dollars. We have mitigated, and expect to continue to mitigate, a portion of our foreign currency exposure through salaries, marketing and support operations in which all costs are local currency based. As a result, our results of operations
and cash flows can be affected by fluctuations in foreign currency exchange rates (primarily the Euro and NIS). A hypothetical 10% movement in foreign currency rates (primarily the Euro and NIS) against the dollar, with all other variables held
constant on the expected sales, would result in a decrease or increase in 2020 sales revenues of approximately $57,000 and on the other hand a decrease or increase in 2020 expenses of approximately $59,000.
| ITEM 12. |
DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
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Not applicable.
| ITEM 13. |
DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
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None.
| ITEM 14. |
MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
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Not applicable.
| ITEM 15. |
CONTROLS AND PROCEDURES
|
Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in its Exchange Act reports is
recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our chief executive officer and chief financial officer to allow timely
decisions regarding required disclosure. Our management, including our chief executive officer and chief financial officer, conducted an evaluation of our disclosure controls and procedures, as defined under Exchange Act Rule 13a-15(e), as of the
end of the period covered by this Annual Report on Form 20-F. Based upon that evaluation, our chief executive officer and chief financial officer have concluded that, as of such date, our disclosure controls and procedures were effective.
69
Management's Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over our financial reporting. Internal control over financial
reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, the company’s principal executive and principal financial officers and effected by the company’s board of
directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles and includes those policies and procedures that:
|
|
• |
pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transaction and dispositions of the assets of the company;
|
|
|
• |
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and
|
|
|
• |
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.
|
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2020. In making this assessment, our
management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO - 2013 framework) in Internal Control-Integrated Framework. Based on that assessment, our management concluded that as of December
31, 2020, our internal control over financial reporting was effective.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting that occurred during the period covered by this annual report that has materially
affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Our board of directors has determined that Mr. Scott Burell, an independent and outside director, meets the definition of an audit committee financial
expert, as defined by rules of the SEC.
We have adopted a code of ethics that applies to our chief executive officer and all senior financial officers of our company, including the chief
financial officer, chief accounting officer or controller, or persons performing similar functions. Our code of ethics has been filed as an exhibit to this annual report. Written copies are available upon request. If we make any substantive
amendment to the code of ethics or grant any waivers, including any implicit waiver, from a provision of the codes of ethics, we will disclose the nature of such amendment or waiver on our website.
70
Independent Registered Public Accounting Firm Fees
The following table sets forth, for each of the years indicated, the billed fees by our principal independent registered public accounting firm. All of
such fees were pre-approved in advance by our audit committee.
|
Year Ended December 31,
|
||||||||
|
Services Rendered
|
2020
|
2019
|
||||||
|
Audit
(1)
|
$
|
75,000
|
$
|
75,000
|
||||
|
Audit Related
|
$
|
4,500
|
0
|
|||||
|
Tax
|
10,000
|
10,000
|
||||||
______________
|
|
(1) |
Audit fees relate to audit services provided for each of the years shown in the table, including fees associated with the annual audit and reviews of our interim financial results, consultations on various accounting issues and audit
services provided in connection with other statutory or regulatory filings.
|
Pre-Approval Policies and Procedures
Our audit committee has adopted a policy and procedures for the pre-approval of audit and non-audit services rendered by our
independent registered public accountants, Kost Forer Gabbay & Kasierer, a member firm of Ernst & Young Global. Pre-approval of an audit or non-audit service may be given as a general pre-approval, as part of the audit committee’s approval
of the scope of the engagement of our independent auditor, or on an individual basis. Any proposed services exceeding general pre-approved levels also require specific pre-approval by our audit committee. The policy prohibits retention of the
independent public accountants to perform the prohibited non-audit functions defined in Section 201 of the Sarbanes-Oxley Act or the rules of the Securities and Exchange Committee, and also requires the audit committee to consider whether proposed
services are compatible with the independence of the public accountants.
| ITEM 16D. |
EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
|
Not applicable.
| ITEM 16E. |
PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
|
Issuer Purchase of Equity Securities
Neither we nor any affiliated purchaser has purchased any of our ordinary shares during 2020, other than shares purchased in a private
placement.
| ITEM 16F. |
CHANGES IN REGISTRANT’S CERTIFYING ACCOUNTANT
|
None.
| ITEM 16G. |
CORPORATE GOVERNANCE
|
Under NASDAQ Stock Market Rule 5615(a)(3), foreign private issuers, such as our company, are permitted to follow certain home country corporate governance
practices instead of certain provisions of the NASDAQ Stock Market Rules. A foreign private issuer that elects to follow a home country practice instead of any of such NASDAQ rules 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. We have provided NASDAQ with notices of non-compliance with respect to the following NASDAQ rules:
|
|
• |
The requirement to maintain a majority of independent directors, as defined under the NASDAQ Marketplace Rules. Instead, under Israeli law and practice, we are required to appoint at least two outside directors, within the meaning of
the Israeli Companies Law, to our board of directors. In addition, in accordance with the rules of the SEC and NASDAQ, we have the mandated three independent directors, as defined by the rules of the SEC and NASDAQ, on our audit
committee. See Item 6C. “Directors, Senior Management and Employees - Board Practices - Outside and Independent Directors.”
|
71
|
|
• |
The requirements regarding the directors’ nominations process. Instead, we follow Israeli law and practice in accordance with which our directors are recommended by our board of directors for election by our shareholders. See Item 6C.
“Directors, Senior Management and Employees - Board Practices - Election of Directors.
|
|
|
• |
The requirement to obtain shareholder approval 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. Under Israeli law and practice, the approval of the board of directors is required for the
establishment or amendment of equity based compensation plans and private placements. Under Israeli regulations, Israeli companies whose shares have been publicly offered only outside of Israel or are listed for trade only on an exchange
outside of Israel, such as our company, are exempt from the Israeli law requirement to obtain shareholder approval for private placements of a 20% or more interest in the company. For the approvals and procedures required under Israeli law
and practice for an issuance that will result in a change of control of the company and acquisitions of the stock or assets of another company, see Item 6C. “Directors, Senior Management and Employee - Board Practices - Approval of Related
Party Transactions Under Israeli Law-Disclosure of Personal Interests of a Controlling Shareholder; Approval of Transactions with Controlling Shareholders” and Exhibit 2,2 to this Form 20-F.
|
Not applicable.
No applicable.
|
Consolidated Financial Statements
|
|
|
|
|
|
F-1
|
|
|
|
|
|
F-2 - F-3
|
|
|
|
|
|
F-4 - F-5
|
|
|
|
|
|
F-6
|
|
|
|
|
|
F-7 - F-8
|
|
|
|
|
|
F-9 - F-10
|
|
|
|
|
|
F-11 - F-30
|
72
|
|
Exhibit
|
Description |
|
|
1.1 | Memorandum of Association of the Registrant (1) |
|
|
1.2 |
|
|
2.1 |
|
|
2.2 |
|
|
4.1 | 2003 Israeli Share Option Plan (5) |
|
|
4.2 |
|
|
4.3 |
|
|
4.4 |
|
|
4.6 | Directors’ and Officers’ Compensation Policy (9) |
|
|
8.1 | List of Subsidiaries of the Registrant |
|
|
12.1 |
|
|
12.2 |
|
|
13.1 |
|
|
13.2 |
|
|
15.1 |
|
|
101.INS* |
XBRL Instance Document
|
|
|
101.SCH* |
XBRL Taxonomy Extension Schema Document
|
|
|
101.CAL* |
XBRL Taxonomy Calculation Linkbase Document
|
|
|
101.DEF* |
XBRL Taxonomy Extension Definition Linkbase Document
|
|
|
101.LAB* |
XBRL Taxonomy Label Linkbase Document
|
|
|
101.PRE* |
XBRL Taxonomy Presentation Linkbase Document
|
|
|
(1)
|
Filed as Exhibit 1.1 to the Form 20-F for the Year Ended December 31, 2020 and incorporated herein by reference.
|
|
|
(2)
|
Filed as Exhibit 1.2 to the Form 20-F for the Year ended December 31, 2020 and incorporated herein by reference.
|
73
|
|
(3)
|
Filed as Exhibit 2.1 to the Form 20-F for the Year Ended December 31, 2017, and incorporated herein by reference.
|
|
|
(4)
|
Filed as Exhibit 2.2 to the Form 20-F for the Year ended December 31, 2019 and incorporated herein by reference.
|
|
|
(5)
|
Filed as Exhibit B to Item IV of Exhibit 99.1 of the Registrant’s Report on Form 6-K for the month of July 2013 submitted on July 2, 2013, and incorporated herein
by reference.
|
|
|
(6)
|
Filed as Appendix B to Item 1 of the Registrant’s Report on Form 6-K for the month of June 2006 submitted on June 23, 2006, and incorporated herein by reference,
|
|
|
(7)
|
Filed as Exhibit 99.2 to the Registrant’s Report on Form 6-K for the month of September 2018 and submitted on September 7, 2018, and incorporated herein by
reference.
|
|
|
(8)
|
Filed as Exhibit 99.2 to the Registrant’s Report on Form 6-K for the month of April 2021 and submitted on April 15, 2021, and incorporated herein by reference.
|
|
|
(9)
|
Filed as Exhibit A to Exhibit 99.2 the Registrant’s Report on Form 6-K for the month of November 2019 submitted on November 20, 2019, and incorporated herein by reference.
|
____________
|
|
* |
Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not
filed for the purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.
|
74
MER TELEMANAGEMENT SOLUTIONS LTD. AND ITS SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2020
IN U.S. DOLLARS
|
Page
|
|
|
F-2 - F-3
|
|
|
F-4 - F-5
|
|
|
F-6
|
|
|
F-7 - F-8
|
|
|
F-9 - F-10
|
|
|
F-11 - F-30
|
- - - - - - - - - -
F - 1
|
Kost Forer Gabbay & Kasierer
144 Menachem Begin Road, Building A
Tel-Aviv 6492102, Israel
|
Tel: +972-3-6232525
Fax: +972-3-5622555
ey.com
|
To the Board of Directors and Shareholders of
MER TELEMANAGEMENT SOLUTIONS LTD.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Mer Telemanagement Solutions Ltd. ("the Company") and its subsidiaries as of December 31, 2020 and 2019, and the related
consolidated statements of operations, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 2020, and the related notes (collectively referred to as the “consolidated financial
statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2019, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles.
The Company's Ability to Continue as a Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note
1c to the consolidated financial statements, the Company has suffered recurring losses from operations, has a working capital deficiency, and has stated that substantial doubt exists about the Company's ability to continue as a going concern.
Management's evaluation of the events and conditions and management's plans regarding these matters are also described in Note 1c. The consolidated financial statements do not include any adjustments to reflect the possible future effects on
the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial
statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S.
federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.
As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting.
Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and
performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles
used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
F - 2
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or
required to be communicated to the audit committee and that: (1) related to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of
the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit
matter or on the accounts or disclosures to which it relates.
|
Goodwill Impairment Assessment
|
|
|
|
|
|
Description of
the Matter
|
At December 31, 2020, the Company’s goodwill balance was $1,502 thousand. As discussed in Note 2(j) to the consolidated financial statements,
the Company recognized a goodwill impairment charge of $1,723 thousand for the year ended December 31, 2020 as a result of an interim goodwill impairment assessment performed during the third quarter and the annual impairment assessment
performed during the fourth quarter of fiscal 2020. Goodwill is subject to annual testing for impairment each October 1st, or more frequently if events occur or circumstances change that would more likely than not reduce the fair value
of a reporting unit below its carrying value. If the carrying value of the reporting unit, including goodwill exceeds the fair value of the reporting unit an impairment charge is recorded equal to the excess, but not more than the total
amount of goodwill allocated to the reporting unit. Management determines the fair value of the reporting unit using the income approach. The income approach is based on a discounted cash flow model. The discounted cash flow model
requires the exercise of significant judgment, including judgments and assumptions about appropriate discount rates and revenue growth.
Auditing management's interim and annual goodwill impairment test of the reporting unit was complex and highly judgmental due to the
estimation required by management in determining the fair value of the reporting unit. In particular, the fair value estimate was sensitive to significant assumptions, such as management’s cash flow projections, including revenue
growth operation margin, terminal value and the discount rate, which are affected by expectations about future market or economic conditions
|
|
How We
Addressed the
Matter in Our
Audit
|
To test the Company’s assessment of the good will impairment test, our audit procedures included, among others, evaluating the methodology
used and testing the significant assumptions used by the Company in its analysis. We also performed sensitivity analyses of the significant assumptions, assessed the historical accuracy of management’s estimates and projections by
comparing them to actual results and obtaining appropriate explanations for the variances; examined management’s support for the current estimates and projections, by comparing them to industry and economic trends, including market
participant data. We also involved our valuation specialist to assist in the evaluation of the Company’s valuation methods and certain significant assumptions, including the discount rates.
|
|
/s/ Kost Forer Gabbay & Kasierer
|
|
KOST FORER GABBAY & KASIERER
|
|
A Member of Ernst & Young Global
|
|
We have served as the Company's auditor since 1995.
|
|
Tel-Aviv, Israel
|
|
May 14, 2021
|
F - 3
MER TELEMANAGEMENT SOLUTIONS LTD. AND ITS SUBSIDIARIES
U.S. dollars in thousands
|
December 31,
|
||||||||
|
2020
|
2019
|
|||||||
|
ASSETS
|
||||||||
|
CURRENT ASSETS:
|
||||||||
|
Cash and cash equivalents
|
$
|
1,504
|
$
|
1,732
|
||||
|
Restricted cash
|
1,003
|
1,464
|
||||||
|
Trade receivables (net of allowance for credit losses of $69 and $75, at December 31, 2019 and 2020, respectively)
|
407
|
499
|
||||||
|
Other accounts receivable and prepaid expenses (Note 3)
|
399
|
236
|
||||||
|
Assets of discontinued operations (Note 1b)
|
178
|
172
|
||||||
|
Total
current assets
|
3,491
|
4,103
|
||||||
|
NON- CURRENT ASSETS:
|
||||||||
|
Severance pay fund
|
252
|
653
|
||||||
|
Property and equipment, net (Note 4)
|
35
|
62
|
||||||
|
Deferred taxes (Note 7)
|
171
|
-
|
||||||
|
Goodwill
|
1,502
|
3,225
|
||||||
|
Total
non-current assets
|
1,960
|
3,940
|
||||||
|
Total
assets
|
$
|
5,451
|
$
|
8,043
|
||||
The accompanying notes are an integral part of the consolidated financial statements.
F - 4
MER TELEMANAGEMENT SOLUTIONS LTD. AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
U.S. dollars in thousands
|
December 31,
|
||||||||
|
2020
|
2019
|
|||||||
|
LIABILITIES AND SHAREHOLDERS' EQUITY
|
||||||||
|
CURRENT LIABILITIES:
|
||||||||
|
Trade payables
|
$
|
114
|
$
|
149
|
||||
|
Deferred revenues
|
745
|
962
|
||||||
|
Accrued expenses and other liabilities (Note 5)
|
1,769
|
2,317
|
||||||
|
Liabilities of discontinued operations (Note 1b)
|
496
|
516
|
||||||
|
Total
current liabilities
|
3,124
|
3,944
|
||||||
|
LONG-TERM LIABILITIES:
|
||||||||
|
Accrued severance pay
|
306
|
831
|
||||||
|
Deferred tax liability (Note 7)
|
-
|
163
|
||||||
|
Total
long-term liabilities
|
306
|
994
|
||||||
|
COMMITMENTS AND CONTINGENT LIABILITIES (Note 6)
|
||||||||
|
SHAREHOLDERS' EQUITY (Note 9):
|
||||||||
|
Share capital -
|
||||||||
|
Ordinary shares of NIS 0.03 par value: Authorized: 17,000,000 shares at December 31, 2020 and 2019; Issued: 4,426,791 and 3,614,208 shares at
December 31, 2020 and 2019, respectively; Outstanding: 4,424,991 and 3,612,408 shares at December 31, 2020 and 2019, respectively
|
37
|
30
|
||||||
|
Preferred Shares of NIS 0.03 par value: Authorized: 3,000,000 shares at December 31, 2020 and 2019; Issued and Outstanding: 1,831,579 and
2,008,772 shares at December 31, 2020 and 2019, respectively
|
15
|
16
|
||||||
|
Additional paid-in capital
|
31,360
|
30,635
|
||||||
|
Treasury shares at cost (1,800 Ordinary shares at December 31, 2020 and 2019)
|
(29
|
)
|
(29
|
)
|
||||
|
Accumulated deficit
|
(29,362
|
)
|
(27,547
|
)
|
||||
|
Total
shareholders' equity
|
2,021
|
3,105
|
||||||
|
Total
liabilities and shareholders' equity
|
$
|
5,451
|
$
|
8,043
|
||||
The accompanying notes are an integral part of the consolidated financial statements.
|
May 14, 2021
|
/s/ Chaim Mer | /s/ Roy Hess | /s/ Ofira Bar | |||
|
Date of approval of the
|
Chaim Mer
|
Roy Hess
|
Ofira Bar
|
|||
|
financial statements
|
Chairman of the board
|
Chief Executive Officer
|
Chief Financial Officer and Interim
|
F - 5
CONSOLIDATED STATEMENTS OF OPERATIONS
U.S. dollars in thousands
|
Year ended December 31,
|
||||||||||||
|
2020
|
2019
|
2018
|
||||||||||
|
Revenues
|
||||||||||||
|
Telecom services
|
$
|
3,383
|
$
|
4,273
|
$
|
4,843
|
||||||
|
Telecom product sales
|
635
|
920
|
1,018
|
|||||||||
|
Total
revenues
|
4,018
|
5,193
|
5,861
|
|||||||||
|
Cost of revenues
|
||||||||||||
|
Telecom services
|
1,511
|
1,486
|
1,719
|
|||||||||
|
Telecom product sales
|
284
|
371
|
430
|
|||||||||
|
Total
cost of revenues
|
1,795
|
1,857
|
2,149
|
|||||||||
|
Gross profit
|
2,223
|
3,336
|
3,712
|
|||||||||
|
Operating expenses
|
||||||||||||
|
Research and development
|
-
|
545
|
825
|
|||||||||
|
Selling and marketing
|
752
|
817
|
1,471
|
|||||||||
|
General and administrative
|
1,867
|
1,890
|
2,239
|
|||||||||
|
Goodwill impairment
|
1,723
|
254
|
-
|
|||||||||
|
Total
operating expenses
|
4,342
|
3,506
|
4,535
|
|||||||||
|
Operating loss
|
(2,119
|
)
|
(170
|
)
|
(823
|
)
|
||||||
|
Financial income (expense), net
|
16
|
(18
|
)
|
(17
|
)
|
|||||||
|
Loss before taxes on income
|
(2,103
|
)
|
(188
|
)
|
(840
|
)
|
||||||
|
Taxes on income (tax benefit), net (Note 7)
|
(325
|
)
|
4
|
46
|
||||||||
|
Net loss from continuing operations
|
(1,778
|
)
|
(192
|
)
|
(886
|
)
|
||||||
|
Income (loss) from discontinued operations
|
(37
|
)
|
57
|
(284
|
)
|
|||||||
|
Net loss
|
$
|
(1,815
|
)
|
$
|
(135
|
)
|
$
|
(1,170
|
)
|
|||
|
Net loss per share:
|
||||||||||||
|
Basic and diluted net loss per share from continuing operations
|
$
|
(0.29
|
)
|
$
|
(0.04
|
)
|
$
|
(0.26
|
)
|
|||
|
Basic and diluted net earnings per share from discontinued operations
|
(0.01
|
)
|
0.01
|
(0.08
|
)
|
|||||||
|
Basic and diluted net loss per share
|
$
|
(0.30
|
)
|
$
|
(0.03
|
)
|
$
|
(0.34
|
)
|
|||
|
Weighted average number of shares used in computing basic and diluted net loss per share
|
5,954,795
|
5,013,374
|
3,435,161
|
|||||||||
The accompanying notes are an integral part of the consolidated financial statements.
F - 6
MER TELEMANAGEMENT SOLUTIONS LTD. AND ITS SUBSIDIARIES
U.S. dollars in thousands (except stock and per stock data)
|
Share capital
|
Preferred shares
|
Additional
|
Treasury |
Accumulated
|
||||||||||||||||||||||||||||
|
Number *
|
Amount
|
Number
|
Amount
|
paid-in capital
|
shares
|
deficit
|
Total
|
|||||||||||||||||||||||||
|
Balance as of January 1, 2018
|
3,118,884
|
25
|
-
|
-
|
28,188
|
(29
|
)
|
(26,472
|
)
|
1,712
|
||||||||||||||||||||||
|
Stock-based compensation
|
-
|
-
|
-
|
90
|
-
|
-
|
90
|
|||||||||||||||||||||||||
|
Issuance of ordinary shares
|
175,439
|
2
|
-
|
-
|
186
|
-
|
-
|
188
|
||||||||||||||||||||||||
|
Issuance of preferred shares
|
1,315,789
|
10
|
1,343
|
1,353
|
||||||||||||||||||||||||||||
|
Effect of adoption of ASC 606
|
-
|
-
|
-
|
-
|
-
|
230
|
230
|
|||||||||||||||||||||||||
|
Net loss
|
-
|
-
|
-
|
-
|
-
|
-
|
(1,170
|
)
|
(1,170
|
)
|
||||||||||||||||||||||
|
Balance as of December 31, 2018
|
3,294,323
|
27
|
1,315,789
|
10
|
29,807
|
(29
|
)
|
(27,412
|
)
|
2,403
|
||||||||||||||||||||||
|
Stock-based compensation
|
-
|
-
|
-
|
-
|
47
|
-
|
-
|
47
|
||||||||||||||||||||||||
|
Issuance of ordinary shares to Vexigo's former shareholders-warrants exercise.
|
318,085
|
3
|
-
|
-
|
(3
|
)
|
-
|
-
|
-
|
|||||||||||||||||||||||
|
Issuance of preferred shares
|
-
|
-
|
692,983
|
6
|
784
|
-
|
-
|
790
|
||||||||||||||||||||||||
|
Net loss
|
-
|
-
|
-
|
-
|
-
|
-
|
(135
|
)
|
(135
|
)
|
||||||||||||||||||||||
|
Balance as of December 31, 2019
|
3,612,408
|
30
|
2,008,772
|
16
|
30,635
|
(29
|
)
|
(27,547
|
)
|
3,105
|
||||||||||||||||||||||
*) Historical stock information was adjusted to retroactively reflect the one for three Ordinary share reverse split implemented in September 2017.
F - 7
MER TELEMANAGEMENT SOLUTIONS LTD. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
U.S. dollars in thousands (except stock and per stock data)
|
Share capital
|
Preferred shares
|
Additional
|
Treasury |
Accumulated
|
||||||||||||||||||||||||||||
|
Number
|
Amount
|
Number
|
Amount
|
paid-in capital
|
shares
|
deficit
|
Total
|
|||||||||||||||||||||||||
|
Balance as of January 1, 2020
|
3,612,408
|
30
|
2,008,772
|
16
|
30,635
|
(29
|
)
|
(27,547
|
)
|
3,105
|
||||||||||||||||||||||
|
Stock-based compensation
|
-
|
-
|
-
|
-
|
21
|
-
|
-
|
21
|
||||||||||||||||||||||||
|
Conversion of preferred shares into ordinary shares
|
800,000
|
6
|
(800,000
|
)
|
(6
|
)
|
-
|
|||||||||||||||||||||||||
|
Issuance of ordinary shares to Vexigo’s former shareholders- warrants exercise
|
12,583
|
1
|
-
|
(1
|
)
|
-
|
-
|
0
|
||||||||||||||||||||||||
|
Issuance of preferred shares
|
-
|
-
|
622,807
|
5
|
705
|
-
|
-
|
710
|
||||||||||||||||||||||||
|
Net loss
|
-
|
-
|
-
|
-
|
-
|
-
|
(1,815
|
)
|
(1,815
|
)
|
||||||||||||||||||||||
|
Balance as of December 31, 2020
|
4,424,991
|
37
|
1,831,579
|
15
|
31,360
|
(29
|
)
|
(29,362
|
)
|
2,021
|
||||||||||||||||||||||
The accompanying notes are an integral
part of the consolidated financial statements
.
F - 8
MER TELEMANAGEMENT SOLUTIONS LTD. AND ITS SUBSIDIARIES
U.S. dollars in thousands
|
Year ended December 31,
|
||||||||||||
|
2020
|
2019
|
2018
|
||||||||||
|
Cash flows from operating activities
|
||||||||||||
|
Net loss
|
$
|
(1,815
|
)
|
$
|
(135
|
)
|
$
|
(1,170
|
)
|
|||
|
Income (loss) from discontinued operations
|
(37
|
)
|
57
|
(284
|
)
|
|||||||
|
Net loss from continuing operations
|
(1,778
|
)
|
(192
|
)
|
(886
|
)
|
||||||
|
Adjustments required to reconcile net loss from continuing operations to net cash used in operating activities:
|
||||||||||||
|
Depreciation and amortization
|
32
|
79
|
82
|
|||||||||
|
Impairment of goodwill
|
1,723
|
254
|
-
|
|||||||||
|
Increase (decrease) in deferred tax, net
|
(334
|
)
|
(18
|
)
|
35
|
|||||||
|
Stock-based compensation
|
21
|
47
|
90
|
|||||||||
|
Decrease in accrued severance pay, net
|
(124
|
)
|
(3
|
)
|
(36
|
)
|
||||||
|
Decrease (increase) in trade receivables, net
|
92
|
105
|
(40
|
)
|
||||||||
|
Increase in other accounts receivable and prepaid expenses
|
(163
|
)
|
(135
|
)
|
(27
|
)
|
||||||
|
Decrease in trade payables
|
(35
|
)
|
(15
|
)
|
(144
|
)
|
||||||
|
Increase (decrease) in accrued expenses and other liabilities
|
(548
|
)
|
(77
|
)
|
111
|
|||||||
|
Decrease in deferred revenues
|
(217
|
)
|
(91
|
)
|
(461
|
)
|
||||||
|
Net cash used in operating activities from continuing operations
|
(1,331
|
)
|
(46
|
)
|
(1,276
|
)
|
||||||
|
Net cash provided by (used in) operating activities from discontinued operations
|
(63
|
)
|
(18
|
)
|
57
|
|||||||
|
Net cash used in operating activity
|
(1,394
|
)
|
(64
|
)
|
(1,219
|
)
|
||||||
|
Cash flows from investing activities
|
||||||||||||
|
Purchase of property and equipment
|
(5
|
)
|
(60
|
)
|
(14
|
)
|
||||||
|
Net cash used in investing activities from continuing operations
|
(5
|
)
|
(60
|
)
|
(14
|
)
|
||||||
|
Net cash used in investing activities from discontinued operations
|
-
|
-
|
(1
|
)
|
||||||||
|
(5
|
)
|
(60
|
)
|
(15
|
)
|
|||||||
F - 9
MER TELEMANAGEMENT SOLUTIONS LTD. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
U.S. dollars in thousands
|
Year ended December 31,
|
||||||||||||
|
2020
|
2019
|
2018
|
||||||||||
|
Cash flows from financing activities
|
||||||||||||
|
Proceeds from issuance of shares
|
710
|
790
|
1,541
|
|||||||||
|
Net cash provided by financing activities from continuing operations
|
710
|
790
|
1,541
|
|||||||||
|
Increase (decrease) in cash, cash equivalents and restricted cash
|
(689
|
)
|
666
|
307
|
||||||||
|
Cash, cash equivalents and restricted cash at the beginning of the year
|
3,196
|
2,530
|
2,223
|
|||||||||
|
Cash, cash equivalents and restricted cash at the end of the year
|
$
|
2, 507
|
$
|
3,196
|
$
|
2,530
|
||||||
|
Supplemental disclosure of cash flows activities
|
||||||||||||
|
Cash paid during the year for income taxes
|
$
|
4
|
$
|
1
|
$
|
1
|
||||||
The accompanying notes are an integral part of the consolidated financial statements.
F - 10
MER TELEMANAGEMENT SOLUTIONS LTD. AND ITS SUBSIDIARIES
U.S. dollars in thousands (except share and per share data)
NOTE 1:
GENERAL
|
|
a. |
Mer Telemanagement Solutions Ltd. (the "Company" or "MTS") was incorporated on December 27, 1995. MTS and its subsidiaries (the "Group") is a worldwide provider of telecom expense management (“TEM”), billing solutions and contact
center software.
|
The Company's wholly-owned subsidiaries in the United States and Hong Kong, MTS IntegraTRAK Inc. and MTS Asia Ltd., act as marketing and customer
service organizations in those countries.
The Company's shares are listed for trade on the NASDAQ Capital Market under the symbol "MTSL".
In April 2015, the Company acquired 100% of the outstanding shares of Vexigo, a privately-held Israeli-based software company supporting video
advertising over the internet and mobile devices.
During 2018, Vexigo sold its operation to an unaffiliated third party. The consideration for the sale was $250 receivable in three (3) installments,
which were fully paid during 2018 and 2019.
On September 6, 2018, the Company entered into a Securities Purchase Agreement (the "Alpha Capital SPA") with Alpha Capital Anstalt, an institutional
investor, for the investment of $1,353 in a newly-created class of convertible preferred shares, and $188 in ordinary shares of the Company. The closing date of the Alpha Capital SPA was on October 31, 2018.
The Alpha Capital SPA includes a greenshoe option for a future investment by Alpha Capital of up to $1.5 million in the newly created preferred shares
at the same price per preferred share paid in the initial investment during a period of 18 months following the closing date of the Alpha Capital SPA. In December 2019 and April 2020, the Company and its Board members approved an extension of
Alpha’s remaining portion of the greenshoe option by six months until April 30, 2020 and by an additional three-month period until July 31, 2020, respectively. During 2020 and 2019 Alpha Capital fully exercised its greenshoe option and
purchased an aggregated number of 1,315,789 convertible preferred shares in consideration of $1,500,000
|
|
b. |
Discontinued operations:
|
|
|
1. |
In March 2009, the Company discontinued the operations of TABS Brazil Ltda. its wholly owned subsidiary in Brazil.
|
|
|
2. |
In June 2018, the Company discontinued the operations of Vexigo ltd. a wholly owned subsidiary in Israel, which was then sold to a third party.
|
The results of the discontinued operations including prior periods' comparable results, assets and liabilities which have been retroactively included
in discontinued operations as separate line items in the statements of income and balance sheets are presented below.
F - 11
MER TELEMANAGEMENT SOLUTIONS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 1:
GENERAL (Cont.)
The summarized results of operations for Vexigo and TABS Brazil Ltd for the years ended December 31, 2018, 2019 and 2020, are as follows:
|
Year ended December 31,
|
||||||||||||
|
2020
|
2019
|
*)2018
|
|
|||||||||
|
Revenue
|
$
|
-
|
$
|
301
|
$
|
794
|
||||||
|
Cost of revenues
|
-
|
255
|
1,034
|
|||||||||
|
Gross profit (loss)
|
-
|
46
|
(240
|
)
|
||||||||
|
Operating expenses (income)
|
(58
|
)
|
(9
|
)
|
310
|
|||||||
|
Operating loss (income)
|
(58
|
)
|
(55
|
)
|
550
|
|||||||
|
Financial income, net
|
21
|
2
|
16
|
|||||||||
|
Gain on disposal of the discontinued operations
|
-
|
-
|
250
|
|||||||||
|
Total net loss (income) from discontinued operations
|
$
|
(37
|
)
|
$
|
(57
|
)
|
$
|
284
|
||||
*) Represent the results of the discontinued operations until their disposal.
The major classes of assets and liabilities that were classified as discontinued operations were:
|
December 31,
|
||||||||
|
2020
|
2019
|
|||||||
|
Cash and cash equivalents
|
$
|
176
|
$
|
170
|
||||
|
Property and equipment, net
|
2
|
2
|
||||||
|
Total assets of discontinued operations
|
178
|
172
|
||||||
|
Trade payables
|
334
|
337
|
||||||
|
Accrued expenses and other liabilities
|
162
|
179
|
||||||
|
Total liabilities of discontinued operations
|
$
|
496
|
$
|
516
|
||||
|
|
c. |
The Company has historically suffered recurring losses from its operating activities.
|
The Company incurred losses for the years ended December 31, 2019 and 2020, amounting to $ 135 and $ 1,815 and has accumulated deficit of $ 29,362 as of December 31, 2020.
In addition, the Company incurred negative cash flows from continuing operations of $1,331 for the year ended December 31, 2020.
Those factors raise substantial doubt about the Company's ability to continue as a going concern. The ability to continue as a going concern is
dependent upon the Company obtaining the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they become due.
F - 12
MER TELEMANAGEMENT SOLUTIONS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 1:
GENERAL (Cont.)
The Company intends to finance operating costs over the next twelve months with existing cash on hand after reducing operating spend if needed.
During 2018 - 2020, the Company implemented a substantive cost reduction mainly by employee’s layoff and reduced its lease expenses during the first quarter of 2019 and the second half of 2020. The Company searched for additional sources of
financing and on April 15, 2021, the Company entered into a definitive agreement and Plan of Merger (the “Merger Agreement”) with SharpLink, Inc., a company incorporated under the laws of the State of Minnesota and a leading online technology
company that works with sports leagues, fantasy sports sites and media companies to connect fans to relevant and timely betting content sourced from its sportsbook partners (“SharpLink”), and New SL Acquisition Corp., a company incorporated
under the laws of the State of Delaware and a wholly-owned subsidiary of the Company (“Merger Sub”). The Merger Agreement is subject to the approval of the Company’s shareholders at a meeting of shareholders that is expected to be held in the
second quarter of 2021, along with the satisfaction or waiver of other customary conditions. For additional information, see Note 10.
The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates the
realization of assets and liabilities and commitments in the normal course of business. The consolidated financial statements for the year ended December 31, 2020, do not include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification of liabilities that may result from uncertainty to the Company's ability to continue as a going concern.
NOTE 2:
SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("U.S.
GAAP").
|
|
a. |
Use of estimates
|
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect
the amounts reported in the financial statements and accompanying notes. The Company's management believes that the estimates, judgments and assumptions used are reasonable based upon information available at the time they were made. These
estimates, judgments and assumptions can affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements, and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those estimates.
On an ongoing basis, the Company's management evaluates estimates, including those related to goodwill, tax assets and liabilities, fair values of
stock-based awards, allowance for credit losses. Such estimates are based on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying
values of assets and liabilities.
F - 13
MER TELEMANAGEMENT SOLUTIONS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
| NOTE 2: |
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|
|
|
b. |
Financial statements in United States dollars
|
A majority of the revenues of the Group are denominated in U.S. dollars ("dollar" or "dollars"). The dollar is the primary currency of the economic
environment in which the Group operates. Thus, the functional and reporting currency of the Group is the dollar. Accordingly, monetary accounts maintained in currencies other than the dollar are re-measured into dollars in accordance with
Accounting Standards Codification ("ASC") No. 830, "Foreign Currency Matters". Changes in currency exchange rates between the Company's functional currency and the currency in which a transaction is denominated are included in the Company's
results of operations as finance income (expenses), net in the period in which the currency exchange rates change.
|
|
c. |
Principles of consolidation
|
The consolidated financial statements include the accounts of the Group. Intercompany transactions and balances, including profits from intercompany
sales not yet realized outside the Group, have been eliminated upon consolidation.
|
|
d. |
Cash equivalents
|
Cash equivalents are short-term unrestricted highly liquid investments that are readily convertible to cash with original maturities of three months
or less, at acquisition.
|
|
e. |
Restricted cash
|
Restricted cash is a deposit account which is held by the Company on behalf of Company's customers.
|
|
f. |
Property and equipment, net
|
Property and equipment are measured at cost, including directly attributable costs, less accumulated depreciation and accumulated impairment losses.
Depreciation is calculated on a straight-line basis over the useful life of the assets at annual rates as follows:
|
%
|
|
|
Computers and peripheral equipment
|
33
|
|
Office furniture and equipment
|
3 - 20 (mainly 7)
|
|
Leasehold improvements
|
Over the shorter of the lease term or useful economic life
|
|
|
g. |
Impairment of long-lived assets
|
The Company's long-lived assets (assets group) to be held or used, including property and equipment, and certain identifiable intangibles are reviewed
for impairment in accordance with ASC 360, "Property, Plant and Equipment" ("ASC 360"), whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
F - 14
MER TELEMANAGEMENT SOLUTIONS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 2:
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted cash flows
expected to be generated by the assets. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets.
|
|
h. |
Goodwill
|
Goodwill and other certain purchased intangible assets have been recorded in the Company’s financial statements as a result of acquisitions. 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, "Intangible - Goodwill and Other," ("ASC 350") goodwill is not amortized, but rather is
subject to an annual impairment test.
ASC 350 requires goodwill to be tested for impairment at the reporting unit level at least annually or between annual tests in certain circumstances
and written down when impaired.
Goodwill is tested for impairment by comparing the fair value of the reporting unit with its carrying value.
ASC 350 allows an entity to first assess qualitative factors to determine whether it is necessary to perform the quantitative goodwill impairment
test. If the qualitative assessment does not result in a more likely than not indication of impairment, no further impairment testing is required. If the Company elects not to use this option, or if the Company determines that it is more likely
than not that the fair value of a reporting unit is less than its carrying value, then the Company prepares a quantitative analysis to determine whether the carrying value of a reporting unit exceeds its estimated fair value. If the carrying
value of a reporting unit would exceed its estimated fair value, the Company would have recognizes an impairment of goodwill for the amount of this excess, in accordance with the guidance in FASB Accounting Standards Update (“ASU”) No. 2017-04,
Intangibles - Goodwill and Other (Topic 350), Simplifying the test for Goodwill Impairment, which was adopted as of January 1, 2020.
The Company’s goodwill balance is only assigned to its Enterprise reporting unit. The Company performs an annual impairment test
of its reporting unit as of the 1
st
of October of each year, or more frequently if impairment indicators are present. The Company identified impairment indicators
during the year and performed a goodwill impairment test for the Enterprise reporting unit, using the income approach to value the reporting unit fair value. The impairment test resulted in a goodwill impairment of $617.
In addition, as part of the Company's annual impairment test procedures, it has reassessed the results of the impairment test performed during the
second quarter of 2020 and concluded that an additional impairment is required as of December 31, 2020 at the amount of $1,106.
The material assumptions used for the income approach were five (5) years of projected cash flows and discount rate of 25%.
F - 15
MER TELEMANAGEMENT SOLUTIONS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 2:
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|
|
i. |
Severance pay:
|
Some of the Company's employees in Israel have subscribed to Section 14 of Israel's Severance Pay Law, 5723-1963 ("Section 14"). Pursuant to Section 14, the Company's employees, covered by this section, are entitled only to monthly deposits, at a rate of 8.33% of their monthly salary, made on their behalf by the Company. Payments in accordance with Section 14 release the Company from any future the severance liabilities in respect of those employees. Neither severance pay liability nor severance pay fund under Section 14 for such employees is recorded on the Company's balance sheet.
With regards to employees in Israel that are not subject to Section 14, the Company's liability for severance pay is calculated pursuant to the
Severance Pay Law, based on the most recent salary of the relevant employees multiplied by the number of years of employment as of the balance sheet date. These employees are entitled to one-month salary for each year of employment or a portion
thereof. The Company's liability for these employees is fully provided for via monthly deposits with severance pay funds, insurance policies and an accrual. The value of these deposits is recorded as an asset with other assets on the Company's
balance sheet.
The deposited funds include profits accumulated up to the balance sheet date. The deposited funds may be withdrawn only upon the fulfillment of the
obligation pursuant to the Severance Pay Law or labor agreements.
Severance expense (income) for the years ended December 31, 2020 and 2019 amounted to approximately $(525) and $109 respectively.
|
|
j. |
Revenue recognition:
|
The Company generates revenues mainly from licensing the rights to use its software products and from providing maintenance, hosting and managed
services, support and training. Certain software licenses require significant customization. The Company sells its products directly to end-users and indirectly through resellers and OEMs (who are considered end users).
The Company recognizes revenue under the five-step methodology required under ASC 606, “Revenue from Contracts with Customers”, which requires the
Company 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.
The Company’s 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.
F - 16
MER TELEMANAGEMENT SOLUTIONS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 2:
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
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. The Company allocates the transaction price for
each contract to each performance obligation identified in the contract based on the relative standalone selling price (SSP). The Company determines 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 determines the SSP based on the price at which the Company sells s renewal contract.
|
|
k. |
Research and development expenses:
|
Research and development costs are charged to the consolidated statements of operation, as incurred. Expenditure on research activities, undertaken
with the prospect of gaining new scientific or technical knowledge and understanding, is recognized in the statement of operation when incurred.
|
|
l. |
Income taxes:
|
The Company accounts for income taxes and uncertain tax positions in accordance with ASC Topic No. 740, "Income Taxes" ("ASC 740"). ASC 740 prescribes
the use of the liability method, according to which deferred tax assets and liability account balances are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted
tax rates and laws that will be in effect when the differences are expected to reverse. Valuation allowances are provided to reduce deferred tax assets to the amounts that are more likely-than-not to be realized.
ASC No. 740 contains a two-step approach to recognizing and measuring a liability for uncertain tax positions. The first step is to evaluate the tax
position taken or expected to be taken in a tax return by determining if the weight of available evidence indicates that it is more likely than not that, on an evaluation of the technical merits, the tax position will be sustained on audit,
including resolution of any related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement.
F - 17
MER TELEMANAGEMENT SOLUTIONS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
| NOTE 2: |
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|
|
|
m. |
Accounting for share-based compensation:
|
The Company accounts for stock-based compensation in accordance with ASC 718, "Compensation-Stock Compensation" ("ASC 718"). ASC 718 requires
companies to estimate the fair value of equity-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as an expense over the requisite
service period in the Company's consolidated statement of income (loss).
The Company recognizes compensation expenses for the value of its awards, based on the straight-line method over the requisite service period of each
of the awards.
The Company selected the Black-Scholes-Merton option pricing model as the most appropriate fair-value method for its stock-option compensation awards
and values restricted stock units based on the market value of the underlying shares at the date of grant.
No options were granted in 2020 and 2019.
|
|
n. |
Concentrations of credit risk:
|
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents,
restricted cash, trade receivables and other account receivable.
Cash, cash equivalents and restricted cash are deposited with major banks in Israel, Hong Kong and the United States. Such deposits in the United
States may be in excess of insured limits and are not insured in other jurisdictions. Management believes that the financial institutions that hold the Company's investments are institutions with high credit standing, and accordingly, minimal
credit risk exists with respect to these investments.
The Company's customers are located mainly in the United States. The Company performs ongoing credit evaluations of its customers. In certain
circumstances, the Company may require letters of credit, other collateral or additional guarantees.
The Company establishes an allowance for credit losses based on historical experience, credit quality, the age of the accounts receivable balances and current economic conditions that may affect a customer's
ability to pay. Allowance for credit losses as of December 31, 2019 and 2020, amounted to $69 and $75, respectively. During the year ended December 31, 2020, no amount of the allowance for credit losses balance was collected.
The allowance for credit losses is determined with respect to specific debts that are doubtful of collection according to management estimates.
The Company has no off-balance-sheet concentrations of credit risk.
F - 18
MER TELEMANAGEMENT SOLUTIONS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 2:
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|
|
o. |
Basic and diluted net earnings (loss) per share:
|
Basic net earnings (loss) per share are computed based on the weighted average number of Ordinary and Preferred shares outstanding during each year.
Diluted net earnings (loss) per share is computed based on the weighted average number of Ordinary and Preferred shares outstanding during each year, plus dilutive potential Ordinary shares considered outstanding during the year, in accordance
with ASC No.260, "Earnings Per Share".
Preferred shares have been included together with the Ordinary shares as a component of both basic and dilutive earnings (loss) per share as these
securities participate equally with the Ordinary shares in the profits, losses and liquidation values.
No options have been included in the calculation of the diluted net earnings per share due to the Company’s losses during all the years presented.
|
|
p. |
Derivatives instruments:
|
ASC No. 815, "Derivatives and Hedging"("ASC 815"), as amended, requires the Company
to recognize all derivatives on the balance sheet at
fair value
. The Company entered into put and call option contracts to hedge certain transactions denominated in foreign currencies. The purpose of the Company's foreign currency hedging activities is
to protect the Company from risk that the eventual dollar cash flows from international activities will be adversely affected by changes in the exchange rates. The Company's 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 statements of operations as financial income or expense, when they
occur.
During 2020, 2019 and 2018, the Company entered into forward, call and put option contracts in the aggregate notional amounts of $1,193 $2,193 and
$2,100, respectively, which converted a portion of its floating currency liabilities to a fixed rate basis, thus reducing the impact of exchange rate fluctuations on the Company's cash flow. In 2020, 2019 and 2018, the revaluation income
(expenses) from these contracts with respect to the above transactions were $(4), $4 and $(9), respectively, and are presented in the statements of operations as financial income (expense), net. As of December 31, 2020, the Company had no
outstanding call and put option contracts.
|
|
q. |
Comprehensive income (loss):
|
The Company accounts for comprehensive income (loss) in accordance with ASC No. 220, "Comprehensive Income". This statement establishes standards for
the reporting and display of comprehensive income and its components in a full set of general purpose financial statements. Comprehensive income (loss) generally represents all changes in shareholders' equity during the period except those
resulting from investments by, or distributions to, shareholders. The Company determined that its items of other comprehensive income (loss) relate to unrealized gains and losses on available for sale marketable securities and changes in
foreign currency translation adjustments.
F - 19
MER TELEMANAGEMENT SOLUTIONS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 2:
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|
|
r. |
Treasury shares:
|
Company shares held as treasury shares are recognized at cost, and as a deduction from equity. Any gain or loss arising from a purchase, sale,
issuance or cancellation of treasury shares is recognized directly in equity.
|
|
s. |
Impact of recently adopted accounting standards:
|
In June 2016, the 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 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.
The Company adopted Topic 326 using the effective date of January 1, 2020, based on the composition of the Company’s 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 the Company’s 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. The Company adopted this standard prospectively effective January 1, 2020. The adoption of this
standard did not have a material impact on the Company’s consolidated financial statements.
|
|
t. |
Impact of recently issued accounting standards:
|
In December 2019, the FASB issued ASU No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes” (“ASU 2020-12”), which
simplifies the accounting for income taxes. ASU 2019-12 is effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2020. The Company is currently evaluating the impact of the new guidance on
the Company’s consolidated financial statements.
F - 20
MER TELEMANAGEMENT SOLUTIONS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
| NOTE 3: |
OTHER ACCOUNTS RECEIVABLE AND PREPAID EXPENSES
|
|
December 31,
|
||||||||
|
2020
|
2019
|
|||||||
|
Government authorities
|
$
|
15
|
$
|
27
|
||||
|
Prepaid expenses
|
376
|
175
|
||||||
|
Others
|
8
|
34
|
||||||
|
$
|
399
|
$
|
236
|
|||||
| NOTE 4: |
PROPERTY AND EQUIPMENT
|
|
December 31,
|
||||||||
|
2020
|
2019
|
|||||||
|
Cost:
|
||||||||
|
Computers and peripheral equipment
|
$
|
632
|
$
|
627
|
||||
|
Office furniture and equipment
|
66
|
66
|
||||||
|
698
|
693
|
|||||||
|
Accumulated depreciation:
|
||||||||
|
Computers and peripheral equipment
|
599
|
567
|
||||||
|
Office furniture and equipment
|
64
|
64
|
||||||
|
Accumulated depreciation
|
663
|
631
|
||||||
|
Depreciated cost
|
$
|
35
|
$
|
62
|
||||
The depreciation expense for the years ended December 31, 2020, 2019 and 2018 amounted to $32, $58 and $61, respectively.
In 2020 and 2019, the Company derecognized fully depreciated property, plant and equipment in an amount of $2 and $13, respectively that are no longer
used by the Company.
NOTE 5:
ACCRUED EXPENSES AND OTHER LIABILITIES
|
December 31,
|
||||||||
|
2020
|
2019
|
|||||||
|
Employees and payroll accruals
|
$
|
257
|
$
|
307
|
||||
|
Institutions and income tax payable
|
140
|
143
|
||||||
|
Accrued expenses
|
1,368
|
1,857
|
||||||
|
Related parties
|
4
|
10
|
||||||
|
$
|
1,769
|
$
|
2,317
|
|||||
F - 21
MER TELEMANAGEMENT SOLUTIONS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
| NOTE 6: |
COMMITMENTS AND CONTINGENT LIABILITIES
|
|
|
a. |
Lease commitments:
The Group leases office space through operating leases. The facilities of the Company in Israel were leased until February 2019. There are no lease commitments under
non-cancelable operating leases as of December 31, 2020.
Commencing February 2019, the Company entered on a monthly basis into non-obligating lease contract in Israel with a monthly rental charge that ranged from $ 10 to $ 15. Due to the
COVID 19 pandemic the Company terminated the Israeli lease contract and since the second half of 2020, the Company’s employees work remotely.
|
|
|
b. |
Royalty commitments:
The Company is committed to pay royalties to Israel Innovation Authority ("IIA"), formerly known as the Office of the Chief Scientist, of the Ministry of Industry, Trade and Labor of
the Government of Israel on proceeds from sales of products resulting from the research and development projects in which the IIA participated. In the event that development of a specific product in which the IIA participated is
successful, the Company will be obligated to repay the grants through royalty payments at the rate of 3% to 5% based on the sales of the Company, up to 100%-150% of the grants received linked to the dollar. Grants received after
January 1999 are subject to interest at a rate equal to the 12 months LIBOR rate. The obligation to pay these royalties is contingent upon actual sales of the products and, in the absence of such sales, no payment is required.
As of December 31, 2020, the Company had a contingent liability to pay royalties in the amount of approximately $ 8,150 plus interest for grants received after January 1999.
The Company has paid or accrued royalties in its cost of revenues relating to the repayment of such IIA grants in the amount of $ 40, $ 51 and $ 66 for the years ended December 31,
2020, 2019 and 2018, respectively.
|
|
|
c. |
Claims and demands:
|
|
|
1. |
Claims related to discontinued operations:
The Company is a party to various tax claims that arose in TABS Brazil a subsidiary which was discontinued in 2009. During 2019, the Company reassessed the likelihood of those tax
claims and based on its legal advisors' opinion it concluded that they have become remote.
In August 2007, the Company’s Brazilian subsidiary, TABS Brazil, was ordered by the Labor Law Court in Brazil to pay approximately $32 to one of its former employees. This amount
which bears a 1% interest rate per month from the date that the claim was filed, accumulating to $89 as of December 31, 2020, was recorded within discontinued operations.
|
F - 22
MER TELEMANAGEMENT SOLUTIONS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
| NOTE 6: |
COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)
|
|
|
2. |
The Israeli Government, through the Fund for Encouragement of Marketing Activities, awarded C. Mer Industries Ltd. ("C. Mer"), the former parent of the Company grants for participation in foreign marketing expenses, partially
related to the Company's marketing activities for the years 1996 - 1998. During 2019, a provision which was recorded in prior years with respect to this demand was reversed based on a legal opinion, the statute of limitation of this
demand expired in 2019.
|
|
|
3. |
During February 2020, a legal action was filed against the Company’s US subsidiary in the New York Supreme Court in the amount of $32. The plaintiff has alleged that the
Company has not paid certain alleged outstanding bills. If the plaintiff insists on continuing the litigation, the Company will seek to dismiss the lawsuit base on the lack of service process. According to the Company’s legal
advisors there is a good basis for such a motion to be granted.
|
NOTE 7:
TAXES ON INCOME
|
|
a. |
Israeli taxation:
|
|
|
1. |
Corporate tax rates:
Taxable income of the Company is subject to the Israeli corporate tax at the rate of 23% for all years presented.
|
|
|
2. |
Tax Benefits for Research and Development:
Israeli tax law permits, under some conditions, a tax deduction for expenditures in the year incurred, including capital expenditures, in scientific research and development
projects. The deduction is permitted if, among other things, the expenditures are approved by the relevant government ministry and the research and development is for the promotion of the enterprise and is carried out by, or on
behalf of, a company seeking the deduction.
The IIA has approved some of the Company's research and development programs and the Company has been able to deduct, for tax purposes, a portion of its research and development
expenses net of the grants received. Other research and development expenses that are not approved may be deducted for tax purposes in three equal installments during a three-year period.
|
|
|
3. |
Tax assessments:
The Company has received final tax assessments through the tax year of 2016.
|
|
|
b. |
Income taxes on non-Israeli subsidiaries:
Non-Israeli subsidiaries are taxed according to the tax laws in their respective countries of residence.
|
F - 23
MER TELEMANAGEMENT SOLUTIONS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 7:
TAXES ON INCOME (Cont.)
|
|
c. |
U.S. subsidiary
On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (the “Act”), which among other provisions, reduced the U.S. corporate tax rate from 35% to 21%, effective January
1, 2018.
At December 31, 2017, the Company re-measured its U.S. deferred tax assets and liabilities, based on the new rates at which they are expected to reverse in the future.
|
|
|
d. |
Net operating loss carry-forwards:
As of December 31, 2020, the Company, its subsidiaries in Hong Kong and in the U.S had an estimated total amount of available carry-forward tax losses of approximately $26,000,
$607, $636, respectively, to offset against future taxable profits. The operating tax loss carry-forwards in Israel may be offset indefinitely against operating income. In addition, as of December 31, 2020, the Company had capital
losses in the amount of approximately
$507 that can be carried forward indefinitely.
MTS IntegraTRAK, the Company’s U.S. subsidiary, is subject to U.S. income taxes. Total net operating loss carry-forwards of approximately $636 as of December 31, 2020, will expire
in the years 2021 to 2028. Utilization of the U.S. net operating losses may be subject to substantial annual limitation due to the "change in ownership" provisions of the Internal Revenue Code of 1986 and similar state provisions.
Such annual limitation may result in the expiration of net operating losses before utilization.
|
|
|
e. |
Deferred income taxes:
Deferred taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for
income tax purposes. The Group's deferred tax liabilities and assets are as follows:
|
|
December 31,
|
||||||||
|
2020
|
2019
|
|||||||
|
Deferred tax asset (liability):
|
||||||||
|
Tax loss carry-forwards
|
$
|
6,254
|
$
|
6,089
|
||||
|
Accruals for interest
|
283
|
283
|
||||||
|
R&D expenses
|
42
|
148
|
||||||
|
Allowances for credit losses and accruals for employee benefits
|
45
|
76
|
||||||
|
Depreciation and amortization
|
5
|
16
|
||||||
|
Deferred tax asset before valuation allowance
|
6,629
|
6,612
|
||||||
|
Goodwill
|
(351
|
)
|
(746
|
)
|
||||
|
Valuation allowance
|
(6,107
|
)
|
(6,029
|
)
|
||||
|
Deferred tax asset (liability), net
|
$
|
171
|
$
|
(163
|
)
|
|||
|
|
|
The Company and certain of its subsidiaries have provided valuation allowances in respect of deferred tax assets resulting from tax loss carry-forwards and other temporary
differences, since they have a history of losses incurred over the past years. Management currently believes that it is more likely than not that part of the deferred tax relating to the loss carry-forwards in the Company and its
subsidiaries and other temporary differences will not be realized in the foreseeable future.
|
F - 24
MER TELEMANAGEMENT SOLUTIONS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 7:
TAXES ON INCOME (Cont.)
|
|
f. |
A reconciliation between the theoretical tax expense, assuming all income is taxed at the statutory tax rate applicable to income of the Company and the actual tax expense as reported in the statements of operations is as follows:
|
|
Year ended December 31,
|
||||||||||||
|
2020
|
2019
|
2018
|
||||||||||
|
Loss before taxes on income, net, as reported in the statements of operations from continuing operations
|
$
|
(2,103
|
)
|
$
|
(188
|
)
|
$
|
(840
|
)
|
|||
|
Tax rates
|
23
|
%
|
23
|
%
|
23
|
%
|
||||||
|
Theoretical tax benefit
|
$
|
(484
|
)
|
$
|
(43
|
)
|
$
|
(193
|
)
|
|||
|
Decrease in taxes resulting from:
|
||||||||||||
|
Non - deductible expenses
|
(116
|
)
|
38
|
37
|
||||||||
|
Loss and timing differences for which no deferred tax was provided
|
264
|
(2
|
)
|
187
|
||||||||
|
Tax adjustment in respect of different tax rate of subsidiaries
|
9
|
3
|
6
|
|||||||||
|
Changes in provision for uncertain tax positions
|
2
|
8
|
9
|
|||||||||
|
Taxes on income, net, as reported in the statements of operations
|
$
|
(325
|
)
|
$
|
4
|
$
|
46
|
|||||
|
|
g. |
Loss before income (expense) taxes is comprised as follows:
|
|
Year ended December 31,
|
||||||||||||
|
2020
|
2019
|
2018
|
||||||||||
|
Domestic
|
$
|
(320
|
)
|
$
|
(217
|
)
|
$
|
(803
|
)
|
|||
|
Foreign
|
(1,783
|
)
|
29
|
(37
|
)
|
|||||||
|
$
|
(2,103
|
)
|
$
|
(188
|
)
|
$
|
(840
|
)
|
||||
|
|
h. |
Taxes on income are comprised as follows:
|
|
Year ended December 31,
|
||||||||||||
|
2020
|
2019
|
2018
|
||||||||||
|
Current
|
$
|
10
|
$
|
22
|
$
|
11
|
||||||
|
Deferred
|
(335
|
)
|
(18
|
)
|
35
|
|||||||
|
$
|
(325
|
)
|
$
|
4
|
$
|
46
|
||||||
|
Domestic
|
$
|
-
|
$
|
-
|
$
|
-
|
||||||
|
Foreign
|
(325
|
)
|
4
|
46
|
||||||||
|
$
|
(325
|
)
|
$
|
4
|
$
|
46
|
||||||
F - 25
MER TELEMANAGEMENT SOLUTIONS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 7:
TAXES ON INCOME (Cont.)
|
|
i. |
As of December 31, 2020, the Company recorded a liability for unrecognized tax benefits of $158. A reconciliation of the opening and closing amounts of unrecognized tax benefits is as follows:
|
|
2020
|
2019
|
|||||||
|
Balance as of beginning of the year
|
$
|
156
|
$
|
148
|
||||
|
Cumulative translation adjustments and other
|
2
|
8
|
||||||
|
Balance at the end of the year
|
$
|
158
|
$
|
156
|
||||
NOTE 8: RELATED PARTY TRANSACTIONS AND BALANCES
|
|
a. |
The Company receives certain services from C. Mer, a publicly traded company. Mr. Chaim Mer, the Company's chairman of the board and Mr. Isaac Ben Bassat, a former director of the Company, are members of the controlling group of C.
Mer. These services include reimbursement for shared expenses related to a commercial insurance policy.
|
|
|
b. |
From January 1, 2009 until September 2011, as part of the acquisition of certain assets and liabilities of AnchorPoint, Inc., the Company received certain services from Data Distributors Inc., a company controlled by Mr. Roger
Challen, a former director of the Company and the controlling shareholder of the Info Group Inc., a beneficial owner of 11.45% of the Company's Ordinary shares as of December 31, 2019. These services include reimbursement for shared
expenses, development and IT services, other administrative services. Expenses recognized with respect to the above-mentioned services were approximately $5, $0 and $10 for the years ended December 31, 2020, 2019 and 2018,
respectively. In addition, the Company rents an office in Powder Springs, Georgia, from Mr. Challen, under a month-to-month lease. In the year ended December 31, 2020 the Company paid or accrued $53 and in each of the years ended
December 31, 2019 and 2018, the Company paid or accrued $56, with respect to the above-mentioned rent expenses.
|
|
|
c. |
Balances and transactions with related parties were as follows:
|
|
|
1. |
Balances with related parties:
|
|
December 31,
|
||||||||
|
2020
|
2019
|
|||||||
|
Other accounts payable and accrued expenses (Note 5)
|
$
|
15
|
$
|
10
|
||||
|
|
2. |
Transactions with related parties:
|
|
Year ended December 31,
|
||||||||||||
|
2020
|
2019
|
2018
|
||||||||||
|
Amounts charged by related parties:
|
||||||||||||
|
Cost of revenues
|
$
|
47
|
$
|
44
|
$
|
37
|
||||||
|
Operating expenses
|
116
|
125
|
148
|
|||||||||
|
$
|
163
|
$
|
169
|
$
|
185
|
|||||||
F - 26
MER TELEMANAGEMENT SOLUTIONS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 9:
SHAREHOLDERS' EQUITY
|
|
a. |
Share capital:
The Ordinary shares entitle their holders the right to receive notice to participate in and vote at general meetings of the Company and the right to receive cash dividends, if
declared.
In August 2017, the Company converted $1,220 of debt to Vexigo’s former shareholders incurred in connection with the acquisition of Vexigo into warrants to acquire 400,000 Ordinary
shares. Following such debt conversion, the Company currently does not have any outstanding debt in connection with the Vexigo acquisition. 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 years period following issuance, the Company had an option to purchase all or a portion of such warrants at a price per warrant of $3. Since
September 2019, most of Vexigo’s former shareholders exercised their warrants and were issued an aggregate of 330,668 Ordinary shares.
In June 2018, the Company issued 175,439 Ordinary shares for an aggregate amount of $188 to Alpha Capital Anstalt, an institutional investor, pursuant to a Purchase Agreement.
In October 2018, the Company issued 1,315,789 convertible preferred shares of a newly-created class (the “Preferred Shares”) for an aggregate amount of $1,353, to Alpha Capital
Anstalt, an institutional investor, pursuant to a Purchase Agreement (the “Alpha Capital SPA”).
The Preferred Shares confer the following rights upon their holders: (i) equal rights to receive dividends, if and when distributed, whether in cash or any other manner, and to
participate in a distribution of bonus shares, if and when distributed (on an as-converted basis), (ii) equal right to participate in a distribution of the Company’s assets available for distribution, in the event of liquidation or
winding-up of the Company (on an as-converted basis), (iii) a right of conversion into Ordinary shares as described below and (iv) equal rights to vote on all matters submitted to a vote of the Ordinary shares (on an as-converted
basis, up to the beneficial ownership limitation described below, to the extent applicable).
Each Preferred Share is convertible, at any time and from time to time at the option of the shareholder thereof, into such number of Ordinary shares determined by dividing the Per
Preferred Share Purchase Price ($1.14, subject to adjustments) by the conversion price then in effect (the “Conversion Rate”). The initial Conversion Rate is 1:1. As to Alpha Capital Anstalt, from the closing date of the Alpha
Capital SPA and until 36 months from the closing date, if and whenever the Company issues or sells Ordinary shares or Ordinary shares equivalents for a consideration per share that is less than the conversion price then in effect
(the “Discounted Per Ordinary Share Purchase Price”), and which is not an exempted issuance, then immediately after such dilutive issuance, the conversion price shall be reduced to equal the Discounted Per Ordinary Share Purchase
Price, but in no event shall the conversion price become lower than the greater of (i) $US 0.10 or (ii) 20% of the closing price on the trading day immediately prior to the date of the Alpha Capital SPA.
|
F - 27
MER TELEMANAGEMENT SOLUTIONS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 9:
SHAREHOLDERS' EQUITY (Cont.)
|
|
|
The Company’s Articles provide that it shall not affect any conversion of the Preferred Shares to the extent that, after giving effect to the conversion, the applicable shareholder
would beneficially own in excess of the Beneficial Ownership Limitation. The “Beneficial Ownership Limitation” is defined a 9.99% of the number of Ordinary Shares outstanding immediately after giving effect to the issuance of Ordinary
shares issuable upon conversion of Preferred Shares held by the applicable shareholder. The applicable shareholder, upon notice to the Company, may increase or decrease the Beneficial Ownership Limitation provisions applicable to its
Preferred Shares. Any such increase or decrease in the Beneficial Ownership Limitation will not be effective until the 61
st
day after such notice is
delivered to the Company and shall only apply to such shareholder.
During 2020 and 2019 Alpha Capital fully exercised its greenshoe option and purchased an aggregated number of 1,315,789 convertible preferred shares in consideration of $1,500,000. In
December 2019 and April 2020, the Company and its Board members approved an extension of Alpha’s remaining portion of the greenshoe option for six months until April 30, 2020 and by an additional three-months period until July 31,
2020, respectively. In addition, during June 2020, Alpha Capital converted 800,000 preferred shares into ordinary shares at a 1:1 ratio.
|
|
|
b. |
Share options:
In 2003, the Company adopted its 2003 Incentive Share Option Plan (the "2003 Plan") that conforms with the provisions of section 102 of the Israel Income Tax Ordinance. As amended
by the Company’s shareholders in 2013 and 2016, the 2003 Plan authorizes the grant of options to purchase up to 482,319 of the Company’s Ordinary shares to officers, employees and directors of the Company or any subsidiary, pursuant
to section 102 of the Israel Income Tax Ordinance and will expire on November 30, 2023.
In June 2006, the Company adopted its 2006 Stock Option plan (the "2006 Plan"), intended to grant options to officers, employees and directors of MTS IntegraTRAK or any subsidiary
of the Company. Each option granted under the 2006 Plan may be either an option intended to be treated as an "incentive stock option", within the meaning of section 422 of the Internal Revenue Code of 1986, as amended, or an option
that will be treated as a "non-qualified stock option". As amended in 2011 and 2013, the 2006 Plan authorizes the grant of options to purchase up to 183,333 of the Company’s Ordinary shares and will expire on July 2026.The total
number of Ordinary shares with respect to which options may be granted to any eligible employee during any twelve months period under the 2006 Plan is 50,000 Ordinary shares, subject to adjustment as provided in the 2006 Plan. Each
option granted under the 2006 Plan is exercisable until the earlier of five years from the date of the grant of the option or the expiration dates of the option plan. The exercise price of the options granted under the 2006 Plan may
not be less than the fair market value of an Ordinary share determined as of the date of grant of the option.
On October 1, 2017 the Company authorized an options grant to its CEO, to acquire 116,667 ordinary shares under 2003 Israeli Share Option Plan. These options vest over a period of four years (25%
vesting on October 1, 2018 and an additional 12.5% vesting every six months for the following three years), subject to the fulfillment of a condition to vesting. The condition to vesting will be fulfilled in the event the
closing price of the Company’s Ordinary shares is equal to or higher than a price per share of $4.5 three month
for a consecutive period. The exercise price per share of the options is
$2.16 (the closing price per share of the Company’s Ordinary shares on the NASDAQ Capital Market on September 28, 2017, the date of the Company’s Board of Directors’ approval of the terms). In addition, in the event of an
M&A or reverse merger transaction (where current shareholders will hold less than 50% of the shares of the company) and if the CEO will not continue to serve as the CEO of the company (or is released during the six-month
period following the closing of the transaction), 50% of all of the unvested options will become vested. The options are due to expire on October 1, 2027, unless earlier terminated pursuant to the terms of our 2003 Israeli Share
Option Plan.
|
F - 28
MER TELEMANAGEMENT SOLUTIONS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
| NOTE 9: |
SHAREHOLDERS' EQUITY (Cont.)
|
|
|
|
As of December 31, 2020, 468,284 Ordinary shares are available for future option grants under the Company’s plans.
|
|
|
c. |
A summary of option activity under the Company's stock option plans to its employees as of December 31, 2020, and changes during the year ended December 31, 2020, are as follows:
|
|
Number of options
|
Weighted-average exercise price
|
Weighted- average remaining contractual term (in years)
|
Aggregate intrinsic value
|
|||||||||||||
|
Outstanding at January 1, 2020
|
116,667
|
$
|
2.16
|
7.76
|
$
|
-
|
||||||||||
|
Granted
|
-
|
$
|
-
|
-
|
$
|
-
|
||||||||||
|
Exercised
|
-
|
$
|
-
|
-
|
$
|
-
|
||||||||||
|
Expired and forfeited
|
-
|
$
|
-
|
-
|
$
|
-
|
||||||||||
|
Outstanding at December 31, 2020
|
116,667
|
$
|
2.16
|
7.76
|
$
|
-
|
||||||||||
|
Exercisable at December 31, 2020
|
87,500
|
$
|
2.16
|
7.76
|
$
|
-
|
||||||||||
|
|
|
There were no new grants or exercises during 2018, 2019 and 2020.
The total compensation cost related to options granted to employees under the Company's share-based compensation plans recognized for the years ended December 31, 2020, 2019 and 2018 amounted to $21, $47 and $90, respectively.
As of December 31, 2020, there was $12 of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the Company's stock option
plans.
|
F - 29
MER TELEMANAGEMENT SOLUTIONS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 9:
SHAREHOLDERS' EQUITY (Cont.)
|
|
d. |
Total stock-based compensation expenses recognized during the period:
The total stock-based compensation expense related to employees' equity-based awards, recognized for the years ended December 31, 2020, 2019 and 2018, was comprised as follows:
|
|
Year ended December 31,
|
||||||||||||
|
2020
|
2019
|
2018
|
||||||||||
|
Research and development
|
$
|
-
|
$
|
-
|
$
|
1
|
||||||
|
General and administrative
|
21
|
47
|
89
|
|||||||||
|
$
|
21
|
$
|
47
|
$
|
90
|
|||||||
NOTE 10:
SUBSEQUENT EVENTS
|
|
a.
|
On April 15, 2021, the Company entered into a definitive agreement and Plan of Merger (the “Merger Agreement”) with SharpLink, Inc. (“SharpLink”), a leading online technology company that works with
sports leagues, fantasy sports sites and media companies to connect fans to relevant and timely betting content sourced from its sportsbook partners, and New SL Acquisition Corp., a company incorporated under the laws of the State
of Delaware and a wholly-owned subsidiary of the Company (“Merger Sub”).
Upon the terms and subject to the satisfaction of the conditions described in the Merger Agreement, including approval of the transaction by the Company’s shareholders, Merger Sub will be merged with
and into SharpLink (the “Merger”), with SharpLink surviving the Merger as a wholly-owned subsidiary of the Company. As a result of the transaction, the securityholders of SharpLink will own 86% of the Company’s securities, on a
fully diluted and as-converted basis (inclusive of a stock option pool of 10% of the fully-diluted outstanding share capital of the Company).
|
|
|
b.
|
The compensation committee in a meeting held on April 6, 2021 and the board of directors in a meeting held on April 8, 2021, approved, subject to the approval of the Company’s shareholders, the following equity compensation:
(1) to the Company’s CEO: (a) a warrant to acquire 116,667 ordinary shares, at an exercise price of $1.321, valid for a period of three years, which will become exercisable in full upon the earliest
of: (i) six months from the date of issuance or (ii) the consummation of an M&A or reverse merger transaction; and (b) a warrant to acquire 50,000 ordinary shares, with no exercise price (i.e., an exercise price equal to
$0), valid for a period of three years, which will become exercisable upon the earliest of: (i) the consummation of an M&A or reverse merger transaction, provided that he still serves as the Company’s CEO until immediately
prior to the consummation or (ii) the consummation of the Transaction with SharpLink, and (2) to the Company’s CFO, options under the Company’s 2003 Israeli Share Option Plan to acquire 50,000 ordinary shares, with no exercise
price (i.e., an exercise price equal to $0), valid for a period of five years, which will become exercisable over a period of five years, with 33.33% vesting on the third, fourth and fifth anniversary of the grant date, provided
that the vesting will accelerate, and the options will become fully exercisable upon the consummation of any M&A or reverse merger transaction. In addition, upon her termination of employment, the option if vested, will
remain valid until the earliest to occur of: (i) six months following the date of her termination of employment and (ii) five years from the grant date.
|
- - - - - - - - - -
F - 30
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to
sign this annual report on its behalf.
|
MER TELEMANAGEMENT SOLUTIONS LTD.
|
|||
|
|
By:
|
/s/ Roy Hess | |
| Roy Hess | |||
| Chief Executive Officer | |||
Dated: May 17, 2021
75
TABLE OF CONTENTS
Part IItem 1. Identity Of Directors, Senior Management and AdvisersItem 2. Offer Statistics and Expected TimetableItem 3. Key InformationItem 4. Information on The CompanyItem 4A. Unresolved Staff CommentsItem 5. Operating and Financial Review and ProspectsItem 6. Directors, Senior Management and EmployeesItem 7. Major Shareholders and Related Party TransactionsItem 8. Financial InformationItem 9. The Offer and ListingItem 10. Additional InformationItem 11. Quantitative and Qualitative Disclosures About Market RiskItem 12. Description Of Securities Other Than Equity SecuritiesPart IIItem 13. Defaults, Dividend Arrearages and DelinquenciesItem 14. Material Modifications To The Rights Of Security Holders and Use Of ProceedsItem 15. Controls and ProceduresItem 16. [reserved]Item 16A. Audit Committee Financial ExpertItem 16B. Code Of EthicsItem 16C. Principal Accountant Fees and ServicesItem 16D. Exemptions From The Listing Standards For Audit CommitteesItem 16E. Purchases Of Equity Securities By The Issuer and Affiliated PurchasersItem 16F. Changes in Registrant S Certifying AccountantItem 16G. Corporate GovernanceItem 16H. Mine Safety DisclosurePart IIIItem 17. Financial StatementsItem 18. Financial StatementsItem 19. ExhibitsNote 1: GeneralNote 1: General (cont.)Note 2: Significant Accounting PoliciesNote 2: Significant Accounting Policies (cont.)Note 3: Other Accounts Receivable and Prepaid ExpensesNote 4: Property and EquipmentNote 5: Accrued Expenses and Other LiabilitiesNote 6: Commitments and Contingent LiabilitiesNote 6: Commitments and Contingent Liabilities (cont.)Note 7: Taxes on IncomeNote 7: Taxes on Income (cont.)Note 8: Related Party Transactions and BalancesNote 9: Shareholders' EquityNote 9: Shareholders' Equity (cont.)Note 10: Subsequent Events