20-F/A 1 zk1719984.htm 20-F/A

SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
 
FORM 20-F/A
 
☐
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
 
OR
 
☒
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2016
 
OR
 
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
 
☐
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of event requiring this shell company report.................
 
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, Ra’anana 4366516, Israel
(Address of principal executive offices)

Alon Mualem (Chief Financial Officer), +972-9-7777-555 (phone), +972-9-7777-566 (fax)
 14 Hatidhar Street, Ra’anana 4366516, Israel
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person

Securities registered or to be registered pursuant to Section 12(b) of the Act:

Title of each class
Name of each exchange on which registered
Ordinary Shares, NIS 0.01 Par Value
NASDAQ Capital Market

Securities registered or to be registered pursuant to Section 12(g) of the Act: None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None

Indicate the number of outstanding shares of each of the issuer's classes of capital or common stock as of the close of the period covered by the annual report:

Ordinary Shares, par value NIS 0.01 per share…………… 8,691,855
(as of December 31, 2016)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
 
Yes   ☐   No   ☒

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
 
Yes   ☐   No   ☒

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
Yes   ☒   No   ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   
 
Yes   ☒   No   ☐
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐
Accelerated filer ☐
Emerging growth company ☐
Non-accelerated filer ☒

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act. 

† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.
 
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
     
U.S. GAAP ☒
International Financial Reporting Standards as issued by the International Accounting Standards Board ☐
Other ☐

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow:
 
Item 17 ☐  Item 18 ☐

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.
 


EXPLANATORY NOTE

This Amendment No. 1 on Form 20-F/A (this "Amendment") to the annual report on Form 20-F for the fiscal year ended December 31, 2016, as filed by Mer Telemanagement Solutions Ltd. (the "Company" or "we") with the Securities and Exchange Commission (the "Commission") on March 28, 2017 (the "Form 20-F"), is being filed solely to correct clerical errors in the date included in the electronic version of the audit report of Kost Forer Gabbay & Kasierer, a Member of Ernst & Young Global ("E&Y"), included in the Form 20-F (the "Audit Report").

Therefore, we are filing this Amendment to our Form 20-F to include the corrected Audit Report together with the consolidated financial statements to which the Audit Report was attached in Item 18 of our Form 20-F.  In addition, we are (i) refiling the consent of E&Y as Exhibit 15.1 and (ii) filing or furnishing, as indicated herein, as Exhibits 12.1, 12.2, 13.1 and 13.2, currently dated certifications.

This Amendment speaks as of the date of the initial filing of the Form 20-F and, other than as described above, this Amendment does not, and does not purport to, amend, update or restate any other information or disclosure included in the Form 20-F and does not, and does not purport to, reflect any events that have occurred after the date of the initial filing of the Form 20-F.
 
i
 

 
ITEM 18.   FINANCIAL STATEMENTS
 
Consolidated Financial Statements
 
Index to Consolidated Financial Statements
F-1
Report of Independent Registered Public Accounting Firm
F-2
Consolidated Balance Sheets
F-3 -F-4
Consolidated Statements of Operations
F-5
Consolidated Statements of Comprehensive Income
F-6
Consolidated Statements of Changes in Shareholders’ Equity
F-7 - F-8
Consolidated Statements of Cash Flows
F-9 - F-10
Notes to Consolidated Financial Statements
F-11 - F-47
 
ITEM 19.   EXHIBITS
 
Exhibit                    Description
 
1.1
Memorandum of Association of the Registrant(1)
 
1.2
Articles of Association of the Registrant(1)
 
2.1  Specimen of Ordinary Share Certificate (2)
 
4.1  2003 Israeli Share Option Plan (3)
 
4.2
2006 Stock Option Plan (4)
 
4.3
Share Purchase Agreement by and among the Registrant, Vexigo Ltd., FPSV Holdings Ltd. and the shareholders of Vexigo Ltd. and of FPSV Holdings Ltd., dated as of February 3, 2015 (5)

                4.4
Purchase Agreement by and among the Registrant and Messrs. Haim Mer, Lior Salansky and Adi Orzel, dated as of May 11, 2015 (6)

                4.5
Payment Rescheduling Letter Agreement by and among the Registrant, FPSV, Vexigo and the former Vexigo shareholders, dated as of February 18, 2016 (7)
 
                4.6
Purchase Agreement by and among the Registrant and investors consisting of all of the shareholders of Vexigo as of March 31, 2015 and all of the shareholders of FPSV as of March 31, 2015; and Messrs. Haim Mer, Roger Challen and Lior Salansky, dated as of February 18, 2016 (8)
 
                4.7            Directors’ and Officers’ Compensation Policy (9)
 
8.1                           List of Subsidiaries of the Registrant(+)
 
11.1                         Code of Ethics (4)
 
12.1
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended
 
12.2
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended.
 
1
13.1
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
13.2
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
15.1
Consent of Kost Forer Gabbay & Kasierer, a Member of Ernst & Young Global
 
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(+)
 
_____________
(+)
Previously filed.
*
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.

(1)
Filed as an exhibit to the Registrant’s Form 20-F for the fiscal year ended December 31, 2014, and incorporated herein by reference.

(2)
Filed as an exhibit to the Registrant’s Registration Statement on Form F-1, registration number 333-05814, filed with the Securities and Exchange Commission, and incorporated herein by reference.
 
(3)
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.
 
(4)
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.
 
(5)
Filed as Exhibit A to Item I of Exhibit 99.2 of the Registrant’s Report on Form 6-K for the month of February 2015 submitted on February 18, 2015, and incorporated herein by reference.
 
(6)
Filed as Exhibit 99.1 to the Registrant’s Report on Form 6-K for the month of May 2015 submitted on May 27, 2015, and incorporated herein by reference.

(7)
Filed as an exhibit to the Registrant’s Form 20-F for the fiscal year ended December 31, 2015, and incorporated herein by reference.

(8)
Filed as Exhibit A to the Registrant’s Report on Form 6-K for the month of April 2016 submitted on April 1, 2016, and incorporated herein by reference.
 
(9)
Filed as Exhibit A to the Registrant’s Report on Form 6-K for the month of June 2016 submitted on June 23, 2016, and incorporated herein by reference.
 

2
 
MER TELEMANAGEMENT SOLUTIONS LTD. AND ITS SUBSIDIARIES
 
CONSOLIDATED FINANCIAL STATEMENTS
 
AS OF DECEMBER 31, 2016
 
U.S. DOLLARS IN THOUSANDS
 
INDEX
 

 

F-1

 


 
 
 
Kost Forer Gabbay & Kasierer
3 Aminadav St.
Tel-Aviv 6706703, Israel
 
  
 
 
Tel: +972-3-6232525
Fax: +972-3-5622555
ey.com
 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of

MER TELEMANAGEMENT SOLUTIONS LTD.
 
We have audited the accompanying consolidated balance sheets of Mer Telemanagement Solutions Ltd. ("the Company") and its subsidiaries as of December 31, 2015 and 2016, and the related consolidated statements of operations, statements of comprehensive loss, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2016. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company's and its subsidiaries internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's and its subsidiaries internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above, present fairly, in all material respects, the consolidated financial position of the Company and its subsidiaries as of December 31, 2015 and 2016, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2016, in conformity with U.S. generally accepted accounting principles.
 
Tel-Aviv, Israel
/s/ Kost Forer Gabbay & Kasierer
KOST FORER GABBAY & KASIERER
March 28, 2017
A Member of Ernst & Young Global
 
 
F-2

 
MER TELEMANAGEMENT SOLUTIONS LTD.
AND ITS SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
U.S. dollars in thousands
 
   
December 31,
  
   
2016
    
2015
  
             
ASSETS
            
             
CURRENT ASSETS:
            
Cash and cash equivalents
  
$
1,508
    
$
3,444
  
Restricted cash
    
504
      
231
  
Restricted marketable securities (Note 4)
    
136
      
134
  
Trade receivables (net of allowance for doubtful accounts of $ 44 and $ 49 at December 31, 2016 and 2015)
    
5,305
      
4,485
  
Deferred tax asset (Note 11)                                                               
   
-
      
40
  
Other accounts receivable and prepaid expenses (Note 5)
    
343
      
103
  
                 
Totalcurrent assets
    
7,796
      
8,437
  
                 
LONG-TERM ASSETS:
                
Severance pay fund
    
752
      
668
  
                 
PROPERTY AND EQUIPMENT, NET (Note 6)
    
198
      
160
  
                 
OTHER ASSETS:
                
Intangible assets, net (Note 7)
    
63
      
4,461
  
Goodwill (Note 8)
    
3,479
      
8,298
  
                 
Totalother assets
    
3,542
      
12,759
  
                 
Totalassets
  
$
12,288
    
$
22,024
  
 
The accompanying notes are an integral part of the consolidated financial statements.
F - 3
MER TELEMANAGEMENT SOLUTIONS LTD.
AND ITS SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
U.S. dollars in thousands (except share and per share data)

   
December 31,
  
   
2016
    
2015
  
             
LIABILITIES AND SHAREHOLDERS' EQUITY
            
             
CURRENT LIABILITIES:
            
Trade payables
  
$
4,086
    
$
3,297
  
Deferred revenues
    
1,374
      
1,826
  
Deferred tax liability (Note 11)
    
-
      
142
  
Accrued expenses and other liabilities (Note 9)
    
3,756
      
3,505
  
Liabilities of discontinued operations (Note 1b)
    
132
      
105
  
                 
Totalcurrent liabilities
    
9,348
      
8,875
  
                 
LONG-TERM LIABILITIES:
                
Liabilities related to Vexigo acquisition (Note 3)
    
-
      
5,624
  
Accrued severance pay
    
914
      
798
  
Deferred tax liability (Note 11)
    
166
      
578
  
                 
Totallong-term liabilities
    
1,080
      
7,000
  
                 
COMMITMENTS AND CONTINGENT LIABILITIES (Note 10)
                
                 
SHAREHOLDERS' EQUITY (Note 13):
                
Share capital -
                
Ordinary shares of NIS 0.01 par value - Authorized: 20,000,000 shares at December 31, 2016 and 2015; Issued: 8,697,255 and 8,048,780 shares at December 31, 2016 and 2015, respectively; Outstanding: 8,691,855 and 8,043,380 shares at December 31, 2016 and 2015, respectively
    
23
      
21
  
Additional paid-in capital
    
26,569
      
25,648
  
 Treasury shares at cost (5,400 Ordinary shares at December 31, 2015 and 2016)
    
(29
)
    
(29
)
Accumulated other comprehensive income (loss)
    
1
      
(8
)
Accumulated deficit
    
(24,704
)
    
(19,483
)
                 
Totalshareholders' equity
    
1,860
      
6,149
  
                 
Totalliabilities and shareholders' equity
  
$
12,288
    
$
22,024
  
 
The accompanying notes are an integral part of the consolidated financial statements.
F - 4

MER TELEMANAGEMENT SOLUTIONS LTD.
AND ITS SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
U.S. dollars in thousands (except share and per share data)
 
   
Year ended December 31,
  
   
2016
    
2015
    
2014
  
Revenues (Note 2.l)
                  
Telecom services
  
$
5,985
    
$
6,018
    
$
5,674
  
Telecom product sales
    
1,566
      
1,677
      
1,392
  
Video advertising
    
6,501
      
7,017
      
-
  
                         
Totalrevenues
    
14,052
      
14,712
      
7,066
  
                         
Cost of revenues
                        
Telecom services
    
2,248
      
2,546
      
2,384
  
Telecom product sales
    
460
      
522
      
509
  
Video advertising
    
4,205
      
5,346
      
-
  
                         
Totalcost of revenues
    
6,913
      
8,414
      
2,893
  
                         
Gross profit
    
7,139
      
6,298
      
4,173
  
                         
Operating expenses
                        
Research and development
    
2,763
      
1,805
      
1,387
  
Selling and marketing
    
2,343
      
2,225
      
1,868
  
General and administrative
    
3,472
      
3,459
      
2,459
  
Goodwill and technology impairments, net of change in contingent earn-out consideration
    
4,245
      
3,514
      
-
  
                         
Totaloperating expenses
    
12,823
      
11,003
      
5,714
  
                         
                         
Operating loss
    
(5,684
)
    
(4,705
)
    
(1,541
)
                         
Financial expense, net
    
(17
)
    
(17
)
    
(95
)
                         
Loss before taxes on income
    
(5,701
)
    
(4,722
)
    
(1,636
)
                         
Taxes on income (tax benefit), net (Note 11)
    
(507
)
    
194
      
54
  
                         
Net loss from continuing operations
    
(5,194
)
    
(4,916
)
    
(1,690
)
                         
 Income (loss) from discontinued operations
    
(27
)
    
177
      
80
  
                         
Net loss
  
$
(5,221
)
  
$
(4,739
)
  
$
(1,610
)
                         
                         
Net loss per share:
                        
Basic and diluted net loss per ordinary share from continuing operations
  
$
(0.62
)
  
$
(0.68
)
  
$
(0.36
)
Basic and diluted net earnings per ordinary share from discontinued operations
    
0.00
      
0.02
      
0.02
  
                         
Basic and diluted net loss per share
  
$
(0.62
)
  
$
(0.66
)
  
$
(0.34
)
                         
Weighted average number of Ordinary shares used in computing basic and diluted net loss per share
    
8,452,280
      
7,174,991
      
4,670,964
  
 
The accompanying notes are an integral part of the consolidated financial statements.
F - 5
MER TELEMANAGEMENT SOLUTIONS LTD.
AND ITS SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
U.S. dollars in thousands
 
   
Year ended December 31,
  
   
2016
    
2015
    
2014
  
                   
Net loss
  
$
(5,221
)
  
$
(4,739
)
  
$
(1,610
)
                         
Other comprehensive income (loss):
                        
Change in foreign currency translation adjustments
    
5
      
-
      
21
  
                         
Available-for-sale investments:
                        
Change in net unrealized gains (loss)
    
4
      
*) -
 
    
(23
)
                         
Other comprehensive income (loss)
    
9
      
-
      
(2
)
                         
Comprehensive loss
  
$
(5,212
)
  
$
(4,739
)
  
$
(1,612
)

*)          Represents an amount less than $ 1.
 
The accompanying notes are an integral part of the consolidated financial statements.

F - 6
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)

               
Additional
          
Accumulated other
          
Total
  
   
Share capital
    
paid-in
    
Treasury
    
comprehensive
    
Accumulated
    
shareholders'
  
   
Number
    
Amount
    
capital
    
shares
    
income (loss)
    
deficit
    
equity
  
                                           
Balance as of January 1, 2014
    
4,665,586
    
$
13
    
$
20,317
    
$
(29
)
  
$
(6
)
  
$
(13,134
)
  
$
7,161
  
                                                         
Stock-based compensation related to options issued to employees
    
-
      
-
      
84
      
-
      
-
      
-
      
84
  
Stock-based compensation related to options issued to non-employees
    
-
      
-
      
(15
)
    
-
      
-
      
-
      
(15
)
Exercise of stock options
    
7,078
      
*) -
   
    
14
      
-
      
-
      
-
      
14
  
Other comprehensive income (loss):
                                                        
Unrealized gains of available-for-sale marketable securities, net
    
-
      
-
      
-
      
-
      
(23
)
    
-
      
(23
)
Foreign currency translation adjustments
    
-
      
-
      
-
      
-
      
21
      
-
      
21
  
Net loss
    
-
      
-
      
-
      
-
      
-
      
(1,610
)
    
(1,610
)
                                                         
Balance as of December 31, 2014
    
4,672,664
      
13
      
20,400
      
(29
)
    
(8
)
    
(14,744
)
    
5,632
  
                                                         
Issuance of shares related to Vexigo acquisition
    
3,115,090
      
8
      
4,507
      
-
      
-
      
-
      
4,515
  
Stock-based compensation related to options issued to employees
    
-
      
-
      
170
      
-
      
-
      
-
      
170
  
May 2015 equity investment
    
227,271
      
-
      
500
      
-
      
-
      
-
      
500
  
Contribution from shareholders with regards to payment deferral agreement with former shareholders of Vexigo
    
-
              
20
      
-
      
-
      
-
      
20
  
Exercise of stock options
    
28,355
      
*) -
   
    
51
      
-
      
-
      
-
      
51
  
Other comprehensive income (loss):
                                                        
Unrealized gains of available-for-sale marketable securities, net
    
-
      
-
      
-
      
-
      
*) -
  
    
-
      
*) -
  
Net loss
    
-
      
-
      
-
      
-
      
-
      
(4,739
)
    
(4,739
)
                                                         
Balance as of December 31, 2015
    
8,043,380
    
$
21
    
$
25,648
    
$
(29
)
  
$
(8
)
  
$
(19,483
)
  
$
6,149
  

*)          Represents an amount less than $ 1.

The accompanying notes are an integral part of the consolidated financial statements.
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)
 
               
Additional
          
Accumulated other
          
Total
  
   
Share capital
    
paid-in
    
Treasury
    
comprehensive
    
Accumulated
    
shareholders'
  
   
Number
    
Amount
    
capital
    
shares
    
income (loss)
    
deficit
    
equity
  
                                           
Balance as of January 1, 2016
    
8,043,380
    
$
21
    
$
25,648
    
$
(29
)
  
$
(8
)
  
$
(19,483
)
  
$
6,149
  
                                                         
Stock-based compensation related to options issued to employees
    
-
      
*) -
    
    
223
      
-
      
-
      
-
      
223
  
Issuance of shares
    
648,475
      
2
      
698
      
-
      
-
      
-
      
700
  
Other comprehensive income (loss):
                                                        
Unrealized gain of available-for-sale marketable securities, net
    
-
      
-
      
-
      
-
      
4
      
-
      
4
  
Foreign currency translation adjustments
    
-
      
-
      
-
      
-
      
5
      
-
      
5
  
Net loss
    
-
      
-
      
-
      
-
      
-
      
(5,221
)
    
(5,221
)
                                                         
Balance as of December 31, 2016
    
8,691,855
    
$
23
    
$
26,569
    
$
(29
)
  
$
1
    
$
(24,704
)
  
$
1,860
  

*)          Represents an amount less than $ 1.
 
The accompanying notes are an integral part of the consolidated financial statements.
F - 8

MER TELEMANAGEMENT SOLUTIONS LTD.
AND ITS SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
U.S. dollars in thousands

   
Year ended December 31,
  
   
2016
    
2015
    
2014
  
Cash flows from operating activities
                  
                   
Net loss
  
$
(5,221
)
  
$
(4,739
)
  
$
(1,610
)
Loss (Income) loss from discontinued operations
    
27
      
(177
)
    
(80
)
                         
Net loss from continuing operations
    
(5,194
)
    
(4,916
)
    
(1,690
)
                         
Adjustments required to reconcile net loss from continuing operations to net cash provided by (used in) operating activities:
                        
                         
Loss (gain)  on sale of available-for-sale marketable securities
    
4
      
8
      
(10
)
Depreciation and amortization
    
1,106
      
868
      
284
  
Impairment of goodwill
    
4,819
      
6,288
      
-
  
Change in payment obligation related to acquisition
    
(4,337
)
    
(2,774
)
    
-
  
Impairment of technology
    
3,763
      
-
      
-
  
Increase (decrease) in deferred tax, net
    
(514
)
    
41
      
25
  
Employees and non-employees stock-based compensation and contribution from shareholders
    
223
      
190
      
69
  
Increase (decrease) in accrued severance pay, net
    
32
      
(16
)
    
(24
)
Decrease (increase) in trade receivables, net
    
(820
)
    
387
      
364
  
Decrease (increase) in other accounts receivable and prepaid expenses
    
(240
)
    
43
      
72
  
Increase in trade payables
    
789
      
1,676
      
-
  
Increase (decrease) in accrued expenses and other liabilities
    
368
      
(1,514
)
    
73
  
Increase (decrease) in deferred revenues
    
(452
)
    
120
      
(60
)
Decrease (increase) in restricted cash
    
(273
)
    
417
      
(585
)
                         
Net cash provided by (used in) operating activities from continuing operations
    
(726
)
    
818
      
(1,482
)
                         
Cash flows from investing activities
                        
                         
Purchase of property and equipment
    
(129
)
    
(108
)
    
(41
)
Cash paid in connection with acquisition of Vexigo Ltd., net of cash acquired (a)
    
(1400
)
    
(2,264
)
    
-
  
Capitalization of software development costs
    
(380
)
    
(411
)
    
-
  
Investment in available-for-sale marketable securities
    
(86
)
    
(104
)
    
(153
)
Proceeds from sale of available-for-sale marketable securities
    
85
      
98
      
157
  
                         
Net cash used in investing activities
    
(1,910
)
    
(2,789
)
    
(37
)

The reclassified notes are an integral part of the consolidated financial statements.
F - 9
MER TELEMANAGEMENT SOLUTIONS LTD.
AND ITS SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
U.S. dollars in thousands
 
   
Year ended December 31,
  
   
2016
    
2015
    
2014
  
 Cash flows from financing activities                  
                   
 Proceeds from issuance of shares
    
700
      
500
      
-
  
 Proceeds from exercise of stock options
    
-
      
51
      
14
  
                         
Net cash provided by financing activities
    
700
      
551
      
14
  
                         
Decrease in cash and cash equivalents
    
(1,936
)
    
(1,420
)
    
(1,505
)
Cash and cash equivalents at the beginning of the year
    
3,444
      
4,864
      
6,369
  
                         
Cash and cash equivalents at the end of the year
  
$
1,508
    
$
3,444
    
$
4,864
  
                         
Supplemental disclosure of cash flows activities
                        
                         
Cash paid during the year for income taxes
  
$
5
    
$
7
    
$
16
  


   
Year ended December 31
  
   
2016
    
2015
    
2014
  
Total assets, net of cash
  
$
-
    
$
4,691
    
$
-
  
Total liabilities
    
-
      
(4,512
)
    
-
  
Technology
    
-
      
4,433
      
-
  
Deferred tax liability
    
-
      
(709
)
    
-
  
Goodwill
    
-
      
11,107
      
-
  
Issuance of shares
    
-
      
(4,369
)
    
-
  
Payment obligations in connection with acquisition
    
-
      
(1,845
)
    
-
  
Contingent earn-out consideration, net
    
-
      
(6,532
)
    
-
  
                         
Total cash paid during the year
  
$
-
    
$
2,264
    
$
-
  

The accompanying notes are an integral part of the consolidated financial statements.
 
F - 10

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

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"), mobile virtual network enabler ("MVNE"), mobile money solutions and online video advertising solutions and services.

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".

On April 1, 2015, the Company acquired 100% of the outstanding shares of Vexigo Ltd. ("Vexigo"), a privately-held Israeli-based software company supporting video advertising over the internet and mobile devices (for further information refer to Note 3 - Business Combination). Vexigo is a global provider of online video advertising software and services delivering compelling results through a propriety in-house technology and an easy-to-use and very effective publishing platform specifically designed for content publishers. The online video advertising is provided through Vexigo, which has proprietary in-house technology solution specifically designed for content publishers. The Vexigo solution for online and mobile platforms supports multiple ad formats and interactive ad units.
 
Regarding Vexigo technology and goodwill impairment in 2016, see note 1c bellow.
 
b.
In March 2009, the Company discontinued the operations of TABS Brazil Ltda. its wholly owned subsidiary in Brazil. The results of operations of such subsidiary, which is inactive, are classified as discontinued operations in the statement of operations.

The summarized results of operations for TABS Brazil Ltda. for the years ended December 31, 2014, 2015 and 2016, are as follows:

   
Year ended December 31,
  
   
2016
    
2015
    
2014
  
                   
Net income (loss) from discontinued operations
  
$
(27
)
  
$
177
    
$
80
  
                         
Basic and diluted net income per Ordinary share from discontinued operations
  
$
0.00
    
$
0.02
    
$
0.02
  

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.)

c.
The Company has incurred an accumulated deficit of approximately $24,704 since inception. As of December 31, 2016, the Company's total shareholders' equity amounted to $1,860. During the year ended December 31, 2016, the Company incurred an operating loss of $5,684 and its cash flows used in operating activities amounted to $726.

As of December 31, 2016, the Company had $1,644 in cash and cash equivalents and short-term marketable securities, out of which $136 held by the Company is pledged to secure future rent payments for the Company's facilities in Israel. 
 
As stated above, the Company acquired 100% of the outstanding shares of Vexigo in consideration of $3,000 at closing and two additional payments of $500 each that were to be paid three months and six months following the closing date. The agreement further provides for earn-out payments of up to $16,000 over a 5.5 years period from the closing date, based on the earnings of the Vexigo product line.
 
In addition, the Company was obligated to pay the former Vexigo shareholders a dividend in the amount of approximately $1,000 which was declared before the acquisition and the working outstanding capital amount at the closing date in the amount of approximately $ 600.

On May 11, 2015, the Company issued an aggregate of 227,271, Ordinary shares in a private placement of securities. The aggregate proceeds of this issuance was $500.

In September 2015, the former Vexigo shareholders agreed that payment of the two remaining installments related to the acquisition consideration would be postponed until January 1, 2016.

In February 2016, the Company further renegotiated and extended the total amount of $2,600 of payments due to Vexigo's former shareholders. The new payment schedule will end in October 2017. As part of this arrangement, the parties also agreed that if, at any time, Company's cash balance will be lower than $2,500, than the Company will stop payments until its cash balances return to that level. During 2016, the Company paid an aggregate amount of $1,400 to the former Vexigo shareholders and based on the current level of cash balance, the Company does not expect to pay the outstanding balance during 2017. As of December 31, 2016, the outstanding balance due to Vexigo's shareholders was $ 1,200.

In May 2016, the Company completed a private placement of 648,475 Ordinary shares, for an aggregate investment of approximately $700, out of which $400 was invested by former Vexigo shareholders.

During the fourth quarter of 2016, the Company performed its annual impairment test of its reporting units. Based on the impairment analysis and in light of the deterioration in Vexigo's results, the Company concluded that the carrying value of the Video Advertising reporting unit exceeded its fair value, which resulted in a full impairment of the goodwill and technology of this business unit.

The Company believes that its cash on hand as of December 31, 2016 and the expected cash flows from operations will be sufficient to meet its working capital and capital expenditure requirements for at least the following 12 months from the financial statements issuance date. In the event the Company is not successful in generating sufficient cash from its current operations, the Company may be required to obtain financing from external sources or further reduce its level of expenditures (See Note 15 regarding reduction in expenditures made subsequent the balance sheet date).

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 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 the 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.

b.
Financial statements in United States dollars

The majority of the revenues of the Group are generated in or linked to the U.S. dollar ("Dollar"). In addition, a substantial portion of the Group's costs are incurred in Dollars. The Company's management believes that the Dollar is the currency of the primary economic environment in which the Company and certain of its subsidiaries operate. Therefore, the functional and reporting currency of the Company and certain of its subsidiaries is the Dollar.

Transactions and balances denominated in U.S. dollars are presented at their original amounts. Monetary accounts maintained in currencies other than the U.S. dollar are re-measured into U.S. dollars in accordance with ASC 830-10, "Foreign Currency Matters". All transactions gains and losses of the re-measurement of monetary balance sheets items are reflected in the consolidated statements of comprehensive loss as financial income or expenses, as appropriate.

For those foreign subsidiaries, whose functional currency has been determined to be their local currency, assets and liabilities are translated at the year- end exchange rates and statements operations items are translated at the average exchange rate prevailing during the period. The resulting translation adjustments are recorded as a separate component of accumulated other comprehensive income (loss) in shareholders' equity or recorded in the consolidate statements of operations as financial income or expenses, as appropriate.

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.

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.)

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 from time to deposit.

e.
Restricted cash

Restricted cash is a deposit account which is held by the Company on behalf of Company's customers.

f.
Marketable securities

The Company accounts for investments in debt and equity securities in accordance with ASC 320, "Debt and Equity Securities" ("ASC 320"). Management determines the appropriate classification of its investments in marketable securities at the time of purchase and reevaluates such determinations at each balance sheet date. The Company classifies all of its securities as available for sale carried at fair market value. Fair value is determined based on observable market value quotes. Available-for-sale securities are carried at fair value, with unrealized gains and losses reported in "accumulated other comprehensive income (loss)" in shareholders' equity. Realized gains and losses on sales of investments, are included in earnings and are derived using the specific identification method for determining the cost of securities (see also Note 4). Interest and dividends on securities are included in financial income (expense), net.

The Company periodically reviews its marketable securities for impairment. If the Company concludes that any of these investments are impaired, the Company determines whether such impairment is "other-than-temporary" as defined under ASC 320-10-35.

The Company accounts for investments in marketable securities in accordance with, ASC 320 "Recognition and Presentation of Other-Than-Temporary Impairments" that changed the impairment and presentation model for debt securities.

Under the amended impairment model, other-than-temporary impairment loss is recognized in earnings if the entity has the intent to sell the debt security, or if it is more likely than not that it will be required to sell the debt security before recovery of its amortized cost basis. However, if an entity does not expect to sell a debt security, it still needs to evaluate expected cash flows to be received and determines if a credit loss exists. In the event of a credit loss, only the amount of impairment associated with the credit loss is recognized currently in earnings. During 2015 and 2016 no other-than-temporary impairments were recorded. For further information refer to Note 4 - Marketable Securities.

The marketable securities held by the Company are pledged to secure future rent payments for the Company's facilities in Israel.

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.)

g.
Property and equipment, net

Property and equipment are stated at cost, net of accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets at the following annual depreciation rates:
   
%
  
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
  

h.
Impairment of long-lived assets

The Company's long-lived assets 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. 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.
 
i.
Intangible assets:

Intangible assets that are considered to have a definite useful life are amortized over their useful lives using a method of amortization that reflects the pattern in which the economic benefits of the intangible assets are consumed or otherwise used up in accordance with ASC 350. The Company's identifiable intangibles are reviewed for impairment in accordance with ASC 360 whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. 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 is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets.
 
The Company's intangible assets were all acquired in connection with historical acquisitions, including the Vexigo acquisition in 2015 and amortized mostly over 5.5 years. For further information refer to Note 3 - Business Combination. During 2014 and 2015, no impairment losses were identified. In 2016 the Company’s Video Advertising technology was fully impaired and an impairment in amount of $3,763 was recorded. For further information refer to Note 7 - Intangible Assets.
 
j.
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 two-step 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 it does result in a more likely than not indication of impairment, the two-step impairment test is performed. 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.

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.)

The Company operates in three operating segments, which also comprise its reporting units: Enterprise, Service Providers and Video Advertising. The Company's goodwill balance is assigned to the Enterprise and Video Advertising reporting units. The Company performs an annual impairment test of its reporting units as of October 1, 2016 of each year, or more frequently if impairment indicators are present. Fair value of the reporting units is determined using discounted cash flows. Significant estimates used in the fair value methodologies include estimates of future cash flows, future growth rates and the weighted average cost of capital of the reporting units.

Based on the impairment analysis the Company did not identify any impairment losses for the goodwill assigned to the Enterprise reporting unit. The material assumptions used for the income approach were five (5) years of projected cash flows, with a discount rate of 18.5%.

During the fourth quarter of 2016, the Company performed an impairment test with respect to the goodwill assigned to the Video Advertising business unit. The Company concluded that the carrying value of the reporting unit exceeded its fair value, and therefore, an impairment of goodwill existed and the second step of the goodwill impairment test was required. The material assumptions used for the income approach were four (4) years of projected cash flows, with a discount rate of 16.9%.

In accordance with ASC350 if goodwill and another asset (or asset group) of a reporting unit are tested for impairment at the same time, the other asset (or asset group) shall be tested for impairment before goodwill. If the asset group was impaired, the impairment loss would be recognized prior to goodwill being tested for impairment. As stated above, the Company’s Video Advertising technology was fully impaired. In addition, the goodwill balance assigned to the Video Advertising business unit as of December 31, 2016 in the amount of $4,819 was also fully impaired. For further information refer to Note 8 - Goodwill.
 
k.
Severance pay:

The Company's liability for severance pay for its Israeli employees is calculated pursuant to Israel's Severance Pay Law. Some of the Israeli employees are included under section 14 of the Israeli Severance Compensation Law ("Section 14"). Under Section 14, the Company's monthly deposits, at a rate of 8.33% of such employees' monthly salary, are made on their behalf with insurance companies on account of severance pay. Payments in accordance with Section 14 release the Israeli companies from any future severance payments in respect of those employees. Deposits under Section 14 are not recorded as an asset in the Company's balance sheet.

Israel-based employees that are not subject to section 14 of the Israeli Severance Pay Law are entitled to a severance pay of one month's salary for each year of employment or a portion thereof. The Company's severance pay liability for employees, that are not subject to Section 14, is fully provided by an accrual and the monthly deposits with insurance policies is recorded as an asset in the Company's balance sheet.

Severance expense for the years ended December 31, 2016 and 2015 amounted to approximately $116 and $88, respectively.
 
l.
Revenue recognition:

The Company generates revenues from three major sources: telecom services, telecom product sales and video advertising.

Telecom services and product sales

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).

Revenues from maintenance, hosting and managed services are recognized when all criteria outlined in ASC 985-605, "Revenue Recognition -Software", are met. Revenue from license fees is recognized when persuasive evidence of an agreement exists, delivery of the product has occurred, no significant obligations with regard to implementation remain, the fee is fixed or determinable and collectability is probable. The Company does not grant a right of return to its customers.

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.)

Where software arrangements involve multiple elements, revenue should allocated to each undelivered element based on vendor specific objective evidence ("VSOE") of the fair values of each undelivered element in the arrangement, in accordance with the "residual method".

Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement fee is allocated to the delivered element and is recognized as revenue when all revenue recognition criteria of ASC 985-605, as amended, are satisfied. Under the residual method, any discount in the arrangement is allocated to the delivered element. If sufficient specific objective evidence does not exist for all undelivered elements, revenue is deferred for the entire arrangement until all revenue recognition criteria are met for such undelivered elements.

Revenues from maintenance and support services are recognized over the term of the maintenance and support agreement on a straight line basis.

Revenues from cloud and managed services are recognized based on SAB 104 and ASC 605-25, when delivery has occurred or services have been rendered, the fee is fixed or determinable, collectability is probable and persuasive evidence of an arrangement exists. These revenues are recognized as one unit of accounting, on a straight-line basis over the term of the last undelivered element.

Deferred revenues include advance payments received under maintenance and support contracts.

Video Advertising
 
The Company, through its Vexigo subsidiary, allows advertisers to improve their business results by promoting marketing campaigns online via performance-based models and provides them with access and exposure to a variety of media companies, other networks and general websites. Vexigo's innovative optimization technology also enables affiliates to fully monetize their media inventory. Vexigo's customers obtain access to the Company's technology which enables advertisers to improve their business results by optimization of marketing campaign targeting. Vexigo's technology also enables partnerships between affiliates and advertisers. Revenue generally derived from charges to advertisers based on Cost per Mille ("CPM"). Advertisers are charged monthly based on the number of times a user clicks on ads. The Company recognizes revenue from an advertisement at that time when all four mentioned revenue recognition criteria have been met.

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.)

Video Advertising revenues are recognized based on SAB 104 and ASC 605-45 "Principal Agent Considerations". ASC 605-45 addresses whether a company should recognize revenue based on (a) the gross amount billed to a customer because it has earned revenue from the sale of the goods or services or (b) the net amount retained (that is, the amount billed to a customer less the amount paid to a publishers) because it has earned a commission or fee. The determination of whether revenues should be reported on a gross or net basis is based on an assessment of whether Vexigo is acting as a principal or an agent in the transaction. In determining whether Vexigo acts as a principal or an agent, the Company follows the accounting guidance for principal-agent considerations. While none of the factors identified in this guidance is individually considered presumptive or determinative, Vexigo has determined that in certain transactions, it is the primary obligor and has a structured inventory risk resulting from the fact that not all purchased ad spaces will be sold.

Accordingly, revenue from this activity is recorded as the gross amount billed to a customer. On the other hand, in arrangements in which Vexigo is not the primary obligor and has no inventory risk, revenues are recognized on the net amount retained.
 
m.
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.

n.
Capitalized development costs:

Capitalized development costs are recognized in accordance with ASC 350-40 "Capitalized Development Costs". Development activities involve a plan or design for the production of new or substantially improved products and processes. Development expenditure is 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 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. As of December 31, 2016 and 2015, the Company's total capitalized development costs amounted to $380 and $411, respectively. For further information refer to Note 7 - Intangible Assets.

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.
Income taxes:

The Company accounts for income taxes and uncertain tax positions in accordance with ASC Topic 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.

The Company implements a two-step approach to recognizing and measuring uncertain tax positions accounted for in accordance with ASC 740. 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.
 
p.
Accounting for share-based compensation ("ASC 718"):
 
The Company accounts for share-based compensation in accordance with ASC 718, "Compensation - Stock compensation," which requires the measurement and recognition of compensation expense based on estimated fair values for all share-based payment awards made to employees, directors and non-employees. 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 periods in the Company's consolidated statement of operations.

The Company recognizes these compensation costs net of a forfeiture rate and recognizes the compensation costs for only those shares expected to vest on an accelerated method 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.
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.)

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. The Company estimates the fair value of stock options granted with the following weighted average assumptions for 2016 and 2015:

   
Year ended December 31,
  
Stock options
  
2016
    
2015
  
             
Expected volatility (1)
  
87.59%-90.62%
 
  
81.57%-85.95%
 
Risk-free interest (2)
  
0.95%-1.29
 
  
1.08%-1.09%
 
Dividend yield (3)
  
0%
 
  
0%
 
Expected life (years) (4)
  
3.75-6.25
    
3.75
  

(1)
The computation of expected volatility is based on realized historical share price volatility of the Company's stock.

(2)
The risk-free interest rate is based on the yield from U.S. Treasury Bonds with an equivalent term;

(3)
The dividend yield assumption is based on the Company's historical experience and expectation of future dividend payouts. The Company has historically not paid dividends and has no foreseeable plans to pay cash dividends in the future.

(4)
Expected term of options granted represents the period of time that options granted are expected to be outstanding, and is estimated based on the Company's history.

The Company applies ASC 505-50 "Equity-Based Payment to Non-Employees" ("ASC 505-50") with respect to options and warrants issued to non-employees which requires the use of option valuation models to measure the fair value of the options and warrants at the measurement date.

q.
Fair value of financial instruments:

The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments:

The carrying amounts of cash and cash equivalents, restricted cash, marketable securities, trade receivables, other accounts receivable, trade payables, long term contingent earn-out liability and accrued liabilities approximate their fair value, due to the maturity of such instruments.

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 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)

The Company applies ASC 820 "Fair Value Measurement" ("ASC 820") which clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability. As a basis for considering such assumptions, ASC 820 establishes a three-tier value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value:

Level 1 -
quoted prices in active markets for identical assets or liabilities.

Level 2 -
inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 -
unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

The fair value of the Company’s marketable securities are based on quoted market prices and classified within Level 1 (Refer to Note 4). The Company’s derivatives instruments are classified within Level 2 as the valuation inputs are based on quoted prices and market observable data of similar instruments. The long term contingent earn-out consideration, based on future earnings of the Vexigo product line, are classified within Level 3 (Refer to Note 3).

r.
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, marketable securities, 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 (see Note 14). The Company performs ongoing credit evaluations of its customers. In certain circumstances, the Company may require letters of credit, other collateral or additional guarantees.

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 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)

The allowance for doubtful accounts is determined with respect to specific debts that are doubtful of collection according to management estimates.

The Company's marketable securities include investments in equity securities and Israeli government securities. Management believes that the portfolio is well diversified, and accordingly, minimal credit risk exists with respect to these marketable securities. The Company has no off-balance-sheet concentrations of credit risk.

s.
Basic and diluted net earnings (loss) per share:

Basic net earnings (loss) per share are computed based on the weighted average number of Ordinary shares outstanding during each year. Diluted net earnings (loss) per share is computed based on the weighted average number of Ordinary shares outstanding during each year, plus dilutive potential Ordinary shares considered outstanding during the year, in accordance with ASC topic 260, "Earnings Per Share" ("ASC 260").

Basic net earnings per share are computed based on the weighted average number of Ordinary shares outstanding during each year. No options have been included in the calculation of the diluted net earnings per Ordinary share due to the Company losses during all year presented.

t.
Derivatives instruments:

ASC 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 2016, 2015 and 2014, the Company entered into forward, call and put option contracts in the aggregate notional amounts of $8,200, $4,200 and $3,350, 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 2016, 2015 and 2014, the revaluation income (expenses) from these contracts with respect to the above transactions were $6, $(7) and $(79), respectively, and are presented in the statements of operations as financial income (expense), net. As of December 31, 2016, the Company had outstanding call and put option contracts in the amount of $ 1,950.

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 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)

u.
Comprehensive income (loss):

The Company accounts for comprehensive income (loss) in accordance with ASC Topic 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 relate to unrealized gains and losses on available for sale marketable securities and changes in foreign currency translation adjustments.

v.
Treasury shares:

Company shares held by MTS 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.

w.
Impact of recently issued accounting standards

1.
In February 2016, the FASB issued ASU 2016‑02—Leases (ASC 842), which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e. lessees and lessors). The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight line basis over the term of the lease, respectively. A lessee is also required to record a right‑of‑use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales‑type leases, direct financing leases and operating leases. The ASU is expected to impact our consolidated financial statements as we have certain operating lease arrangements. ASC 842 supersedes the previous leases standard, ASC 840 Leases. The standard is effective on January 1, 2019, with early adoption permitted. The Company is currently in the process of evaluating the impact of the adoption of this standard on its consolidated financial statements.

2.
In March 2016, the FASB issued ASU 2016-09 "Improvements to Employee Share-Based Payment Accounting". This ASU affects entities that issue share-based payment awards to their employees. The ASU is designed to simplify several aspects of accounting for share-based payment award transactions which include the income tax consequences, classification of awards as either equity or liabilities, classification on the statement of cash flows and forfeiture rate calculations. ASU 2016-09 will become effective for the Company in the annual period ending August 31, 2018. Early adoption is permitted in any interim or annual period. The Company is currently in the process of evaluating the impact of the adoption of this standard on its consolidated financial statements.
 
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 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)

3.
On May 28, 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, requiring an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The updated standard will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective and permits the use of either the retrospective or cumulative effect transition method.
 
In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing. ASU 2016-10 covers two specific topics: performance obligations and licensing. This amendment includes guidance on immaterial promised goods or services, shipping or handling activities, separately identifiable performance obligations, functional or symbolic intellectual property licenses, sales-based and usage-based royalties, license restrictions (time, use, geographical) and licensing renewals. In addition, in May 2016, FASB issued ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, which is intended to not change the core principle of the guidance in Topic 606, but rather affect only the narrow aspects of Topic 606 by reducing the potential for diversity in practice at initial application and by reducing the cost and complexity of applying Topic 606 both at transition and on an ongoing basis.
        
In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers: Deferral of the Effective Date, which deferred the effective date of the new revenue standard for periods beginning after December 15, 2016 to December 15, 2017, with early adoption permitted but not earlier than the original effective date. Accordingly, the updated standard is effective for the Company in the first quarter of 2018 and the Company does not plan to early adopt. The Company has not yet selected a transition method and the Company is currently evaluating the effect that the updated standard will have on the Company's consolidated financial statements and related disclosures.
 
While the Company is continuing to assess all potential impacts of the new standard, the Company currently believes the most significant impact relates to the Company's accounting for arrangements that include software licenses bundled with maintenance and support. Under current GAAP, the revenue attributable to these software licenses is recognized ratably over the term of the arrangement because VSOE does not exist for the undelivered maintenance and support element as it is not sold separately. The requirement to have VSOE for undelivered elements to enable the separation of revenue for the delivered software licenses is eliminated under the new standard. Accordingly, under the new standard the Company will be required to recognize as revenue a portion of the arrangement fee upon delivery of the software license. Except of the changes above, the Company currently expects revenue related to the product, services and cloud offerings will remain substantially unchanged. However, the Company is still in the process of evaluating the impact of the new standard on these arrangements and additional changes may be identified. Due to the complexity of certain of our contracts, the actual revenue recognition treatment required under the new standard for these arrangements may be dependent on contract-specific terms and may vary in some instances.
 
4.
In August 2016, FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230) Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 eliminates the diversity in practice related to the classification of certain cash receipts and payments for debt prepayment or extinguishment costs, the maturing of a zero coupon bond, the settlement of contingent liabilities arising from a business combination, proceeds from insurance settlements, distributions from certain equity method investees and beneficial interests obtained in a financial asset securitization. ASU 2016-15 designates the appropriate cash flow classification, including requirements to allocate certain components of these cash receipts and payments among operating, investing and financing activities. The retrospective transition method, requiring adjustment to all comparative periods presented, is required unless it is impracticable for some of the amendments, in which case those amendments would be prospectively as of the earliest date practicable. The standard is effective on January 1, 2019. The Company is currently assessing the impact of the adoption of this standard on its consolidated financial statements and footnote disclosures.
 
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 3:-
BUSINESS COMBINATION

Acquisition of Vexigo Ltd.

On April 1, 2015 ("Closing Date") the Company completed the acquisition of 100% of the shares of Vexigo pursuant to a share purchase agreement ("SPA"). Vexigo was a privately-held Israeli-based software company supporting video advertising over the internet and mobile devices. The financial results of Vexigo are included in the consolidated financial statements from the Closing Date. The total consideration consisted of:
 
·
Cash consideration of $4,000, was to be paid in three instalments as follows: (a) at Closing Date $3,000 and, (b) two additional instalments of $500 each, three and six months following the Closing Date. Such payments were further extended as described below.
 
·
3,115,090 ordinary shares of the Company issued at Closing Date having a total value of $ 4,368, which considered the market restrictions on these shares.
 
·
Milestone-based contingent cash payments based on Vexigo's product line EBITDA post acquisition, of up to $16,000 payable over 5.5 years. The fair value of the contingent consideration amounted to approximately $6,532, net of termination fees. At Closing Date the Company recorded a related liability.
 
·
The SPA assumed zero working capital and included customary net working capital adjustments to the purchase price as defined in the SPA.
 
In addition, the Company incurred acquisition related costs of $424, which are included in general and administrative expenses for the year ended December 31, 2015. Acquisition related costs include legal, accounting and finder’s fees and other costs directly related to the acquisition.

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 3:-
BUSINESS COMBINATION (Cont.)

In addition to the above, the Company undertook to pay a pre-closing declared dividend in the amount of $1,554. During 2015, the Company paid $554 on account of such pre-closing obligation of Vexigo to pay the previously declared dividend to its shareholders. The remained balance of $1,000 was paid during 2016.

 In February 2016, the Company reached an agreement to extend the payment schedule for the consideration due to be paid to the former shareholders of Vexigo, totaling $2,600. (See Note 1c).
 
Under business combination accounting the total purchase price was allocated to Vexigo's net tangible and intangible assets based on their estimated fair values as set forth below. The excess of the purchase price over the net tangible and identifiable intangible assets was recorded as goodwill.

Intangible assets:
 
   
Closing Date
April 1, 2015
  
       
Total assets
  
$
204
  
Total liabilities
    
(148
)
Technology
    
4,433
  
Goodwill
    
11,107
  
 Deferred tax liability
    
(709
)
         
Total consideration
  
$
14,887
  

 Intangible asset

In performing a purchase price allocation, the Company considered, among other factors, analysis of historical financial performance, highest and best use of the acquired assets and estimates of future performance of Vexigo's products. The fair value of Vexigo’s Video Advertising technology of $4,433 (useful life 5.5 years) was based on a valuation, performed by the Company's management with the assistance of a third party valuation firm using estimates and assumptions provided by management.

Regarding goodwill and technology impairment during 2016 and 2015 see Notes 7 and 8.
 
 Condensed combined pro forma information

The following unaudited condensed combined pro forma information for the years ended December 31, 2014 and 2015, gives effect to the acquisition of Vexigo as if the acquisition had occurred on January 1, 2014. The pro forma information is not necessarily indicative of the results of operations, which actually would have occurred if the acquisition had been consummated on that date, nor does it purport to represent the results of operations for future periods. For the purposes of the pro forma information, the Company has assumed that all Vexigo revenues prior to the acquisition date were recognized on gross basis (Refer to Note 2.l.) and net income includes additional amortization of intangible assets related to the acquisition of $ 806 in each of 2014 and 2015, and its related tax effects.
 
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 3:-
BUSINESS COMBINATION (Cont.)

   
Year ended December 31,
  
   
2015
    
2014
  
   
Unaudited
  
             
Revenues
  
$
18,964
    
$
17,319
  
Net income (loss)
    
(3, 923
)
    
251
  
Basic and diluted earnings (loss) per share
  
$
(0.55
)
  
$
0.03
  

        Contingent earn-out consideration

Under business combination accounting, the Company is required to measure the contingent consideration related to an earn-out at its fair value on each reporting date. For the purpose of ASC 805, the Company used a third party specialist, to perform the fair value valuation as of the closing date and as of every balance sheet date thereafter. The fair value of the earn-outs was measured using a Monte Carlo simulation of the triangular model, for possible EBITDA for the 5.5 years following the closing date. As of the Closing Date and December 31, 2015 the total contingent consideration was determined to be $6,732 and $4,255, respectively. Contingent consideration is classified as a liability and may be adjusted to fair value at each reporting date through earnings, until the contingency is resolved and may affect the Company's results in the future. As part of the impairment valuation performed during the fourth quarter of 2016, the fair value of the earn-outs as of December 31, 2016 was estimated to be zero, due to the updated projections of the Company and the re-evaluation study that was performed.
 
NOTE 4:-        MARKETABLE SECURITIES

The following is a summary of the Company's accumulated gross unrealized gains/ losses from investments in marketable securities as of December 31, 2016 and 2015:

   
December 31, 2016
    
December 31, 2015
  
   
Amortized
    
Gross unrealized
    
Gross unrealized
    
Fair
market
    
Amortized
    
Gross unrealized
    
Gross unrealized
    
Fair
market
  
   
cost
    
gains
    
losses
    
value
    
Cost
    
gains
    
losses
    
value
  
Available-for-sale:
                                                
                                                 
Equity securities
  
$
77
    
$
-
    
$
-
    
$
77
    
$
87
    
$
-
    
$
(2
)
  
$
85
  
Corporate bonds
    
41
      
*) -
 
    
-
      
41
      
16
      
*) -
 
    
-
      
16
  
Israeli Government debt
    
18
      
-
      
*) -
 
    
18
      
36
      
-
      
(3
)
    
33
  
                                                                 
   
$
136
    
$
-
    
$
-
    
$
136
    
$
139
    
$
-
    
$
(5
)
  
$
134
  

*)          Represents an amount less than $ 1.

The net realized gains (losses) on sales of available-for-sale securities of $ (4), $ (8) and $ 10 in 2016, 2015 and 2014, respectively, were recorded in financial income (expense), net.

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 4:-        MARKETABLE SECURITIES (Cont.)

The amortized cost and fair value of debt and securities as of December 31, 2016 and 2015, by contractual maturity, are shown below:

   
December 31, 2016
    
December 31, 2015
  
   
Amortized cost
    
Fair market value
    
Amortized cost
    
Fair market value
  
                         
Matures up to one year
  
$
94
    
$
94
    
$
126
    
$
121
  
Matures after one year through five years
    
34
      
34
      
12
      
13
  
Matures after five years
    
8
      
8
      
-
      
-
  
                                 
Total
  
$
136
    
$
136
    
$
138
    
$
134
  

The marketable securities are restricted in order to secure the Company's obligations under an office lease (For further information refer to Note 10).
 
NOTE 5:-
OTHER ACCOUNTS RECEIVABLE AND PREPAID EXPENSES

   
December 31,
  
   
2016
    
2015
  
             
Government authorities
  
$
278
    
$
58
  
Prepaid expenses
    
37
      
21
  
Lease deposits
    
4
      
6
  
Others
    
24
      
18
  
                 
   
$
343
    
$
103
  

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 6:-
PROPERTY AND EQUIPMENT

   
December 31,
  
   
2016
    
2015
  
Cost:
            
             
Computers and peripheral equipment
  
$
1,094
    
$
987
  
Office furniture and equipment
    
216
      
200
  
Leasehold improvements
    
36
      
30
  
                 
     
1,346
      
1,217
  
Accumulated depreciation:
                
                 
Computers and peripheral equipment
    
961
      
877
  
Office furniture and equipment
    
170
      
164
  
Leasehold improvements
    
17
      
16
  
                 
Accumulated depreciation
    
1,148
      
1,057
  
                 
Depreciated cost
  
$
198
    
$
160
  

The depreciation expense for the years ended December 31, 2016, 2015 and 2015 amounted to $ 91, $ 96 and $ 106, respectively.
 
NOTE 7:-
INTANGIBLE ASSETS, NET

a.
Intangibles consist of the following:
 
   
December 31,
  
   
2016
    
2015
  
Cost:
            
             
Developed technology
  
$
2,170
    
$
2,170
  
Customer relationships
    
1,015
      
1,015
  
Brand name
    
229
      
229
  
Capitalized developed costs
    
791
      
411
  
Video technology
    
4,433
      
4,433
  
Video technology and capitalized developed cost impairment
    
(3,763
)
    
-
  
                 
     
4,875
      
8,258
  
Accumulated amortization:
                
                 
Developed technology
    
2,170
      
2,045
  
Customer relationships
    
1,015
      
1,001
  
Brand name
    
166
      
146
  
Video technology
    
1,461
      
605
  
                 
     
4,812
      
3,797
  
                 
Amortized cost
  
$
63
    
$
4,461
  

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 7:-
INTANGIBLE ASSETS, NET (Cont.)

b.
Amortization expense amounted to $ 1,015, $ 772 and $ 1,782 for the years ended December 31, 2016, 2015 and 2014, respectively.

c.
Estimated amortization expense for:

Year ended December 31,
      
       
2017
  
$
21
  
2018
    
21
  
2019
    
21
  
         
   
$
63
  
 
NOTE 8:-
GOODWILL

The Company's goodwill balance is assigned to the Enterprise and Video Advertising reporting units as follows:
 
     
December 31,
2016
  
       
January 1, 2014 and December 31, 2014  (Enterprise reporting unit)
  
$
3,479
  
         
Acquisition of Video Advertising business (Note 3)
    
11,107
  
Goodwill impairment in 2015 (Note 1)
    
(6,288
)
Goodwill impairment in 2016 (Note 1)
    
(4,819
)
         
December 31, 2016
  
$
3,479
  


NOTE 9:-
ACCRUED EXPENSES AND OTHER LIABILITIES

   
December 31,
  
   
2016
    
2015
  
             
Employees and payroll accruals
  
$
969
    
$
759
  
Institutions and income tax payable
    
177
      
303
  
Accrued expenses
    
1,390
      
1,152
  
Related parties
    
1,220
      
1,291
  
                 
   
$
3,756
    
$
3,505
  
 
F - 30
MER TELEMANAGEMENT SOLUTIONS LTD.
AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
 
NOTE 10:-
COMMITMENTS AND CONTINGENT LIABILITIES

a.
Lease commitments:

The Group leases office space and motor vehicles through operating leases. The facilities of the Company and its subsidiaries are leased for periods ending February 2019. Future minimum lease commitments under non-cancelable operating leases as of December 31, 2016 are as follows:

Year ended December 31,
      
       
2017
  
$
176
  
2018
    
116
  
2019
    
10
  
         
   
$
302
  

Operating lease expenses for the years ended December 31, 2016, 2015 and 2014 were approximately $451, $411 and $379, respectively.

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 is subject to interest at a rate equal to the 12 month 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, 2016, the Company had a contingent liability to pay royalties in the amount of approximately $8,453 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 $112, $115 and $103 for the years ended December 31, 2016, 2015 and 2014, respectively.

F - 31
MER TELEMANAGEMENT SOLUTIONS LTD.
AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)

NOTE 10:-     COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)

c.
Claims and demands:

1.
Claims related to discontinued operations:

The Company is a party to various tax claims that arose in TABS Brazil. Accordingly, the Company recorded a provision of approximately $14 in respect of such claims in accordance with ASC 450, "Contingencies", based on the legal counselor.

In August 2007, TABS Brazil was ordered by the Labor Law Court in Brazil to pay approximately $51 to one of its former employees. Such amount bears a 1% interest rate per month from the date that the claim was filed. The Company recorded a provision in its financial statements for the total amount of the claim. As of December 31, 2016 total claims related to discontinued operations amounted to $132.
 
2.
The Israeli Government, through the Fund for Encouragement of Marketing Activities, awarded C. Mer Industries Ltd. (“C. Mer”), a related party of the Company grants for participation in foreign marketing expenses, partially related to the Company's marketing activities for the years 1996 - 1998. During 2012, the Company received through an affiliated company a demand with respect to the reimbursement of above-mentioned grants. As of December 31, 2016 and 2015, the Company provided a provision in the amount that was considered probable.
 
d.
Guarantees:

The Company provided a bank guarantee in the amount of $ 69 to secure its obligations under one of its lease agreements, as describe in more details in Note 4.
 
NOTE 11:-      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 as follows: 2013 - 25%, 2014 and 2015- 26.5%. On January 5, 2016, the Israeli Parliament officially published the Law for the Amendment of the Israeli Tax Ordinance (Amendment 216), that reduces the standard corporate income tax rate from 26.5% to 25%. In December 2016, the Israeli Parliament approved the Economic Efficiency Law (Legislative Amendments for Applying the Economic Policy for the 2017 and 2018 Budget Years), 2016 which reduces the corporate income tax rate to 24% (instead of 25%) effective from January 1, 2017 and to 23% effective from January 1, 2018.
F - 32
MER TELEMANAGEMENT SOLUTIONS LTD.
AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
 
NOTE 11:-      TAXES ON INCOME (Cont.)

2.
Tax benefits under the Law for the Encouragement of Capital Investments, 1959 ("the Law"):

According to the Law, the Company is entitled to various tax benefits by virtue of the "approved enterprise" status granted to part of their enterprises, as implied by this Law. The principal benefits by virtue of the Law are:

According to the provisions of the Law, the Company has chosen to enjoy the "Alternative" track. Under this track, the Company is tax exempt in the first two years of the benefit period and subject to tax at the reduced rate of 10%-25% for a period of several years for the remaining benefit period.

Another condition for receiving the benefits under the alternative track is a minimum qualifying investment. This condition requires an investment in the acquisition of productive assets such as machinery and equipment which must be carried out within three years. The minimum qualifying investment required for setting up a plant is NIS 300,000.

As for plant expansions, the minimum qualifying investment is the higher of NIS 300,000 and an amount equivalent to the "qualifying percentage" of the value of the productive assets. Productive assets that are used by the plant but not owned by it will also be viewed as productive assets.

The Company was eligible under the terms of minimum qualifying investment and elected 2008 as its "year of election".
 
The income qualifying for tax benefits under the alternative track is the taxable income of a company that has met certain conditions as determined by the Investment Law ("a beneficiary company"), and which is derived from an industrial enterprise. The Investment Law specifies the types of qualifying income that is entitled to tax benefits under the alternative track with respect of an industrial enterprise, whereby income from an industrial enterprise includes, among others, revenues from the production and development of software products and revenues from industrial research and development activities performed for a foreign resident (and approved by the Head of the Administration of Industrial Research and Development).
 
F - 33
MER TELEMANAGEMENT SOLUTIONS LTD.
AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
 
NOTE 11:-      TAXES ON INCOME (Cont.)

The benefit period starts with the first year the beneficiary enterprise earns taxable income, provided that 14 years have not passed since the approval was granted and 12 years have not passed since the enterprise began operating. In respect of expansion programs pursuant to Amendment No. 60 to the Investment Law, the benefit period starts at the later of the year elected and the first year the Company earns taxable income provided that 12 years have not passed since the beginning of the year of election. The respective benefit period has not yet begun However, the benefit period is expected to end on December 31, 2019.

The above benefits are contingent upon the fulfillment of the conditions stipulated by the Investment Law, regulations published there-under and the letters of approval for the investments in the approved enterprises, as above. Non-compliance with the conditions may cancel all or part of the benefits and refund of the amount of the benefits, including interest. Management believes that the Company is meeting the aforementioned conditions.

Amendment to the Law for the Encouragement of Capital Investments, 1959 (Amendment 68):

In January 2011, the Law for Economic Policy for 2011 and 2012 (Amended Legislation), 2011 ("the Amendment") was enacted. The Amendment prescribes, among others, amendments to the Law for the Encouragement of Capital Investments, 1959 ("the Law"). The Amendment became effective as of January 1, 2011. According to the Amendment, the benefit tracks in the Law were modified and a flat tax rate applies to the Company's entire preferred income under its status as a preferred company with a preferred enterprise. Commencing from the 2011 tax year, the Company can elect (without possibility of reversal) to apply the Amendment in a certain tax year and from that year and thereafter, it will be subject to the amended tax rates, as detailed below.

As of December 31, 2016, the Company chose not to adopt this amendment, but may elect to do so in the future. Vexigo chose to adopt this amendment and believes it is entitled to benefit from a reduced corporate tax rate under the Israeli privileged enterprise program.

Amendment to the Law for the Encouragement of Capital Investments, 1959 (Amendment 71):
 
In August 2013, the Law for Changing National Priorities (Legislative Amendments for Achieving Budget Targets for 2013 and 2014), 2013 which includes Amendment 71 to the Law for the Encouragement of Capital Investments ("the Amendment") was enacted. According to the Amendment, the tax rate on preferred income from a preferred enterprise in 2014 and thereafter will be 16% (in development area A - 9%). As for changes in tax rates resulting from the enactment of Amendment 73 to the Law, see below.
F - 34
MER TELEMANAGEMENT SOLUTIONS LTD.
AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
 
NOTE 11:-      TAXES ON INCOME (Cont.)
 
The Amendment also prescribes that any dividends distributed to individuals or foreign residents from the preferred enterprise's earnings as above will be subject to tax at a rate of 20%.

Amendment to the Law for the Encouragement of Capital Investments, 1959 (Amendment 73):
 
In December 2016, the Economic Efficiency Law (Legislative Amendments for Applying the Economic Policy for the 2017 and 2018 Budget Years), 2016 which includes Amendment 73 to the Law for the Encouragement of Capital Investments ("the Amendment") was published. According to the Amendment, a preferred enterprise located in development area A will be subject to a tax rate of 7.5% instead of 9% effective from January 1, 2017 and thereafter (the tax rate applicable to preferred enterprises located in other areas remains at 16%).
 
The Amendment also prescribes special tax tracks for technological enterprises, which are subject to rules that are to be issued by the Minister of Finance by March 31, 2017.
 
The new tax track under the Amendment, which may be relevant to the Company is as follows:
 
Technological preferred enterprise - an enterprise for which total consolidated revenues of its parent company and all subsidiaries are less than NIS 10 billion. A technological preferred enterprise, as defined in the Law, which is located in the center of Israel will be subject to tax at a rate of 12% on profits deriving from intellectual property (in development area A - a tax rate of 7.5%).
 
Any dividends distributed to "foreign companies", as defined in the Law, deriving from income from the technological enterprises will be subject to tax at a rate of 4%.
 
Since as of December 31, 2016 definitive criteria to determine the tax benefits had not yet been established, it cannot be concluded that the legislation in respect of technological enterprises had been enacted or substantively enacted as of that date. Accordingly, the above changes in the tax rates relating to technological enterprises were not taken into account in the computation of deferred taxes as of December 31, 2016.
 
3.
The Law for the Encouragement of Industry (Taxation), 1969:
 
The Company has the status of an "industrial company", as defined by this law. According to this status and by virtue of regulations published thereunder, the Company is entitled to claim a deduction of accelerated depreciation on equipment used in industrial activities, as determined in the regulations issued under the Inflationary Law. The Company is also entitled to amortize a patent or rights to use a patent or intellectual property that are used in the enterprise's development or advancement, to deduct issuance expenses for shares listed for trading, and to file a consolidated income tax report under certain conditions.
F - 35
MER TELEMANAGEMENT SOLUTIONS LTD.
AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
 
NOTE 11:-      TAXES ON INCOME (Cont.)
 
4.
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.
 
5.
Tax assessments:
 
The Company and Vexigo have received final tax assessments through the 2012 and 2011 tax year.

F - 36
MER TELEMANAGEMENT SOLUTIONS LTD.
AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
 
NOTE 11:-      TAXES ON INCOME (Cont.)
 
b.
Income taxes on non-Israeli subsidiaries:

Non-Israeli subsidiaries are taxed according to the tax laws in their respective countries of residence.

c.
Net operating loss carry-forwards:

As of December 31, 2016, the Company and its subsidiaries in Hong Kong, U.S. and Vexigo (Israel) had an estimated total amount of available carry-forward tax losses of approximately $ 20,791, $ 452, $ 648, and $ 407, 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, 2016, the Company had capital losses in the amount of approximately $ 459 that can be carried forward indefinitely.

F - 37
MER TELEMANAGEMENT SOLUTIONS LTD.
AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
 
NOTE 11:-      TAXES ON INCOME (Cont.)

MTS IntegraTRAK is subject to U.S. income taxes. Total net operating loss carry-forwards of approximately $ 648 as of December 31, 2016, 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.

d.
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,
  
   
2016
    
2015
  
Deferred tax asset (liability):
            
             
Tax loss carry-forwards
  
$
5,492
    
$
5,593
  
Allowances for doubtful accounts and accruals for employee benefits
    
111
      
103
  
Intangible assets
    
67
      
81
  
Depreciation, accruals for interest and other
    
808
      
746
  
                 
Deferred tax asset before valuation allowance
    
6,478
      
6,523
  
Goodwill and deferred tax
    
(989
)
    
(834
)
Valuation allowance
    
(5,323
)
    
(6,369
)
                 
Deferred tax liability, net
  
$
(166
)
  
$
(680
)

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 - 38
MER TELEMANAGEMENT SOLUTIONS LTD.
AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)

NOTE 11:-      TAXES ON INCOME (Cont.)

e.
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,
  
   
2016
    
2015
    
2014
  
                   
Loss before taxes on income, net, as reported in the statements of operations from continuing operations
  
$
(5,701
)
  
$
(4,722
)
  
$
(1,636
)
                         
Tax rates
    
25
%
    
26.5
%
    
26.5
%
                         
Theoretical tax benefit
  
$
(1,425
)
  
$
(1,251
)
  
$
(434
)
                         
Decrease in taxes resulting from:
                        
                         
Non – deductible expenses
    
1,175
      
1,255
      
156
  
Loss and timing differences for which no deferred tax was provided
    
(334
)
    
209
      
297
  
Tax adjustment in respect of different tax rate of subsidiaries
    
75
      
(49
)
    
34
  
Changes in provision for uncertain tax positions
    
2
      
30
      
1
  
                         
Taxes on income, net, as reported in the statements of operations
  
$
(507
)
  
$
194
    
$
54
  
 
f.
Loss before income taxes is comprised as follows:
 
   
Year ended December 31,
  
   
2016
    
2015
    
2014
  
                   
Domestic
  
$
(5,743
)
  
$
(4,855
)
  
$
(1,785
)
Foreign
    
42
      
133
      
149
  
                         
   
$
(5,701
)
  
$
(4,722
)
  
$
(1,636
)

F - 39
MER TELEMANAGEMENT SOLUTIONS LTD.
AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
 
NOTE 11:-      TAXES ON INCOME (Cont.)

g.
Taxes on income are comprised as follows:

   
Year ended December 31,
  
   
2016
    
2015
    
2014
  
                   
Current taxes
  
$
7
    
$
153
    
$
29
  
Deferred taxes
    
(514
)
    
41
      
25
  
                         
   
$
(507
)
  
$
194
    
$
54
  
                         
Foreign
  
$
63
    
$
57
    
$
45
  
Domestic
  
$
(570
)
  
$
137
    
$
9
  
   
$
(507
)
  
$
194
    
$
54
  
 
h.
As of December 31, 2016, the Company recorded a liability for unrecognized tax benefits of $135. A reconciliation of the opening and closing amounts of unrecognized tax benefits is as follows:

   
December 31,
  
   
2016
    
2015
  
             
Balance as of beginning of the year
  
$
132
    
$
102
  
Additions based on tax positions taken during the current period
    
3
      
30
  
                 
Balance at the end of the year
  
$
135
    
$
132
  
 
NOTE 12:-     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. For the years ended December 31, 2016, 2015 and 2014, the Company paid or accrued $12, $11 and $11, respectively, with respect to the above mentioned expenses. In 2012 MTS Ltd. engaged with Mer Telecom Ltd., a subsidiary of C. Mer, in a deployment of its mobile financial services ("MFS") solution for a customer in Africa and completed the deployment in 2013. The Company recorded revenue in the amount of $ 14, $ 33 and $ 33 in 2016, 2015 and 2014, respectively. As of December 31, 2016 the solution was implemented, but the customer has not yet activated the solution.

F - 40
MER TELEMANAGEMENT SOLUTIONS LTD.
AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)

NOTE 12:-     RELATED PARTY TRANSACTIONS AND BALANCES (Cont.)
 
In 2014, the Company engaged with Athena Ltd., a subsidiary of C. Mer, in a deployment of a MFS solution for a customer in Africa in the amount of $ 65. As of December 31, 2015, the solution was completed and delivered and therefore revenue was recognized in 2015.

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 director of the Company and the controlling shareholder of the Info Group Inc., a beneficial owner of 12.5% of the Company's Ordinary shares as of December 31, 2016. 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 $ 9, $9 and $ 30 for the years ended December 31, 2016, 2015 and 2014, respectively. In addition, the Company rents an office in Powder Springs, Georgia, from Mr. Challen, under a month-to-month lease. In each of the years ended December 31, 2016, 2015 and 2014, the Company paid or accrued $ 56 with respect to the above mentioned rent expenses.

Regarding liabilities to related party derived from the Vexigo acquisition, see note 1.c.

b.
Balances and transactions with related parties were as follows:

1. Balances with related parties:

   
December 31,
  
   
2016
    
2015
  
             
Other accounts receivable and prepaid expenses (Note 5)
  
$
10
    
$
10
  
                 
Other accounts payable and accrued expenses (Note 9)
  
$
1,220
    
$
1,291
  

F - 41
MER TELEMANAGEMENT SOLUTIONS LTD.
AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)

NOTE 12:-     RELATED PARTY TRANSACTIONS AND BALANCES (Cont.)

2. Transactions with related parties:

   
Year ended December 31,
  
   
2016
    
2015
    
2014
  
                   
Revenues derived from a related party
  
$
14
    
$
33
    
$
37
  
                         
Amounts charged by related parties:
                        
                         
Cost of revenues
  
$
36
    
$
37
    
$
83
  
Operating expenses
    
142
      
139
      
180
  
                         
   
$
178
    
$
176
    
$
263
  
 
NOTE 13:-     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.

On April 1, 2015, upon closing the Vexigo transaction, the Company issued an aggregate of 3,115,090 restricted ordinary shares constituting 40% of the Company outstanding ordinary shares post-closing to the former shareholders of Vexigo.

Upon the closing of the Vexigo transaction, the Company issued to an independent business consultant (who subsequently became the Company's chief executive officer) a warrant based on a cashless exercise mechanism to acquire 2% of the Company's outstanding ordinary shares on a pre-closing basis (93,453 ordinary shares based on the number of shares outstanding prior to the closing) with an exercise price equal to the market price of the Ordinary shares at the signing of the SPA (i.e., $0.96 per share) valid for a period of five years.

On May 11, 2015, the Company issued in a private placement to certain of its shareholders an aggregate of 227,271, Ordinary shares for an aggregate of $500, pursuant to a share purchase agreement.

On May 16, 2016, the Company issued in a private placement to certain of its shareholders an aggregate of 648,475, Ordinary shares, for an aggregate of $700, out of which amount, an aggregate of $400 was invested by former Vexigo shareholders, out of the outstanding amount owed to them.

F - 42
MER TELEMANAGEMENT SOLUTIONS LTD.
AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)

NOTE 13:-     SHAREHOLDERS' EQUITY (Cont.)

b.         Share options:

The Company’s 1996 Incentive Share Option Plan (the "Plan") when adopted, authorized the grant of options to purchase up to 750,000 of its Ordinary shares to officers, employees and directors of the Company or any subsidiary, pursuant to section 102 of the Israel Income Tax Ordinance. Any option, which is canceled or forfeited before expiration, will become available for future grants.

Each option granted under the 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 plans may not be less than the nominal value of the shares into which such options were exercised. The options primarily vest gradually over four years of employment.

In 2003, pursuant to an amendment in section 102 of the Israeli Income Tax Ordinance the Company rolled-over the remaining 446,958 options available at that time under the Plan for future grants under the 2003 Incentive Share Option Plan (the "2003 Plan") that conforms with the amended provisions of section 102 of the Israel Income Tax Ordinance. In August 2013, shareholders approved amendments to the 2003 Plan. Its term was extended by ten years so that the 2003 Plan will expire on November 30, 2023, unless further extended. The number of ordinary shares issuable under the 2003 Plan was increased by an additional 500,000 Ordinary shares, so that the Company is entitled to issue up to 946,957 ordinary shares under the 2003 Plan. In August 2016, shareholders approved the increase of the number of ordinary shares issuable under the 2003 Plan by an additional 500,000 Ordinary shares, so that the Company is entitled to issue up to 1,446,957 ordinary shares under the 2003 Plan.

In June 2006, the Company authorized pursuant to its 2006 Stock Option plan (the "2006 Plan"), to grant options to officers, employees and directors of MTS IntegraTRAK or any subsidiary of up to 200,000 of the Company's Ordinary shares. 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".

At the Company's 2011 annual general meeting, shareholders approved an amendment to the 2006 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 there-under to any eligible employee during any 12 month period to 150,000 Ordinary shares, subject to adjustment as provided in the 2006 Plan.

At the Company's 2013 annual general meeting, shareholders approved an amendment to the 2006 Plan to provide for the issuance thereunder of an additional 150,000 Ordinary shares, such that the Company will be entitled to issue options to purchase up to 550,000 Ordinary shares under 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.

F - 43
MER TELEMANAGEMENT SOLUTIONS LTD.
AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)

NOTE 13:-     SHAREHOLDERS' EQUITY (Cont.)

As of December 31, 2016 803,034 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, 2016 and changes during the year ended December 31, 2016 are as follows:
 
   
Number of
options
    
Weighted-
average
exercise
price
    
Weighted-
average
remaining
contractual
term (in
years)
    
Aggregate
intrinsic
value
  
                         
Outstanding at January 1, 2016
    
566,145
    
$
1.45
      
-
      
-
  
Granted
    
397,674
    
$
1.15
      
9.58
      
-
  
Exercised
    
-
    
$
-
      
-
      
-
  
Expired and forfeited
    
12,000
    
$
1.07
      
-
      
-
  
                                 
Outstanding at December 31, 2016
    
951,819
    
$
1.45
      
4.90
    
$
-
  
                                 
Vested and expected to vest
    
851,980
    
$
1.38
      
5.22
    
$
-
                                 
Exercisable at December 31, 2016
    
302,750
    
$
1.63
      
0.80
    
$
-
 

The weighted average grant-date fair value of options granted during 2016 and 2015 was $ 1.21 per option.

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, 2016, 2015 and 2014 amounted at $205, $170 and $84, respectively, net of estimated forfeitures.

As of December 31, 2016, there was $314 of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the Company's stock option plans.

F - 44
MER TELEMANAGEMENT SOLUTIONS LTD.
AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
 
NOTE 13:-
SHAREHOLDERS' EQUITY (Cont.)

d.
Total stock-based compensation expenses recognized in 2015 and 2016:

The total stock-based compensation expense related to employees' equity-based awards, recognized for the years ended December 31, 2016, 2015 and 2014, was comprised as follows:

   
Year ended December 31,
  
   
2016
    
2015
    
2014
  
                   
Cost of revenues
  
$
8
    
$
17
    
$
11
  
Research and development
    
30
      
45
      
13
  
Selling and marketing
    
12
      
12
      
1
  
General and administrative
    
155
      
96
      
59
  
                         
   
$
205
    
$
170
    
$
84
  

e.
Options to non-employees:

Issuance date
  
In connection with
  
Number of options granted
    
Options exercisable
    
Exercise price per share
  
Exercisable through
                                   
April 1, 2015
  
consultant
  
80,000
    
-
    
0.88
  
April 2020

Our former CEO, Mr. Salansky currently serves as a consultant to the Company’s Board of  Directors and agreed to provide his consulting services in consideration for the extension of the option granted to him on April 1, 2015 (which became fully vested on April 1, 2016) to acquire 80,000 ordinary shares under our 2003 Plan. Total stock-based compensation expense related to non-employees' equity-based awards, recognized in 2016 was $ 18.
 
NOTE 14:-     REPORTABLE SEGMENTS AND GEOGRAPHIC INFORMATION

a.
Reportable segments:

The Chief Operating Decision Maker ("CODM") assesses the Company's business based on three operating segments: Enterprise, Service Providers and Video Advertising. Enterprise segment includes TEM, services and solutions. The Service Providers segments include Billing and MVNE services and solutions. These three segments also comprise the Company's reporting units. The CODM uses adjusted net income before interest, tax, depreciation and amortization, goodwill impairment, net of change in contingent earn-out considerations, capital gain and stock based compensation ("adjusted EBITDA"), to assess performance, measure liquidity and make decisions. Adjusted EBITDA is a non-GAAP unaudited measure of profit and loss.

The Company's segments are engaged in business activities for which they earn revenues and incur expenses, their results are reviewed by the CODM and discrete financial information is available.

Asset information, by reportable segment, is not reviewed by the CODM, therefore segment asset disclosure is not included.

F - 45
MER TELEMANAGEMENT SOLUTIONS LTD.
AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)

NOTE 14:-     REPORTABLE SEGMENTS AND GEOGRAPHIC INFORMATION (Cont.)

The following tables present the financial information for the Company's reportable segments.

   
Year ended December 31,
  
   
2016
    
2015
    
2014
  
                   
Enterprise
                  
                   
Revenue
  
$
6,663
    
$
6,860
    
$
6,601
  
Adjusted EBITDA (unaudited)
  
$
513
    
$
676
    
$
512
  
                         
                         
Video Advertising
                        
                         
Telecom revenue
  
$
6,502
    
$
7,017
  (*)  
$
-
  
Adjusted EBITDA (unaudited)
  
$
(327
)
  
$
(273
 )(*)  
$
-
  
                         
Service Providers
                        
                         
Telecom revenue
  
$
887
    
$
835
    
$
465
  
Adjusted EBITDA (unaudited)
  
$
(296
)
  
$
(556
 )  
$
(1,700
)
                         
Total
                        
                         
Revenue
  
$
14,052
    
$
14,712
    
$
7,066
  
Adjusted EBITDA (unaudited)
  
$
(110
)
  
$
(153
 )  
$
(1,188
)

(*)   Financial information for the nine months ended on December 31, 2015

A reconciliation of total adjusted EBITDA to net income for each year is as follows:

   
Year ended December 31,
  
   
2016
    
2015
    
2014
  
                   
Adjusted EBITDA (unaudited)
  
$
(110
)
  
$
(153
)
  
$
(1,188
)
Depreciation and amortization expenses
    
(1,106
)
    
(868
)
    
(284
)
Stock-based compensation
    
(223
)
    
(170
)
    
(69
)
Financial expense (income), net
    
(17
)
    
(17
)
    
(95
)
Goodwill impairment, net of contingent consideration
    
(482
)
    
(3,514
)
    
-
  
Video advertising technology impairment
    
(3,763
)
    
-
      
-
  
Income tax effect
    
507
      
(194
)
    
(54
)
                         
Net income (loss) from continuing operations
  
$
(5,194
)
  
$
(4,916
)
  
$
(1,690
)
 
F - 46
MER TELEMANAGEMENT SOLUTIONS LTD.
AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
 
NOTE 14:-     REPORTABLE SEGMENTS AND GEOGRAPHIC INFORMATION (Cont.)

The total revenues from external customers are attributed to geographic areas based on the location of the customer:

   
Year ended December 31,
  
   
2016
    
2015
    
2014
  
                   
United States
  
$
6,860
    
$
11,450
    
$
5,642
  
Asia
    
1,984
      
1,493
      
300
  
Israel
    
3,178
      
571
      
440
  
Europe
    
1,147
      
923
      
376
  
Other
    
883
      
275
      
308
  
                         
   
$
14,052
    
$
14,712
    
$
7,066
  
 
NOTE 15:-     SUBSEQUENT EVENT

Following the year end and due to the continued weakness in the Company’s Video Advertising business, the Company took additional steps to reduce its operational expenses Company-wide and to eliminate non-profitable operations, including the layoff of employees and other cost-cutting measures.

During December 2016, the Company signed a new lease agreement for its executive offices in Israel; however, due to cost-cutting measures, the Company negotiated an agreement to cancel this lease in consideration of a payment of approximately $131.
 
 
 
 
F - 47
 
S I G N A T U R E S
 
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F/A and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
 
  MER TELEMANAGEMENT SOLUTIONS LTD.  
       
By:
/s/ Alon Mualem  
    Alon Mualem  
    Interim Chief Executive Officer and Chief Financial Officer  
       
Dated: May 18, 2017
 
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