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1.25"><br style="line-height: 1.25" /> </div> <div style="font: 10pt/1.25 Times New Roman, Times, serif; text-align: justify">A summary of significant accounting policies used in preparing the Company's financial statements, including a summary of recent accounting pronouncements that may affect its financial statements in the future, follows:</div> <div style="line-height: 1.25"><br style="line-height: 1.25" /> </div> <div style="font: italic bold 10pt/1.25 Times New Roman, Times, serif; text-align: justify">Use of Estimates</div> <div style="line-height: 1.25"><br style="line-height: 1.25" /> </div> <div style="font: 10pt/1.25 Times New Roman, Times, serif; text-align: justify">The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Such estimates and judgments are revised periodically as required. Actual results could differ from those estimates. Significant estimates include allowances for billing adjustments and doubtful accounts, the recoverability of long-lived assets and goodwill, income taxes, income tax valuation allowance, uncertain tax liabilities, the value of ordinary shares issued in asset acquisitions, business combinations or underlying the Company's ordinary share options, and estimates of likely outcomes related to certain contingent liabilities.</div> <div style="line-height: 1.25"><br style="line-height: 1.25" /> </div> <div style="font: 10pt/1.25 Times New Roman, Times, serif; text-align: justify">The Company evaluates its estimates on an ongoing basis. The Company's estimates and assumptions are based on factors such as historical experience, trends within the Company and the telecommunications industry, general economic conditions and on various other assumptions that it believes to be reasonable under the circumstances. The results of such assumptions form the basis for making judgments about the carrying values of assets and liabilities that are not readily available. Actual results may differ from the Company's estimates and assumptions as a result of varying market and economic conditions, and may result in lower revenues and net income.</div> <div style="line-height: 1.25"><br style="line-height: 1.25" /> </div> <div style="font: italic bold 10pt/1.25 Times New Roman, Times, serif; text-align: justify">Fair Value</div> <div style="line-height: 1.25"><br style="line-height: 1.25" /> </div> <div style="font: 10pt/1.25 Times New Roman, Times, serif; text-align: justify">The Company accounts for financial instruments in accordance with ASC 820, "Fair Value Measurements and Disclosures", which provides a framework for measuring fair value and expands required disclosure about fair value measurements of assets and liabilities. ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company's judgements about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.</div> <div style="line-height: 1.25"><br style="line-height: 1.25" /> </div> <div style="font: 10pt/1.25 Times New Roman, Times, serif; text-align: justify">The hierarchy is broken down into three levels based on the reliability of inputs as follows:</div> <div style="line-height: 1.25"><br style="line-height: 1.25" /> </div> <div style="font: 10pt/1.25 Times New Roman, Times, serif; text-align: justify; margin-left: 36pt">Level 1 &#8211; Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities.</div> <div style="line-height: 1.25"><br style="line-height: 1.25" /> </div> <div style="font: 10pt/1.25 Times New Roman, Times, serif; text-align: justify; margin-left: 36pt">Level 2 &#8211; Valuations based on inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.</div> <div style="line-height: 1.25"><br style="line-height: 1.25" /> </div> <div style="font: 10pt/1.25 Times New Roman, Times, serif; text-align: justify; margin-left: 36pt">Level 3 &#8211; Valuation based on inputs that are unobservable and significant to the overall fair value measurement.</div> <div style="line-height: 1.25"><br style="line-height: 1.25" /> </div> <div style="font: 10pt/1.25 Times New Roman, Times, serif; text-align: justify">When available, the Company uses quoted market prices to determine fair value, and it classifies such measurements within Level 1. Fair value measurements are classified according to the lowest level input or value-driver that is significant to the valuation. Fair value includes the consideration of nonperformance risk. Nonperformance risk refers to the risk that an obligation (either by a counterparty or the Company) will not be fulfilled. For the Company's financial assets traded in an active market (Level 1), the nonperformance risk is included in the market price. The Company's assets and liabilities measured on a recurring basis at fair value may include marketable securities and time deposits. As of March 31, 2017 and December 31, 2016, all of them were Level 1 instruments. The fair value of Level 2 securities is estimated based on observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. The carrying amounts of the Company's financial instruments, including cash and cash equivalents, accounts payable and accrued expenses are expected to approximate fair value because of their immediate availability, near term maturities or potential interest payments at settlement.</div> <div style="line-height: 1.25"><br style="line-height: 1.25" /> </div> <div style="font: italic bold 10pt/1.25 Times New Roman, Times, serif; text-align: justify">Cash and Cash Equivalents</div> <div style="line-height: 1.25"><br style="line-height: 1.25" /> </div> <div style="font: 10pt/1.25 Times New Roman, Times, serif; text-align: justify">The Company considers all highly liquid investments with a maturity at acquisition of three months or less to be cash equivalents.</div> <div style="line-height: 1.25"><br style="line-height: 1.25" /> </div> <div style="font: italic bold 10pt/1.25 Times New Roman, Times, serif; text-align: justify">Investments</div> <div style="line-height: 1.25"><br style="line-height: 1.25" /> </div> <div style="font: 10pt/1.25 Times New Roman, Times, serif; text-align: justify">Investments consist of interest bearing time deposits with maturity dates of greater than 90 days totaling $447 thousand and $367 thousand at March 31, 2017 and December 31, 2016, respectively.</div> <div style="line-height: 1.25"><br style="line-height: 1.25" /> </div> <div style="font: 10pt/1.25 Times New Roman, Times, serif; text-align: justify">The fair value of time deposits at March 31, 2017 and December 31, 2016 was determined based on face value, which approximates fair value and is a Level 1 input. There was no realized gain or loss on investments for the three months ended March 31, 2017 and 2016.</div> <div style="line-height: 1.25"><br style="line-height: 1.25" /> </div> <div style="font: italic bold 10pt/1.25 Times New Roman, Times, serif; text-align: justify">Allowance for Doubtful Accounts and Billing Adjustments</div> <div style="line-height: 1.25"><br style="line-height: 1.25" /> </div> <div style="font: 10pt/1.25 Times New Roman, Times, serif; text-align: justify">The Company maintains an allowance for doubtful accounts and billing adjustments based on the expected collectability of its accounts receivables. That estimate is based on historical collection experience, current economic and market conditions and a review of the current status of each customer's trade accounts receivable. The allowance includes estimates of billing adjustments, which are negotiated with other telecommunications carriers and are common in the telecommunications industry.</div> <div style="line-height: 1.25"><br style="line-height: 1.25" /> </div> <div style="font: italic bold 10pt/1.25 Times New Roman, Times, serif; text-align: left">Inventories</div> <div style="line-height: 1.25"><br style="line-height: 1.25" /> </div> <div style="font: 10pt/1.25 Times New Roman, Times, serif; text-align: justify">Inventories are stated at the lower of cost or market, with cost primarily determined using the first-in first-out cost method. 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In the third quarter ended September 30, 2016, management concluded that it was remote that the revenue target would be reached, and accordingly recorded a $2.0 million receivable from earnout escrow in the consolidated balance sheets. Revenues for the year ended December 31, 2016 did not reach the target and the Company has requested return of the funds.</font></div> <div style="line-height: 1.25"><br style="line-height: 1.25" /> </div> <div style="font: italic bold 10pt/1.25 Times New Roman, Times, serif; text-align: justify">Property, Equipment and Depreciation Expense</div> <div style="line-height: 1.25"><br style="line-height: 1.25" /> </div> <div style="font: 10pt/1.25 Times New Roman, Times, serif; text-align: justify">Property and equipment are accounted for under ASC 360, "Property, Plant and Equipment" and consist primarily of servers, computer hardware, furniture, and leasehold improvements. 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P</font>roperty and equipment <font style="font: 10pt Times New Roman, Times, serif">to be disposed of are reported at the lower of carrying amount or fair value less costs to sell. </font>Management believes there was no impairment of the Company's property or equipment at March 31, 2017.</div> <div style="line-height: 1.25"><br style="line-height: 1.25" /> </div> <div style="font: 10pt/1.25 Times New Roman, Times, serif; text-align: justify">The Company's hardware consists of routers, gateways and servers that enable the Company's telephony services. Some of these assets may be subject to technological risks and rapid market changes due to the introduction of new technology, products and services and changing customer demand. These changes may result in future adjustments to the estimated useful lives and the carrying value of these assets. 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Intangible assets with indefinite lives are not amortized to operations, but instead are reviewed for impairment at least annually, or more frequently if there is an indicator of impairment.</div> <div style="line-height: 1.25"><br style="line-height: 1.25" /> </div> <div style="font: 10pt/1.25 Times New Roman, Times, serif; text-align: justify">The Company reviews definite lived intangible assets subject to amortization for possible impairment using a three-step approach.&#160; Under the first step, management determines whether an indicator of impairment is present (a "Triggering Event"). If a Triggering Event has occurred, the second step is to test for recoverability based on a comparison of the asset's carrying amount with the sum of the undiscounted cash flows expected to result from the use of the asset <font style="font: 10pt Times New Roman, Times, serif">and its eventual disposition</font>. 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The Company typically enters into multi-year agreements, typically with durations of three to five years, to provide the hosted voice and other services. The Company earns revenue from the sale of the hardware and network equipment necessary to operate its UCaaS services directly to its customers. All revenue is recorded net of sales returns and allowances.</div> <div style="line-height: 1.25"><br style="line-height: 1.25" /> </div> <div style="font: italic bold 10pt/1.25 Times New Roman, Times, serif; text-align: justify">Revenue Recognition</div> <div style="line-height: 1.25"><br style="line-height: 1.25" /> </div> <div style="font: 10pt/1.25 Times New Roman, Times, serif; text-align: justify">The Company recognizes revenue in accordance with ASC 605, "Revenue Recognition", which provides authoritative guidance on revenue recognition. For arrangements that include more than one product or service (deliverables), the Company applies Section 25 of ASC 605, "Multiple-Element Arrangements". 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Direct sales of devices include shipping charges and 30 days to return the device and cancel the service.&#160; For retail sales of devices, there is a delay between shipment to the retailer and the ultimate sale to a customer (end-user). Based on sales and inventory data provided by retail partners, the Company's estimate of the delay for the three months ended March 31, 2017 and 2016 was 30 days and 90 days, respectively. The Company defers revenue recognition on direct sales for the 30 day return period and on retail sales for the delay period, after which the Company recognizes the revenue from device sales ratably over the remaining initial access right period.</div> <div style="line-height: 1.25"><br style="line-height: 1.25" /> </div> <div style="font: 10pt/1.25 Times New Roman, Times, serif; text-align: justify">Customers may renew access rights for periods ranging from one month to five years. 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For the three months ended March 31, 2017 and 2016, the Company's estimates of returns and actual returns from initial stocking orders have not been materially different.</div> <div style="line-height: 1.25"><br style="line-height: 1.25" /> </div> <div style="font: italic bold 10pt/1.25 Times New Roman, Times, serif; text-align: justify; text-indent: 36pt">Other magicJack-Related Products</div> <div style="line-height: 1.25"><br style="line-height: 1.25" /> </div> <div style="font: 10pt/1.25 Times New Roman, Times, serif; text-align: justify">The Company offers customers other optional products related to their magicJack devices and services, such as insurance, custom or vanity phone numbers, Canadian phone numbers, the ability to either change their existing phone numbers or port them to a magicJack device, and battery powerbanks for mobile devices. 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The Company recognizes revenues from sales of its hosted services in the period the services are provided over the term of the respective customer agreements. Customers are billed monthly in advance for these recurring services and in arrears for one time service charges and other certain usage charges.&#160; Revenues from sales of hardware and network equipment are recognized in the period that the equipment is delivered. 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As such they are accounted for as a combined unit of accounting under ASC 605-25.&#160; Some agreements include a refund period or a promotion for free introductory service.&#160; Revenue recognition is deferred for either period, after which the Company recognizes the revenue for the combined unit ratably over the remaining service period.&#160; Revenue from this segment was not significant for the three months ended March 31, 2017 and 2016.</div> <div style="line-height: 1.25"><br style="line-height: 1.25" /> </div> <div style="font: italic bold 10pt/1.25 Times New Roman, Times, serif; text-align: justify">Cost of Revenues</div> <div style="line-height: 1.25"><br style="line-height: 1.25" /> </div> <div style="font: italic bold 10pt/1.25 Times New Roman, Times, serif; text-align: justify">Core Consumer Segment</div> <div style="line-height: 1.25"><br style="line-height: 1.25" /> </div> <div style="font: 10pt/1.25 Times New Roman, Times, serif; text-align: justify">Cost of revenues for the Core Consumer segment include direct costs of operation of the Company's servers, which are expensed as incurred. 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Such estimates and judgments are revised periodically as required. Actual results could differ from those estimates. Significant estimates include allowances for billing adjustments and doubtful accounts, the recoverability of long-lived assets and goodwill, income taxes, income tax valuation allowance, uncertain tax liabilities, the value of ordinary shares issued in asset acquisitions, business combinations or underlying the Company's ordinary share options, and estimates of likely outcomes related to certain contingent liabilities.</div> <div style="line-height: 1.25"><br style="line-height: 1.25" /> </div> <div style="font: 10pt/1.25 Times New Roman, Times, serif; text-align: justify">The Company evaluates its estimates on an ongoing basis. 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ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company's judgements about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.</div> <div style="line-height: 1.25"><br style="line-height: 1.25" /> </div> <div style="font: 10pt/1.25 Times New Roman, Times, serif; text-align: justify">The hierarchy is broken down into three levels based on the reliability of inputs as follows:</div> <div style="line-height: 1.25"><br style="line-height: 1.25" /> </div> <div style="font: 10pt/1.25 Times New Roman, Times, serif; text-align: justify; margin-left: 36pt">Level 1 &#8211; Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities.</div> <div style="line-height: 1.25"><br style="line-height: 1.25" /> </div> <div style="font: 10pt/1.25 Times New Roman, Times, serif; text-align: justify; margin-left: 36pt">Level 2 &#8211; Valuations based on inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.</div> <div style="line-height: 1.25"><br style="line-height: 1.25" /> </div> <div style="font: 10pt/1.25 Times New Roman, Times, serif; text-align: justify; margin-left: 36pt">Level 3 &#8211; Valuation based on inputs that are unobservable and significant to the overall fair value measurement.</div> <div style="line-height: 1.25"><br style="line-height: 1.25" /> </div> <div style="font: 10pt/1.25 Times New Roman, Times, serif; text-align: justify">When available, the Company uses quoted market prices to determine fair value, and it classifies such measurements within Level 1. 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