(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:
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: As
of December 31, 2019, there were 13,786,153 ordinary shares, NIS 0.20 par value per share, outstanding.
Indicate by check mark if the registrant
is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
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.
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.
Indicate by check mark whether the registrant
has submitted electronically every Interactive Data File required to be submitted 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 such files).
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See definition of “large
accelerated filer, “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
If an emerging growth company that prepares
its financial statements in accordance with U.S. GAAP, indicate by checkmark 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. ☐
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 ☐
If “Other” has been checked
in response to the previous question, indicate by check mark which financial statement item the registrant elected to follow.
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).
Except for the historical
information contained herein, the statements contained in this annual report on Form 20-F, or this Annual Report, are forward-looking
statements, within the meaning of the Private Securities Litigation Reform Act of 1995, regarding future events and our future
results that are subject to the safe harbors created under the Securities Act of 1933, as amended, and the Securities Exchange
Act of 1934, as amended, or the Exchange Act. These statements are based on current expectations, estimates, forecasts and
projections about the industries in which we operate and the beliefs and assumptions of our management.
As used in this Annual
Report, the terms “we,” “us,” “our,” “RADCOM” and the “Company” mean
RADCOM Ltd. and its subsidiaries, unless otherwise indicated.
References herein to
our “solutions” or “solution” are intended to refer to our products and related services as the context
requires.
We have registered
with the United States Patent and Trademark Office, or USPTO, and hold the trademarks “Omni-Q” and “RADCOM”
in the United States. All other trademarks and trade names appearing in this Annual Report are owned by their respective holders.
This Annual Report
contains express or implied “forward-looking statements” within the meaning of the Private Securities Litigation Reform
Act of 1995 and other U.S. Federal securities laws.
In some cases, forward-looking
statements are identified by terminology such as “may,” “will,” “could,” “should,”
“expects,” “plans,” “anticipates,” “believes,” “intends,” “estimates,”
“predicts,” “potential,” or “continue” or the negative of these terms or other comparable terminology.
Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results
or performance to differ materially from those projected. These statements are only current predictions and are subject to known
and unknown risks, uncertainties, and other factors that may cause our or our industry’s actual results, levels of activity,
performance or achievements to be materially different from those anticipated by the forward-looking statements. The forward-looking
statements contained in this Annual Report are subject to risks and uncertainties, including those discussed under “Item
3.D-Risk Factors” and in our other filings with the Securities and Exchange Commission. Readers are cautioned not to place
undue reliance on these forward-looking statements, which speak only as of the date hereof. Although we believe that the expectations
reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance,
or achievements. Except as required by law, we are under no duty to (and expressly disclaim any such obligation to) update or revise
any of the forward-looking statements, whether as a result of new information, future events or otherwise, after the date of this
Annual Report.
PART I
ITEM 1.
|
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
|
Not applicable.
ITEM 2.
|
OFFER STATISTICS AND EXPECTED TIMETABLE
|
Not applicable.
|
A.
|
SELECTED FINANCIAL DATA
|
We have derived the
following selected consolidated statements of operations data for the years ended December 31, 2019, 2018 and 2017 and the
selected consolidated balance sheet data as of December 31, 2019 and 2018 from our audited consolidated financial statements
and notes included in this Annual Report. Our selected consolidated statements of operations data for the years ended December
31, 2016 and 2015 and the selected consolidated balance sheet data as of December 31, 2017, 2016 and 2015, have been derived from
audited consolidated financial statements not included in this Annual Report. We prepare our consolidated financial statements
in accordance with U.S. generally accepted accounting principles, or U.S. GAAP.
You should read the
selected consolidated financial data together with “Item 5—Operating and Financial Review and Prospects” and
our consolidated financial statements and related notes included elsewhere in this Annual Report. All references to “dollars,”
“U.S. dollars” or “$” in this Annual Report are to United States dollars. All references to “NIS”
are to the New Israeli Shekels.
Statement of Operations Data:
|
|
Year Ended December 31,
(in thousands of U.S. dollars, except share and per share data)
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
$
|
16,382
|
|
|
$
|
13,529
|
|
|
$
|
7,457
|
|
|
$
|
8,642
|
|
|
$
|
15,500
|
|
Services
|
|
|
16,300
|
|
|
|
8,303
|
|
|
|
3,597
|
|
|
|
3,334
|
|
|
|
2,551
|
|
Projects
|
|
|
328
|
|
|
|
12,218
|
|
|
|
26,179
|
|
|
|
17,534
|
|
|
|
622
|
|
|
|
|
33,010
|
|
|
|
34,050
|
|
|
|
37,233
|
|
|
|
29,510
|
|
|
|
18,673
|
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
|
4,811
|
|
|
|
4,851
|
|
|
|
4,680
|
|
|
|
5,603
|
|
|
|
3,924
|
|
Services
|
|
|
5,022
|
|
|
|
1,190
|
|
|
|
487
|
|
|
|
477
|
|
|
|
285
|
|
Projects
|
|
|
84
|
|
|
|
2,825
|
|
|
|
5,321
|
|
|
|
2,902
|
|
|
|
117
|
|
|
|
|
9,917
|
|
|
|
8,866
|
|
|
|
10,488
|
|
|
|
8,982
|
|
|
|
4,326
|
|
Gross profit
|
|
|
23,093
|
|
|
|
25,184
|
|
|
|
26,745
|
|
|
|
20,528
|
|
|
|
14,347
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
18,578
|
|
|
|
15,503
|
|
|
|
10,562
|
|
|
|
8,047
|
|
|
|
6,071
|
|
Less - royalty-bearing participation
|
|
|
1,838
|
|
|
|
1,648
|
|
|
|
1,599
|
|
|
|
1,693
|
|
|
|
1,582
|
|
Research and development, net
|
|
|
16,740
|
|
|
|
13,855
|
|
|
|
8,963
|
|
|
|
6,354
|
|
|
|
4,489
|
|
Sales and marketing, net
|
|
|
10,514
|
|
|
|
11,426
|
|
|
|
10,996
|
|
|
|
8,528
|
|
|
|
7,834
|
|
General and administrative
|
|
|
3,674
|
|
|
|
3,391
|
|
|
|
4,191
|
|
|
|
4,523
|
|
|
|
2,393
|
|
Total operating expenses
|
|
|
30,928
|
|
|
|
28,672
|
|
|
|
24,150
|
|
|
|
19,405
|
|
|
|
14,716
|
|
Operating income (loss)
|
|
|
(7,835
|
)
|
|
|
(3,488
|
)
|
|
|
2,595
|
|
|
|
1,123
|
|
|
|
(369
|
)
|
Financial income (expenses), net
|
|
|
1,172
|
|
|
|
1,136
|
|
|
|
389
|
|
|
|
816
|
|
|
|
(433
|
)
|
Income (loss) before taxes on income
|
|
|
(6,663
|
)
|
|
|
(2,352
|
)
|
|
|
2,984
|
|
|
|
1,939
|
|
|
|
(802
|
)
|
Taxes on income
|
|
|
(169
|
)
|
|
|
(63
|
)
|
|
|
(83
|
)
|
|
|
(24
|
)
|
|
|
(121
|
)
|
Net income (loss)
|
|
$
|
(6,832
|
)
|
|
$
|
(2,415
|
)
|
|
$
|
2,901
|
|
|
$
|
1,915
|
|
|
$
|
(923
|
)
|
Basic net income (loss) per ordinary share
|
|
$
|
(0.50
|
)
|
|
$
|
(0.18
|
)
|
|
$
|
0.24
|
|
|
$
|
0.18
|
|
|
$
|
(0.11
|
)
|
Weighted average number of ordinary shares used to compute basic net income (loss) per ordinary share
|
|
|
13,779,885
|
|
|
|
13,630,793
|
|
|
|
12,039,176
|
|
|
|
10,406,897
|
|
|
|
8,572,681
|
|
Diluted net income (loss) per ordinary share
|
|
$
|
(0.50
|
)
|
|
$
|
(0.18
|
)
|
|
$
|
0.23
|
|
|
$
|
0.18
|
|
|
$
|
(0.11
|
)
|
Weighted average number of ordinary shares used to compute diluted net income (loss) per ordinary share
|
|
|
13,779,885
|
|
|
|
13,630,793
|
|
|
|
12,351,566
|
|
|
|
10,779,547
|
|
|
|
8,572,681
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital
|
|
$
|
70,487
|
|
|
$
|
76,860
|
|
|
$
|
74,842
|
|
|
$
|
38,854
|
|
|
$
|
9,643
|
|
Total assets
|
|
$
|
96,402
|
|
|
$
|
89,531
|
|
|
$
|
91,909
|
|
|
$
|
54,568
|
|
|
$
|
20,135
|
|
Shareholders’ equity
|
|
$
|
73,870
|
|
|
$
|
78,480
|
|
|
$
|
76,396
|
|
|
$
|
40,143
|
|
|
$
|
9,863
|
|
Share capital
|
|
$
|
648
|
|
|
$
|
643
|
|
|
$
|
628
|
|
|
$
|
523
|
|
|
$
|
372
|
|
Exchange Rate Information
The following table
shows, for each of the months indicated the high and low exchange rates between the NIS and the U.S. dollar, expressed as NIS per
U.S. dollar and based upon the daily representative rate of exchange as published by the Bank of Israel:
Month
|
|
High (NIS)
|
|
|
Low (NIS)
|
|
March 2020 (through March 25)
|
|
|
3.862
|
|
|
|
3.460
|
|
February 2020
|
|
|
3.467
|
|
|
|
3.416
|
|
January 2020
|
|
|
3.475
|
|
|
|
3.448
|
|
December 2019
|
|
|
3.501
|
|
|
|
3.456
|
|
November 2019
|
|
|
3.522
|
|
|
|
3.455
|
|
October 2019
|
|
|
3.545
|
|
|
|
3.481
|
|
September 2019
|
|
|
3.549
|
|
|
|
3.482
|
|
On March 25, 2020,
the daily representative rate of exchange between the NIS and U.S. dollar as published by the Bank of Israel was NIS 3.642 to $1.00.
The following table
shows, for each of the periods indicated, the average exchange rate between the NIS and the U.S. dollar, expressed as NIS per U.S.
dollar, calculated based on the average of the representative daily rate of exchange during the relevant period as published by
the Bank of Israel:
Year
|
|
Average (NIS)
|
|
2020 (through March 25, 2020)
|
|
|
3.494
|
|
2019
|
|
|
3.564
|
|
2018
|
|
|
3.597
|
|
2017
|
|
|
3.600
|
|
2016
|
|
|
3.841
|
|
2015
|
|
|
3.884
|
|
The effect of exchange
rate fluctuations on our business and operations is discussed in “Item 5.A—Operating and Financial Review and Prospects—Operating
Results—Impact of Inflation and Foreign Currency Fluctuations.”
|
B.
|
CAPITALIZATION AND INDEBTEDNESS
|
Not applicable.
|
C.
|
REASONS FOR THE OFFER AND USE OF PROCEEDS
|
Not applicable.
Investing in our
ordinary shares involves a high degree of risk. You should carefully consider the risks described below before investing in our
ordinary shares.
Our business, operating
results and financial condition could be seriously harmed due to any of the following risks, among others. If we do
not successfully address the risks to which we are subject, we could experience a material adverse effect on our business, results
of operations and financial condition and our share price may decline. We cannot assure you that we will successfully
address any of these risks.
Risks Related to Our Business and
Our Industry
The COVID-19 Coronavirus
outbreak could harm our business.
The ongoing coronavirus
outbreak has resulted in increased travel restrictions and has caused significant disruptions to business activities globally.
Such restrictions and disruptions, and any potential future travel restrictions, quarantine requirements, government ordered shutdowns
or similar actions in countries in which the Company, its employees, customers, suppliers and other stakeholders or its customers
operate could interfere with our ability to deliver products and solutions, impact potential customers’ procurement decisions
and financial stability, and have other additional negative impacts on our operations and business. Due to the nature of our business,
we have been able to transition our employees to work from home so as to allow the development of our products and solutions and
our support of customers’ ongoing needs to continue without interruption. However, we cannot be certain of our ability to
meet all customer needs or to meet all of our development targets through remote work and are unable to predict how long we will
be required to continue working remotely and what additional travel or other restrictions may arise which could have a direct impact
on our business.
Our
business is dependent on a limited number of significant customers and the loss of a significant customer could materially adversely
affect our results of operations.
Our business is dependent
on a limited number of significant customers. For example, our three largest customers accounted for approximately 83% of our revenue
in fiscal year 2019. The loss of any significant customer, a significant decrease in business from any such customer, or a reduction
in customer revenue due to adverse changes in the terms of our contractual arrangements, market conditions, customer circumstances
or other factors could have a material adverse effect on our results of operations and financial condition. Revenue from individual
customers may fluctuate from time to time based on the commencement, scope and completion of projects or other engagements, the
timing and magnitude of which may be affected by market or other conditions.
The pace in which
we grow our business depends on our customers’ internal processes and decisions regarding the transition to NFV and 5G.
The pace of transition
to NFV and 5G and timeframe for reaching a mature infrastructure for NFV and 5G is dependent on CSPs’ internal decisions
regarding NFV and 5G technology implementation, timing, nature of virtualization and budgeting. Such decisions may be affected
by the overall pace of NFV adoption and 5G deployment in the industry as well as by other technology trends such as the deployment
of 5G networks. The pace in which we deploy our solutions is directly affected by the pace of CSPs’ internal processes and
the pace of maturation of the NFV market. To the extent that CSPs require more time to reach the decision to virtualize, decide
to delay virtualization while the market develops, or elect not to transition to NFV and to deploy 5G, our sales cycles may lengthen,
and the growth of our business may be adversely affected.
Natural disasters
and other events beyond our control could harm our business.
Natural disasters or
other catastrophic events may cause damage or disruption to our operations, international commerce and the global economy, and
thus could have a negative effect on us. Our business operations are subject to interruption by natural disasters, flooding, fire,
power shortages, pandemics such as the recent spread of the coronavirus, terrorism, political unrest, telecommunications failure,
vandalism, cyber-attacks, geopolitical instability, war, the effects of climate change (such as drought, wildfires, increased storm
severity and sea level rise) and other events beyond our control. Although we maintain crisis management and disaster response
plans, such events could make it difficult or impossible for us to deliver our solutions and services to our customers, could decrease
demand for our solutions and services, and could cause us to incur substantial expense.
A reduction in some
CSPs’ revenues and profitability could lead to decreased investment in capital equipment and infrastructure which may, in
turn, affect our revenues and results of operations. A continued slowdown in our customers’ investment in capital equipment
and infrastructure might materially and adversely affect our revenues and results of operations.
Our future success
is dependent upon the continued growth of the telecommunications industry as well as the specific sectors that we target, which
currently include NFV transformation, 5G and Internet of Things, 4G cellular, Triple Play networks, VoLTE, , or IoT. During the
last few years, some of the CSPs have experienced a reduction in their revenues from subscribers and lower profitability, which
affected their spending budgets. This trend may continue. The global telecommunications industry and various sectors within the
industry are evolving rapidly and it is difficult to predict its potential growth rate or future trends in technology development.
Our future success
also depends upon the increased utilization of our solutions by next-generation network operators and specifically virtualized
networks, who may not adopt our technology.
During the last few
years, developments in the telecommunications industry have had a material effect on our existing and/or potential customers and
may continue to have such an effect in the future. Such developments include changes in general global economic conditions, industry
consolidation, emergence of new competitors, commoditization of voice services, regulatory changes, and changes in the plans of
CSPs to shift, transform and adapt their network operations to NFV and to rollout 5G networks. Over the last few years, the telecommunications
industry has experienced financial pressures that have caused many in the industry to reduce investment in capital intensive projects,
and in some cases, have led to restructurings. While the transformation of network operations to NFV arises out of the desire of
CSPs to reduce network infrastructure expense, thus creating opportunities for us, it also creates a downward pressure on the prices
of our solutions.
The market for our
solutions is characterized by rapidly changing technology and we may be materially adversely affected if we do not respond promptly
and effectively to such changes.
The telecommunications
industry is characterized by rapidly changing technology, network infrastructure, and customer requirements and by evolving industry
standards and frequent new product introductions. These changes require us to constantly adapt and improve our solutions to meet
changing industry requirements. If we are unable to stay ahead of industry trends or to timely and successfully complete the development
of solutions supporting new standards and technologies such as 5G, our business may be affected as new requirements could reduce
or shift the market for our solutions or require us to develop new solutions.
Additionally, because
new or enhanced telecommunications and data communications-related products developed by other companies could be incompatible
with our solutions, our timely access to information concerning changes in technology, in customer requirements, and in industry
standards, as well as our ability to anticipate such changes and develop and market new and enhanced solutions successfully and
on a timely basis, will be significant factors in our ability to remain competitive.
Our
future success will depend on our ability to develop and maintain long-term relationships with our customers and to meet their
expectations in providing solutions and related services.
We
believe that our future success will depend to a significant extent on our ability to develop and maintain long-term relationships
with successful CSPs who have the financial and other resources required to invest in significant ongoing Service Assurance, Customer
Experience Management, or CEM, and Service Operations Center, or SOC, solutions. Our business and our results of operations could
be adversely affected if we are unable to develop sustainable customer relationships, or to meet customers’ expectations
in providing solutions and related services.
We
may enter into long-term sales agreements with large customers. Such agreements may prove unprofitable as our costs and product
mix shift over the terms of the agreements.
We
may enter from time to time into long-term sales agreements with large customers. We may be required under such agreements to sell
our solutions at fixed prices over the terms of the agreements. The costs we incur in fulfilling the agreements may vary substantially
from our initial cost estimates. Any cost overruns that we cannot pass on to our customers could adversely affect our results of
operations.
In
the future, we may also be required under such agreements to sell solutions that we may otherwise wish to discontinue, thereby
diverting our resources from developing more profitable or strategically important solutions.
Our large customers
have substantial negotiating leverage, which may require that we agree to terms and conditions that may have an adverse effect
on our business.
Large CSPs have substantial
purchasing power and leverage in negotiating contractual arrangements with us. These customers may require us to develop additional
features and may impose penalties on us for failure to deliver such features on a timely basis, or failure to meet performance
standards. As we seek to increase our sales to large CSPs, we may be required to agree to unfavorable terms and conditions which
may decrease our revenues and/or increase the time it takes to convert orders into revenues and could result in an adverse effect
on our business, financial condition and results of operations. Similarly, some of our contracts may contain change in control
provisions which may have an adverse effect on our business and results if exercised following a change in control transaction
or, in the alternative, may act as an impediment to certain change in control transactions.
Global economic
conditions may adversely affect our business.
Changes in global economic
conditions could have a negative impact on business around the world and on the telecommunications sector. Conditions may be depressed,
or may be subject to deterioration, which could lead to a reduction in consumer and customer spending overall and may in turn have
an adverse impact on sales of our solutions. A disruption in the ability of our significant customers to access liquidity
could cause serious disruptions or an overall deterioration of their businesses, which could lead to a significant reduction in
their orders of our solutions and the inability or failure on their part, to meet their payment obligations to us, any of which
could have an adverse effect on our business, financial condition, results of operations and liquidity. In addition, any disruption
in the ability of our customers to access liquidity could require us to assume greater credit risk relating to our receivables
or could limit our ability to collect receivables related to purchases by affected customers. As a result, we may have to defer
recognition of revenues, our reserves for doubtful accounts and write-offs of accounts receivable may increase and we may incur
losses.
Our plans to focus
most of our sales efforts on tier 1 and other leading CSPs in the North American, European and select other markets may not be
successful.
We believe that the
significant share of NFV deployment activity is expected to take place in North America, Europe, select CSPs in Asia-Pacific and
select CSPs in developing markets such as Latin America. We have accordingly enhanced our presence and focused our sales and marketing
resources in these markets. While we expect the selection of our NFV solutions by AT&T and another tier 1 CSP to enhance the
opportunities available to us, we may not be successful in expanding our business as we plan.
Our expectations
regarding the pace of NFV transformations or 5G rollout may not materialize.
We believe that most
of the industry’s leading CSPs will rollout 5G networks which will in turn promote the adoption of cloud-native and NFV solutions.
Our expectation is that market for our solutions will materialize and gain momentum as a result. However, our expectations may
not be correct, and the actual pace of NFV transformation and/or 5G rollout may take longer than we anticipate or may not occur
at all. If the demand for NFV does not continue to grow or the 5G rollout does not materialize, our business, financial condition
and results of operations may suffer.
We have a history
of quarterly fluctuations and unpredictability in our results of operations and expect these fluctuations to continue. This
may cause our share price to fluctuate and/or to decline.
We have experienced,
and in the future may also experience, significant fluctuations in our quarterly results of operations. Factors that may contribute
to fluctuations in our quarterly results of operations include:
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the variation in size and timing of individual purchases by our customers;
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seasonal factors that may affect capital spending by customers, such as the varying fiscal year-ends of customers;
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the relatively long sales cycles for our solutions;
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the request for longer payment terms from us or long-term financing of customers’ purchases from us, as well as additional conditions tied to such payment terms;
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competitive conditions in our markets;
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the timing of the introduction and market acceptance of new solutions or enhancements by us and by our customers, competitors and suppliers;
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changes in the level of operating expenses relative to revenues;
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changes in global or regional economic conditions or in the telecommunications industry;
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delays in or cancellation of projects by customers;
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changes in the product mix;
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the size and timing of approval of grants from the Government of Israel; and
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foreign currency exchange rates.
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Our costs of revenues
consist of variable costs, which include labor and related costs, including costs incurred in software development customization
for projects and deployment costs, the use of hardware, inventory write-offs, packaging, importation taxes, shipping and handling
costs, license fees for software components of third parties, warranty expenses, allocation of overhead expenses, subcontractors’
expenses, royalties to the Israel Innovation Authority, or IIA, and share-based compensation. A major part of our costs of sales
is relatively variable and determined based on our anticipated revenues. We believe, therefore, that quarter-to-quarter comparisons
of our operating results may not be a reliable indication of future performance.
Our revenues in any
quarter generally have been, and may continue to be, derived from a relatively small number of orders with relatively high average
revenues per order. Therefore, the loss of any order or a delay in closing a transaction could have a more significant impact on
our quarterly revenues and results of operations, than on those of companies with relatively high volumes of sales or low revenues
per order.
We may experience a
delay in generating or recognizing revenues for several reasons, including revenue recognition accounting requirements. In many
cases, we cannot recognize revenue from an order prior to customer acceptance, which may take three to 12 months from the commencement
of the engagement. Therefore, a major part of the revenue for any fiscal quarter may be derived from a backlog of orders under
delivery and may not correlate to the date of a customer’s order or the delivery date.
Our revenues for a
specific quarter may also be difficult to predict and may be affected if we experience a non-linear sales pattern. We generally
experience significantly higher levels of sales orders towards the end of a quarter as a result of customers submitting their orders
late in the quarter. Furthermore, orders received towards the end of the quarter are usually not delivered within the same quarter
and are usually only recognized as revenue at a later stage.
If our revenues in
any quarter remain level or decline in comparison to any prior quarter, our financial results for that quarter could be adversely
affected.
Due to the factors
described above, as well as other unanticipated factors, in future quarters our results of operations could fail to meet guidance
we may give to the public from time to time or the expectations of public market analysts or investors. If this occurs, the price
of our ordinary shares may be adversely affected.
We expect our gross
margins to vary over time and we may not be able to sustain or improve upon our recent levels of gross margin which may have a
material adverse effect on our future profitability.
We may not be able
to sustain or improve upon our recent levels of gross margin. Our gross margins may be adversely affected by numerous factors,
including:
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increased price competition;
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local sales taxes which may be incurred for direct sales;
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increased industry consolidation among our customers, which may lead to decreased demand for and downward pricing pressure on our solutions;
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changes in customer, geographic or product mix;
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increases in costs such as employment costs or third-party service or component costs;
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changes in distribution channels;
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losses on customer contracts; and
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increases in warranty costs.
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Further deterioration
in gross margins, due to these or other factors, may have a material adverse effect on our business, financial condition and results
of operations.
Our sales derived
from emerging market countries may be materially adversely affected by economic, exchange rates, regulatory and political developments
in those countries.
We plan to continue
to generate revenue from various emerging market countries which represent a portion of our existing business and our expected
growth. Economic or political turmoil in these countries could materially adversely affect our revenues and results of operations.
Our investments in emerging market countries may also be subject to risks and uncertainties, including unfavorable taxation treatment,
exchange rates, challenges in protecting our intellectual property rights, nationalization, inflation, currency fluctuations, or
the absence of, or unexpected changes in, regulation as well as other unforeseeable operational risks.
Most of our customers
usually require a detailed and comprehensive evaluation process before they order our solutions. Our sales process may be subject
to delays that could significantly decrease our revenues and result in the eventual cancellations of some sale opportunities.
We derive all of our
revenues from the sale of solutions and related services for CSPs. As common practice in our industry, our solutions generally
undergo a lengthy evaluation process before we can sell them. In recent years, our customers have been conducting a more stringent
and detailed evaluation of our solutions and decisions are subject to additional levels of internal review. As a result, the sales
cycle may be longer than anticipated. The following factors, among others, affect the length of the approval process:
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the time involved for our customers to determine and announce their specifications;
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the time required for our customers to process approvals for purchasing decisions;
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the complexity of the solutions involved;
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the technological priorities and budgets of our customers; and
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the need for our customers to obtain or comply with any required regulatory approvals.
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If customers delay
project approval or extend anticipated decision-making timelines, or if continued delays result in the eventual cancellation of
any sale opportunities, it may have a material adverse effect on our business, financial condition and results of operations.
We have experienced
periods of growth of our business. If we cannot adequately manage our business, our results of operations may suffer.
During 2017, 2018 and
2019, we increased the size of our workforce and we may continue to do so in the future in order to enable us to meet our obligations,
continue enhancing our products and solutions, and grow our business. There is no guarantee that these efforts to increase our
work force will have a positive effect on our business. Future growth may place a significant strain on our managerial, operational
and financial resources.
We cannot be sure that
our systems, procedures and managerial controls will be adequate to support our operations. Any delay in implementing, or transitioning
to, new or enhanced systems, procedures or controls may adversely affect our ability to record and report financial and management
information on a timely and accurate basis. We believe that significant growth may require us to hire additional personnel. Moreover,
competition for qualified personnel can be intense in the areas where we operate, and the processes of locating, training and successfully
integrating qualified personnel into our operations can be lengthy and expensive. If we are unable to successfully manage our expansion,
including by attracting, incentivizing and retaining highly skilled personnel, we may not succeed in expanding our business, our
expenses may increase, and our results of operations may be adversely affected.
In addition, employees
may seek future employment with our business partners, customers or competitors. We cannot be sure that the confidential nature
of our proprietary information will not be compromised by any such employees who terminate their employment with us.
We may lose significant
market share as a result of intense competition in the market for our existing and future solutions.
Many companies compete
with us in the market for service assurance and CEM/SOC solutions. We expect that competition will increase in the future,
both with respect to solutions that we currently offer and solutions that we are developing. Moreover, manufacturers
of data communications and telecommunications equipment with whom we partner or may partner may in the future incorporate into
their products capabilities similar to ours, thus reducing the demand for our solutions.
Some of our existing
and potential competitors have substantially greater resources, including financial, technological, engineering, manufacturing,
and marketing and distribution capabilities, and several of them may enjoy greater market recognition than us. We may not
be able to compete effectively with our competitors. A failure to do so could adversely affect our revenues and profitability.
Our non-competition
agreements with our employees may not be enforceable under Israeli law. If any of these employees leaves us and joins a competitor,
such competitor could benefit from the expertise our former employee gained while working for us.
We generally enter
into non-competition agreements with our key employees. These agreements prohibit those employees, while they work for us and for
a specified length of time after they cease to work for us, from directly competing with us or working for our competitors for
a limited period. Under applicable Israeli law, we may be unable to enforce these agreements or any part thereof against our Israeli
employees. If we cannot enforce our non-competition agreements against our Israeli (or any other) employees, then we may be unable
to prevent our competitors from benefiting from the expertise of these former employees, which could impair our business, results
of operations and ability to capitalize on our proprietary information.
Our business could
be harmed if we were to lose the services of one or more members of our senior management team, or if we are unable to attract
and retain qualified personnel.
Our future growth and
success depend to an extent upon the continuing services of our executive officers and other key employees including our Chief
Executive Officer, Eyal Harari, our Chief Operating Officer, Hilik Itman, and our Chief Technology Officer, Rami Amit. We do not
have long-term employment agreements with any of our employees. Competition for qualified management and other high-level telecommunications
industry personnel is intense, and we may not be successful in attracting and retaining qualified personnel. If we lose the services
of any key employees, we may not be able to manage our business successfully or to achieve our business objectives.
Our success also depends
on our ability to identify, attract and retain qualified technical, sales, finance and management personnel. We have experienced,
and may continue to experience, difficulties in hiring and retaining candidates with appropriate qualifications. If we do not succeed
in hiring and retaining candidates with appropriate qualifications, our revenues and product development efforts could be harmed.
The complexity and
scope of the solutions we provide to larger CSPs is increasing. Larger projects entail greater operational risk and an increased
chance of failure.
The complexity and
scope of the solutions we provide to larger CSPs is increasing. The larger and more complex such projects are, the greater the
operational risks associated with such projects. These potential risks include failure to successfully deliver our solution, failure
to fully integrate our solutions with third party products and complex environments in the CSP’s network, and our dependence
on subcontractors and partners for the successful and timely completion of such projects. Failure to complete a larger project
successfully could expose us to potential contractual penalties, claims for breach of contract and in extreme cases, to cancellation
of the entire project, and may result in difficulty in collecting payment and recognizing revenues from such project.
We could be subject
to claims under our warranties and extended maintenance and support agreements which may affect our financial condition.
Our solutions are complex
and may sometimes contain undetected errors which can delay introductions or necessitate redesign. In addition, we are dependent
on other suppliers for key components that are incorporated in our solutions. Failures in networks in which our solutions
are deployed arising out of our solutions may result in customer dissatisfaction, contractual claims and, potentially, liability
claims being filed against us. Our warranties require us to correct any errors or defects in our solutions. The warranty period
is mostly for one year but could be extended either in the initial purchase of our solution or after the initial warranty period
ends through the purchase of extended support and maintenance. Any failure of a network in which our solutions are deployed (whether
or not our solutions are the cause) and any customer claims against us, along with any associated negative publicity, could result
in the loss of, or delay in, market acceptance of our solutions and harm to our business. In addition, under the warranty and extended
maintenance agreements, we need to meet certain service levels and if we fail to meet them, we may be exposed to penalties.
We incorporate open
source technology in our solutions which may expose us to liability and have a material impact on our product development and sales.
Some of our solutions
utilize open source technologies. These technologies are licensed to us under varying license structures. These licenses pose a
potential risk to our solution in the event they are inappropriately integrated. If we have not, or do not in the future, properly
integrate software that is subject to such licenses into our solutions or if we utilize open source software that is subject to
licensing terms that are incompatible with our use, we may be required to disclose our own source code to the public or may lose
rights to our solutions. Any such requirement to disclose or grant rights in our source code or other confidential information
related to our solutions could, therefore, materially adversely affect our competitive advantage and impact our business, financial
condition and results of operations.
We depend on limited
sources for key components and if we are unable to obtain these components when needed we may experience delays in delivering our
solutions.
We currently obtain
key components of our software solutions from a limited number of suppliers. With some of our suppliers, we do not have long-term
supply contracts. We may be subject to the following risks:
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delays in delivery could interrupt and delay delivery and result in cancellations of orders;
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suppliers could increase component prices significantly and with immediate effect;
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we may not be able to locate alternatives for such components; and
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suppliers could discontinue the supply or support of such components which may require us to modify our solutions, and cause delays in delivery, increased development costs and increased solution prices.
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Our proprietary
technology is difficult to protect and unauthorized use of our proprietary technology by third parties may impair our ability to
compete effectively.
Our success and ability
to compete depend in large part upon protecting our proprietary technology. We rely upon a combination of contractual rights,
software licenses, trade secrets, copyrights, non-disclosure agreements and technical measures to establish and protect our intellectual
property rights in our solutions and technologies. In addition, we sometimes enter into non-competition, non-disclosure and
confidentiality agreements with our employees, distributors, sales representatives and certain suppliers with access to sensitive
information. We currently have one registered patent and five pending patent applications. However, these measures may not
be adequate to protect our technology from third-party infringement. Additionally, effective intellectual property protection
may not be available in every country in which we offer, or intend to offer, our solutions.
We may expand our
business or enhance our technology through partnerships and acquisitions that could result in diversion of resources and extra
expenses. This could disrupt our business and adversely affect our financial condition.
Part of our growth
strategy may be to selectively pursue partnerships and acquisitions that provide us access to complementary technologies and accelerate
our penetration into new markets. The negotiation of acquisitions, investments or joint ventures, as well as the integration of
acquired or jointly developed businesses or technologies, could divert our management’s time and resources. Acquired businesses,
technologies or joint ventures may not be successfully integrated with our solutions and operations. We may not realize the intended
benefits of any acquisition, investment or joint venture and we may incur future losses from any acquisition, investment or joint
venture.
In addition, acquisitions could result in,
among other things:
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substantial cash expenditures;
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potentially dilutive issuances of equity securities;
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the incurrence of debt and contingent liabilities;
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a decrease in our profit margins; and
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amortization of intangibles and potential impairment of goodwill.
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If we implement our growth strategy by acquiring
other businesses, and this disrupts our operations, our business, financial condition and results of operations could be adversely
affected. As of the date of this Annual Report, we have not proceeded with such acquisitions.
Certain privacy
and data security laws and regulations may affect the use of our solutions.
Our solutions and their
use may be subject to certain laws and regulations regarding privacy and data security including United States federal and state
laws and recently enacted European privacy laws. Generally, attention to privacy and data security requirements is increasing worldwide
and is resulting in increased regulation. Such regulations may impose significant penalties for non-compliance, such as the penalties
proposed under the European data protection regulations which became effective in May 2018. Use of our solutions could be subject
to such new regulation, which could significantly increase the cost of implementing our solutions and impact our ability to compete
in the marketplace. Such regulations could also impose additional data security requirements which will impact the cost of developing
new solutions and limit the return we can expect to achieve on past and future investments in our solutions.
If security measures
for our solutions are compromised and as a result, our customers’ data or our systems are accessed improperly, made unavailable,
or improperly modified, our solutions may be perceived as vulnerable, which may materially affect our business and result in potential
liability.
Despite our efforts
to implement appropriate security measures, we cannot guarantee that our solutions and systems are fully protected from vulnerabilities
such as viruses, worms and other malicious software programs, attacks, break-ins and similar disruptions from unauthorized
tampering by computer hackers and others seeking to gain unauthorized access to digital systems for purposes of misappropriating
assets or sensitive information, corrupting data, or causing operational disruption. If a cyber-attack or other security incident
were to result in unauthorized access to, or deletion of, and/or modification and/or exfiltration of our customers’ data,
other external data or our own data or our systems or if the use of the solutions we provide to our customers was disrupted, customers
could lose confidence in the security and reliability of our solutions and perceive them not to be secure. This in turn could lead
to fewer customers using our solutions and result in reduced revenue and earnings. The costs we would incur to address and fix
these security incidents would increase our expenses. Additionally, the occurrence of a cyber-attack or security incident with
respect to our solutions could cause our customers to make claims against us for damages allegedly resulting from a security breach,
and security incidents could also lead to data or privacy breaches, regulatory investigations and claims, all of which could increase
our liability. These risks may increase as we grow our customer base and increase instances of deployment and use of our solutions.
Because we received
grants from the IIA, we are subject to ongoing restrictions.
We have received an
aggregate of $46.7 million in royalty-bearing grants from the IIA for certain research and development activities pursuant to an
incentive program. Accordingly, we are obligated to pay royalties to the IIA on revenues from products developed pursuant to the
program or deriving therefrom. In addition, under the terms of the program our ability to transfer any resulting know-how, especially
to parties outside of Israel, is subject to certain terms and conditions. The Law for the Encouragement of Research, Development
and Technological Innovation in the Industry, 1984-5744, or the R&D Law, generally requires a grant recipient and its controlling
shareholders to notify the IIA of changes in the ownership of the recipient company and to undertake to the IIA to observe the
laws governing the grant programs.
Additionally, in May
2010, we received a notice from the IIA regarding alleged miscalculations in the amount of royalties paid by us to the IIA for
the years 1992 through 2009 and the revenues on which the Company must pay royalties. During 2011, we reviewed with the IIA these
alleged miscalculations. We believe that all royalties due to the IIA from the sale of products developed with funding provided
by the IIA during such years were properly paid or were otherwise accrued as of December 31, 2019. However, we cannot be sure that
the IIA will accept our arguments mentioned above, which, if not accepted, may result in the expenditure of financial resources.
We may be subject
to claims of infringement of third-party intellectual property which may have an adverse effect on our business.
Third parties may from
time to time assert against us infringement claims or claims that we have violated a patent or infringed a copyright, trademark
or other proprietary right belonging to them. If such infringement were found to exist, we might be required to modify
our products or intellectual property or to obtain a license or right to use such technology or intellectual property. Any
infringement claim, even if not meritorious, could result in the expenditure of significant financial and managerial resources.
Zohar Zisapel and
Yehuda Zisapel beneficially own, in the aggregate, approximately 23% of our ordinary shares and therefore have significant influence
over the outcome of matters requiring shareholder approval including the election of directors.
As of March 25, 2020,
Zohar Zisapel (a member of our Board of Directors) and Yehuda Zisapel, who are brothers, may be deemed to beneficially own an aggregate
of 3,234,531 ordinary shares, including options exercisable for 16,000 ordinary shares that are exercisable within 60 days of March
25, 2020 and 610 RSU that will be vested within 60 days of March 25, 2020, representing approximately 23% of our outstanding ordinary
shares. As a result, despite the fact that each one of them, to our knowledge, operates independently from the other
with respect to his respective shareholding of our shares, Zohar Zisapel and Yehuda Zisapel have significant influence over the
outcome of various actions that require shareholder approval including the election of our directors. In addition, Zohar Zisapel
and Yehuda Zisapel may be able to delay or prevent a transaction in which shareholders might receive a premium over the prevailing
market price for their shares and prevent changes in control or in management.
We engage in transactions
and may compete with companies controlled by Zohar Zisapel and Yehuda Zisapel which may result in potential conflicts.
We are engaged in,
and expect to continue to be engaged in, numerous transactions with companies controlled by Zohar Zisapel and/or Yehuda Zisapel. We
believe that such transactions are beneficial to us and are generally conducted upon terms that are no less favorable to us than
would be available from unaffiliated third parties. Nevertheless, these transactions may result in a conflict of interest
between what is best for us and the interests of the other parties in such transactions. Furthermore, in some cases we may compete,
or buy third party components from other companies who compete, with companies controlled by Zohar Zisapel and/or Yehuda Zisapel.
For more information,
see “Item 7.B-Major Shareholders and Related Party Transactions—Related Party Transactions” and “Item 10.B-Fiduciary
Duties of Shareholders.”
We incurred net
losses in the past and may not achieve or sustain profitability in the future.
In 2019 and 2018, we
incurred net losses of approximately $6.8 million and $2.4 million, respectively. Although we were profitable in 2017 and 2016,
we may continue to incur losses in the future or may be unable to sustain profitability, which could materially affect our cash
and liquidity and could adversely affect the value and market price of our shares.
Our growing international
presence exposes us to risks associated with varied and changing political, cultural, legal and economic conditions worldwide and
if we fail to adapt appropriately to the challenges associated with operating internationally the expected growth of our business
may be impeded, and our operating results may be affected.
While we are headquartered
in Israel, approximately 96% of our sales in 2019, 98% of our sales in 2018, and 90% of our sales in 2017 were generated outside
of Israel. Our international sales will be limited if we cannot continue to establish and maintain relationships with international
distributors and resellers, set up additional foreign operations, expand international sales channel management, hire additional
personnel, develop relationships with international CSPs and operate adequate after-sales support internationally.
Even if we are able
to successfully expand our international operations, we may not be able to maintain or increase international market demand
for our solutions. Our international operations are subject to a number of risks, including:
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legal, language and cultural differences in the conduct of business;
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challenges in staffing and managing foreign operations due to the limited number of qualified candidates and due to employment laws and business practices in foreign countries;
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our inability to comply with import/export, environmental and other trade compliance and other regulations of the countries in which we do business including additional labor laws, particularly in Brazil and India, together with unexpected changes in such regulations;
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insufficient measures to ensure that we design, implement, and maintain adequate controls over our financial processes and reporting in the future;
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our failure to adhere to laws, regulations, and contractual obligations relating to customer contracts in various countries;
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our inability to maintain a competitive list of distributors and resellers for indirect sales;
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tariffs and other trade barriers;
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economic and political instability in foreign markets;
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wars, acts of terrorism and political unrest;
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lack of integration of foreign operations;
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variations in effective income tax rates among countries where we conduct business;
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potential foreign and domestic tax consequences and withholding taxes that limit the repatriation of earnings;
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technology standards that differ from those on which our solutions are based, which could require expensive redesign and retention of personnel familiar with those standards;
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laws and business practices favoring local competitors;
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longer accounts receivable payment cycles and possible difficulties in collecting payments; and
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failure to meet certification requirements.
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Any of these factors
could harm our international operations and have an adverse effect on our business, operating efficiency, results of operations,
financial performance and financial condition. The continuing weakness in foreign economies could have a significant negative effect
on our future operating results.
Because our revenues
are generated primarily in foreign currencies (mostly in U.S. dollars but also in other currencies), but a significant portion
of our expenses are incurred in New Israeli Shekels, our results of operations may be seriously harmed by currency fluctuations.
We sell in markets
throughout the world and most of our revenues are generated in U.S. dollars. We also generate revenues in Brazilian real, or BRL,
euro and other currencies. Financing activities are also made in U.S. dollars. Accordingly, we consider the U.S. dollar to be our
functional currency. However, a significant portion of our expenses is in NIS, mainly related to employee expenses. Therefore,
fluctuations in exchange rates between the NIS and the U.S. dollar as well as between other currencies and the U.S. dollar may
have an adverse effect on our results of operations and financial condition. As of today, we have not entered into any hedging
transactions in order to mitigate these risks.
Moreover, as our revenues
are currently denominated primarily in U.S. dollars, devaluation in the local currencies of our customers relative to the U.S.
dollar could cause customers to default on payment. Also, as a portion of our revenues is denominated in BRL, devaluation in this
currency may cause financial expenses related to our intercompany short-term balances. In the future, additional revenues may be
denominated in currencies other than U.S. dollars, thereby exposing us to gains and losses on non-U.S. currency transactions.
In addition, a material
portion of our leases are denominated in currencies other than the U.S. dollar, mainly in NIS. In accordance with the lease accounting
standard, which became effective on January 1, 2019, associated lease liabilities are remeasured using the current exchange rate
in the future reporting periods, which may result in material foreign exchange gains or losses.
Our international
sales and operations are subject to complex laws relating to foreign corrupt practices and bribery, among many other subjects.
A violation of, or change in, these laws could adversely affect our business, financial condition or results of operations.
Our operations in countries
outside the United States are subject, among others, to the Foreign Corrupt Practices Act of 1977 as amended from time to time,
or FCPA, which prohibits U.S. companies or foreign companies whose shares traded on a U.S. stock exchange, or their agents and
employees, from providing anything of value to a foreign public official, as defined in the FCPA, for the purposes of influencing
any act or decision of these individuals in their official capacity to help obtain or retain business, direct business to any person
or corporate entity, or obtain any unfair advantage. We have internal control policies and procedures with respect to the FCPA.
However, we cannot assure that our policies and procedures will always protect us from reckless or criminal acts that may be committed
by our employees or agents. Violations of the FCPA may result in severe criminal or civil sanctions, and we may be subject to other
liabilities, which could have a material adverse effect on our business, results of operations and financial condition. In addition,
investigations by governmental authorities as well as legal, social, economic and political issues in countries where we operate
could have a material adverse effect on our business and results of operations. We are also subject to the risks that our employees
or agents outside of the United States may fail to comply with other applicable laws. The costs of complying with these and similar
laws may be significant and may require significant management time and focus. Any violation of these or similar laws, intentional
or unintentional, could have a material adverse effect on our business, financial condition or results of operations.
Any inability to
comply with Section 404 of the Sarbanes-Oxley Act of 2002 regarding effective internal control procedures may negatively impact
the report on our financial statements to be provided by our independent auditors.
Pursuant to rules of
the U.S. Securities and Exchange Commission, or SEC, adopted pursuant to Section 404, or Section 404, of the Sarbanes-Oxley Act
of 2002, or the Sarbanes-Oxley Act, we are required to include in our annual report a report of management on our internal control
over financial reporting including an assessment by management of the effectiveness of our internal control over financial reporting. In
addition, because we qualify as an accelerated filer under the SEC rules, our independent registered public accounting firm is
required to attest to and report on the effectiveness of our internal control over financial reporting. Our management or
our auditors may conclude that our internal control over financial reporting is not effective. Such conclusion could result in
a loss of investor confidence in the reliability of our financial statements, which could negatively impact the market price of
our shares. Further, our auditors or we may identify material weaknesses or significant deficiencies in our assessments of our
internal control over financial reporting. Failure to maintain effective internal control over financial reporting could result
in investigation or sanctions by regulatory authorities and could have an adverse effect on our business, financial condition and
results of operations, and on investor confidence in our reported financial information.
If we determine that
we are not in compliance with Section 404, we may be required to implement new internal controls and procedures and re-evaluate
our financial reporting. We may experience higher than anticipated operating expenses as well as third party advisory fees during
the implementation of these changes and thereafter. Further, we may need to hire additional qualified personnel in order to comply
with Section 404. If we are unable to implement these changes effectively or efficiently, it could have a material adverse
effect on our business, financial condition, results of operations, financial reporting or financial results and could result
in our conclusion that our internal controls over financial reporting are not effective.
Risks Related to our Ordinary Shares
Wide fluctuations
in the market price of our ordinary shares could adversely affect us and our shareholders.
Between January 1,
2019 and March 25, 2020, our ordinary shares have traded on the Nasdaq Capital Market, or the Nasdaq, as high as $10.30 and as
low as $5.52 per share. As of March 25, 2020, the closing price of our ordinary shares on Nasdaq was $6.00 per share. The
market price of our ordinary shares has been and is likely to continue to be highly volatile and could be subject to wide fluctuations
in response to numerous factors, including the other risks identified in this “Item 3.D-Risk Factors”.
In addition, the stock
market in general, and the market for Israeli and technology companies in particular, has been highly volatile. Many of these
factors are beyond our control and may materially adversely affect the market price of our ordinary shares, regardless of our performance. Shareholders
may not be able to resell their ordinary shares following periods of volatility because of the market’s adverse reaction
to such volatility.
From time to time
we may choose to raise funds. If adequate financing is not available on terms favorable to us or to our shareholders, our operations
and growth strategy may be affected.
From time to time we
may choose to raise funds in connection with our operations and growth strategy. We do not know whether additional financing will
be available when needed, or whether it will be available on terms favorable to us. Any such financings may dilute the ownership
of existing shareholders and could adversely affect the market price of our ordinary shares. In addition, if adequate financing
is not available on terms favorable to us or to our shareholders, our operations and growth strategy may be affected.
The trading volume
of our shares is relatively low and it may be low in the future.
Our shares have been
traded at low volumes in the past and may be traded at low volumes in the future for reasons related or unrelated to our performance.
This low trading volume may result in lesser liquidity and lower than expected market prices for our ordinary shares, and our shareholders
may not be able to resell their shares for more than they paid for them. This low trading volume may also result in greater share
price volatility as result of short trading activities or the acquisition or disposition of shares by any single larger or institutional
shareholder.
Risks Related to Our Location in Israel
Conditions in Israel
affect our operations and may limit our ability to produce and sell our solutions.
We are incorporated
under Israeli law and our principal offices and research and development facilities are located in Israel. Accordingly, security,
political and economic conditions in the Middle East in general, and in Israel in particular, may directly affect our business.
Over the past several
decades, a number of armed conflicts have taken place between Israel and its Arab neighbors and a state of hostility, varying in
degree and intensity, has led to security and economic problems for Israel. From time to time since late 2000, there has also been
a high level of violence between Israel and the Palestinians. In addition, since 2010 political uprisings and conflicts in various
countries in the Middle East, including Egypt and Syria, are affecting the political stability of those countries. Any armed conflicts
or political instability in the region, including acts of terrorism or any other hostilities involving or threatening Israel, could
affect business conditions and could make it more difficult for us to conduct our operations in Israel, which could increase our
costs and adversely affect our financial results.
Further, in the past,
the State of Israel and Israeli companies have been subjected to economic boycotts. Several countries still restrict business with
the State of Israel and with Israeli companies. These restrictive laws and policies may have an adverse impact on our operating
results, financial conditions or the expansion of our business.
In addition, Israel
is experiencing a level of unprecedented political instability. The Israeli government has been in a transitionary phase since
December 2018, when the Israeli Parliament, or the Knesset, first resolved to dissolve itself and call for new general elections.
Since then Israel held general elections three times – in April and September of 2019 and in March of 2020. The Knesset
has not passed a budget for the year 2020 and certain government ministries, which may be critical to the operation of our business,
are without necessary resources and may not receive sufficient funding moving forward. In the event that the current political
stalemate is not resolved during 2020, our ability to conduct our business effectively may be adversely affected.
We currently benefit
from government programs that may be discontinued or reduced.
We currently receive
grants under Government of Israel programs. In order to maintain our eligibility for these programs, we must continue to meet
specific conditions and pay royalties with respect to grants received. In addition, some of these programs restrict
our ability to develop particular products outside of Israel or to transfer particular technology. If we fail to comply with
these conditions in the future, the benefits received could be canceled and we could be required to refund any payments previously
received under these programs. Additionally, these programs may be discontinued or curtailed in the future. If we do
not receive these grants in the future, we will have to allocate funds to product development at the expense of other operational
costs. If the Government of Israel discontinues or curtails these programs, our business, financial condition and results
of operations could be materially adversely affected. For more information, see “Item 4.B—Information on
the Company—Business Overview—Israel Innovation Authority.”
Provisions of Israeli
law may delay, prevent or make difficult a merger or acquisition of us, which could prevent a change of control and depress the
market price of our shares.
The Israeli Companies
Law, 5759-1999, or the Israeli Companies Law, regulates acquisitions of shares through tender offers, requires special approvals
for transactions involving shareholders holding 25% or more of the company’s capital, and regulates other matters that may
be relevant to these types of transactions. These provisions of Israeli law could have the effect of delaying or preventing a change
in control and may make it more difficult for a third party to acquire us, even if doing so would be beneficial to our shareholders.
These provisions may limit the price that investors may be willing to pay in the future for our ordinary shares. Furthermore, Israeli
tax considerations may make potential transactions undesirable to us or to some of our shareholders.
Our results of operations
may be negatively affected by the obligation of our personnel to perform military service.
Some of our employees
are required to perform annual military reserve duty in Israel and may be called to active duty at any time under certain circumstances.
Our operations could be disrupted by the absence for a significant period of one or more of our executive officers or other key
employees due to military service. Any disruption to our operations would harm our business.
It may be difficult
to effect service of process, assert U.S. securities laws claims and enforce U.S. judgments in Israel against us or our directors,
officers and auditors named in this Annual Report.
We were incorporated
in Israel. All our directors reside outside of the United States, and most of our assets are located outside of the United States.
Therefore, a judgment obtained against us, or any of these persons, including a judgment based on the civil liability provisions
of the U.S. federal securities laws, may not be collectible in the United States and may not necessarily be enforced by an Israeli
court. It also may be difficult to effect service of process on these persons in the United States or to assert U.S. securities
law claims in original actions instituted in Israel. Additionally, it may be difficult for an investor, or any other person or
entity, to initiate an action with respect to United States securities laws in Israel. Israeli courts may refuse to hear a claim
based on an alleged violation of United States securities laws reasoning that Israel is not the most appropriate forum in which
to bring such a claim. In addition, even if an Israeli court agrees to hear a claim, it may determine that Israeli law and not
United States law is applicable to the claim. If United States law is found to be applicable, the content of applicable United
States law must be proven as a fact by expert witnesses, which can be a time consuming and costly process. Certain matters of procedure
will also be governed by Israeli law. There is little binding case law in Israel that addresses the matters described above. As
a result of the difficulty associated with enforcing a judgment against us in Israel, you may not be able to collect any damages
awarded by either a United States or foreign court.
As a foreign private
issuer whose shares are listed on the Nasdaq, we may follow certain home country corporate governance practices instead of certain
Nasdaq requirements.
As a foreign private
issuer whose shares are listed on the Nasdaq, we are permitted to follow certain home country corporate governance practices instead
of certain requirements of the Nasdaq Stock Market Rules including requirements regarding compensation of officers, shareholder
approval for certain dilutive events (such as for the establishment or amendment of certain equity-based compensation plans, an
issuance that will result in a change of control of the company, certain transactions other than a public offering involving issuances
of a 20% or more interest in the company and certain acquisitions of the stock or assets of another company) and other matters.
Accordingly, our shareholders
may not be afforded the same protection as provided under Nasdaq’s corporate governance rules. For more information, see
“Item 16G—Corporate Governance”.
The rights and responsibilities
of our shareholders are governed by Israeli law and differ in some respects from those under Delaware law.
Because we are an
Israeli company, the rights and responsibilities of our shareholders are governed by our articles of association and by Israeli
law. These rights and responsibilities differ in some respects from the rights and responsibilities of shareholders in a Delaware
corporation. In particular, a shareholder of an Israeli company has a duty to act in good faith towards the company and other
shareholders and to refrain from abusing his, her or its power in the company, including, among other things, in voting at the
general meeting of shareholders on certain matters. Israeli law provides that these duties are applicable to shareholder votes
on, among other things, amendments to a company’s articles of association, increases in a company’s authorized share
capital, mergers and interested party transactions requiring shareholder approval. In addition, a shareholder who knows that it
possesses the power to determine the outcome of a shareholders’ vote or to appoint or prevent the appointment of a director
or executive officer of the company has a duty of fairness towards the company. However, Israeli law does not define the substance
of this duty of fairness. There is little case law available to assist in understanding the implications of these provisions that
govern shareholder behavior.
ITEM 4.
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INFORMATION ON THE COMPANY
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A.
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HISTORY AND DEVELOPMENT OF THE COMPANY
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Both our legal and
commercial name is RADCOM Ltd., and we are an Israeli company. We were incorporated in 1985 under the laws of the State of
Israel and commenced operations in 1991. The principal legislation under which we operate is the Israeli Companies Law. Our
principal executive offices are located at 24 Raoul Wallenberg Street, Tel Aviv 69719, Israel, and our telephone and fax numbers
are 972-3-645-5055 and 972-3-647-4681, respectively. Our website is www.radcom.com. Information on our website and other
information that can be accessed through it are not part of, or incorporated by reference into, this Annual Report.
In 1993, we established
a wholly-owned subsidiary in the United States, currently named RADCOM, Inc., or RADCOM US. In 1996, we incorporated a wholly-owned
subsidiary in Israel, RADCOM Investments (96) Ltd., or RADCOM Investments, located at our office in Tel Aviv, Israel. In 2010,
we established a wholly-owned subsidiary in Brazil, RADCOM do Brasil Comercio, Importacao e Exportacao Ltda., or RADCOM Brazil.
In 2012, we incorporated a wholly-owned subsidiary in India, RADCOM Trading India Private Limited, or RADCOM India.
In the years ended
December 31, 2019, 2018 and 2017, our capital expenditures were approximately $699, $662 thousand, and $790 thousand, respectively,
and were spent primarily on computers and electronic equipment. We have no current significant commitments for capital expenditures.
For more information,
the SEC maintains an Internet site (http://www.sec.gov) that contains reports, proxy and information statements, and other information
regarding us that has been filed electronically with the SEC.
Overview
We are a leading provider
of NFV and 5G-ready service assurance, cloud-native network intelligence solutions for CSPs. NFV is a software-centric design approach
which virtualizes entire classes of network functions into building blocks that may be connected or chained together to create
services in software-based, virtualized network environments. NFV is designed to consolidate and deliver the networking
components needed to support a fully virtualized network utilizing standard technologies that run on high-volume service, switch
and storage hardware to virtualize network functions. NFV is a key enabler of the coming 5G telecommunications infrastructure,
helping to virtualize all the various aspects of the network. We have a strong track-record of innovation.
Our RADCOM Network
Intelligence portfolio of solutions includes: RADCOM Service Assurance, delivering service assurance, RADCOM Network Visibility
for smart filtering, load balancing and sampling, and RADCOM Network Insights for business-critical intelligence and real-time
information on the customer and service experience.
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RADCOM Service Assurance and Customer Experience Monitoring (formerly known as MaveriQ) – allows telecom operators to gain end-to-end network visibility and customer experience insights across NFV and hybrid network. RADCOM Service Assurance delivers a real-time, high performance, and automated solution that is critical in providing operators customer insights in today’s top-tier, high-capacity networks;
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RADCOM Network Visibility – a cloud-native network packet broker and filtering solution that allows operators to manage network traffic at scale across multiple cloud environments and control the visibility layer to perform dynamic, on-demand analysis of select datasets; and
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RADCOM Network and Customer Insights – a business intelligence solution offering smart insights for multiple use cases, enabled by data captured and correlated through RADCOM Network Visibility and RADCOM Service Assurance. With RADCOM Network Insights we are able to offer a broad CEM and SOC solution to CSPs.
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We specialize in solutions
for next-generation mobile and fixed networks, including 5G, LTE, VoLTE, VoWifi, IMS, VoIP, and UMTS.
Since 2016, we have
been working with AT&T, in its continuing efforts to transition to a full NFV network. By developing and adapting our solutions
to meet the industry’s most stringent requirements we have expanded our customer base to include new customers and markets
while also expanding our footprint with existing customers by supporting them in their transition to NFV. As new and existing customers
seek to manage their existing networks while evaluating and deploying NFV-based architectures, we believe we are well positioned
with our advanced cloud-native solutions and our growing industry track record.
Our technological leadership
was validated by Rakuten’s 2019 selection of our solutions as their “eyes to the network” in support of their
launch of the world’s first end-to-end cloud-native, NFV-based, network. Using our solutions, Rakuten will monitor its entire
end-to-end network, including the world’s first fully virtualized radio access network (RAN).
Our portfolio enables
CSPs to smoothly transition their networks to NFV and 5G by monitoring and assuring both physical network and NFV-based network
and consequentially, ‘hybrid’ networks from tapping point to network insights. With the transition between physical
and virtualized networks taking place gradually, CSPs may need to manage ‘hybrid’ networks for the foreseeable future.
Our solutions are well positioned to address this need and provide service and network performance visibility in both physical
and virtual environments.
CSPs across the globe
use our solutions to deliver high quality services, reduce churn, manage network performance, analyze traffic and enhance customer
care. Our solutions incorporate cutting edge technologies and a wealth of knowledge gained in our advanced work with some of the
most technologically innovative CSPs in the industry. Our carrier-grade solutions support both mobile and fixed networks and scale
to terabit data bandwidths to enable big data analytics.
Our solutions deliver
specialized capabilities for virtualized infrastructure and next-generation networks, such as 5G and allow CSPs to monitor
and proactively improve quality of experience for their subscribers. The key benefits of our solutions are:
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advanced software-based architecture;
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ease of deployment and management;
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improved customer retention;
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reduced subscriber churn rates;
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improved service availability and quality;
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ability to correlate session information and provide an end-to-end view of the customer experience;
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full ability to install the solution as a virtual network function for seamless integration into all NFV infrastructures;
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dynamic multi-functional solution for 5G service assurance;
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on-demand monitoring capabilities;
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scalability for next-generation services;
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enhanced ability to collect all network packets for a complete and comprehensive view of the network and the customer experience;
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increased operational efficiency and lower costs;
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support for multiple protocols for end-to-end network coverage;
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the existence of both network-wide views and drilldown to an individual subscriber level and down to each session;
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support for the largest scale multi-market networks;
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accelerated deployment and migration to NFV and 5G; and
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real-time capabilities.
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Our fully cloud-native
solutions enable CSPs to manage both existing physical networks and next-generation, NFV-based architectures. We recognized that
CSPs would require a new approach for service assurance and CEM solutions in order to monitor huge volumes of data and support
NFV-based network deployments and the transition to 5G.
In February 2014, we
launched our service assurance solution which incorporates software-based probes, and which subsequently replaced our OmniQ hardware-based
solution and have, since then, continually invested in R&D so as to maintain our technological edge. In December 2015, this
effort resulted in the selection of our service assurance by AT&T for its next-generation virtualized network environment.
AT&T’s deployment represents the first NFV networks of scale in the industry.
During 2017 and 2018,
we improved our NFV capabilities to meet the stringent requirements of top tier CSPs having a large subscriber base and a high
level of expertise as we commenced deployment with an additional tier 1 CSP, and further expanded our solutions to support existing
customers in their transition to NFV and meeting their initial requirements for 5G. We also continued the development and enhancement
of our solutions to meet the complicated needs of monitoring 5G networks and to offer a smart mediation layer which allows us to
offer a full end-to-end customer and service view which addresses CSPs’ requirements for a smart CEM solution.
In 2018, we also launched our Network Visibility
solution to allow CSPs to gain more visibility into their network. RADCOM Network Visibility offers an integrated cloud-native
solution with advanced packet broker capabilities that ensure intelligent traffic distribution, smart load balancing, and intelligent
sampling for full end-to-end visibility across the network. RADCOM Network Visibility helps to distribute network traffic from
multiple cloud environments to service assurance probes, security tools, and other systems.
In 2019 we increased
our development efforts, focusing on enhancing automation and analytics capabilities and offering containerized solutions so as
to maintain our technological leadership.
Our continuing and
increased investment in research and development was validated in 2019 by our new engagements with AT&T and Rakuten. In March
2019, we entered into a new mutli-year engagement with AT&T which continues our successful relationship with AT&T and establishes
the foundation for the continuing and expanding integration of our solutions into AT&T’s network. In May 2019, we entered
into a multi-year agreement with Rakuten to provide our Network Intelligence solution for Rakuten’s unique and innovative
mobile network. Rakuten’s network will be the world’s first fully virtualized, end-to-end cloud-native mobile network
that adopts 5G systems architecture from launch. Rakuten chose RADCOM Network Intelligence because of its ability to monitor the
entire end-to-end network, including the world’s first fully virtualized radio access network (RAN). Our solutions will be
tightly integrated across Rakuten’s distributed telco cloud to assure the highest service quality is delivered to customers
for voice, video, VoLTE, data, and IoT services from the mobile edge up to the network core.
We expect to continue
our investment in research and development and to leverage our success with industry leading customers as we seek to engage with
other CSPs that are looking to manage existing networks while evaluating their transformation to the next-generation NFV architectures
and to 5G.
Industry Background
Our Customers and the Markets for Our Solutions
We operate in a large
market that is undergoing significant transformation with significant potential for growth. The customers in our market consist
primarily of mobile and fixed CSPs who are responsible for providing mobile and fixed telecommunications services. Our solutions
are used by multiple divisions within a CSP’s organization, including engineering, operations, marketing, management and
customer care departments.
CSPs face many challenges
in managing their network – from the rapid growth in mobile data traffic to complexities in managing services that are delivered
across multiple vendor technologies. These challenges are intensifying with further traffic growth and the emergence of new technologies
and services, such as machine to machine, IoT and 5G. With the need to manage millions of various network elements and services
from multiple vendors and technologies, deploying a virtualized network intelligence and CEM solution is an essential part of a
CSP’s network. In addition, CSPs are facing strong competition both from other CSPs and from over-the-top (OTT) players who
are offering more and more similar services. In order to fight for their customers’ satisfaction, CSPs will need to gain
deeper insight into customer behavior, enabling them to tailor processes based on customer preferences.
Similar to how virtualization
has become widely deployed in many data centers and large enterprises, many CSPs are looking to reduce costs and become more agile
by transitioning from physical network elements to software-centric, virtualized NFV architectures. As NFV enables CSPs to replace
dedicated physical network elements with software-based solutions that run-on standard, non-proprietary, third-party hardware,
this creates an increasing demand for NFV solutions such as ours. However, it also results in downward pressure on NFV and service
assurance solution pricing in order to allow the CSPs to obtain cost reduction objectives. Although the pace of NFV transformation
is uncertain and NFV deployments for existing networks did not occur at the expected pace, major CSPs are currently evaluating
and/or moving parts of their network to support NFV as NFV and software-defined networking, or SDN, are expected to play an important
role in 5G networks. For instance, 5G will support diverse use cases optimized by dynamic network slicing using SDN and NFV architectures
and is expected to lead to an acceleration in NFV transformations.
While NFV provides
many benefits, transitioning infrastructure to NFV adds significant complexity when it comes to service assurance and CEM. Prior
probe and management solutions were not designed for NFV. Whereas prior solutions focused on monitoring physical network devices,
new solutions must broaden capabilities to monitor internal virtual machine to virtual machine communications between various virtualized
network functions all hosted on the same server as well as communications between servers. New solutions must also work tightly
within the NFV eco-system to provide benefits from a full closed loop approach, where the monitoring solution acts as a virtualized
network function with full automation capabilities.
Our Strategy
Our objective is to
be the market leader for virtualized network intelligence and customer experience solutions for virtualized, 5G and hybrid networks.
We believe our leadership and innovation around NFV and cloud-based solutions will be advantageous to us as these types of solutions
are expected to play a key role in the deployment of 5G networks. We plan to increase our sales by leveraging our unparalleled
experienced gained from implementing the largest, most advanced NFV deployment to date (with AT&T) and from implementing our
solutions in the world’s first fully virtualized network (with Rakuten) where we provide complete visibility from the radio
access network (RAN) to the network core. In addition, we also offer our solutions and expertise to new and existing tier 1 and
innovative CSPs in our targeted geographical regions. We plan to maintain our technical advantage over competitors by further extensively
investing in enhancing the analytics and automation capabilities of our NFV and cloud-based solutions to meet the needs of 5G networks.
Key elements of our
strategy include:
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Focusing our network and customer experience insight capabilities to enhance the business value of our solution. RADCOM Network Insights is intended to meet the need for an end-to-end customer and service experience management solution. In addition to standard reporting and dashboards, this solution offers advanced capabilities which allow CSPs to gain real-time insights, discern trends, and develop forecasts which will allow them to improve core operations, enhance the customer experience, and improve marketing efficiency. Through the addition of new offerings such as those offered by Network Visibility, we aim to provide end-to-end network visibility from virtual tapping point to network insights.
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Targeting Tier 1 and other CSPs who are evaluating and/or migrating to NFV and 5G. The introduction of 5G networks is expected to drive a greater transition to NFV and necessitate real cloud-native network intelligence solutions. We believe that our solutions are significantly more advanced than competitors’ offerings and that we are better positioned than competitors who lack the experience deploying in virtualized environments or do not offer true cloud-native solutions that can be deployed at large scale. In order to transition to NFV, CSPs generally need to replace or upgrade their service assurance and CEM solutions with software that can support legacy, NFV-based architectures as well as 5G use cases. Our solution, which monitors both existing networks and NFV, ensures a smooth migration and enables CSPs to future-proof their investment in a network intelligence solution. With our advanced deployment with customers such as AT&T and Rakuten, and our reputation as the NFV technology leader, we believe we are well positioned to leverage our vast experience in true cloud-native and fully virtualized network intelligence in order to successfully expand our deployment base to other CSPs as we focus our sales and marketing activities on tier 1, galaxy (multi-carrier) and innovative operators and other operators seeking to migrate or actively migrating to NFV.
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Targeting innovative CSPs deploying fully virtualized, cloud-based networks. The introduction of new technologies and 5G network architecture allows innovative CSPs to deploy fully virtualized networks. These virtualized networks require fully virtualized service assurance and other solutions such as those in our Network Intelligence portfolio of solutions. Building on our experience with Rakuten, the world’s first and only CSP to deploy a fully virtualized network, we intend to target innovative CSPs seeking to upgrade their networks or to deploy new networks in a fully virtualized environment. We believe that our key role in Rakuten’s innovative and unique deployment places us at an advantage as we seek to engage with other CSPs looking to deploy similar networks.
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Entering into multi-year contracts providing for recurring revenues. With a transition to NFV and completely virtualized solutions, the sale of hardware with our solutions is expected to decrease while our engagements with CSPs are expected to consist primarily of software products and professional services. Software and services, more so than hardware, can be deployed and paid for in phases over time. We aim to leverage this by offering CSPs long term multi-year sales models which allow them to meet their system planning needs through term licensing, operational services, managed services, annual maintenance and support and software upgrade packages and the ability to add new capabilities so as to ensure that the CSPs are always benefitting from our most-up to date cutting-edge software solutions.
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Utilizing our industry leadership to introduce optimized costing models to the market. As a true software-based company we offer our existing and potential customers an appealing commercial model that combines both predictable spending on capital and operating expenditures with lower spending on service assurance and CEM solutions, in comparison to the appliance-based legacy solutions our competition continues to offer. With our optimized commercial model, we offer our customers several alternatives that enable them to grow their business and traffic on the network without impacting their spending with us.
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Products and Solutions
Our Network Intelligence
portfolio includes RADCOM Service Assurance, RADCOM Network Visibility and RADCOM Network Insights.
RADCOM Service
Assurance and Customer Experience Monitoring (formerly MaveriQ)
RADCOM Service Assurance
is a cloud-native, 5G-ready, fully virtualized service assurance solutions which allows telecom operators to gain end-to-end network
visibility and customer experience insights across NFV and hybrid network. RADCOM Service Assurance delivers a real-time, high
performance, and automated solution that is critical in providing operators customer insights in today’s top-tier, high-capacity
networks.
Our patented technology
enables RADCOM Service Assurance to capture and correlate network events and RADCOM virtual probes to acquire and correlate network
packets, which together are the key to 5G monitoring. RADCOM’s solution is designed to provide network intelligence
from the RAN to the core. Built using a dynamic, modular, and stream-based microservices architecture, RADCOM Service Assurance
can process large volumes of streaming data at lightning speed with very low latency. This enables customers to use RADCOM Service
Assurance on their physical and cloud infrastructures as they transition from legacy hardware-based networks to NFV-based virtualized
networks.
RADCOM Service Assurance
offers the service provider full end-to-end visibility of the network across technologies. RADCOM Service Assurance monitors multiple
types of services such as voice, video and data, employing numerous tools and network performance and measurement methodologies
to continuously analyze service performance and provide customer experience quality metrics. RADCOM Service Assurance offers users
a full array of analysis and troubleshooting tools, delivering a comprehensive, integrated network service view that facilitates
performance monitoring, fault detection and network and service troubleshooting from tapping point to network insights. RADCOM
Service Assurance displays performance and quality measurements from both the signaling and the user planes, based on a broad
range of passive software-based probes, which are installed on standard, non-proprietary third-party hardware that function together
with RADCOM Service Assurance to deliver essential functionality.
RADCOM Service Assurance
consists of a powerful and user-friendly central management module and a broad range of passive software-based probes used to
gather transmission quality data from various types of networks and services, including 5G, VoIP, UMTS, LTE, IMS data and others.
Signaling and media attributes and quality measurement extended detail records collected from the probes in the RADCOM Service
Assurance Manager (the central site-management software) are stored in the solution’s database. These can then be used by
the reporting and troubleshooting applications to perform service performance analysis, drilldown and troubleshooting on key performance
indicators, or KPIs, to gauge performance over time and key quality indicators to gauge the quality of service.
RADCOM Service Assurance
provides an advanced set of service assurance monitoring applications: network troubleshooting, network quality monitoring, service
quality monitoring, customer quality of service monitoring, and customer service level agreements monitoring.
RADCOM Service Assurance
is designed to enable CSPs to succeed in their efforts to address significant technology challenges, including:
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deployment of next-generation networks such as 5G and LTE;
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migration to and integration of new network architectures;
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delivery of advanced, complex services such as VoIP IMS and video quality analytics; and
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proactive management and quality assurance for all data sessions and calls on existing and next-generation service providers’ production networks.
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CSPs use RADCOM Service Assurance for a
wide array of use cases, such as:
Customer and Service Assurance
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Troubleshooting – enables CSPs to “drill down” to identify the source of specific problems, using tools ranging from call or session tracing to a full decoding of the call flow.
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Performance monitoring – allows CSPs to analyze and optimize network component performance levels and customer experience with the goal of identifying faults before they compromise the customer’s experience.
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Fault detection – automatic fault detection and service KPIs alert CSPs to network problems as they arise.
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Mediation – generates call detail records needed to feed the solutions’ smart mediation layer as well as third-party operations support systems and other solutions.
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Roaming and Interconnect Analysis
RADCOM Service Assurance
is used by CSPs to monitor their roaming and interconnect traffic. By identifying problematic links, CSPs avoid revenue loss, detect
problems with specific roaming partners, and manage interconnection KPIs.
RADCOM Network Visibility
RADCOM Network Visibility,
launched in February 2018, virtualizes the traditional network packet broker. Utilizing its advanced smart load balancing capabilities,
RADCOM Network Visibility cost effectively provides operators with end-to-end network visibility for NFV networks. Working in unison
with RADCOM Service Assurance, RADCOM Network Visibility is fully automated under ETSI compliant NFV orchestration for onboarding
and configuration and provides operators with on-demand capabilities, auto-scaling, and auto-healing as well as seamless upgrades.
RADCOM Network Visibility
offers operators an integrated cloud-native visibility solution that ensures intelligent traffic distribution, load balancing and
full end-to-end visibility across virtual networks, and provides advanced packet broker capabilities, like packet de-duplication,
secure socket layer decryption and packet slicing. As a cloud-native solution, RADCOM Network Visibility has no dedicated hardware
limitations and can be dynamically deployed and scaled efficiently with an NFV distributed approach to high scale packet brokering.
RADCOM Network Visibility
enables CSPs to virtually, intelligently and efficiently:
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manage, scale and load balance the network traffic;
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automate and synchronize visibility and assurance, onboarding and configuration;
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distribute traffic between the network intelligence probes without having to duplicate traffic and waste network resources;
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load balance Mobility Management Entity (MME)/IMS traffic with deciphering support;
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filter and analyze traffic with application-based routing;
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save network and bandwidth resources by filtering traffic at the tapping point; and
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utilize a unified and centralized management solution.
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RADCOM Network Visibility
plays a critical role in managing network performance and aggregating live data from the network, performing session-aware load
balancing and filtering before carefully optimizing the traffic flow to virtual probes. Under a unified management solution, RADCOM
Network Visibility is deployed and configured with a simple drop and drag graphic user interface that provides operators with direct
interfaces to a suite of troubleshooting tools and with a single point of access to multiple resources. This approach can deliver
significant cost savings as operators can analyze traffic before it reaches the service assurance tools. Furthermore, with powerful
filtering capabilities, this solution’s visibility layer can identify and manage specific data, thus significantly saving
on the use of network resources by filtering the amount of data delivered to RADCOM Service Assurance.
RADCOM Network Insights
RADCOM Network Insights
provides CSPs with real-time actionable business and marketing insights, which are customer centric while still maximizing revenue
streams across the organization. These rich, actionable network insights, allows operators to fully visualize their networks and
improve the service and customer experience, provide customer impact analysis, and proactively handle issues to fully understand
the customer experience and offer an improved Quality of Experience, or QoE, and a reduced customer churn, which is of particular
importance in transitioning to NFV and 5G.
RADCOM Network Insights
takes data from the RADCOM Service Assurance and RADCOM Network Visibility solutions, and certain external systems, to generate
automatic alerts when service levels drop below a pre-defined threshold. The solution can provide actionable triggers to external
systems for proactive handling. Operators can view the insights via an interactive dashboard and easily segment the data –
deciding the area of the network on which to focus.
RADCOM’s Network
Insights solution takes a proactive approach to handling network issues. By using both internal probe-based data and certain external
data feeds, RADCOM has the network intelligence to know which data to extract in order to provide the actionable insights required.
Key network monitoring metrics can be fed into RADCOM’s key quality indicators and converted to Quality of Service. Combined
with customer resource management feeds and legacy third-party probe data, the solution enables operators to assess the QoE for
the subscriber and make proactive decisions.
RADCOM Network Insights’
sophisticated tools are delivered via a powerful data virtualization suite. This enables the CSP to pinpoint necessary data for
actionable insights which are required to improve the CSP’s customers QoE and therefore to improve the CSP’s capital
efficiency.
Sales and Marketing Organization
We sell to customers
throughout the world mainly via direct channels and through resellers, including through our executives and sales representatives
in the United States, Europe, Israel, Brazil and Asia, but also via indirect channels.
Direct channels:
Most of our sales are
made through a direct channel, whereby our customers (the end-users) enter into an agreement directly with us. During 2019, this
direct channel was used mainly in North America, South America and Asia.
In North America, we
operate through RADCOM US, which sells our solutions to end-users directly and provides support to customers in the North American
market. Our solutions are sold to end-users in North America either by RADCOM US or by RADCOM Ltd.
In Brazil, we operate
through RADCOM Brazil, which primarily sells our solutions to end-users in the Brazilian market directly.
In India, we operate
through RADCOM India, which primarily provides customer support and development services worldwide.
Elsewhere, our solutions
are primarily sold to the end-users directly by RADCOM Ltd., including through our sales representatives in Europe and in Asia,
and supported by local representatives and subcontractors in the local market.
Indirect channels:
In several markets
we sell our solutions through independent distributors who market our solutions. We continue to search for new distributors to
penetrate new geographical markets and new customers, and to better serve our target markets.
Our distributors and
resellers serve as our local representative in certain countries as part of our sales, marketing and support team. They help sell,
deploy and service our solutions, offer technical support in the end-user’s native language, and attend to customer needs
during local business hours.
Geographic Markets:
The table below indicates
the approximate breakdown of our revenue by territory, based on the location of the end-customer:
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Year ended December 31,
(in millions of U.S. dollars)
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Year ended December 31,
(in percentages)
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2019
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2018
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2017
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2019
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2018
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2017
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North America
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14.5
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22.2
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25.1
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43.9
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65.1
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67.5
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Asia
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14.1
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7.2
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4.9
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42.7
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21.1
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13.2
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Latin America
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2.7
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3.6
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2.7
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8.2
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10.6
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7.2
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Others (including Israel)
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1.7
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1.1
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4.5
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5.2
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3.2
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12.1
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Total revenues
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33.0
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34.1
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37.2
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100
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%
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100
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%
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100
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%
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Competition
The market for our
solutions is competitive, and we expect that competition will continue in the future, both with respect to solutions that we are
currently offering and solutions that we are developing. Our principal competitors include Anritsu, Empirix, Huawei, NetScout,
Polystar, and EXFO. In addition to these competitors, we expect competition from
established and emerging communications, network management and test equipment companies, as well as traditional players in the
CEM space such as Huawei, Sandvine, Ericsson and Nokia. Many of our competitors have substantially greater resources than we have,
including financial, technological, engineering, manufacturing, marketing and distribution capabilities, and some of them may enjoy
greater market recognition than we do. Furthermore, the transition to NFV and software-based solutions could possibly open the
market to new competitors or bring in competitors from adjacent markets. For more information, see “Item 3.D-Risk Factors-
Risks Related to Our Business and Our Industry.”
We believe that we are differentiated from
our competitors due to:
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our recognized class-leading, cloud-native NFV service assurance solutions;
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our experience deploying and scaling NFV solutions with Tier 1 CSPs such as AT&T;
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our experience deploying our NFV solutions on the world’s first fully virtualized network;
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our advanced technology offering which provides end-to-end network visibility from virtual tapping point to network insights;
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our multi-technology correlation capabilities that can support all major technologies – 4G, 5G, LTE, IMS, VoLTE, VoIP and legacy 3G - within the same solution;
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our development of service assurance solutions for the deployment of 5G networks;
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our solution full software-based solutions provide cost-efficiency, rapid deployment times and agility in development;
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our support for both physical and NFV networks to allow CSPs who have yet to transform to NFV, to accelerate NFV deployments and smoothly transition from physical infrastructure while using the same solutions; and
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our proven flexibility and responsiveness in a dynamic customer and technology environment.
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Following our strategic
deployment with AT&T, our additional deployments with other CSPs, our engagement with Rakuten and our progress in engaging
new customers thereafter, we believe that we are positioned to be the leader in NFV, cloud-native network intelligence solutions
for CSPs transitioning to NFV and deploying 5G networks.
Customer Service and Support
We believe that providing
a high level of customer service and support to end-users is essential to our success, and it is our goal to establish RADCOM as
an industry leader in customer satisfaction. Investments that we are making to achieve this goal include:
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Enhancement of support: We are dedicated to the provision of timely, effective and professional support for all our customers. On-call support is provided by our direct sales/support force as well as by our representatives, distributors, and Original Equipment Manufacturer, or OEM, partners. In addition, we routinely contact our customers to solicit feedback and promote full usage of our solutions. We may provide our customers with a free warranty period which includes bug-fixing and a warranty on our solutions. After the initial warranty period, we offer extended warranties which can be purchased for multi-year periods. Generally, the cost of the extended warranty is an annual maintenance fee based on a percentage of the overall cost of the solutions.
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Customer-oriented product development: With the goal of continuously enhancing our customer relationships, we meet regularly with customers, and use the feedback from these discussions to improve our solutions and guide our R&D roadmap.
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Regional technical support: As the sale of a system and solutions requires a high level of technical skill, we decided to enhance our support with local experts located in our regional offices. This strategy is advantageous in terms of the time zone, culture and language. For example, in our U.S., Brazil and India offices we established local support teams responsible for first level engagements with customers (tier 1).
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Support of our sales representatives: We provide a high level of pre- and post-sale technical support to our sales representatives in the field. We use a broad range of channels to deliver this support, including technical training, marketing material and others.
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Seasonality of Our Business
In addition to general
market and economic conditions, such as overall industry consolidation, the pace of adoption of new technologies, and the general
state of the economy, our orders are affected by the varying fiscal year-ends of customers. Although this results in fluctuations
in our revenues from quarter to quarter, such fluctuations are not subject to any clear seasonality or consistent seasonal patterns.
Development Facilities
Our corporate office
and development facilities are located in Tel Aviv, Israel, and consist primarily of software development, testing, quality control
and installation.
Research and Development
The industry in which
we compete is subject to rapid technological developments, evolving industry standards, changes in customer requirements, and new
product introductions and enhancements. As a result, our success depends in part upon our ability to continue to enhance our
existing solutions and to develop and introduce new solutions that improve performance and reduce total costs on a cost-effective
and timely basis.
In 2019, we significantly
increased investment in research and development in order to maintain our technological leadership and to meet the current and
future needs of the world’s most advanced CSPs. We believe that the widescale rollout of 5G will bring with it a larger wave
of network virtualization by CSPs. Through our research and development efforts, we expect to be well positioned to offer state
of the art technologies and capabilities to these CSPs. Accordingly, we increased our strategic focus in 2019 on research and development
and on future-proofing our solutions by increasing our investing in the development of enhanced automation, containerized deployment
capabilities; and advanced machine learning based techniques to identify network anomalies and analyze the increased network traffic
that is expected with the roll-out of 5G networks. In parallel, we continued to enhance and develop our NFV solutions so as to
offer greater value and benefit to our customers.
We expect to continue
this significant investment in 2020 as we develop new features and new solution offerings to meet the requirements of 5G networks.
Israel Innovation Authority
We have received royalty-bearing
grants from the IIA for certain research and development activities pursuant to an incentive program, which are subject to provisions
of the R&D Law and the regulations promulgated thereunder.
In addition, we have
filed numerous applications, and in the future may continue to file additional applications, for grants from the IIA pursuant to
the R&D Law. Grants received under such programs are repaid through mandatory royalty payments based on revenues generated
from products developed pursuant to such programs or deriving therefrom. The receipt of such grants is contingent upon our ability
to comply with certain applicable requirements and conditions specified in the R&D Law and under the applicable program. As
of December 31, 2019, royalties at a rate of 3% are due on revenues from sales of products and related services that incorporate
know-how developed, in whole or in part, within the framework of projects funded by the IIA.
The R&D Law provides
that the IIA is authorized to determine the ownership requirements of know-how developed under an approved research and development
program and/or rights associated with such know-how including intellectual property, which is not the product that was developed
under such program, or the Funded Know-How.
The R&D Law further
provides that Funded Know-How may not be transferred to any third parties, unless certain requirements are met, as determined in
each project separately.
Among others, the IIA
may determine that certain Funded Know-How can be transferred to third parties in Israel only if such transferee company will also
be subject to the same terms and conditions that were levied upon the transferor company under the R&D Law prior to the transfer
of such know-how.
The IIA may approve
the transfer of Funded Know-How from Israel to abroad, generally, in the following cases: (a) the grant recipient pays to the IIA
up to 600% of the total amount of the grants and interest in consideration for such Funded Know-How ; (b) if the grant recipient
receives an alternative know-how from a third party in exchange for its Funded Know-How, subject to certain requirements, among
which the alternative know-how will generate higher revenues than the Funded Know-How for the company; (c) if such transfer of
Funded Know-How arises in connection with certain types of cooperation in research and development activities; or (d) if such transfer
of know-how arises in connection with a liquidation by reason of insolvency or receivership of the grant recipient and the Funded
Know-How is sold for a lower price than the amount of funds invested in it, in which case the payment set forth in (a) may be reduced.
The R&D Law generally
imposes reporting requirements with respect to certain changes in the ownership of a grant recipient. The R&D Law requires
the grant recipient and its controlling shareholders or the foreign interested party of such grant recipient to notify the IIA
of any change in control of the recipient or a change in the holdings of the means of control of the grant recipient that results
in a non-Israeli citizen or non-Israeli resident or corporation incorporated in Israel becoming an interested party directly in
the grant recipient, and requires the new interested party to undertake to the IIA to comply with the R&D Law. In addition,
the IIA may require additional information or representations in respect of such events. For R&D Law purposes, “control”
is defined as the ability to direct the activities of a corporation except the ability that stems from serving as an officer or
director of the company. A person is presumed to have control if such person holds 50% or more of the means of control of a company.
“Means of control” generally refers to voting rights in a company’s shareholders meeting or the right to appoint
directors or the chief executive officer. An “interested party” of a company includes a holder of 5% or more of its
outstanding share capital or voting rights, its chief executive officer and directors, someone who has the right to appoint its
chief executive officer or at least one director, and a company with respect to which any of the foregoing interested parties owns
25% or more of the outstanding share capital or voting rights or has the right to appoint 25% or more of the directors. Accordingly,
any non-Israeli who acquires 5% or more of our ordinary shares will be required to notify the IIA that it has become an interested
party and to sign an undertaking to comply with the R&D Law.
Amendment No. 7 to
the R&D Law became effective on January 1, 2016 and established the formation of the IIA in place of the Office of the Chief
Scientist. Accordingly, pursuant to Amendment No. 7, it is expected that the IIA may establish new guidelines and/or amend the
existing guidelines regarding the R&D Law and/or regulations thereunder. Consequently, Amendment No. 7 creates uncertainty
with respect to the terms of our existing and/or future IIA programs and incentives as we do not know what guidelines will be adopted
by the IIA or will be amended by it.
Since we commenced
operations, we have received royalty-bearing grants from the IIA. As of December 31, 2019, our total contingent liability to the
IIA in respect of grants received including accumulated interest and net of accumulated royalties paid was approximately $51.0
million.
In May 2010, we received
a notice from the IIA regarding alleged miscalculations in the amount of royalties paid by us to the IIA for the years 1992 through
2009. See “Item 3.D. Risk Factors–Risks related to our Business and Our Industry”.
Binational Industrial Research and
Development Foundation
Although we have not
received any new grants since 1996 and have not been required to pay any royalties since 2003, we have in the past received funding
for the research and development of products from the Israel-U.S. Binational Industrial Research and Development Foundation, or
the BIRD Foundation. We are obligated to pay royalties to the BIRD Foundation with respect to sales of products based on technology
resulting from research and development funded by the BIRD Foundation. Royalties to the BIRD Foundation are payable at the
rate of 5% based on the sales of such products, up to 150% of the grant received, linked to the United States Consumer Price Index. As
of December 31, 2019, our contingent liability to the BIRD Foundation for funding received was approximately $390 thousand.
Since 2003, we have not generated sales of products developed with the funds provided by the BIRD Foundation.
Indian Subsidiary and China Office Funding
In April 2012 and in
April 2014, the Israeli Ministry of Economy, or MOE, approved our application for funding to help set up our Indian subsidiary
and China office, respectively, as part of a designated grant plan for the purpose of setting up and establishing a marketing agency
in India and China. The grant was intended to cover up to 50% of the costs of the office establishment, logistics, expenses and
hiring of employees and consultants in India and China, based on the approved budget for the plan for a period of three years.
We are currently in the process of winding down our China office.
We are obligated to
pay to the MOE, over a period of five years commencing as of the lapse of the third anniversary of the grant, royalties of 3% of
increased sales in the target market, with respect to the year during which the grant was approved (2012 for India, and 2014 for
China), over a period of five years but not more than the total linked amount of the grant received. No further grants are expected
to be received from this plan.
As of December 31,
2019, the total amount of marketing grants received from the MOE with respect to our offices in China and our subsidiary in India
is approximately $668 thousand. We had no obligation to pay royalties during the year ended December 31, 2019.
Proprietary Rights
To protect our rights
to our intellectual property, we rely upon a combination of trademarks, contractual rights, trade secret law, copyrights, non-disclosure
agreements and technical measures to establish and protect our proprietary rights in our solutions and technologies. We own
registered trademarks for the name RADCOM and for the name Omni-Q®. We currently have one registered patent and
five pending patent applications in the United States. In addition, we usually enter into non-disclosure and confidentiality
agreements with our employees, distributors, sales representatives and with suppliers and sub-contractors who have access to sensitive
information.
Employees
Our total headcount
as of December 31, 2019 was 282 including employees and contractors. See “Item 6.D – Directors, Senior Management and
Employees – Employees.”
We consider our relations
with our employees to be good and we have never experienced a strike or work stoppage. Except for employees located in Brazil,
none of our employees are represented by labor unions.
Although we are not
a party to a collective bargaining agreement in Israel, we are subject to certain provisions of collective bargaining agreements
among the General Federation of Labor in Israel, or the Histadrut, and the Coordinating Bureau of Economic Organizations (including
the Industrialists’ Association), or the CBEO, that are applicable to our Israeli employees by virtue of expansion orders
of the MOE, including transportation allowance, annual recreation allowance, the lengths of the workday and workweek and mandatory
general insurance pension. In addition, we may be subject to the provisions of the extension order applicable to the Metal, Electricity,
Electronics and Software Industry. Israeli labor laws are applicable to all our employees in Israel. These provisions
and laws principally concern the length of the work day, minimum wages for workers, procedures for dismissing employees, determination
of severance pay, leaves of absence (such as annual vacation or maternity leave), sick pay and other conditions of employment.
In Israel, we follow
a general practice, which is the contribution of funds on behalf of most of our employees to an individual insurance policy known
as “Managers Insurance” or a pension fund. The contribution rates towards such Managers’ Insurance
are above and beyond the legal requirement. This policy provides a combination of savings plan, disability insurance and severance
pay benefits to the insured employee. It provides for payments to the employee upon retirement or death and accumulates
funds on account of severance pay, if any, to which the employee may be legally entitled upon termination of employment. Each
participating employee contributes an amount equal to up to 7% of such employee’s base salary, and we contribute between
15.4% and 17.3% of the employee’s base salary. Pursuant to changes to Israeli law as well as collective bargaining agreements
entered into by the Histadrut and the CBEO, the amounts that we are required to contribute may increase from time to time.
Our employment agreements
with new employees in Israel are in accordance with Section 14 of the Israeli Severance Pay Law – 1963, which provides that
our contributions to severance pay fund shall cover our entire severance obligation. Upon termination, the release of the contributed
amounts from the fund to the employee shall relieve us from any further severance obligation and no additional payments shall be
made by us to the employee. As a result, the related obligation and amounts deposited on behalf of such obligation are not stated
on the balance sheet, as we are legally released from severance obligation to employees once the amounts have been deposited, and
we have no further legal ownership on the amounts deposited.
We also provide employees
of RADCOM with an Education Fund, to which each participating employee contributes an amount equal to 2.5% of such employee’s
base salary and we contribute an amount equal to 7.5% of the employee’s base salary (generally up to a certain ceiling provided
in the Israeli Income Tax Regulations). Israeli employees and employers also are required to pay pre-determined sums
which include a contribution to national health insurance to the Israel National Insurance Institute, which provides a range of
social security benefits.
In the United States,
we provide benefits in the form of health, dental, vision and disability coverage and matching 401(k) plan contributions, in an
average amount equal to approximately 16.9% of the employee’s base salary.
In Brazil, we provide
benefits in the form of health coverage, including health, vision and dental coverage, in an amount that varies from 3% - 12% of
the employee’s base salary.
In India, we provide
benefits in form of health coverage, education fund, house rent allowance and health insurance fund, in an amount equal to 26%
of the employee’s salary.
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C.
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ORGANIZATIONAL STRUCTURE
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Our subsidiaries are:
(1) RADCOM US, which conducts the sales, marketing, and customer support of our products in North America; (2) RADCOM Investments
(96) Ltd, for the purpose of making various investments, including the purchase of securities; (3) RADCOM Brazil, which conducts
the sales, marketing and customer support of our products in Brazil; and (4) RADCOM India, which primarily provides, customer support
and development services worldwide. The following is a list of our subsidiaries, each of which is wholly-owned:
Name of Subsidiary
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Jurisdiction of Incorporation
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RADCOM, Inc.
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New Jersey
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RADCOM Investments (96) Ltd
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Israel
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RADCOM do Brasil Comercio, Importacao Exportacao Ltda
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Brazil
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RADCOM Trading India Private Limited
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India
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D.
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PROPERTY, PLANTS AND EQUIPMENT
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We currently lease
an aggregate of approximately 22,830 square feet of office space in Tel Aviv, Israel, from affiliates of our principal shareholders.
This space includes our development facilities, which consist primarily of programming, documenting, quality control, testing and
bug fixing, as well as from time to time, installation of software components on third party hardware.
In 2019, we paid to
affiliates of our principal shareholders aggregate annual lease and maintenance payments in the sum of approximately $772 thousand
for our Tel Aviv offices. We may, in the future, lease additional space from affiliated parties.
We also lease an aggregate
of approximately 5,946 square feet of office space in Paramus, New Jersey, from an affiliate of our principal shareholder. In 2019,
our aggregate annual lease payments for such premises were approximately $117 thousand.
We also lease an aggregate
of approximately 484 square feet of office space in Brazil and 5,809 square feet in India. The aggregate annual lease and maintenance
payments for those premises in 2019 were approximately $7 thousand and $119 thousand.
We believe that our
offices and facilities are adequate for our current needs and that suitable additional or substitute space will be available when
needed.
ITEM 4A.
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UNRESOLVED STAFF COMMENTS
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Not applicable.
ITEM 5.
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OPERATING AND FINANCIAL REVIEW AND PROSPECTS
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The following discussion
of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and
the related notes included elsewhere in this Annual Report.
Overview
We provide cloud-native
NFV-ready network intelligence solutions for CSPs. Our world leading, innovative solutions are well-positioned to fulfill the
CSPs’ ongoing needs to monitor their networks (fixed and mobile) and assure the delivery of a quality service to their subscribers;
both on NFV networks and non-virtual networks.
General
Our discussion and
analysis of our financial condition and results of operation are based upon our consolidated financial statements, which have been
prepared in accordance with U.S. GAAP. Our operating and financial review and prospects should be read in conjunction with our
financial statements, accompanying notes thereto and other financial information appearing elsewhere in this Annual Report.
We commenced operations
in 1991. Since then, we have focused on developing and enhancing our products, building our worldwide direct and indirect distribution
network and establishing and expanding our sales, marketing, and customer support infrastructures.
Most of our revenues
are generated in U.S. dollars and the financing activities are made in U.S. dollars. Accordingly, we consider the U.S. dollar to
be our functional currency and our consolidated financial statements are prepared in dollars.
As we evaluate our
growth prospects and manage our operations for the future, we believe that the adoption of NFV and future deployment of 5G by leading
CSPs will drive our growth.
We followed the below
sales strategy in 2019 in order to expand our sales pipeline and revenues:
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We focused on leveraging our NFV implementations with AT&T, Rakuten and other customers to expand our value proposition to additional carriers;
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We expanded our business with our key existing customers;
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We continued our investment in our sales and marketing resources and have expanded our reach through the engagement of local representatives;
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We invested in marketing campaigns globally to enhance our market positioning and open new opportunities;
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We increased our investment in research and development to maintain our recognized technological leadership in cloud-based, 5G and NFV solutions, to meet the requirements of our customers, and to develop new product offerings and capabilities;
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We invested in our professional services team and resources to meet our customers’ deployment, customization and support requirements and to allow us to successfully deliver multiple proof of concept demonstrations to potential new customers; and
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We pursued strategic partnerships, including OEM partnerships, and teaming agreements.
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In 2019, we continued
expanding the capability and solution offerings of our RADCOM Network Intelligence portfolio. Our leadership in virtualized solutions
has contributed to our 2019 results, including by our expansion into new markets through the addition of new customers such as
Rakuten.
Revenues. In
general, our revenues derive from sales of our products or solutions, fixed-price projects, and sales of services which primarily
include extended warranty, support services and managed services. Revenues consist of gross sales, less discounts and refunds,
when applicable. In May 2014, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, 2014-09,
Revenue from Contracts with Customers (Topic 606). For further information regarding this ASU and its impact on our financial results
see “Item 5.B—Liquidity and Capital Resources — Critical Accounting Policies and Estimates”.
Cost of revenues. Cost
of revenues, consisting of salaries and related expenses derive primarily from employees engaged in managed services and ongoing
customer support, solution deployment and software development customization activities. Cost of revenues also consists of the
use of hardware, inventory write-offs, importation taxes, shipping and handling costs, license fees for software components of
third parties, hardware warranty expenses, allocation of overhead expenses, subcontractors’, royalties to the IIA and share-based
compensation. As part of our plan to reduce product cost and improve flexibility, we shifted during the last few years to a model
whereby we install our software-based solutions on standard, non-proprietary third-party hardware that functions together with
our software to deliver the product’s essential functionality.
Our gross profit is
affected by several factors, including the introduction of new products, price erosion due to increasing competition, the bargaining
power of larger clients, the number of employees that we have in operations, deployment, software development customization, managed
services and customer support, integration of third-party software components into our own, product mix, and exchange rate fluctuations.
Research and Development
expenses, Net. Research and development expenses, net consist primarily of salaries and related expenses, including share-based
compensation, payments for subcontractors and overhead expenses. Overhead expenses consist of a variety of costs, including
rent, office and associated expenses. The R&D expenses have been partially offset by royalty-bearing grants from the IIA.
Sales and Marketing
expenses, Net. Sales and marketing expenses, net consist primarily of salaries and related expenses, including share-based
compensation, commissions and fees to third party representatives, advertising, trade shows, promotional expenses, domestic and
international travels, web site maintenance, and overhead expenses, net of grants received from the MOE.
General and Administrative
Expenses. General and administrative expenses consist primarily of salaries and related expenses including share-based compensation,
professional fees (which include legal, audit and other consulting fees), bad debt expenses, other general corporate expenses and
overhead expenses.
Financial Income,
Net. Financial income, net, consists primarily of interest earned on bank deposits, bank charges, and gains or
losses from the exchange rate differences of monetary balance sheet items denominated in non-U.S. dollar currencies.
Summary of Our Financial Performance
for the Fiscal Year Ended 2019 Compared to the Fiscal Year Ended 2018
For the year ended
December 31, 2019, our revenues were approximately $33.0 million, compared to approximately $34.1 million in 2018, reflecting a
decrease of approximately 3.2%. We provided approximately $6.8 million in cash from operating activities during 2019, compared
to approximately $1.9 million used in 2018. Our net loss for the year ended December 31, 2019 was approximately $6.8 million,
compared to a net loss of approximately $2.4 million for 2018.
As of December 31,
2019, our cash and cash equivalents and short-term bank deposits totaled approximately $69.3 million, compared with cash and cash
equivalents of approximately $62.0 million as of December 31, 2018.
Our 2019 net loss includes
non-cash expenses due to share-based compensation of approximately $2.2 million compared to approximately $2.1 million in 2018.
Reportable Segments
Management receives
sales information by customers and by geographical regions. Research and development, sales and marketing, and general and
administrative expenses are reported on a combined basis only (i.e., they are not allocated to product groups or geographical
regions). Because a measure of operating profit or loss by product groups or geographical regions is not presented to management
due to shared resources, we have concluded that we operate in one reportable segment.
Results for the Year Ended December
31, 2019 compared to Year Ended December 31, 2018
The following table
sets forth, for the periods indicated, certain financial data expressed as a percentage of revenues:
|
|
Year ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Revenues
|
|
|
100
|
%
|
|
|
100
|
%
|
Cost of revenues
|
|
|
30.0
|
|
|
|
26.0
|
|
Gross profit
|
|
|
70.0
|
|
|
|
74.0
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
56.3
|
|
|
|
45.5
|
|
Less royalty-bearing participation
|
|
|
5.6
|
|
|
|
4.8
|
|
Research and development, net
|
|
|
50.7
|
|
|
|
40.7
|
|
Sales and marketing
|
|
|
31.9
|
|
|
|
33.5
|
|
General and administrative
|
|
|
11.1
|
|
|
|
10.0
|
|
Total operating expenses
|
|
|
93.7
|
|
|
|
84.2
|
|
Operating loss
|
|
|
(23.7
|
)
|
|
|
(10.2
|
)
|
Financial income, net
|
|
|
3.5
|
|
|
|
3.3
|
|
Loss before taxes on income
|
|
|
(20.2
|
)
|
|
|
(6.9
|
)
|
Taxes on income
|
|
|
(0.5
|
)
|
|
|
(0.2
|
)
|
Net loss
|
|
|
(20.7
|
)
|
|
|
(7.1
|
)
|
Revenues
|
|
|
|
|
|
|
|
|
Year Ended December 31,
(in millions of U.S. dollars)
|
|
|
|
2019
|
|
|
2018
|
|
Products
|
|
|
16.4
|
|
|
|
13.6
|
|
Services
|
|
|
16.3
|
|
|
|
8.3
|
|
Projects
|
|
|
0.3
|
|
|
|
12.2
|
|
Total Revenues
|
|
|
33.0
|
|
|
|
34.1
|
|
Revenues. In
2019, our revenues decreased by approximately $1.1 million, or approximately 3.2% compared to 2018 due to a decrease of approximately
$11.9 million in revenues from projects, offset by an increase of approximately $8.0 million and $2.8 million in revenues from
services and products, respectively. The decrease in projects revenues relates to the completion of the AT&T initial project
implementation in the first quarter of 2019. The increase in products and services revenues relates mainly to a new engagement
in Asia.
Revenues per geographic region, based on the location of
the end-customer
|
|
Year Ended December 31,
(in millions of U.S. dollars)
|
|
|
Year Ended December 31,
(as percentages)
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
North America
|
|
|
14.5
|
|
|
|
22.2
|
|
|
|
43.9
|
|
|
|
65.1
|
|
Asia
|
|
|
14.1
|
|
|
|
7.2
|
|
|
|
42.7
|
|
|
|
21.1
|
|
Latin America
|
|
|
2.7
|
|
|
|
3.6
|
|
|
|
8.2
|
|
|
|
10.6
|
|
Others (including Israel)
|
|
|
1.7
|
|
|
|
1.1
|
|
|
|
5.2
|
|
|
|
3.2
|
|
Total revenues
|
|
|
33.0
|
|
|
|
34.1
|
|
|
|
100
|
%
|
|
|
100
|
%
|
In 2019 our three
largest customers amounted to approximately $13.5 million, $6.8 million and $7.2 million of the total consolidated revenues. In
2018, our three largest customers amounted to approximately $16.3 million, $6.2 million and $5.1 million out of total consolidated
revenues.
Cost of Revenues and Gross Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
(in millions of U.S. dollars)
|
|
|
|
2019
|
|
|
2018
|
|
Products
|
|
|
4.8
|
|
|
|
4.9
|
|
Services
|
|
|
5.0
|
|
|
|
1.2
|
|
Projects
|
|
|
0.1
|
|
|
|
2.8
|
|
Total cost of revenues
|
|
|
9.9
|
|
|
|
8.9
|
|
Gross profit
|
|
|
23.1
|
|
|
|
25.2
|
|
Cost of Revenues. During
2019, our gross profit as a percentage of revenues, calculated to include variable costs such as salaries and related expenses
was approximately 70% compared to approximately 74% in 2018. The decrease in the gross profit as a percentage of revenue reflects
a larger relative increase in our cost of revenues as compared to the decrease in our revenues. This increase in our cost of revenues
is attributed mainly to cost of salaries and related expenses as well as subcontractors’ fees associated with managed services
activities.
Our cost of revenues
for 2019 includes an expense of approximately $204 thousand for share-based compensation, as compared to approximately $112 thousand
for share-based compensation in 2018.
The following table
provides the operating costs and expenses of the Company in 2019 and 2018 as well as the percentage change of such expenses in
2019 as compared to 2018.
|
|
Year ended December 31,
(in millions of U.S. dollars)
|
|
|
% Change
|
|
|
|
2019
|
|
|
2018
|
|
|
2019 vs 2018
|
|
Research and development
|
|
|
18.5
|
|
|
|
15.5
|
|
|
|
19.4
|
|
Less royalty-bearing participation
|
|
|
1.8
|
|
|
|
1.6
|
|
|
|
12.5
|
|
Research and development, net
|
|
|
16.7
|
|
|
|
13.9
|
|
|
|
20.1
|
|
Sales and marketing
|
|
|
10.5
|
|
|
|
11.4
|
|
|
|
(7.9
|
)
|
General and administrative
|
|
|
3.7
|
|
|
|
3.4
|
|
|
|
8.8
|
|
Total operating expenses
|
|
|
30.9
|
|
|
|
28.7
|
|
|
|
7.7
|
|
Research and Development
Expenses. Research and development expenses, gross, increased from approximately $15.5 million in 2018 to approximately $18.5
million in 2019. As a percentage of total revenues, research and development expenses, gross, increased from approximately 45.5%
in 2018 to approximately 56.3% in 2019. The increase in our gross research and development expenses is attributable mostly to the
increase in the average number of employees allocated to research and development costs, sub-contractors and related expenses.
This primarily derives from a decrease in the allocation of research and development employees’ to cost of projects associated
with software development customizations, in line with the decrease in project revenues. As of December 31, 2019, our total research
and development headcount, including contractors, was 150, compared to 125 employees and contractors as of December 31, 2018. Our
research and development costs included an expense of approximately $729 thousand for share-based compensation in 2019, as compared
to approximately $808 thousand for share-based compensation in 2018.
We believe that our
research and development efforts are a key element of our strategy and are essential to our success. An increase or a decrease
in our total revenues would not necessarily result in a proportional increase or decrease in the levels of our research and development
expenditures, which could affect our operating margin.
Sales and Marketing
Expenses. Sales and marketing expenses decreased from approximately $11.4 million in 2018 to approximately
$10.5 million in 2019. The decrease in our sales and marketing expenses from 2018 to 2019 is mainly attributable to decrease in
the average number of employees allocated to sales and marketing. As a percentage of total revenues, sales and marketing expenses
decreased from 33.5% in 2018 to 31.9% in 2019. Our sales and marketing expenses included an expense of approximately $638 thousand
for share-based compensation in 2019, as compared to approximately $698 thousand for share-based compensation in 2018.
General and Administrative
Expenses. General and administrative expenses increased from approximately $3.4 million in 2018 to approximately
$3.7 million in 2019. The increase in our general and administrative expenses from 2018 is mainly attributed to an increase in
share-based compensation and professional fees. As a percentage of total revenues, general and administrative expenses increased
from 10.0% in 2018 to 11.1% in 2019. Our general and administrative expenses included approximately $657 thousand for share-based
compensation in 2019, as compared to approximately $503 thousand for share-based compensation in 2018.
Financial
Income, Net. In 2019, the financial income, net, was approximately $1.2 million, as compared to financial income, net,
of approximately $1.1 million in 2018. The increase in our financial income, net from 2018 is attributed to an increase in interest
income from short-term bank deposits.
Taxes
on Income. In 2019, we recorded tax expenses of approximately $169 thousand, as compared to tax expenses of approximately
$63 thousand in 2018. Tax expenses are comprised from tax expenses of RADCOM India and RADCOM US as well as withholding taxes that
were deducted by our customers.
Comparison of Financial Data for Year Ended December 31,
2018 compared with Year Ended December 31, 2017
For a discussion of the financial data for
the year ended December 31, 2018 compared with the year ended December 31, 2017, see “Item 5.A.-Operating and Financial Review
and Prospects-Operating Results” included in our Annual Report on Form 20-F for the fiscal year ended December 31, 2018.
Impact of Inflation and Foreign Currency
Fluctuations
Most of our revenues
are generated in U.S. dollars and the financing activities are made in U.S. dollars. We also generate revenues in BRLs, euros and
other currencies; however, we consider the U.S. dollar to be our functional currency. In the future additional revenues may be
denominated in currencies other than U.S. dollars.
Since a significant
portion of our expenses is in NIS, as we pay our Israeli employees’ salaries in NIS, the dollar cost of our operations is
influenced by the exchange rates between the NIS and the US dollar. Fluctuations in exchange rates between the U.S. dollar,
the BRL, euro, and other currencies in which we generate revenue, and the U.S. dollar, may also have an effect on our results of
operations. With respect to our Brazilian subsidiary, the functional currency has been determined to be their local currency. Assets
and liabilities are translated at year-end exchange rates and statements of income items are translated at average exchange rates
prevailing during the year. Such translation adjustments are recorded as a separate component of accumulated other comprehensive
loss in shareholders’ equity.
Because exchange rates
between the NIS and the U.S. dollar fluctuate continuously, exchange rate fluctuations will have an impact on our profitability
and period-to-period comparisons of our results. The effects of foreign currency re-measurements of financial assets
and liabilities are reported in our financial statements as financial income or expense. Based on our budget for 2020, we expect
that an increase of NIS 0.10 to the exchange rate of the NIS to U.S. dollar will decrease our expenses expressed in dollar terms
by approximately $584 thousand per fiscal year and vice versa.
Effective Corporate Tax Rate
As of January 1, 2019,
Israeli resident companies were generally subject to corporate tax at the rate of 23%. Israeli resident companies are generally
subject to capital gains tax at the corporate tax rate. We do not generate taxable income in Israel, as we have historically incurred
operating losses resulting in carry forward losses for tax purposes totaling approximately $33.7 million as of December 31, 2019.
We believe that we will be able to carry forward these tax losses to future tax years. We do not expect to pay taxes in Israel,
on our incomes from operations, until we utilize our carry forward tax losses. We may be required to pay taxes on our passive income,
if any. For more information on taxation, see “Item 10.E – Taxation.
Our effective corporate
tax rate may exceed the Israeli tax rate. Our U.S. and Brazilian subsidiaries will generally be subject to applicable federal,
state, local and foreign taxation, and we may also be subject to taxation in the other foreign jurisdictions in which we own assets,
have employees or conduct business activities.
We recorded a valuation
allowance of approximately $13.5 million at December 31, 2019 for all of our deferred tax assets. Based on the weight of
available evidence, we believe it is more likely than not that all of our deferred tax assets will not be realized.
|
B.
|
LIQUIDITY AND CAPITAL RESOURCES
|
We have financed our
operations through cash generated from operations, the proceeds from our private and public offerings, proceeds from the exercise
of options and warrants and royalty-bearing participation from the IIA and others. Cash and cash equivalents and short-term bank
deposits at December 31, 2019, and 2018 were approximately $69.3 million and $62.0 million, respectively.
We believe that our
existing capital resources and cash flows from operations will be adequate to satisfy our expected liquidity requirements through
the next twelve months. Without derogating from the foregoing estimate regarding our existing capital resources and cash flows
from operations, we may decide to raise additional funds in 2020. We believe that, if required, we will be able to raise additional
capital or reduce discretionary spending to provide the required liquidity beyond the next twelve months.
Net Cash Provided
by (Used in) Operating Activities. Net cash provided by operating activities was approximately $6.8 million in 2019 compared
to net cash used in operating activities of approximately $1.9 million in 2018.
The positive net cash
flow in 2019 was primarily due to a decrease in trade receivables of approximately $9.3 million, an increase in other liabilities
and accrued expenses of approximately $2.7 million, share-based and restricted share compensation expenses of approximately $2.2
million, an increase in trade payable of approximately $1.0 million, decrease in operating lease right-of-use assets and liabilities,
net and effect of exchange rate differences of approximately $0.4 million, depreciation of approximately $0.8 million, an increase
in deferred revenue and advances from customers of approximately $0.6 million and an increase in the employees and payroll accruals
of approximately $0.7 million. This was partially offset by net loss of approximately $6.8 million, an increase in other accounts
receivable and prepaid expenses of approximately $1.8 million, an increase in accrued interest on short-term bank deposits of approximately
$1.2 million and an increase in inventories of approximately $1.1 million.
The negative net cash
flow in 2018 was primarily due to net loss of approximately $2.4 million, a decrease in the deferred revenue and advances from
customers of approximately $2.2 million, a decrease in employees and payroll accruals of approximately $0.6 million, a decrease
in trade payables of approximately $0.2 million and a decrease in other liabilities and accrued expenses of approximately $0.8
million. This was partially offset by share-based and restricted share compensation expenses of approximately $2.1 million, a decrease
in inventories of approximately $0.9 million, a decrease in other accounts receivable and prepaid expenses of approximately $0.7
million and depreciation of approximately $0.7 million.
The trade receivables
and days of sales outstanding, or DSO, are primarily impacted by payment terms, variations in the levels of shipment in the quarter,
and collections performance. Trade receivables for 2019 decreased to approximately $11.0 million from approximately
$20.4 million in 2018.
The increase in inventories
in 2019 was mainly due to the increase in inventory delivered to customers for which revenue criteria have not been met and recognized.
Net Cash Provided
by (Used in) Investing Activities. Our investing activities generally consist of the purchase of equipment and investment
in short-term bank deposits. Net cash used in investing activities in 2019 was approximately $62.6 million, compared to net cash
provided by investing activities in 2018 of $39.3 million. In 2019, we invested approximately $61.9 million in a short-term bank
deposits and approximately $0.7 million for the purchase of equipment. In 2018 we received approximately $40.0 million from the
maturity of a short-term bank deposit and invested approximately $0.7 million for the purchase of equipment.
Net Cash provided
by Financing Activities. In 2019, net cash provided by financing activities was approximately $16 thousand compared to approximately
$2.1 million in 2018 from the exercise of options.
Investments
We may in the future
undertake hedging or other similar transactions or invest in market risk-sensitive instruments, if our management determines that
it is necessary to offset risks such as foreign currency and interest rate fluctuations.
Impact of Related Party Transactions
We have entered into
a number of lease agreements with the RAD-BYNET Group (as described under “Item 7.B-Major Shareholders and Related Party
Transactions-Related Party Transactions”). The pricing of the transactions with respect to such leases was determined
based on negotiations between the parties. Members of our audit committee of the Board of Directors, or the Audit Committee,
Board of Directors and management reviewed the pricing of the leases and confirmed that these leases were not different from terms
that could have been obtained from unaffiliated third parties. We believe, however, that due to the affiliation between us
and the RAD-BYNET Group, we have greater flexibility on certain issues than what may be available from unaffiliated third parties.
We have also entered
into a number of limited term engagements with Matrix IT Ltd. or its affiliated companies (as described under “Item 7.B-Major
Shareholders and Related Party Transactions-Related Party Transactions”) for certain software and/or services used in connection
with the development of our solutions. Members of our Board of Directors and management reviewed the pricing of such agreements
and confirmed that these agreements were not different from terms that could have been obtained from unaffiliated third parties.
For more information,
see “Item 7.B—Major Shareholders and Related Party Transactions—Related Party Transactions” below.
Please see “Item
5.F—Operating and Financial Review and Prospects—Tabular Disclosure of Contractual Obligations” below for a discussion
of our material commitments for capital expenditures.
Government Grants and Related Royalties
The Government of Israel,
through the IIA, encourages research and development projects pursuant to the R&D Law and the regulations promulgated thereunder. We
may receive grants from the IIA at the rates that range from 20% to 50% of the research and development expenses, as prescribed
by the research committee of the IIA in accordance with the R&D Law. We recorded such grants from the IIA in the total
amount of approximately $1.8 million in 2019, $1.6 million in 2018 and $1.6 million in 2017. Pursuant to the specific terms of
these grants, we are obligated to pay royalties of 3% of the revenues generated by sales of products (and certain related services)
funded with these grants. In the event that a project funded by the IIA does not result in the development of a product which
generates revenues, we would not be obligated to repay the grants we received for the product’s development. Royalty
expenses relating to the IIA grants included in the cost of revenues for years ended December 31, 2019, 2018 and 2017 were approximately
$990 thousand, $922 thousand, and $1.3 million, respectively. The total grants regarding projects that we have received from the
IIA as of December 31, 2019 were approximately $46.7 million. For projects authorized as a research and development program
under the R&D Law since January 1, 1999, the repayment interest rate is LIBOR. As of December 31, 2019, the accumulated interest
was approximately $20.0 million, the accumulated royalties paid to the IIA were approximately $15.7 million and our total amount
of contingent liability to the IIA in respect of grants received was, according to our records, approximately $51.0 million. For
additional information, see “Item 4.B—Information on the Company—Business Overview—Israel Innovation Authority.”
In April 2012 and in
April 2014, the MOE approved our application for funding to help set up our Indian subsidiary and China office respectively as
part of a designated grant plan for the purpose of setting up and establishing a marketing agency in India and China. The grant
is intended to cover up to 50% of the costs of the office establishment, logistics, expenses and hiring of employees and consultants
in India and China, based on the approved budget for the plan for a period of three years. The total marketing grants that we have
received from the MOE as of December 31, 2017 were approximately $668 thousand. No further grants are expected to be received from
such plans.
We are obligated to
pay to the MOE, royalties of 3% on the increased sales in the target market, with respect to the year during which the grant was
approved (2012 for India, and 2014 for China), over a period of five years but not more than the total linked amount of the grant
received. During 2018, the Company paid an aggregate amount of $9 thousand of royalties to the MOE. No royalties were required
to be paid during 2019. For additional information, see “Item 4.B—Information on the Company—Business Overview—Israel
Innovation Authority.”
We are also obligated
to pay royalties to the BIRD Foundation, with respect to sales of products based on technology resulting from research and development
funded by the BIRD Foundation. Royalties to the BIRD Foundation are generally payable at the rate of 5% of the sales of such
products, up to 150% of the grant received, linked to the United States Consumer Price Index. As of December 31, 2019,
we had a contingent obligation to pay the BIRD Foundation aggregate royalties in the amount of approximately $390 thousand. For
additional information, see “Item 4.B—Information on the Company—Business Overview—Binational Industrial
Research and Development Foundation.”
Critical Accounting Policies and
Estimates
The preparation of
Consolidated Financial Statements and related disclosures in conformity with U.S. GAAP requires us to make judgments, assumptions,
and estimates that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. Note 2 of the Notes
to the Consolidated Financial Statements describes the significant accounting policies and methods used in the preparation of the
Consolidated Financial Statements. The accounting policies described below are significantly affected by critical accounting estimates.
Such accounting policies require significant judgments, assumptions, and estimations used in the preparation of the Consolidated
Financial Statements, and actual results could differ materially from the amounts reported based on these policies.
Revenue recognition.
We recognize revenues in accordance with
ASC No. 606, “Revenue from Contracts with Customers”. As such, we identify a contract with a customer, identify the performance
obligations in the contract, determine the transaction price, allocate the transaction price to each performance obligation in
the contract and recognize revenues when (or as) performance obligations are satisfied as follows:
|
a)
|
Identify the contract with a customer:
|
We generally consider either agreements
or purchase orders, which in some cases are governed by master agreements, to be contracts with customers. In evaluating the contract
with a customer, we analyze the customer’s intent and ability to pay the amount of promised consideration (credit risk) and
consider the probability of collecting substantially all of the consideration.
|
b)
|
Identify the performance obligations in the contract:
|
At a contract’s inception,
we assess the goods or services promised in a contract with a customer and identify the performance obligations.
The main
performance obligations usually are the provisions of the following:
License for our software solutions
(which may include significant customization), professional services, managed services, service type warranty and post-contract
customer support, each of which are distinct, to be the identified performance obligations.
|
c)
|
Determine the transaction price:
|
The transaction price is the amount
of consideration to which we are entitled in exchange for transferring promised goods or services to a customer, excluding amounts
collected on behalf of third parties.
We don’t usually grant our
customers with a right to return the products sold. However, in some cases, the arrangements may include refunds, liquidated damages,
penalties or other damages if we fail to deliver future goods or services or if the goods or services fail to meet certain specifications
to acceptance criteria. All of the above are accounted for as variable considerations, which may be considered as adjustments to
the transaction price.
We include estimated amounts in
the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur
when the uncertainty associated with the variable consideration is resolved. Our estimates of variable consideration and determination
of whether to include estimated amounts in the transaction price are based largely on an assessment of our anticipated performance
and all information (historical, current and forecasted) that is reasonably available.
As our standard payment terms are
less than one year, the contracts have no significant financing component. In instances of contracts where revenue recognition
differs from the timing of invoicing, we have determined that those contracts generally do not include a significant financing
component. The primary purpose of the invoicing terms is to provide customers with simplified and predictable ways of purchasing
our products and services, not to receive or provide financing.
|
d)
|
Allocate the transaction price to the performance obligations in the contract:
|
Our selling price is highly variable.
Each contract is different by its scope and price. The transaction price is allocated to the separate performance obligations on
a relative standalone selling price basis. The standalone selling prices of software licenses are typically estimated using the
residual approach. Standalone selling prices of services are typically estimated based on observable transactions when these services
are sold on a standalone basis.
|
e)
|
Recognize revenue when a performance obligation is satisfied:
|
Revenue is recognized when or as
performance obligations are satisfied by transferring control of a promised good or service to a customer. Control is either transferred
over time or at a point in time, which affects the revenue recognition schedule.
Products. Revenues from
sales of software solutions which include customer acceptance or software licenses only which do not include significant customization
are recognized at a point in time of the acceptance of the solution or the point in time the software license is delivered.
Services. Revenues related
to managed services, service type warranty and post-contract customer support are recognized over time on a straight-line basis.
Projects. Revenues from
the software solutions which include software license with significant customization are usually recognized over time during the
customization period based on Man Months (“MM”) incurred to date in ratio to total estimated MM which represent an input
method that best depicts the transfer of control over the performance obligation to the customer. Provisions for estimated losses
on uncompleted contracts are made in the period in which such losses are determined.
Deferred revenues represent
unrecognized fees collected as well as other advances and payments received from customers, for which revenue has not yet been
recognized. Deferred revenues are classified as short-term and long-term deferred revenues based on the period in which revenues
are expected to be recognized.
We record unbilled
receivables from contracts when the revenue recognized exceeds the amount billed to the customer.
We capitalize an asset
for the incremental costs of obtaining a contract whenever such expenses are expected to be recovered. Capitalized costs derive
primarily from sales commissions or incentives granted to employees and partners. Our contracts with customers include performance
obligations related to products and services, some of which are satisfied at a point in time and others over time. Commission costs
related to performance obligations satisfied at a point in time are expensed at the time of sale, which is when revenue is recognized.
Commission costs related to long-term service contracts and performance obligations satisfied over time are deferred and recognized
on a systematic basis that is consistent with the transfer of the products or services to which the asset relates. Amortization
expense is included in sales and marketing expenses in the accompanying consolidated statements of income (loss).
Share-based compensation.
Our accounts for share-based compensation are in accordance with ASC 718 “Compensation – Stock-based Compensation”,
or ASC 718, which requires us to estimate the fair value of share-based payment awards on the grant date using an option-pricing
model.
We recognize compensation
expenses for the value of the awards granted based on the accelerated attribution method over the requisite service period of each
of the awards.
ASC 718 allows entities
to make an accounting policy election to either estimate forfeitures or recognize forfeitures as they occur. We elected an accounting
policy of recording forfeitures as they occur.
We selected the Black-Scholes
option-pricing model as the most appropriate fair value method for our stock options awards. This option-pricing model requires
several assumptions, of which the most significant are the expected stock price volatility and the expected option term. Expected
volatility was calculated based upon actual historical stock price movements over the most recent periods ending on the grant date,
equal to the expected option term, as management believes that this is the best indicator of future volatility. The expected term
was generated by running the Monte Carlo model pursuant to which historical post-vesting forfeitures and suboptimal exercise factor
is estimated by using historical option exercise information. The suboptimal exercise factor is the ratio by which the stock price
must increase over the exercise price before employees are expected to exercise their stock options. The expected term of the options
granted is derived from the output of the options valuation model and represents the period of time that options granted are expected
to be outstanding. The risk-free interest rate is based on the yield from U.S. treasury bonds with an equivalent term to the expected
life of the options. Forfeitures account as they occur. Historically the Company has not paid dividends and in addition has no
plans in the foreseeable future to pay dividends, and therefore use an expected dividend yield of zero in the option pricing model.
Determining the fair
value of share-based awards at the grant date requires the exercise of judgment.
No stock options awards
were granted by us during the year ended December 31, 2018.
|
C.
|
RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES
|
See “Item 4.B—Information
on the Company—Business Overview—Research and Development,” “Item 4.B—Information on the Company—Business
Overview—Proprietary Rights”, and “Item 5—Operating and Financial Review and Prospects—Research
and Development” and “Item 5.A—Operating and Financial Review and Prospects—Operating Results”.
During 2019, we saw
an increased interest in NFV capable service assurance solutions as the first step in NFV transitions. Initial inquiries by CSPs
into potential NFV migrations during the preceding three years are now starting to evolve into proof of concept demonstrations
and actual deployments. However, despite the interest in NFV solutions, the pace of transition to NFV in 2019 has been slow as
the market awaits 5G rollout. Due to the complexity of NFV transformations and 5G rollout, there is variability in the pace of
implementation. Some carriers are not yet out of the design phase, others are launching only limited initial implementations, and
yet others electing to delay decision until more information can be gleaned from those CSPS that have elected to embark on their
own NFV transformation. In addition, some CSPs are delaying NFV for now as they focus on future infrastructure plans such as 5G.
We expect that the
NFV market will gain momentum with the deployment of 5G networks, resulting in potential increased interest by CSPs in our solutions.
Key benefits that CSPs will derive from NFV include faster time-to-market, enablement of new services, automatic scaling of resources
up and down to fit the network’s dynamic nature, and significantly lower costs (both capital expenditures and operating expenses).
Customer experience
is a major driver for CSPs to invest in solutions that enable to them to better monitor and proactively offer resolution and upgrade
of quality of service.
As services become
more technologically complex and their volumes increase, service quality becomes an issue that must be addressed and specifically
must be virtualized to allow for end-to-end visibility across the different network areas. Our Network Intelligence solutions address
this need by providing end-to-end network visibility from virtual tapping point to network insights.
|
E.
|
OFF–BALANCE SHEET ARRANGEMENTS
|
None.
|
F.
|
TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS
|
The following table
of our material contractual obligations as of December 31, 2019, summarizes the aggregate effect that these obligations are expected
to have on our cash flows in the periods indicated:
|
|
Payments due by period
|
|
Contractual Obligations
|
|
Total
|
|
|
Less than
1 year
|
|
|
1-3
years
|
|
|
4-5
years
|
|
|
More than
5 years
|
|
|
|
|
|
|
(in thousands of U.S. dollars)
|
|
Operating lease obligations, including imputed interest (1)
|
|
$
|
6,720
|
|
|
$
|
1,410
|
|
|
$
|
2,697
|
|
|
$
|
2,182
|
|
|
$
|
431
|
|
Open purchase orders (2)
|
|
|
415
|
|
|
|
415
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other long-term commitments (3)
|
|
|
539
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
7,674
|
|
|
$
|
1,825
|
|
|
$
|
2,697
|
|
|
$
|
2,182
|
|
|
$
|
431
|
|
|
(1)
|
Represents
operating lease costs, consisting of leases for facilities and vehicles. Includes options to extend part of the lease agreements
for additional 2 years and up to 5 years.
|
|
(2)
|
We
purchase components from a variety of suppliers and vendors, in connection with the development and sales of our products.
|
|
(3)
|
In
addition to the obligations noted above, we have potential liability for severance pay for Israeli employees, which is calculated
pursuant to Israeli Severance Pay Law, based on the most recent monthly salary of the employees multiplied by the number of years
of employment as of the balance sheet date. After completing one full year of employment, our Israeli employees are entitled
to one month’s salary for each year of employment or a portion thereof. Our obligation for accrued severance pay under
Israel’s Severance Pay Law as of December 31, 2019, was approximately $3.9 million, of which approximately $3.4 million
was funded through deposits in severance pay funds, leaving a net obligation of approximately $0.5 million. The timing of
payment of this liability is dependent on timing of the departure of the employees and whether they leave of their own will or
are dismissed.
|
In addition, we are
required to pay royalties of 3% and 5% of the revenues derived from products incorporating know-how developed from research and
development grants from the IIA and BIRD Foundation, respectively. As of December 31, 2019, our contingent liability
to the IIA in respect of grants received was approximately $51.0 million, and our contingent liability to the BIRD Foundation in
respect of funding received was approximately $390 thousand. If we do not generate revenues from products incorporating know-how
developed within the framework of these programs, we will not be obligated to pay royalties under these programs.
For additional information,
see “Item 4.B—Information on the Company—Business Overview—Israel Innovation Authority”, and “Item
4.B—Information on the Company—Business Overview—Binational Industrial Research and Development Foundation.”
We are also obligated
to pay to the MOE royalties of 3% on the increased sales in the target market derived in India and China, with respect to the year
during which the grant was approved (2012 and 2014, respectively), over a period of five years but not more than the total linked
amount of the grant received by us. The total marketing grants that the Company has received from the MOE as of December 31, 2019
were approximately $668 thousand. No further grants are expected to be received from such plans.
Effect of Recent Accounting Pronouncements
See Note 2, Significant
Accounting policies, in Notes to the Consolidated Financial Statements in Item 18 of part II of this Report, for a full description
of recent accounting pronouncements, including the expected dates of adoption and estimated effects on financial condition and
results of operations.
ITEM 6.
|
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
|
|
A.
|
DIRECTORS AND SENIOR MANAGEMENT
|
The following table lists our
current directors and executive officers:
Name
|
|
Age
|
|
Position
|
Rachel (Heli) Bennun
|
|
66
|
|
Executive Chairman of our Board of Directors
|
Matty Karp (1)(4)(5)
|
|
70
|
|
Director
|
Mirella Kuvent (1)(2)(4)
|
|
59
|
|
Director
|
Oren Most (1)(3)(4)(5)
|
|
69
|
|
Director
|
Yaron Ravkaie
|
|
51
|
|
Director
|
Rami Schwartz (1)(5)
|
|
62
|
|
Director
|
Zohar Zisapel
|
|
71
|
|
Director
|
Eyal Harari
|
|
43
|
|
Chief Executive Officer
|
Amir Hai
|
|
54
|
|
Chief Financial Officer
|
Hilik Itman
|
|
48
|
|
Chief Operating Officer
|
Rami Amit
|
|
54
|
|
Chief Technology Officer and Head of Product
|
|
(1)
|
Independent
Director, under Nasdaq Stock Market Rules, or the Nasdaq Listing Rules.
|
|
(2)
|
Chairman
of Audit Committee.
|
|
(3)
|
Chairman
of Compensation Committee.
|
|
(4)
|
Audit
Committee Member.
|
|
(5)
|
Compensation
Committee Member.
|
Ms. Rachel (Heli)
Bennun has served as a director since December 2012 and was appointed as the Executive Chairman of our Board of Directors in
September 2015. In addition, Ms. Bennun has served as a consultant to the Company’s management since January 2012. Ms. Bennun
has over 25 years of professional experience in hi-tech companies. Ms. Bennun co-founded Arel Communications & Software Ltd.
(formerly Nasdaq: ARLC) in 1988, a company focused on offering integrated video, audio and data-enabled conferencing solutions,
including real time Interactive Distance Learning, and served as CEO, CFO, and director, leading the company to its initial public
offering on Nasdaq in 1994. Ms. Bennun also co-founded ArelNet Ltd. (formerly TASE: ARNT), a pioneer in the field of Voice over
IP, and served as CEO and as a director, leading the company to its initial public offering on TASE and until its acquisition by
Airspan Network Inc. Ms. Bennun has also served as CEO and director of OrganiTech USA, Inc. (PINK: ORGT), a pioneer in the cleantech
industry. Ms. Bennun holds a M.Sc. and a B.Sc. in Industrial and Management Engineering from Ben-Gurion University.
Mr. Matty Karp has
served as a director since December 2009. From 1996 to 2015, he was the managing partner of Concord Ventures, an Israeli venture
capital fund focused on Israeli early stage technology companies, which he co-founded in 1997. From 2007 to 2008, he served as
the Chairman of Israel Growth Partners Acquisition Corp. From 1994 to 1999, he served as the Chief Executive Officer of Kardan
Technologies, a technology investment company, and continued to serve as a director until October 2001. From 1994 to 1997, he served
as the President of Nitzanim Venture Fund, an Israeli venture capital fund focused on early-stage high technology companies. From
1987 to 1994, he served in numerous positions at Elbit Systems Ltd. (Nasdaq and TASE: ESLT). Mr. Karp has served as a director
of a number of companies, including: Elta Ltd.; Galileo Technology, which was acquired by Marvell Technology Group (Nasdaq: MRVL);
Accord Networks which was acquired by Polycom (Nasdaq: PLCM); Saifun Semiconductors, which merged with Spansion, and El Al Israel
Airlines (TASE: ELAL). Mr. Karp received a B.Sc., cum laude, in Electrical Engineering from the Technion - Israel Institute of
Technology and is a graduate of the Harvard Business School Advanced Management Program.
Ms. Mirella Kuvent
has served as a director since July 2019. Ms. Kuvent serves as an external director and member of the risk management and audit
committees for Diners Club Israel Ltd. and Diners Finance Ltd. Ms. Kuvent has also served as an external director to Ham-Let (Israel
Canada) Ltd. from 2007 to 2013 and for the Company for the Reconstruction and Development of the Jewish Quarter in the Old City
of Jerusalem Ltd. from 2014 to 2017 and has been a member of finance committees, audit committees and compensation committees,
having also served as chair of an audit committee. Ms. Kuvent also has extensive experience in senior commercial, marketing and
business development roles with technology companies offering solutions to communications services providers as well as with a
large communication services company. Ms. Kuvent holds a B.A. in business administration from Fundação Getúlio
Vargas and an M.B.A. from the Hebrew University of Jerusalem.
Mr. Oren Most
has served as a director since July 2019. Mr. Most is the founder and president of Golan Telecom, Ltd., an Israeli cellular operator.
Mr. Most has also served in executive positions with several private and public companies including as President and Chief Executive
Officer of Gilat Satellite Networks Ltd. (Nasdaq and TASE: GILT) and as Founder and Deputy Chief Executive Officer of Cellcom (Israel)
Ltd. Mr. Most has also served as director for several public and private corporations. Mr. Most holds a B.A. in Sociology &
Anthropology, Film & Television from the Tel Aviv University and an M.B.A. from New York University.
Mr. Yaron Ravkaie
has served as a director since January 2020. Mr. Ravkaie is the chief executive officer of Teridion Technologies Ltd., having assumed
that role in January 2020. Mr. Ravkaie previously served as the Company’s chief executive officer from January 2016 through
December 2019. Prior to joining RADCOM, Mr. Ravkaie served during 2015 as the Chief Business
Officer of RR Media Ltd. (Nasdaq: RRM). Prior to serving at RR Media Ltd., and between 1998 and 2015, Mr. Ravkaie served in
various roles with Amdocs Ltd. (Nasdaq: DOX), including as the President of the Mobile Financial Services Division, President of
the AT&T division, and other director and vice president roles. Mr. Ravkaie served for nine years in information systems, industrial
engineering and logistics with the Israeli Air Force as a Major. Mr. Ravkaie holds an M.B.A. from the University of Beersheba and
a B.Sc. in Industrial Engineering & Management from the Technion, Haifa.
Mr.
Rami Schwartz has served as a director since July 2019. Mr. Schwartz has over 20 years’ experience in leadership positions
in the technology and enterprise software fields. Mr. Schwartz currently serves as the Managing Director of the Portland Trust
Israel and as an Advisory Board Member to AlgoSec. Mr. Schwartz previously served in senior positions, including as business group
president, founder, Chief Executive Officer and Active Chairman, with several public and private companies including Amdocs. Mr.
Schwartz also served as Chief of System Development for the Israeli Air Force. Mr. Schwartz holds a B.Sc. in math and computer
science form the Hebrew University of Jerusalem.
Mr. Zohar Zisapel,
a co-founder of our Company, has served as a director since our inception in 1985 and served as our Chairman of the Board from
inception until September 2015. Mr. Zisapel is the Chairman of Ceragon Networks Ltd. (Nasdaq: CRNT) and serves as chairman or director
of several private companies in the in the areas of communications, cyber security and automotive. Mr. Zisapel holds a B.Sc. and
a M.Sc. in Electrical Engineering from the Technion - Israel Institute of Technology and an M.B.A. from Tel-Aviv University.
Mr. Eyal
Harari, our Chief Executive Officer, joined us in November 2000 as a software R&D group manager and was appointed to his
current position effective January 1, 2020, having previously served as Chief Executive Officer of RADCOM US and as our Chief
Operating Officer. Before joining RADCOM, Mr. Harari served in the Communication, Computers & Electronics Corps of the
Israel Defense Forces, managing large-scale software projects. Mr. Harari received a B.A. in Computer Science from the
Open University of Tel Aviv and holds an M.B.A. from Tel-Aviv University and an LL.M in Business Law from Bar Ilan University.
Mr. Amir Hai,
our Chief Financial Officer, joined us in October 2018. Prior to joining RADCOM, Mr. Hai was Chief Financial Officer of Smart Medical
Systems Ltd., from 2014 to 2018. Before 2014, Mr. Hai served as Chief Financial Officer for several other companies including two
publicly traded companies and served as High-tech Senior Manager for Ernst & Young Israel. Since 2012, Mr. Hai also serves
as external director and chairman of the audit committee of Matrix IT Ltd. Mr. Hai holds a B.A. in Economics from the College of
Management Academic Studies in Israel and is certified in Israel as a CPA.
Mr. Hilik Itman,
our Chief Operating Officer joined us in June 1997 as a software engineer and was appointed to his current position in January
2020, having most recently served as the Company’s Vice President of Research and Development. Mr. Itman led the R70S software
development and led the MaveriQ development during the company’s transition from hardware-based products, to software-based
probe products. Mr. Itman holds a B.A. in Mathematics and Computer Science from the Open University.
Mr. Rami Amit, our
Chief Technology Officer and Head of Product, joined us in February 2017. Prior to joining RADCOM, Mr. Amit served from 2013 to
2017 as director of engineering in the Cisco NFV Business Unit, which included worldwide deployments by many tier 1 customers.
Mr. Amit was a major contributor to the vision of the evolution to virtualization in that space. Prior to his time at Cisco Mr.
Amit was Chief Technology Officer for Jungo, a leading software provider, founded Surf&Call Solutions, which was later acquired
by CosmoCom and was the first employee of the VoIP industry pioneer, VocalTec, in which he is considered as one of the early inventors
of VoIP, building the first ever VoIP gateway shown in public in the mid-1990s and leading many of the VoIP technologies used today
on a daily basis. Mr. Amit holds a B.Sc. in electrical engineering from Tel Aviv University.
Ms. Bennun is the life
partner of Mr. Zohar Zisapel. Otherwise, there are no family relationships between any of the directors or executive officers named
above.
Name and Principal Position
|
|
Year
|
|
Salary
($)
|
|
|
Bonus
($)
|
|
|
Equity-Based
Compensation
($)(1)
|
|
|
All Other
Compensation
($)(2)
|
|
|
Total
($)
|
|
Yaron Ravkaie, Former CEO
|
|
2019
|
|
|
288,827
|
|
|
|
127,159
|
|
|
|
232,303
|
|
|
|
150,767(3)
|
|
|
|
799,056
|
|
Eyal Harari, CEO
(former CEO of RADCOM US)
|
|
2019
|
|
|
250,000
|
|
|
|
100,000
|
|
|
|
203,427
|
|
|
|
53,552
|
|
|
|
606,979
|
|
Hilik Itman, VP R&D
|
|
2019
|
|
|
184,352
|
|
|
|
49,151
|
|
|
|
308,283
|
|
|
|
42,000
|
|
|
|
583,786
|
|
Rami Amit, CTO and Head of Product
|
|
2019
|
|
|
224,536
|
|
|
|
75,625
|
|
|
|
155,963
|
|
|
|
52,000
|
|
|
|
508,124
|
|
Amir Hai, CFO
|
|
2019
|
|
|
157,271
|
|
|
|
40,046
|
|
|
|
31,632
|
|
|
|
57,486
|
|
|
|
286,435
|
|
|
(1)
|
Equity
based compensation includes the cost of non-cash share-based compensation of the Company in 2019. The grants awarded during 2019
and 2018 were for a vesting term of up to 4 years.
|
|
(2)
|
All
other compensation includes social benefits and car leasing costs.
|
|
(3)
|
Includes
amounts accrued in connection with the termination of Yaron Ravakie’s employment as CEO.
|
The bonus paid to our
CEO is based on a formula which takes into consideration three independent measurable and non-measurable components and which was
approved by Board of Directors in accordance with the Compensation Policy and the CEO’s amended terms of employment approved
by general meeting of our shareholders on July 11, 2019.
The bonus and commission
payments made to our other officers are based on the achievements of goals and objectives that are set and communicated at the
beginning of each year and which are made in accordance with our compensation policy, as approved by our shareholders from time
to time and most recently on July 11, 2019.
The aggregate direct
remuneration paid to all our directors and executive officers as a group for the year ended December 31, 2019 was approximately
$2.1 million in salaries, bonus, commissions and directors’ fees. This amount includes approximately $0.2 million that was
set aside or accrued to provide pension, retirement or similar benefits. These amounts do not include the expense of share-based
compensation as per ASC 718.
During 2019, our officers
received, in the aggregate, 216,200 restricted share units, or RSUs, under our 2013 Share Option Plan, or the 2013 Plan. The RSUs
have a vesting schedule of three to four years over equal annual installments commencing as of the date of the grant. Further information
regarding the options and RSU grants to our directors is detailed below.
As of December 31,
2019, our current directors and officers, as a group, held options to purchase an aggregate of 171,260 ordinary shares of the Company
and 246,709 RSUs that were granted under our 2013 Plan. The directors are reimbursed for expenses and receive cash and equity
compensation, which terms are detailed below.
The cash compensation
paid to our independent directors (other than to our Executive Chairman, as of September 10, 2015) and external directors (until
we adopted the exemption from the need to have external directors), is an annual fee of NIS 52,575 (currently equivalent to approximately
$14,372) and a per meeting attendance fee of NIS 1,856 (currently equivalent to approximately $507), which amounts are subject
to adjustment for changes in the Israeli CPI and changes in the amounts payable pursuant to Israeli law from time to time.
Share Option Plans
On April 3, 2013, our
Board of Directors adopted the 2013 Plan. The 2013 Plan expires on April 2, 2023. Under the 2013 Plan, we may grant options to
purchase our ordinary shares, restricted shares and RSUs to our employees, directors, consultants and contractors. As of March
25, 2020, we have granted 1,238,802 options and 1,016,948 RSUs under the 2013 Plan. In addition, we granted 40,000 RSUs to our
CEO in February 2020 which are pending shareholders’ approval. Options and RSUs granted under our option plans generally
vest over a period of between one and four years, with expiration term for options of five to seven years from the date of grant,
subject to the discretion of our Board of Directors, which has the authority to deviate from such parameters in respect of specific
grants. The share option plans are administered either by our Board of Directors or, subject to applicable law, by our Compensation
Committee, which has the discretion to make all decisions relating to the interpretation and operation of the options plans, including
determining who will receive an option award and the terms and conditions of the option awards. On October 30, 2016, the Company’s
Board of Directors resolved to increase the number of outstanding shares reserved under the 2013 Plan to 2,450,000.
The Company measures
the compensation expense for all share-based payments (including employee stock options) at fair value, in accordance with ASC
718. We recorded an expense of approximately $2.2 million for share-based compensation plans during 2019. During 2019, we granted
388,020 RSUs, which will result in ongoing accounting charges that will significantly reduce our net income. See Notes 2(m) and
11(c) of the Notes to the Consolidated Financial Statements for further information.
As of March 25, 2020,
there are 324,285 outstanding options to purchase ordinary shares and 584,203 unvested RSUs under the 2013 Plan.
Pursuant to Rule 5615(a)(3)
of the Nasdaq Listing Rules, we follow our home country practice in lieu of the Nasdaq Listing Rules with respect to the approvals
required for the establishment and for material amendments to our share option plans. Consequently, we have adopted share option
plans and material amendments thereto by action of our Board of Directors, without shareholder approval. See also “Item 16G—Corporate
Governance.”
Compensation
Policy
On June 5, 2019, our
Compensation Committee and Board of Directors approved our compensation policy for our Executive Officers and Directors, and our
shareholders approved the compensation policy on July 11, 2019. See “Item 6.C—Directors, Senior Management and Employees—Board
Practices—Compensation Committee.”
Terms of Office
Our current Board of
Directors is comprised of Rachel (Heli) Bennun (Executive Chairman), Matty Karp, Mirella Kuvent, Oren Most, Yaron Ravkaie, Rami
Schwartz, and Zohar Zisapel, . Our directors are elected by the shareholders at the annual general meeting of the shareholders,
except in certain cases where directors are appointed by the Board of Directors and their appointment is later ratified at the
first meeting of the shareholders thereafter. Other than Mr. Ravkaie, all of our directors were elected in our annual
general meeting which took place in July 2019. The terms of office of Mr. Zisapel and Ms. Kuvent will expire on the first annual
general meeting following their election. The terms of office of Mr. Schwartz and Mr. Most will expire on the second annual general
meeting following their election. The terms of office of Ms. Bennun and Mr. Karp will expire on the third annual general meeting
following their election. In November 2019, Mr. Ravkaie was appointed by our Board of Directors to filling a vacant position on
our Board of Directors for a term commencing January 1, 2020 and expiring on our next annual general meeting. None of our directors
have service contracts with the Company relating to their service as a director, and none of the directors will receive benefits
upon termination of their position as a director. For a description of our compensation of directors see “Item 6.B—Directors,
Senior Management and Employees—Compensation.”
External Directors
Under the Israeli Companies
Law, a public company incorporated under the laws of the State of Israel must appoint at least two External Directors; however,
pursuant to an exemption provided under section 5D of the Israeli Companies Regulations (Relief for Public Companies with Shares
Listed for Trading on a Stock Market Outside of Israel), 5760-2000, or the Exemption, a public company with securities listed on
certain foreign exchanges, including Nasdaq, that satisfies the applicable foreign country laws and regulations that apply to companies
organized in that country relating to the appointment of independent directors and composition of audit and compensation committees
and has no controlling shareholder is exempt from the requirement to elect External Directors or comply with the audit committee
and compensation committee composition requirements under the Companies Law.
On July 31, 2019, our Board adopted the
Exemption. As a result of the adoption of the Exemption, the terms of office of any External Directors serving at the time of such
adoption were shortened to the earlier to occur of the remainder of their three-year term as External Director or the term ending
on the second annual general meeting following the adoption of the Exemption. As a result, the terms of office of Mr. Schwartz
and Mr. Most were reduced.
Audit Committee
The current members
of our Audit Committee are Matty Karp, Mirella Kuvent, and Oren Most. Ms. Kuvent is the Chairman of the Audit Committee. Our Board
of Directors has determined that all of the above are independent Audit Committee members within the meaning of the Nasdaq Listing
Rules. Our Board of Directors has also determined that Oren Most is an “Audit Committee Financial Expert” as defined
in Item 407(d)(5)(ii) of Regulation S-K under the Exchange Act and that he has the requisite experience under Nasdaq Listing Rules.
Our Audit Committee
operates under a written charter that is posted on our website.
As stated in our Audit
Committee charter, the Audit Committee assists our Board of Directors in fulfilling its responsibility for oversight of the quality
and integrity of our accounting, auditing and financial reporting practices and financial statements, and the “independence”
requirements and performance of our independent auditors. The Audit Committee also has the authority and responsibility
to oversee our independent auditors, to recommend for shareholder approval the appointment and, where appropriate, the replacement
of our independent auditors, and to pre-approve audit engagement fees and all permitted non-audit services and fees.
Under the Companies
Law and the Nasdaq Listing Rules, our Audit Committee is responsible for (i) determining whether there are deficiencies in the
business management practices of our Company, including in consultation with our internal auditor or the independent auditor, and
making recommendations to the Board to improve such practices, (ii) determining whether to approve certain related party transactions
(including transactions in which an office holder has a personal interest) and whether such transaction should be deemed as material
or extraordinary, (iii) where the Board approves the working plan of the internal auditor, to examine such working plan before
its submission to the Board and propose amendments thereto, (iv) examining our internal controls and internal auditor’s performance,
including whether the internal auditor has sufficient resources and tools to dispose of its responsibilities, (v) examining the
scope of our auditor’s work and compensation and submitting a recommendation with respect thereto to our Board or shareholders,
depending on which of them is considering the appointment of our auditor, and (vi) establishing procedures for the handling of
employee complaints as to the management of our business and the protection to be provided to such employees. In compliance with
regulations promulgated under the Israeli Companies Law, our Audit Committee also approves our financial statements, thereby fulfilling
the requirement that a board committee provide such approval.
Compensation Committee
The current members
of our Compensation Committee are Matty Karp, Oren Most and Rami Schwartz. Mr. Most is the Chairman of the Compensation Committee.
Our Board of Directors has determined that all Compensation Committee members are independent within the meaning of the Nasdaq
Listing Rules.
The Compensation Committee operates under
a charter that is posted on our website.
As stated in our Compensation Committee
Charter and as provided under the Israeli Companies Law and the Nasdaq Listing Rules, our Compensation Committee is responsible
for (i) proposing office holder compensation policies to the Board, (ii) proposing necessary revisions to any compensation policy
and examining its implementation, (iii) determining whether to approve transactions with respect to compensation of office holders,
(iv) determining, in accordance with office holder compensation policies, whether to exempt an engagement with an unaffiliated
nominee for the position of chief executive officer from requiring shareholder approval, and (v) administration of our share option
plan.
Subject to the provisions
of the Israeli Companies Law, compensation of executive officers is generally determined and approved by our Compensation Committee
and our Board of Directors. Shareholder approval is generally required when (i) approval by our Board of Directors and our Compensation
Committee is not consistent with our Compensation Policy which was last adopted by annual meeting of shareholders on July 11, 2019,
or (ii) the compensation is that of our Chief Executive Officer. In special circumstances, our Compensation Committee and Board
may approve the compensation of an executive officer (other than a director, a chief executive officer or a controlling shareholder)
or approve the compensation policy despite shareholder objection. Additionally, under certain circumstances, our Compensation Committee
may exempt an engagement with a nominee for the position of chief executive officer from requiring shareholders’ approval
or may otherwise postpone such shareholders’ approval.
A director or executive officer may not
be present when the Board discusses or votes upon the terms of his or her compensation, unless the chairman of the Board determines
that he or she should be present to present the transaction that is subject to approval. The Chief Executive Officer may not be
present during voting or deliberations regarding his or her compensation.
The Israeli Companies
Law provides that our compensation policy must serve as the basis for the decisions concerning the financial terms of employment
or engagement of executives and directors, including exculpation, insurance, indemnification or any monetary payment or obligation
of payment in respect of employment or engagement. The compensation policy must be approved (or reapproved) not longer than every
three years, and relate to certain factors, including advancement of the company’s objective, business plan and its long-term
strategy and creation of appropriate incentives for office holders. It must also consider, among other things, the company’s
risk management, size and nature of its operations. The compensation policy must furthermore consider the following additional
factors:
|
●
|
the knowledge, skills, expertise and accomplishments of the relevant office holder;
|
|
●
|
the office holder’s roles and responsibilities and prior compensation agreements with him or her;
|
|
●
|
the relationship between the terms offered and the average compensation of the other employees of the company, including those employed through human resource companies;
|
|
●
|
the impact of disparities in salary upon work relationships in the company;
|
|
●
|
the possibility of reducing variable compensation at the discretion of the Board of Directors or the possibility of setting a limit on the exercise value of non-cash variable equity-based compensation; and
|
|
●
|
as to severance compensation, the period of service of the office holder, the terms of his or her compensation during such service period, the company’s performance during that period of service, the person’s contributions towards the company’s achievement of its goals and the maximization of its profits and the circumstances under which the person is leaving the company.
|
The compensation policy
must also include the following principles:
|
●
|
the link between variable compensation and long-term performance and measurable criteria;
|
|
●
|
the relationship between variable and fixed compensation, and the ceiling for the value of variable compensation;
|
|
|
|
|
●
|
the conditions under which a director or executive would be required to repay compensation paid to him or her if it was later shown that the data upon which such compensation was based was inaccurate and was required to be restated in the company’s financial statements;
|
|
●
|
the minimum holding or vesting period for variable, equity-based compensation; and
|
|
|
|
|
●
|
maximum limits for severance compensation.
|
On June 5, 2019, our
Compensation Committee and Board of Directors approved an amended compensation policy for Executive Officers and Directors, and
our shareholders approved such compensation policy on July 11, 2019.
Internal auditor
Under the Israeli Companies
Law, the board of directors of a public company must also appoint an internal auditor proposed by the audit committee. The
duty of the internal auditor is to examine, among other things, whether the company’s conduct complies with applicable law
and orderly business procedure. Under the Israeli Companies Law, the internal auditor may not be an interested party, an office
holder or an affiliate, or a relative of an interested party, an office holder or affiliate, nor may the internal auditor be the
company’s independent accountant or its representative. An interested party is defined in the Israeli Companies Law
as a 5% or greater shareholder, any person or entity that has the right to designate at least one director or the general manager
of the company and any person who serves as a director or as a general manager.
Ms. Sharon Cohen, who
is a partner at Brightman Almagor Zohar & Co., a member of Deloitte, serves as our internal auditor.
Exculpation, Indemnification and
Insurance of Directors and Officers
We have agreed to exculpate
and indemnify our office holders to the fullest extent permitted under the Israeli Companies Law. We have also purchased a directors
and officers liability insurance policy. For information regarding exculpation, indemnification and insurance of directors
and officers under applicable law and our articles of association, see “Item 10.B—Additional Information—Memorandum
and Articles of Association.”
Management Employment Agreements
We maintain written
employment agreements with all our employees. These agreements provide, among other matters, for monthly salaries, our contributions
to Managers’ Insurance and an Education Fund and severance benefits. Most of our agreements with our key employees
are subject to termination by either party upon the delivery of notice of termination as provided therein.
Nominating Committee
Our Board of Directors
does not currently have a nominating committee. However, independent directors do retain oversight over director nominations, and
in accordance with the requirements of the Nasdaq Listing Rules, our director nominees will
either be selected for or recommended to the Board of Directors’ by a majority
of the independent directors of the Board of Directors.
Our total headcount
as of December 31, 2019 was 282, including full-time and part-time employees and contractors, broken down geographically and by
function as follows:
|
|
Research and
Development
|
|
|
Sales, Marketing and
Customer Support
|
|
|
Operations
|
|
|
Administration and
Management
|
|
|
Total
Headcount
|
|
Israel
|
|
|
111
|
|
|
|
41
|
|
|
|
3
|
|
|
|
13
|
|
|
|
168
|
|
India
|
|
|
14
|
|
|
|
26
|
|
|
|
-
|
|
|
|
2
|
|
|
|
42
|
|
United States
|
|
|
-
|
|
|
|
23
|
|
|
|
-
|
|
|
|
4
|
|
|
|
27
|
|
Brazil
|
|
|
-
|
|
|
|
7
|
|
|
|
-
|
|
|
|
1
|
|
|
|
8
|
|
Other
|
|
|
25
|
|
|
|
12
|
|
|
|
-
|
|
|
|
-
|
|
|
|
37
|
|
Total
|
|
|
150
|
|
|
|
109
|
|
|
|
3
|
|
|
|
20
|
|
|
|
282
|
|
We consider our relations
with our employees to be good and we have never experienced a strike or work stoppage. Except for employees located in Brazil,
none of our employees are represented by labor unions.
For more information,
see “Item 4.B—Information on the Company—Business Overview—Employees.”
The following table
sets forth certain information regarding the beneficial ownership of our ordinary shares by our directors and officers. The percentage
of outstanding ordinary shares is based on 13,883,538 ordinary shares outstanding as of March 25, 2020. Except for Mr. Zohar Zisapel,
none of our executive officers or directors beneficially owns 1% or more of our outstanding ordinary shares.
Name
|
|
Number of
Ordinary
Shares
Beneficially
Owned(1)
|
|
|
Percentage
of
Outstanding
Ordinary
Shares
Beneficially
Owned(2)(3)
|
|
Zohar Zisapel
|
|
|
2,889,722
|
(4)
|
|
|
20.8
|
%
|
All directors and executive officers as a group, except Zohar Zisapel (10 persons)
|
|
|
264,809
|
(5)
|
|
|
1. 9
|
%
|
(1)
|
Except as otherwise noted and subject to applicable community property laws, each person named in the table has sole voting and investment power with respect to all ordinary shares listed as owned by such person. Shares beneficially owned include shares that may be acquired pursuant to options to purchase ordinary shares that are exercisable within 60 days of March 25, 2020.
|
|
|
(2)
|
In determining the percentage owned by each person or group, ordinary shares for each person or group includes ordinary shares that may be acquired by such person or group pursuant to options to purchase ordinary shares that are exercisable within 60 days of March 25, 2020.
|
|
|
(3)
|
The number of outstanding ordinary shares does not include 5,189 shares held by RADCOM US, a wholly owned subsidiary, and 30,843 shares that were repurchased by us.
|
|
|
(4)
|
Includes (i) 2,330,965 ordinary shares held by Mr. Zohar Zisapel, (ii) 299,416 ordinary shares held by Michael & Klil Holdings (93) Ltd or Klil, an Israeli company, wholly owned by Mr. Zohar Zisapel, (iii) 242,731 ordinary shares held by Lomsha Ltd. or Lomsha, an Israeli company wholly owned by Mr. Zohar Zisapel, (iv) 610 RSUs expected to be vested within 60 days of March 25, 2020 and (v) 16,000 ordinary shares issuable upon exercise of options, with an average exercise price per share of $13.46, expiring between the years 2020 and 2021. The options listed above are exercisable currently or within 60 days of March 25, 2020. Mr. Zohar Zisapel’s brother, Mr. Yehuda Zisapel holds 344,809 ordinary shares. Additionally, Mr. Zohar Zisapel’s life partner and Executive Chairman of the Company’s Board of Directors, Ms. Heli Bennun holds 21,258 exercisable options, 1,832 RSUs expected to be vested within 60 days of March 25, 2020 and 7,328 ordinary shares. Mr. Zohar Zisapel disclaims beneficial ownership of the ordinary shares held by Mr. Yehuda Zisapel and by Ms. Heli Bennun. This information is based on information provided to the Company by Mr. Zohar Zisapel.
|
|
|
(5)
|
Each of the directors and executive officers not separately identified in the above table beneficially owns less than 1% of our outstanding ordinary shares, including options held by each such party, which are vested or shall become vested within 60 days of March 25, 2020 and have, therefore, not been separately disclosed. The number of shares is comprised of 136,260 ordinary shares issuable upon exercise of options exercisable within 60 days of March 25, 2020, 9,272 RSU that will vest within 60 days of March 25, 2020 and 119,277 ordinary shares.
|
For a description of
our share option plans for the granting of options to our employees see “Item 6.B—Directors, Senior Management and
Employees—Compensation—Share Option Plans.”
ITEM 7.
|
MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
|
The following table
sets forth certain information regarding the beneficial ownership of our ordinary shares as of March 25, 2020, by each person or
entity known to own beneficially 5% or more of our outstanding ordinary shares, based on information provided to us
by the shareholders or disclosed in public filings with the SEC. The voting rights of our major shareholders do not differ from
the voting rights of other holders of our ordinary shares. As of March 25, 2020, our ordinary shares had a total of 16 holders
of record, of which 9 were registered with addresses in the United States. We believe that the number of beneficial owners of our
shares is substantially greater than the number of record holders, because a large portion of our ordinary shares is held of record
in broker “street name”. As of March 25, 2020, U.S. holders of record held approximately 65% of our outstanding ordinary
shares.
Name
|
|
Number of
Ordinary
Shares
beneficially
owned(1)
|
|
|
Percentage
of
Outstanding
Ordinary
Shares
beneficially
owned (2)
|
|
Zohar Zisapel
|
|
|
2,889,722
|
(3)
|
|
|
20.8
|
%
|
|
|
|
|
|
|
|
|
|
Yelin Lapidot Holdings Management Ltd.
|
|
|
1,630,633
|
(4)
|
|
|
11.7
|
%
|
(1)
|
Except as otherwise noted and subject to applicable community property laws, each person named in the table has sole voting and investment power with respect to all ordinary shares listed as owned by such person. Shares beneficially owned include shares that may be acquired pursuant to options to purchase ordinary shares that are exercisable within 60 days of March 25, 2020.
|
(2)
|
The percentage of outstanding ordinary shares is based on 13,883,538 ordinary shares outstanding as of March 25, 2020. In determining the percentage owned by each person, ordinary shares for each person includes ordinary shares that may be acquired by such person pursuant to options to purchase ordinary shares that are exercisable within 60 days of March 25, 2020. The number of outstanding ordinary shares does not include 5,189 ordinary shares held by RADCOM US, a wholly owned subsidiary and 30,843 ordinary shares that were repurchased by us.
|
(3)
|
Includes (i) 2,330,965 ordinary shares held by Mr. Zohar Zisapel, (ii) 299,416 ordinary shares held by Michael & Klil Holdings (93) Ltd or Klil, an Israeli company, wholly owned by Mr. Zohar Zisapel, (iii) 242,731 ordinary shares held by Lomsha Ltd. or Lomsha, an Israeli company wholly owned by Mr. Zohar Zisapel, (iv) 610 RSUs expected to be vested within 60 days of March 25, 2020 and (v) 16,000 ordinary shares issuable upon exercise of options, with an average exercise price per share of $13.46, expiring between the years 2020 and 2021. The options listed above are exercisable currently or within 60 days of March 25, 2020. Mr. Zohar Zisapel’s brother, Mr. Yehuda Zisapel holds 344,809 ordinary shares. Additionally, Mr. Zohar Zisapel’s life partner and Executive Chairman of the Company’s Board of Directors, Ms. Heli Bennun holds 21,258 exercisable options, 1,832 RSUs expected to be vested within 60 days of March 25, 2020 and 7,328 ordinary shares. Mr. Zohar Zisapel disclaims beneficial ownership of the ordinary shares held by Mr. Yehuda Zisapel and by Ms. Heli Bennun. This information is based on information provided to the Company by Mr. Zohar Zisapel.
|
(4)
|
The information with respect to the holdings of Yelin Lapidot Holdings Management, Ltd. is based on a Schedule 13G/A filed with the SEC by Dov Yelin, Yair Lapidot, Yelin Lapidot Holdings Management Ltd. Yelin Lapidot Mutual Funds Management Ltd. and Yelin Lapidot Provident Funds Management Ltd. on February 10, 2020 and reflects the holdings of such persons as of December 31, 2019.
|
|
B.
|
RELATED PARTY TRANSACTIONS
|
RAD-BYNET Group
Mr. Zohar Zisapel,
a member of our Board of Directors, is the Chairman of the board of Ceragon Networks Ltd., RADWIN Ltd., RADIFLOW Ltd., Hailo,
HiAuto Ltd. and Innoviz Ltd. and director in the following companies: Nuance Hearing Ltd., RAD Data Communications Ltd., RAD-Bynet
Properties and Assets (1981) Ltd., Packetlight Networks Ltd., CyberInt Technologies Ltd., Armis Security Ltd., Cylus Ltd. and several
other private holdings, real estate and medical devices companies. The above list does not constitute a complete list of
Mr. Zohar Zisapel’s holdings. In some of these companies his brother, Mr. Yehuda Zisapel is also a director.
Mr. Yehuda Zisapel
(brother of Mr. Zohar Zisapel) serves also as director in additional companies, including: RADWARE Ltd., Bynet Data Communications
Ltd., Bynet Electronics Ltd., Bynet Semech (Outsourcing) Ltd., Bynet Systems Applications Ltd., Ab-Net Communications Ltd., BYNET
Software Systems Ltd., Internet Binat Ltd., SecurityDam Ltd., Binat Business Ltd and several other private holdings, real estate
and medical devices companies. The above list does not constitute a complete list of Mr. Yehuda Zisapel’s holdings.
Some of the above
companies may be suppliers/distributors/consumers of RADCOM products or may render additional services by arm’s length transactions
or share logistical arrangements with the Company. Some of the above companies are known as the “RAD-BYNET Group.”
Ms. Rachel (Heli)
Bennun, who is the Executive Chairman of our Board of Directors, is Mr. Zohar Zisapel’s life partner.
We and other members
of the RAD-BYNET Group also market certain of our products through the same distribution channels. Certain products
of members of the RAD-BYNET Group are complementary to, and may be used in connection with, products of ours, and others of such
products may be used in place of (and thus may be deemed to be competitive with) our products.
Supplier and Service
Provider Arrangements
We purchase certain
personnel, administrative and IT products and services from members of the RAD-BYNET group, on terms that are either beneficial
to us or are no less favorable than terms that might be available to us from unrelated third parties, based on quotes we received
from unrelated third parties.
Members of the RAD-BYNET
group may provide to us, for which we pay on market terms and rates. The aggregate amount of such purchases was approximately $49
thousand in 2019.
Office Leases
We currently lease
office premises in Tel Aviv, Israel and in Paramus, New Jersey, from private companies controlled by Mr. Yehuda Zisapel and his
wife, Ms. Nava Zisapel, and Mr. Zohar Zisapel. When these agreements were signed, the lease payments were at fair market prices
based on quotes we received from third parties for similar space. Historically, we have had some additional flexibility
to change the leased space, which we might not have had with unrelated third parties. The aggregate amount of lease
and maintenance payments was approximately $912 thousand in 2019.
We believe that the
terms of the transactions in which we have entered and are currently engaged with other members of the RAD-BYNET Group are beneficial
to us and no less favorable to us than terms that might be available to us from unaffiliated third parties. All future transactions
and arrangements (or modifications of existing ones) with members of the RAD-BYNET Group in which our office holders have a personal
interest or which raise issues of such office holders’ fiduciary duties will require approval by our Board of Directors and,
in certain circumstances, approval of our Audit Committee and shareholders under the Israeli Companies Law.
Matrix IT Ltd.
Mr. Amir Hai, our Chief
Financial Officer, is a member of the board and Chairman of the Audit Committee of Matrix IT Ltd., or Matrix., an Israeli technology
company offering a broad array of project and technology services. Among other things, Matrix is a certified distributor of the
Red Hat OpenStack platform. The Company, from time to time, has entered and expects to continue to enter into certain limited term
engagements with Matrix or its affiliated companies in connection with specific development projects and/or use of the Red Hat
OpenStack platform. The terms of the transactions in which we have entered and are currently engaged with Matrix and/or its affiliates
are believed to be no less favorable to us than terms that might be available to us from unrelated third parties. All future transactions
and arrangements (or modifications of existing ones) with Matrix or its affiliated companies will require approval by our Board
of Directors and, in certain circumstances, approval of our Audit Committee and shareholders in accordance with the Israeli Companies
Law. In 2019, we purchased products and services from Matrix and its affiliates as a related party in the amount of approximately
$288 thousand.
|
C.
|
INTERESTS OF EXPERTS AND COUNSEL
|
Not applicable.
ITEM 8.
|
FINANCIAL INFORMATION
|
|
A.
|
CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
|
Our consolidated financial
statements and other financial information, which can be found at the end of this Annual Report beginning on page F-1, are incorporated
herein by reference.
Export Sales
In 2019 and 2018, the
amount of our export sales was approximately $31.6 million and $33.3 million respectively, which represented 96% and 98% of our
total sales.
Legal Proceedings
We are currently not,
and have not been in the recent past, a party to any legal proceedings which may have or have had in the recent past material effects
on our financial position or profitability. However, we have been in the past, and may be from time to time in the future, named
as a defendant in certain routine litigation incidental to our business.
Dividend Policy
We have never declared
or paid any cash dividends on our ordinary shares. We currently intend to retain any future earnings to finance operations
and to expand our business and, therefore, do not expect to pay any cash dividends in the foreseeable future.
Except as otherwise
disclosed below and/or in this Annual Report, there has been no significant change affecting our financial statements since December 31,
2019.
ITEM 9.
|
THE OFFER AND LISTING
|
|
A.
|
OFFER AND LISTING DETAILS
|
Our ordinary shares
are traded on the Nasdaq Capital Market under the symbol “RDCM.”
Not applicable.
Our ordinary shares
are traded on the Nasdaq Capital Market.
Not applicable.
Not applicable.
Not applicable.
ITEM 10.
|
ADDITIONAL INFORMATION
|
Not applicable.
|
B.
|
MEMORANDUM AND ARTICLES OF ASSOCIATION
|
Copies of our Memorandum and Articles of
Association are attached as Exhibit 1.1 and Exhibit 1.2, respectively, to this Annual Report. The information called for by this
Item is set forth in Exhibit 2.2 to this Annual Report and is incorporated by reference into this Annual Report.
On March 29, 2019,
we entered into a series of agreements with AT&T relating to the sale of our solutions and services to AT&T. The AT&T
agreements include:
|
●
|
Software and Professional Services Agreement, or SPSA – a three-year framework agreement with two additional one-year options which establishes general terms and conditions for the delivery of products and services. Such terms include, among others, terms relating to ordering procedures; AT&T site, privacy, and security requirements; terms related to the licensing of intellectual property to AT&T; change in control provisions permitting AT&T’s termination of the agreement under certain circumstances; intellectual property infringement indemnity; insurance requirements; and limitations of liability. The SPSA provides the structure pursuant to which the parties may enter into supplemental agreements for purposes of effectuating specific orders. With regard to such orders, the terms of any supplemental agreements take precedence over the terms of the SPSA.
|
|
●
|
Supplement Agreement – a three-year agreement with two additional one-year options governing the sale of our solutions and related professional services to AT&T. The Supplement Agreement provides the detailed technical scope for our solutions and the prices applicable to such solutions. Pursuant to the Supplement Agreement, AT&T has committed to issue certain orders related to the continuing enhancement of existing solutions for the first two years of the agreement and to the expansion of license use rights during the first year of the agreement and retains options to issue certain additional orders over the three-year term of the agreement.
|
|
●
|
Supplemental Support & Maintenance Agreement – a three-year agreement for our performance of support and maintenance services for our solutions deployed on AT&T’s network. This agreement defines the technical aspects of support including error severity levels, response times, and method of interface, as well as the annual fee for such services.
|
We entered into a series
of agreements with Rakuten relating to the sale of our solutions and services to Rakuten. The Rakuten Agreements include:
|
●
|
Master Software and Professional Services Agreement, or MSPSA – a multi-year framework agreement effective May 21, 2019, establishing general terms and conditions for the delivery of software and services. Such terms include, among others, terms relating to ordering procedures, intellectual property, confidentiality, indemnity, and limitations of liability. The MSPSA provides the structure pursuant to which the parties may enter into additional statements of work, or SOWs, for purposes of effectuating specific orders. The SOWs establish the scope of services, technical specifications, and certain other terms with regard to each particular order. The terms of any SOWs take precedence over the terms of the MSPSA.
|
|
|
|
|
●
|
Statement of Work No. 1, or SOW No. 1 – a multi-year agreement effective May 22, 2019, governing the delivery of our solution and services as a managed service to Rakuten and providing the detailed technical scope for the managed services and the prices applicable to such services. SOW No. 1 establishes a multi-year commitment with certain additional renewal periods.
|
Additionally, we have
entered and from time to time may enter into additional SOWs with Rakuten providing for additional products and or services complementary
to the services provided under SOW No. 1.
There are currently
no Israeli currency control restrictions on payments of dividends or other distributions with respect to our ordinary shares or
the proceeds from the sale of our ordinary shares, except for the obligation upon Israeli residents to file reports with the Bank
of Israel regarding certain transactions. However, legislation remains in effect pursuant to which currency controls can be
imposed by administrative action at any time and from time to time.
Israeli Tax Considerations
The following is a
summary of the current tax structure applicable to companies incorporated in Israel, with special reference to its effect on us. The
following also contains a discussion of the material Israeli consequences to purchasers of our ordinary shares and Israeli government
programs that benefit us.
This summary does not
discuss all the aspects of Israeli tax law that may be relevant to a particular investor in light of his or her personal investment
circumstances or to some types of investors subject to special treatment under Israeli law. To the extent that the discussion is
based on new tax legislation which has not been subject to judicial or administrative interpretation, we cannot assure you that
the views expressed in the discussion will be accepted by the appropriate tax authorities or the courts. The discussion is
not intended, and should not be construed, as legal or professional tax advice and is not exhaustive of all possible tax considerations.
Holders of our ordinary
shares should consult their own tax advisors as to the United States, Israeli or other tax consequences of the purchase, ownership
and disposition of ordinary shares, including, in particular, the effect of any foreign state or local taxes.
General Corporate
Tax Structure
Taxable income of the
Company is subject to the Israeli corporate tax at the rate as follows: 2017 – 24%, 2018 and 2019 – 23%.
Tax benefits under the
Law for the Encouragement of Capital Investments, 1959 ,or the Encouragement of Capital Investments Law:
In August 2013, the
Israeli Parliament enacted the Law for Changing National Priorities (Legislative Amendments for Achieving Budget Targets for 2013
and 2014), 2013 which includes Amendment 71 thereto, or Amendment 71. Per Amendment 71, the tax rate on preferred income from a
preferred enterprise in 2014-2016 will be 9% in certain areas in Israel designated as Development Area A and 16% in other areas.
In 2017, the tax rate for Development Area A was reduced to 7.5%.
We may claim the tax
benefits offered by Amendment 71 in our tax returns, provided that our facilities meet the criteria for tax benefits set out by
the amendment. We are also entitled to approach the Israeli Tax Authorities for a pre-ruling regarding their eligibility for benefits
under Amendment 71 (and in some cases are required to apply for such approval).
In December 2016, the
Israeli Parliament enacted the Economic Efficiency Law (Legislative Amendments for Applying the Economic Policy for the 2017 and
2018 Budget Years), 2016 which includes Amendment 73 thereto, or Amendment 73. Amendment 73, which came into effect in January
2017, prescribes special tax tracks for Preferred Technological Enterprises, granting such enterprises a tax rate of 7.5% in Development
Area A and 12% in other areas, and granting a tax rate of 6% for enterprises that qualify as a Special Preferred Technological
Enterprise.
Under Amendment 73,
any dividends distributed to “foreign companies”, as defined in the Economic Efficiency Law, by companies having over
90% foreign (i.e., non-Israeli) ownership, deriving from income from the Preferred Technological Enterprises will be subject
to tax at a rate of 4% .
In order to be eligible
for the reduced tax rate, a company must meet certain criteria as set forth in Amendment 73 including that R&D expenses and
employee level remain at a certain rate.
We have yet to claim
the tax benefits offered under Amendment 73 and accordingly such reduced taxes were not considered in the computation of the deferred
taxes and valuation allowance as of December 31, 2019.
Capital Gains Tax on Sales of Our
Ordinary Shares
Generally, as to Israeli
residents, the Israeli tax law imposes a capital gains tax on the gain from the sale of any capital assets by Israeli residents,
whether such gain was sourced in Israel or abroad. As to non-Israeli residents, the Israeli tax law generally imposes a capital
gains tax on the sale of assets, including shares, by non-Israeli residents, if those assets are either (a) located in Israel;
(b) located outside of Israel and are a direct or indirect right to an asset or inventory located in Israel; (c) are shares or
rights to shares in an Israeli resident corporation; or (d) are rights in a foreign resident corporation (non-Israeli corporation)
that holds, directly or indirectly, assets located in Israel, unless a specific exemption is available or unless a tax treaty between
Israel and the shareholder’s country of residence provides otherwise. Under the Israeli Income Tax Ordinance [New Version],
1961, there is a distinction between a real gain and inflationary surplus. The inflationary surplus is equal to the increase in
the purchase price of the relevant asset attributable to the increase in the Israeli consumer price index or, in certain circumstances,
a foreign currency exchange rate, between the date of purchase and the date of sale. The real gain is the excess of the total capital
gain over the inflationary surplus.
The income tax rate
applicable to real gain derived by an Israeli individual from the sale of shares which had been purchased after January 1, 2012,
whether listed on a stock exchange or not, is 25%. However, if such shareholder is considered a “Substantial Shareholder”
(a person who holds, alone or together with a family relative or with a person who is not a relative where the person has a permanent
cooperation agreement with such non-relative) 10% or more of the company’s issued share capital or of voting rights in it)
at the time of sale or at any time during the preceding 12-month period, such gain will be taxed at the rate of 30%. As of January
1, 2016, an additional tax at a rate of 2% will be imposed on high earners whose annual income or gains exceed NIS 803,520. As
of January 1, 2017, an additional income tax at a rate of 3% will be imposed on high earners whose annual taxable income or gain
exceeds NIS 640,000. As of January 1, 2018, an additional income tax at a rate of 3% will be imposed on high earners whose annual
taxable income or gain exceeds NIS 641,880 (including, but not limited to, dividends, interest and capital gain).
Moreover, capital gains
derived by a shareholder who is a dealer or trader in securities, or to whom such income is otherwise taxable as ordinary business
income, are taxed in Israel at ordinary income rates (for fiscal year 2017, 2018 and 2019, up to 50% for individuals and for Israeli
resident corporations, the corporate tax rate is 24%, 23% and 23%, respectively).
Non-Israeli resident
shareholders are generally exempt from Israeli capital gains tax on any gains derived from the sale, exchange or disposition of
our ordinary shares purchased after January 1, 2009, provided that such gains were not derived from a permanent establishment or
business activity of such shareholders in Israel. However, non-Israeli corporations shareholders will not be entitled to the foregoing
exemptions if an Israeli resident (i) has a controlling interest of more than 25% in such non-Israeli corporation or (ii) is the
beneficiary of or is entitled to 25% or more of the revenues or profits of such non-Israeli corporation, whether directly or indirectly.
Regardless of whether
shareholders may be liable for Israeli income tax on the sale of our ordinary shares, the payment of the consideration may be subject
to withholding of Israeli tax at the source. Accordingly, shareholders may be required to demonstrate that they are exempt from
tax on their capital gains in order to avoid withholding at source at the time of sale.
U.S.-Israel Tax
Treaty
Pursuant to the Convention
between the Government of the United States of America and the Government of Israel with Respect to Taxes on Income, as amended
(the “U.S. - Israel Tax Treaty”), the sale, exchange or disposition of ordinary shares by a person who (i) holds
the ordinary shares as a capital asset, (ii) qualifies as a resident of the United States within the meaning of the U.S.-Israel
Tax Treaty and (iii) is entitled to claim the benefits afforded to such resident by the U.S.-Israel Tax Treaty, generally
will not be subject to Israeli capital gains tax unless either (a) such resident holds, directly or indirectly, shares representing
10% or more of the voting power of a company during any part of the 12-month period preceding such sale, exchange or disposition,
subject to certain conditions, or (b) the capital gains from such sale, exchange or disposition can be allocated to a permanent
establishment in Israel. In the event that the exemption shall not be available, the sale, exchange or disposition of
ordinary shares would be subject to such Israeli capital gains tax to the extent applicable; however, under the U.S.-Israel Tax
Treaty, such residents may be permitted to claim a credit for such taxes against U.S. federal income tax imposed with respect to
such sale, exchange or disposition, subject to the limitations in U.S. laws applicable to foreign tax credits. The U.S.-Israel
Tax Treaty does not relate to state or local taxes.
In some instances where
our shareholders may be liable to Israeli tax on the sale of their ordinary shares, the payment of the consideration may be subject
to the withholding of Israeli tax at source. However, where a shareholder is exempt from Israeli taxation as described in the “Item
10.E—Additional Information—Taxation—Capital Gains Tax on Sales of Our Ordinary Shares”, such exemption
takes precedence over the U.S.-Israel Tax Treaty.
Taxation of Non-Residents
on Dividends
Non-Israeli residents
are generally subject to Israeli withholding income tax on the receipt of dividends paid on our Shares at the rate of 25% (or 30%
for individuals, if such individual is a Substantial Shareholder at the time receiving the dividend or on any date in the 12 months
preceding such date), which tax will be withheld at source, unless a tax certificate is obtained from the Israeli Tax Authority
authorizing withholding-exempt remittances or a reduced rate of tax pursuant to an applicable tax treaty.
A “substantial
shareholder” is generally a person who alone or together with such person’s relative or another person who collaborates
with such person on a permanent basis, holds, directly or indirectly, at least 10% of any of the “means of control”
of the corporation. “Means of control” generally include the right to vote, receive profits, nominate a director or
an executive officer, receive assets upon liquidation, or order someone who holds any of the aforesaid rights how to act, regardless
of the source of such right.
A non-Israeli resident
who receives dividends from which tax was withheld is generally exempt from the duty to file tax returns in Israel in respect of
such income.
For example, under
the U.S.-Israel Tax Treaty, Israeli withholding tax on dividends paid to a U.S. resident for treaty purposes may not, in general,
exceed 25%, or 15% in the case of dividends paid out of the profits of an Approved Enterprise, subject to certain conditions. Where
the recipient is a U.S. corporation owning 10% or more of the outstanding shares of the voting stock of the paying corporation
during the part of the paying corporation’s taxable year, which precedes the date of payment of the dividend and during the
whole of its prior taxable year (if any) and not more than 25% of the gross income of the paying corporation for such prior taxable
year (if any) consists certain interest or dividends, the Israeli tax withheld may not exceed 12.5%, subject to certain conditions.
Israeli Transfer
Pricing Regulations
Section 85A and the
regulations thereunder contain elaborate transfer pricing provisions which include the arm’s-length principle, that apply
to any international transaction in which there is a special relationship between the parties to the transaction and for which
a price was settled on for property, a right, a service, or credit.
According to the arm’s
length, such international transaction shall be reported in accordance with the market price and conditions and tax shall be due
accordingly. The assessment of whether a transaction falls under the aforementioned definition shall be implemented in accordance
with one of the procedures mentioned in the regulations and is based, among others, on comparisons of characteristics which portray
similar transactions in ordinary market conditions, such as the field of activity, the type of the asset or service, the contractual
conditions of the international transaction, the risks taken by each party and according to additional terms and conditions specified
in the regulations.
United States Federal Corporate Income
Tax Considerations
RADCOM US is taxed
under United States federal and state tax rules. Income tax is calculated at a federal tax rate of 21% rate.
United States Federal Income Tax
Considerations for U.S. Holders
Subject to the limitations
described herein, the following discussion summarizes certain U.S. federal income tax consequences to a U.S. Holder of our ordinary
shares. A “U.S. Holder” means a holder of our ordinary shares who is:
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an individual who is a citizen or resident of the United States for U.S. federal income tax purposes;
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a corporation (or other entity taxable as a corporation for U.S. federal income tax purposes) created or organized in the United States or under the laws of the United States or any political subdivision thereof or the District of Columbia;
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an estate, the income of which is subject to U.S. federal income tax regardless of its source; or
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a trust (i) if, in general, a court within the United States is able to exercise primary supervision over its administration and one or more U.S. persons have the authority to control all of its substantial decisions, or (ii) that has in effect a valid election under applicable U.S. Treasury Regulations to be treated as a U.S. person.
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Unless otherwise specifically
indicated, this discussion does not consider the U.S. tax consequences to a person that is not a U.S. Holder, or a Non-U.S. Holder.
This discussion considers only U.S. Holders that will own our ordinary shares as capital assets (generally, for investment) and
does not purport to be a comprehensive description of all of the tax considerations that may be relevant to each U.S. Holder’s
decision to purchase our ordinary shares.
This discussion is
based on current provisions of the Internal Revenue Code of 1986, as amended, or the Code, current and proposed Treasury Regulations
promulgated thereunder, and administrative and judicial decisions as of the date hereof, all of which are subject to change, possibly
on a retroactive basis. This discussion does not address all aspects of U.S. federal income taxation that may be relevant to any
particular U.S. Holder in light of such holder’s individual circumstances. In particular, this discussion does not address
the potential application of the alternative minimum tax or U.S. federal income tax consequences to U.S. Holders that are subject
to special treatment, including U.S. Holders that:
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are broker-dealers or insurance companies;
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have elected mark-to-market accounting;
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are tax-exempt organizations or retirement plans;
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are financial institutions;
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hold our ordinary shares as part of a straddle, “hedge” or “conversion transaction” with other investments;
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acquired our ordinary shares upon the exercise of employee stock options or otherwise as compensation;
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own directly, indirectly or by attribution at least 10% of our voting power or value;
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have a functional currency that is not the U.S. dollar;
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are certain former citizens or long-term residents of the United States; or
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are real estate investment trusts or regulated investment companies.
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If a partnership (or
any other entity treated as a partnership for U.S. federal income tax purposes) holds our ordinary shares, the tax treatment of
the partnership and a partner in such partnership will generally depend on the status of the partner and the activities of the
partnership. Such a partner or partnership should consult its own tax advisor as to its tax consequences.
In addition, this discussion
does not address any aspect of state, local or non-United States laws or the possible application of United States federal gift
or estate tax.
Each holder of our
ordinary shares is advised to consult such person’s own tax advisor with respect to the specific tax consequences to such
person of purchasing, holding or disposing of our ordinary shares, including the applicability and effect of federal, state, local
and foreign income tax and other tax laws to such person’s particular circumstances.
Taxation of U.S.
Holders of Ordinary Shares
Taxation of Distributions
Paid on Ordinary Shares. A U.S. Holder, other than certain U.S. Holders that are U.S. corporations, will be required
to include in gross income as ordinary dividend income the amount of any distribution paid on our ordinary shares, including any
non-U.S. taxes withheld from the amount paid, to the extent the distribution is paid out of our current or accumulated earnings
and profits as determined for U.S. federal income tax purposes. Distributions in excess of such earnings and profits will
be applied against and will reduce the U.S. Holder’s basis in our ordinary shares and, to the extent in excess of such basis,
will be treated as gain from the sale or exchange of our ordinary shares. The dividend portion of such distributions
generally will not qualify for the dividends received deduction available to corporations.
Subject to the discussion
below under “Medicare Tax” dividends that are received by U.S. Holders that are individuals, estates or trusts will
be taxed at the rate applicable to long-term capital gains (a maximum rate of 20% for taxable years beginning after December 31,
2012), provided that such dividends meet the requirements of “qualified dividend income.” For this purpose,
qualified dividend income generally includes dividends paid by a non-U.S. corporation if certain holding period and other requirements
are met and either (i) the stock of the non-U.S. corporation with respect to which the dividends are paid is readily tradable on
an established securities market in the U.S. (e.g., Nasdaq) or (ii) the non-U.S. corporation is eligible for benefits of a comprehensive
income tax treaty with the United States, which includes an information exchange program and is determined to be satisfactory by
the U.S. Secretary of the Treasury. The IRS has determined that the U.S.-Israel income tax treaty is satisfactory for this
purpose. Dividends that fail to meet such requirements, and dividends received by corporate U.S. Holders, are taxed
at ordinary income rates. No dividend received by a U.S. Holder will be a qualified dividend (i) if the U.S. Holder
held the ordinary share with respect to which the dividend was paid for less than 61 days during the 121-day period beginning on
the date that is 60 days before the ex-dividend date with respect to such dividend, excluding for this purpose, under the rules
of Code Section 246(c), any period during which the U.S. Holder has an option to sell, is under a contractual obligation to sell,
has made and not closed a short sale of, is the grantor of a deep-in-the-money or otherwise nonqualified option to buy, or has
otherwise diminished its risk of loss by holding other positions with respect to, such ordinary share (or substantially identical
securities); or (ii) to the extent that the U.S. Holder is under an obligation (pursuant to a short sale or otherwise) to
make related payments with respect to positions in property substantially similar or related to the ordinary share with respect
to which the dividend is paid. If we were to be a “passive foreign investment company” (as such term is
defined in the Code) for any taxable year, dividends paid on our ordinary shares in such year or in the following taxable year
would not be qualified dividends. In addition, a non-corporate U.S. Holder will be able to take a qualified dividend
into account in determining its deductible investment interest (which is generally limited to its net investment income) only if
it elects to do so; in such case the dividend will be taxed at ordinary income rates.
Distributions of current
or accumulated earnings and profits paid in foreign currency to a U.S. Holder (including any non-U.S. taxes withheld therefrom)
will generally be includible in the income of a U.S. Holder in a U.S. dollar amount calculated by reference to the exchange rate
on the day the distribution is received. A U.S. Holder that receives a foreign currency distribution and converts the
foreign currency into U.S. dollars subsequent to receipt may have foreign exchange gain or loss based on any appreciation or depreciation
in the value of the foreign currency against the U.S. dollar, which will generally be U.S. source ordinary income or loss.
U.S. Holders, other
than certain U.S. Holders that are corporations, may have the option of claiming the amount of any non-U.S. income taxes withheld
at source either as a deduction from gross income or as a dollar-for-dollar credit against their U.S. federal income tax liability. Individuals
who do not claim itemized deductions, but instead utilize the standard deduction, may not claim a deduction for the amount of the
non-U.S. income taxes withheld, but such amount may be claimed as a credit against the individual’s U.S. federal income tax
liability. The amount of non-U.S. income taxes which may be claimed as a credit in any taxable year is subject to complex
limitations and restrictions, which must be determined on an individual basis by each shareholder. These limitations
include, among others, rules which limit foreign tax credits allowable with respect to specific classes of income to the U.S. federal
income taxes otherwise payable with respect to each such class of income. A U.S. Holder will be denied a foreign tax
credit with respect to non-U.S. income tax withheld from a dividend received on the ordinary shares if such U.S. Holder has not
held the ordinary shares for at least 16 days of the 31-day period beginning on the date which is 15 days before the ex-dividend
date with respect to such dividend, or to the extent such U.S. Holder is under an obligation to make related payments with respect
to substantially similar or related property. Any days during which a U.S. Holder has substantially diminished its risk
of loss on the ordinary shares are not counted toward meeting the required 16-day holding period. Distributions
of current or accumulated earnings and profits generally will be foreign source passive income for United States foreign tax credit
purposes.
Taxation of the
Disposition of Ordinary Shares. Upon the sale, exchange or other disposition of our ordinary shares, a U.S. Holder
will recognize capital gain or loss in an amount equal to the difference between such U.S. Holder’s basis in such ordinary
shares, which is usually the cost of such shares, and the amount realized on the disposition. A U.S. Holder that uses
the cash method of accounting calculates the U.S. dollar value of the proceeds received on the sale as of the date that the sale
settles, while a U.S. Holder that uses the accrual method of accounting is required to calculate the value of the proceeds of the
sale as of the “trade date,” unless such U.S. Holder has elected to use the settlement date to determine its proceeds
of sale. Subject to the discussion below under “Medicare Tax,” capital gain from the sale, exchange or other
disposition of ordinary shares held more than one year is long-term capital gain and is eligible for a reduced rate of taxation
for individuals (currently a maximum rate of 20% for taxable years beginning after December 31, 2012). Gains recognized
by a U.S. Holder on a sale, exchange or other disposition of ordinary shares generally will be treated as United States source
income for U.S. foreign tax credit purposes. A loss recognized by a U.S. Holder on the sale, exchange or other disposition
of ordinary shares generally is allocated to U.S. source income. The deductibility of a capital loss recognized on the
sale, exchange or other disposition of ordinary shares is subject to limitations. A U.S. Holder that receives foreign
currency upon disposition of ordinary shares and converts the foreign currency into U.S. dollars subsequent to the settlement date
or trade date (whichever date the taxpayer was required to use to calculate the value of the proceeds of sale) may have foreign
exchange gain or loss based on any appreciation or depreciation in the value of the foreign currency against the U.S. dollar, which
will generally be U.S. source ordinary income or loss.
Medicare Tax.
With respect to taxable years beginning after December 31, 2012, certain non-corporate U.S. holders will be subject to an additional
3.8% Medicare tax on all or a portion of their “net investment income,” which may include dividends on, or capital
gains recognized from the disposition of, our ordinary shares. U.S. Holders are urged to consult their own tax advisors regarding
the implications of the additional Medicare tax on their investment in our ordinary shares.
Taxation for
Non-U.S. Holders of Ordinary Shares
Except as described
in “—Information Reporting and Backup Withholding” below, a Non-U.S. Holder of our ordinary shares will not be
subject to U.S. federal income or withholding tax on the payment of dividends on, and/or the proceeds from the disposition of,
our ordinary shares, unless, in the case of U.S. federal income taxes:
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such item is effectively connected with the conduct by the Non-U.S. Holder of a trade or business in the United States and, in the case of a resident of a country which has a treaty with the United States, such item is attributable to a permanent establishment or, in the case of an individual, a fixed place of business, in the United States; or
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the Non-U.S. Holder is an individual who holds the ordinary shares as a capital asset and is present in the United States for 183 days or more in the taxable year of the disposition and certain other conditions are met.
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Information Reporting
and Backup Withholding
U.S. Holders (other
than exempt recipients, such as corporations) generally are subject to information reporting requirements with respect to dividends
paid on, or proceeds from the disposition of, our ordinary shares. U.S. Holders are also generally subject to backup withholding
(currently at a rate of 24%) on dividends paid on, or proceeds from the disposition of, our ordinary shares unless the U.S. Holder
provides IRS Form W-9 or otherwise establishes an exemption.
Non-U.S. Holders generally
are not subject to information reporting or backup withholding with respect to dividends paid on, or upon the proceeds from the
disposition of, our ordinary shares, provided that such Non-U.S. Holder provides its taxpayer identification number, certifies
to its foreign status, or otherwise establishes an exemption.
The amount of any backup
withholding may be allowed as a credit against a U.S. or Non-U.S. Holder’s U.S. federal income tax liability and may entitle
such holder to a refund, provided that certain required information is furnished to the IRS.
Certain individuals
who are U.S. Holders may be required to file a Form 8938 to report their ownership of specified foreign financial assets, which
may include our ordinary shares, if the total value of those assets exceed certain thresholds. U.S. Holders are urged to consult
their tax advisors regarding their tax reporting obligations, including the requirement to file a Form 8938.
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F.
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DIVIDENDS AND PAYING AGENTS
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Not applicable.
Not applicable.
We are required to
file reports and other information with the SEC under the Exchange Act and the regulations thereunder applicable to foreign private
issuers. We are subject to the informational requirements of the Exchange Act applicable to foreign private issuers and fulfill
the obligation with respect to such requirements by filing reports with the SEC. You may read and copy any document we file
with the SEC without charge on the SEC’s website (www.sec.gov). We generally make available on our own website (www.radcom.com)
our annual reports as well as other information. However, as an Israeli publicly traded company, we do not send copies of
our annual reports to our shareholders. We will mail out copies of our annual financial statements only to those shareholders
that submit a written request for such statements. See also “Item 10.B—Additional Information—Memorandum
and Articles of Association” and “Item 16G—Corporate Governance.” Information contained on our website
is not a part of this Annual Report.
Any statement contained
in this Annual Report about any of our contracts or other documents is not necessarily complete. If the contract or document is
filed as an exhibit to this Annual Report, the contract or document is deemed to modify the description contained in this Annual
Report. We urge you to review the exhibits themselves for a complete description of the contract or document.
As a foreign private
issuer, we are exempt from the rules under the Exchange Act prescribing the furnishing and content of proxy statements, and our
officers, directors and principal shareholders are exempt from reporting and “short-swing” profit recovery provisions
contained in Section 16 of the Exchange Act. In addition, we are not required under the Exchange Act to file periodic
reports and financial statements with the SEC as frequently or as promptly as United States companies whose securities are registered
under the Exchange Act. A copy of each report submitted in accordance with applicable United States law is available
for public review at our principal executive offices.
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I.
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SUBSIDIARY INFORMATION
|
Not applicable.
ITEM 11.
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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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We are exposed to a
variety of risks, including changes in interest rates affecting primarily the interest received on short-term deposits and foreign
currency fluctuations. We may in the future undertake hedging or other similar transactions or invest in market, risk-sensitive
instruments if our management determines that it is necessary to offset these risks.
Interest Rate Risk
Our exposure to market
risks regarding changes in interest rates relates primarily to our cash, cash equivalents, and short-term bank deposits and to
loans we may take that are based on a floating/fixed interest rate. Our cash and cash equivalents and short-term bank deposits
are held mainly in U.S. dollars with financial banks and bear annual average interest range of approximately 1.60-3.08%. For the
purposes of specific risk analysis, we use a sensitivity analysis to determine the impact that market risk exposure may have on
the financial income derived from our cash and cash equivalents. The potential loss to us over one year that would result from
a hypothetical change in our annual average range interest rates of 10% is not material.
Foreign Currency Exchange Risk
Our financial results
may be negatively impacted by foreign currency fluctuations. Our foreign operations are generally transacted through our U.S. and
Brazil subsidiaries and through our representatives and distributors. Typically, these sales and related expenses are denominated
in U.S. dollars, BRLs or in euros for European countries, while a significant portion of our expenses are denominated in NIS. Because
our financial results are reported in U.S. dollars, our results of operations may be adversely impacted by fluctuations in the
rates of exchange between the U.S. dollar and other currencies, mainly the NIS and BRL. Based on our budget for 2020, we expect
that (i) an increase of ten percent (10%) in the exchange rate of the NIS to U.S. dollar will decrease our operating expenses expressed
in dollar terms by approximately $1.9 million per year and vice versa and (ii) an increase of ten percent (10%) in the exchange
rate of the BRL to U.S. dollar will decrease our operating expenses expressed in dollar terms by approximately $99 thousand per
year and vice versa.
See also “Item
5.A—Operating and Financial Review and Prospects—Operating Results—Impact of Inflation and Currency Fluctuations.”
ITEM 12.
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DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
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Not applicable.
RADCOM LTD. AND ITS SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
U.S.
dollars in thousands, except share and per share data
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|
December
31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
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LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
Trade payables
|
|
$
|
2,452
|
|
|
$
|
1,559
|
|
Employees and payroll accruals
|
|
|
4,132
|
|
|
|
3,420
|
|
Deferred revenues and advances
from customers
|
|
|
828
|
|
|
|
266
|
|
Operating lease liabilities
|
|
|
1,263
|
|
|
|
-
|
|
Other
liabilities and accrued expenses
|
|
|
4,050
|
|
|
|
2,281
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
12,725
|
|
|
|
7,526
|
|
|
|
|
|
|
|
|
|
|
NON-CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
Deferred revenues
|
|
|
100
|
|
|
|
100
|
|
Accrued severance pay
|
|
|
3,904
|
|
|
|
3,425
|
|
Operating lease liabilities
|
|
|
4,967
|
|
|
|
-
|
|
Other
liabilities and accrued expenses
|
|
|
836
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total non-current
liabilities
|
|
|
9,807
|
|
|
|
3,525
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
22,532
|
|
|
$
|
11,051
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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SHAREHOLDERS’ EQUITY:
|
|
|
|
|
|
|
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Share capital:
|
|
|
|
|
|
|
|
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Ordinary Shares of NIS 0.20 par
value: Authorized: 20,000,000 shares at December 31, 2019 and 2018; 13,822,185 and 13,735,759 shares issued and 13,786,153
and 13,699,727 shares outstanding at December 31, 2019 and 2018, respectively
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$
|
648
|
|
|
$
|
643
|
|
Additional paid-in capital
|
|
|
137,969
|
|
|
|
135,730
|
|
Accumulated other comprehensive
loss
|
|
|
(2,634
|
)
|
|
|
(2,612
|
)
|
Accumulated
deficit
|
|
|
(62,113
|
)
|
|
|
(55,281
|
)
|
|
|
|
|
|
|
|
|
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Total shareholders’
equity
|
|
|
73,870
|
|
|
|
78,480
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
shareholders’ equity
|
|
$
|
96,402
|
|
|
$
|
89,531
|
|
The
accompanying notes are an integral part of the consolidated financial statements.
RADCOM LTD. AND ITS SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
U.S.
dollars in thousands, except share and per share data
|
|
Year
ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
Products
|
|
$
|
16,382
|
|
|
$
|
13,529
|
|
|
$
|
7,457
|
|
Services
|
|
|
16,300
|
|
|
|
8,303
|
|
|
|
3,597
|
|
Projects
|
|
|
328
|
|
|
|
12,218
|
|
|
|
26,179
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33,010
|
|
|
|
34,050
|
|
|
|
37,233
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
|
4,811
|
|
|
|
4,851
|
|
|
|
4,680
|
|
Services
|
|
|
5,022
|
|
|
|
1,190
|
|
|
|
487
|
|
Projects
|
|
|
84
|
|
|
|
2,825
|
|
|
|
5,321
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,917
|
|
|
|
8,866
|
|
|
|
10,488
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
23,093
|
|
|
|
25,184
|
|
|
|
26,745
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
|
18,578
|
|
|
|
15,503
|
|
|
|
10,562
|
|
Less
- royalty-bearing participation
|
|
|
1,838
|
|
|
|
1,648
|
|
|
|
1,599
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development, net
|
|
|
16,740
|
|
|
|
13,855
|
|
|
|
8,963
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
and marketing, net
|
|
|
10,514
|
|
|
|
11,426
|
|
|
|
10,996
|
|
General
and administrative
|
|
|
3,674
|
|
|
|
3,391
|
|
|
|
4,191
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
30,928
|
|
|
|
28,672
|
|
|
|
24,150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
|
(7,835
|
)
|
|
|
(3,488
|
)
|
|
|
2,595
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
income, net
|
|
|
1,172
|
|
|
|
1,136
|
|
|
|
389
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before taxes on income
|
|
|
(6,663
|
)
|
|
|
(2,352
|
)
|
|
|
2,984
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxes
on income
|
|
|
(169
|
)
|
|
|
(63
|
)
|
|
|
(83
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(6,832
|
)
|
|
$
|
(2,415
|
)
|
|
$
|
2,901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
net income (loss) per Ordinary Share
|
|
$
|
(0.50
|
)
|
|
$
|
(0.18
|
)
|
|
$
|
0.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
net income (loss) per Ordinary Share
|
|
$
|
(0.50
|
)
|
|
$
|
(0.18
|
)
|
|
$
|
0.23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of Ordinary Share used in computing basic net income (loss) per Ordinary Share
|
|
|
13,779,885
|
|
|
|
13,630,793
|
|
|
|
12,039,176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of Ordinary Share used in computing diluted net income (loss) per Ordinary Share
|
|
|
13,779,885
|
|
|
|
13,630,793
|
|
|
|
12,351,566
|
|
The
accompanying notes are an integral part of the consolidated financial statements.
RADCOM LTD. AND ITS SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
U.S.
dollars in thousands
|
|
Year
ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(6,832
|
)
|
|
$
|
(2,415
|
)
|
|
$
|
2,901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
|
|
(22
|
)
|
|
|
(92
|
)
|
|
|
39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive
income (loss)
|
|
|
(22
|
)
|
|
|
(92
|
)
|
|
|
39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
$
|
(6,854
|
)
|
|
$
|
(2,507
|
)
|
|
$
|
2,940
|
|
The
accompanying notes are an integral part of the consolidated financial statements.
RADCOM LTD. AND ITS SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
U.S.
dollars in thousands, except share and per share data
|
|
Number
of shares
|
|
|
Share
capital amount
|
|
|
Additional
paid-in capital
|
|
|
Accumulated
other comprehensive loss
|
|
|
Accumulated
deficit
|
|
|
Total
shareholders’ equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of January 1, 2017
|
|
|
11,586,228
|
|
|
$
|
523
|
|
|
$
|
98,283
|
|
|
$
|
(2,559
|
)
|
|
$
|
(56,104
|
)
|
|
$
|
40,143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of Ordinary Shares, net of issuance costs of $2,194, upon follow-on public offering
|
|
|
1,661,536
|
|
|
|
95
|
|
|
|
30,111
|
|
|
|
-
|
|
|
|
-
|
|
|
|
30,206
|
|
Share-based
compensation and RSUs
|
|
|
-
|
|
|
|
-
|
|
|
|
2,216
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,216
|
|
Exercise
of options into Ordinary Shares
|
|
|
109,487
|
|
|
|
7
|
|
|
|
884
|
|
|
|
-
|
|
|
|
-
|
|
|
|
891
|
|
RSUs
vested
|
|
|
52,724
|
|
|
|
3
|
|
|
|
(3
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Net
income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,901
|
|
|
|
2,901
|
|
Other
comprehensive income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
39
|
|
|
|
-
|
|
|
|
39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of December 31, 2017
|
|
|
13,409,975
|
|
|
$
|
628
|
|
|
$
|
131,491
|
|
|
$
|
(2,520
|
)
|
|
$
|
(53,203
|
)
|
|
$
|
76,396
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
effect of changes in accounting principles (ASC 606)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
337
|
|
|
|
337
|
|
Share-based
compensation and RSUs
|
|
|
-
|
|
|
|
-
|
|
|
|
2,121
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,121
|
|
Exercise
of options into Ordinary Shares
|
|
|
215,542
|
|
|
|
11
|
|
|
|
2,122
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,133
|
|
RSUs
vested
|
|
|
74,210
|
|
|
|
4
|
|
|
|
(4
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,415
|
)
|
|
|
(2,415
|
)
|
Other
comprehensive loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(92
|
)
|
|
|
-
|
|
|
|
(92
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of December 31, 2018
|
|
|
13,699,727
|
|
|
$
|
643
|
|
|
$
|
135,730
|
|
|
$
|
(2,612
|
)
|
|
$
|
(55,281
|
)
|
|
$
|
78,480
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based
compensation and RSUs
|
|
|
-
|
|
|
|
-
|
|
|
|
2,228
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,228
|
|
Exercise
of options into Ordinary Shares
|
|
|
2,250
|
|
|
|
*
|
|
|
|
16
|
|
|
|
-
|
|
|
|
-
|
|
|
|
16
|
|
RSUs
vested
|
|
|
84,176
|
|
|
|
5
|
|
|
|
(5
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(6,832
|
)
|
|
|
(6,832
|
)
|
Other
comprehensive loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(22
|
)
|
|
|
-
|
|
|
|
(22
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of December 31, 2019
|
|
|
13,786,153
|
|
|
$
|
648
|
|
|
$
|
137,969
|
|
|
$
|
(2,634
|
)
|
|
$
|
(62,113
|
)
|
|
$
|
73,870
|
|
|
*)
|
Represent
an amount lower than $1.
|
The
accompanying notes are an integral part of the consolidated financial statements.
RADCOM LTD. AND ITS SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
U.S.
dollars in thousands
|
|
Year ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(6,832
|
)
|
|
$
|
(2,415
|
)
|
|
$
|
2,901
|
|
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
752
|
|
|
|
657
|
|
|
|
537
|
|
Share-based compensation and RSUs
|
|
|
2,228
|
|
|
|
2,121
|
|
|
|
2,216
|
|
Change in:
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance pay, net
|
|
|
81
|
|
|
|
(63
|
)
|
|
|
42
|
|
Trade receivables, net
|
|
|
9,303
|
|
|
|
13
|
|
|
|
(15,865
|
)
|
Other account receivables and prepaid expenses
|
|
|
(1,753
|
)
|
|
|
658
|
|
|
|
(520
|
)
|
Inventories
|
|
|
(1,135
|
)
|
|
|
901
|
|
|
|
(560
|
)
|
Trade payables
|
|
|
998
|
|
|
|
(182
|
)
|
|
|
(1,150
|
)
|
Employees and payroll accruals
|
|
|
717
|
|
|
|
(622
|
)
|
|
|
524
|
|
Other liabilities and accrued expenses
|
|
|
2,694
|
|
|
|
(848
|
)
|
|
|
1,385
|
|
Deferred revenue and advances from customers
|
|
|
562
|
|
|
|
(2,169
|
)
|
|
|
(109
|
)
|
Operating lease right-of-use assets and liabilities, net and effect of exchange rate differences
|
|
|
388
|
|
|
|
-
|
|
|
|
-
|
|
Accrued interest on short-term bank deposits
|
|
|
(1,163
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used
in) operating activities
|
|
|
6,840
|
|
|
|
(1,949
|
)
|
|
|
(10,599
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayment of (investment in) short-term bank deposits
|
|
|
(61,917
|
)
|
|
|
40,000
|
|
|
|
(40,000
|
)
|
Purchase of property and equipment
|
|
|
(699
|
)
|
|
|
(662
|
)
|
|
|
(790
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
(62,616
|
)
|
|
|
39,338
|
|
|
|
(40,790
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of Ordinary Shares, net of issuance costs upon follow-on public offering
|
|
|
-
|
|
|
|
-
|
|
|
|
30,206
|
|
Exercise of options into Ordinary Shares
|
|
|
16
|
|
|
|
2,133
|
|
|
|
891
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
$
|
16
|
|
|
$
|
2,133
|
|
|
$
|
31,097
|
|
RADCOM LTD. AND ITS SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
U.S.
dollars in thousands
|
|
Year
ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments on cash and cash equivalents
|
|
$
|
(27
|
)
|
|
$
|
(145
|
)
|
|
$
|
(15
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
(decrease) in cash and cash equivalents
|
|
|
(55,787
|
)
|
|
|
39,377
|
|
|
|
(20,307
|
)
|
Cash
and cash equivalents and restricted bank deposit at beginning of the period
|
|
|
61,988
|
|
|
|
22,611
|
|
|
|
42,918
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents and restricted bank deposit at end of the period
|
|
$
|
6,201
|
|
|
$
|
61,988
|
|
|
$
|
22,611
|
|
(a)
Non-cash investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property
and equipment
|
|
$
|
47
|
|
|
$
|
152
|
|
|
$
|
239
|
|
Operating lease right-of-use
assets
|
|
$
|
1,133
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(b)
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxes on income
|
|
$
|
118
|
|
|
$
|
25
|
|
|
$
|
83
|
|
The
accompanying notes are an integral part of the consolidated financial statements.
RADCOM LTD. AND ITS SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except
share and per share data
|
a.
|
RADCOM Ltd. (the “Company”), an Israeli corporation, is a leading provider of NFV and 5G-ready service assurance, cloud-native network intelligence solutions for Communication Service Providers (“CSPs”). The Company’s solutions include RADCOM Service Assurance, a cloud-native, 5G-ready, fully virtualized service assurance solutions which allows telecom operators to gain end-to-end network visibility and customer experience insights across NFV and hybrid network; RADCOM Network Visibility, a cloud-native network packet broker and filtering solution that allows CSPs to manage network traffic at scale across multiple cloud environments and control the visibility layer to perform dynamic, on-demand analysis of select datasets; and RADCOM Network Insights, a business intelligence solution offering smart insights for multiple use cases, enabled by data captured and correlated through RADCOM Network Visibility and RADCOM Service Assurance. The Company specializes in solutions for next-generation mobile and fixed networks, including 5G, LTE, VoLTE, VoWifi, IMS, VoIP, and UMTS. The Company’s shares (the “Ordinary Shares”) are listed on the Nasdaq Capital Market under the symbol “RDCM”.
|
The
Company has wholly-owned subsidiaries in the United States and Brazil, that are primarily engaged in the sales, marketing, deployment
and customer support of the Company’s products in United States and Brazil. The Company also has a wholly-owned subsidiary in
India, that primarily provides customer support and development services worldwide. Additionally, the Company has a wholly-owned
subsidiary in Israel solely established for the purpose of making various investments, including securities purchases.
|
b.
|
The Company depends on a limited number of customers
for selling its solution. Such customers accounted for 83% of the Company’s revenues for the year ended December 31, 2019.
If these customers become unable or unwilling to continue to buy the Company’s solution, it could adversely affect the Company’s
results of operations and financial position (see also Note 12b).
|
The loss of any major customer,
a significant decrease in business from any such customer or a reduction in customer revenue due to adverse changes in the market,
economic or competitive conditions or other factors could have a material adverse effect on the Company’s business, results
of operations and financial condition.
|
c.
|
Follow-on
Public Offerings:
|
In
October 2017, the Company closed a follow-on public offering (as further described in Note 11b) for a total consideration of approximately
$30,206, net of underwriting discounts, commissions and other offering expenses of $2,194 payable by the Company.
RADCOM LTD. AND ITS SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands, except share and per share data
|
NOTE
2: -
|
SIGNIFICANT
ACCOUNTING POLICIES
|
The
consolidated financial statements are prepared according to United States generally accepted accounting principles (“U.S.
GAAP”).
The
preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates, judgments
and assumptions. The Company’s management believes that the estimates, judgments and assumptions used are reasonable based
upon information available at the time they are made. These estimates, judgments and assumptions can affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements, and the
reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
|
b.
|
Financial
statements in U.S. dollars (“$” “dollar” or “dollars”):
|
Most
of the revenues of the Company and its subsidiaries, other than the Company’s subsidiary in Brazil, are denominated in U.S.
dollars. Financing activities are made in U.S. dollars. Therefore, the Company’s management believes that the currency of
the primary economic environment in which the operations of the Company and its subsidiaries are conducted is the dollar, which
is used as the functional currency.
Transactions
and balances originally denominated in dollars are presented at their original amounts. Transactions and balances in other currencies
are re-measured into dollars in accordance with the principles set forth in Statement of Accounting Standards Codification (“ASC”)
830, “Foreign Currency Matters”.
Other
than in the Company’s subsidiary in Brazil, all exchange gains and losses from re-measurement of monetary balance sheet
items denominated in non-dollar currencies are reflected in the consolidated statement of operations when they arise.
Amounts
in the financial statements representing the dollar equivalent of balances denominated in other currencies do not necessarily
represent their real or economic value and such amounts may not necessarily be exchangeable for dollars.
RADCOM 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.)
|
For
the Company’s subsidiary in Brazil, whose functional currency has been determined to be its local currency, assets and liabilities
are translated at year-end exchange rates and statements of income items are translated at average exchange rates prevailing during
the year. Such translation adjustments are recorded as a separate component of accumulated other comprehensive loss in the shareholders’
equity.
|
c.
|
Principles
of consolidation:
|
The
consolidated financial statements include the financial statements of the Company and its subsidiaries. All intercompany transactions
and balances have been eliminated in consolidation.
|
d.
|
Cash
and cash equivalents:
|
The
Company considers all highly liquid deposit instruments with an original maturity of three months or less at the date of purchase
to be cash equivalents.
|
e.
|
Short-term
bank deposits:
|
Short-term
bank deposits are deposits with maturities of more than three months but less than one year and which do not meet the definition
of cash equivalents. Such deposits include annual interest rate ranging between 2.35%-3.27% resulting in accrued interest
of $1,163 as of December 31, 2019. The deposits are presented according to their terms.
|
f.
|
Concentration
of credit risk:
|
Financial
instruments that may subject the Company to significant concentration of credit risk consist mainly of cash and cash equivalents,
short-term bank deposits, severance pay fund and trade receivables.
Cash
and cash equivalents are maintained with major financial institutions mainly in Israel. Assets held for severance benefits are
maintained with major insurance companies and financial institutions in Israel. Such deposits are not insured. However, management
believes that such financial institutions are financially sound and, accordingly, low credit risk exists with respect to these
investments.
RADCOM 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 grants credit to customers without generally requiring collateral or security. The risk of collection associated with
trade receivables is reduced by geographical dispersion of the Company’s customer base. The Company establishes an allowance
for doubtful accounts based on historical experience, credit quality, the age of the accounts receivable balances and current
economic conditions that may affect a customer’s ability to pay. Allowance for doubtful accounts as of December 31, 2018
amounted to $19. During the year ended December 31, 2019, the Company collected $10 of the allowance for doubtful accounts balance.
No additional allowances for doubtful accounts were recorded during the year ended December 31, 2019. No bad debt expenses
were recorded during the years ended December 31, 2019, 2018 and 2017.
Inventories
are stated at the lower of cost and net realizable value. Cost is determined on a “moving average” basis. Inventory
write-offs are provided to cover technological obsolescence, excess inventories and discontinued products.
Inventory
write-off is measured as the difference between the cost of the inventory and net realizable value based upon assumptions about
future demand and is charged to the cost of revenues. At the point of the loss recognition, a new, lower-cost basis for that inventory
is established, and subsequent changes in facts and circumstances do not result in the restoration or increase in that newly established
cost basis.
The
total inventory write-offs during the years ended 2019 and 2017 amounted to $14 and $369, respectively.
No
inventory write-offs were recorded during the year ended December 31, 2018.
|
h.
|
Property
and equipment:
|
Property
and equipment are stated at cost less accumulated depreciation. Maintenance and repairs are charged to operations as incurred.
Depreciation
is calculated on the straight-line method over the estimated useful lives of the assets.
Annual
rates of depreciation are as follows:
|
|
%
|
|
|
|
Computers and electronic
equipment
|
|
15 - 33
|
Office furniture and equipment
|
|
6 - 33
|
Leasehold improvements
|
|
At the shorter of the lease
period or useful life of the leasehold improvement
|
RADCOM LTD. AND ITS SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except
share and per share data
|
NOTE 2: -
|
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|
|
i.
|
Impairment of long-lived assets:
|
The Company’s
long-lived assets are reviewed for impairment in accordance with ASC 360, “Property, plants and equipment”, whenever
events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of an asset
to be held and used is assessed by a comparison of the carrying amount of the asset to the future undiscounted cash flows expected
to be generated by the asset. If such asset is considered to be impaired, the impairment to be recognized is measured at the amount
by which the carrying amount of the asset exceeds its fair value. During the years ended December 31, 2019, 2018 and 2017, no impairment
losses were identified.
On January 1, 2019 the Company
adopted ASC 842, “Leases”, using the modified retrospective transition approach, by applying the new standard to all
leases existing at the date of initial application. Results and disclosure requirements for reporting periods beginning after January
1, 2019 are presented under ASC 842, while prior period amounts have not been adjusted and continue to be reported in accordance
with the historical accounting under ASC 840.
The Company elected the package
of practical expedients permitted under the standard related to treating lease and non-lease components as a single lease component
for all equipment leases as well as electing a policy exclusion permitting leases with an original lease term of less than one
year to be excluded from the operating lease right-of-use (“ROU”) assets and operating lease liabilities.
Upon adoption of ASC 842 on
January 1, 2019, the Company recorded both operating lease ROU assets and operating lease liabilities of $5,936. The adoption did
not impact the Company’s retained earnings, or prior year consolidated statements of comprehensive loss and statements of cash
flows.
Under ASC 842, the Company determines if an arrangement is a
lease at inception. The Company’s assessment is based on: (1) whether the contract includes an identified asset, (2): whether the
company obtains substantially all of the economic benefits from the use of the asset throughout the period of use, and (3) whether
the Company has the right to direct how and for what purpose the identified asset is used throughout the period.
ROU assets represent the Company’s
right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease
payments arising from the lease. ROU assets and operating lease liabilities are recognized at commencement date based on the present
value of remaining lease payments over the lease term. For this purpose, the Company consider only payments that are fixed and
determinable at the time of commencement. The Company uses its incremental borrowing rate based on the information available at
the commencement date to determine the present value of the lease payments.
RADCOM 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.)
|
Several of the Company’s
leases include options to extend the lease and some have termination options that are factored into the Company’s determination
of the lease payments when appropriate. For purposes of calculating lease liabilities, lease terms include options to extend or
terminate the lease when it is reasonably certain that the Company will exercise such options. The Company’s lease agreements
do not contain any material residual value guarantees.
A portion of the Company’s
real estate leases is generally subject to annual changes in the Consumer Price Index (“CPI”). The changes to the CPI
are treated as variable lease payments and recognized in the period in which the obligation for those payments was incurred.
Operating lease expenses are
recognized on a straight-line basis over the lease term.
For all short-term leases which
are less than 12 months and existing short-term leases of those assets in transition, the Company does not recognize operating
lease ROU assets or operating lease liabilities, but recognizes lease expenses over the lease term on a straight-line basis.
See Note
9 for further information on leases.
The Company’s solution is sold
to customers directly, through resellers and to lesser extent through distributors. Sales through resellers are considered final
sales per revenue recognition criteria.
The Company recognizes revenues in accordance with ASC No. 606,
“Revenue from Contracts with Customers” (“ASC No. 606”). As such, the Company identifies a contract with a
customer, identifies the performance obligations in the contract, determines the transaction price, allocates the transaction price
to each performance obligation in the contract and recognizes revenues when (or as) the Company satisfies a performance obligation
as follows:
|
a)
|
Identify the contract with a customer:
|
The Company generally considers either agreements or purchase orders, which in some cases are governed by master agreements, to
be contracts with customers. In evaluating the contract with a customer, the Company analyzes the customer’s intent and ability
to pay the amount of promised consideration (credit risk) and considers the probability of collecting substantially all of the
consideration.
RADCOM LTD. AND ITS SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except
share and per share data
|
NOTE 2: -
|
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|
|
b)
|
Identify the performance obligations in the contract:
|
At a contract’s inception,
the Company assesses the goods or services promised in a contract with a customer and identifies the performance obligations.
The main performance obligations
usually are the provisions of the following:
License for the Company’s software solutions (which may
include significant customization), professional services, managed services, service type warranty and post-contract customer support,
each of which are distinct, to be the identified performance obligations.
|
c)
|
Determine the transaction price:
|
The transaction price is the
amount of consideration to which the Company is entitled in exchange for transferring promised goods or services to a customer,
excluding amounts collected on behalf of third parties.
Generally, the Company doesn’t
grant its customers a right to return the products sold. However, in some cases, the arrangements may include refunds, liquidated
damages, penalties or other damages if the Company fails to deliver future goods or services or if the goods or services fail to
meet certain specifications to acceptance criteria. All of the above are accounted for as variable considerations, which may be
considered as adjustments to the transaction price.
The Company includes estimated
amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will
not occur when the uncertainty associated with the variable consideration is resolved. The Company’s estimates of variable consideration
and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of the Company’s
anticipated performance and all information (historical, current and forecasted) that is reasonably available.
As the Company’s standard
payment terms are less than one year, the contracts have no significant financing component. In instances of contracts which revenue
recognition differs from the timing of invoicing, the Company determined that those contracts generally do not include a significant
financing component. The primary purpose of the invoicing terms is to provide customers with simplified and predictable ways of
purchasing the Company’s products and services, not to receive or provide financing.
RADCOM 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)
|
Allocate the transaction price to the performance obligations in the contract:
|
The Company’s selling
price is highly variable. Each contract is different by its scope and price. The standalone selling prices of software licenses
are typically estimated using the residual approach. Standalone selling prices of services are typically estimated based on observable
transactions when these services are sold on a standalone basis. The transaction price is allocated to the separate performance
obligations on a relative standalone selling price basis.
|
e)
|
Recognize revenue when a performance obligation is satisfied:
|
Revenue is recognized when or as performance obligations are satisfied by transferring control of a promised good or service to
a customer. Control is either transferred over time or at a point in time, which affects the revenue recognition schedule.
Products: Revenues
from software solutions which include customer acceptance or software license only contracts which do not include significant customization,
are recognized at a point in time of the acceptance of the solution or the point in time the software license is delivered.
Services: Revenues
related to managed services, service type warranty and post-contract customer support are recognized over time on a straight-line
basis.
Projects: Revenues
from software solutions which include software license with significant customization are usually recognized over time during the
customization period based on Man Months (“MM”) incurred to date in ratio to total estimated MM which represent an input
method that best depicts the transfer of control over the performance obligation to the customer. Provisions for estimated losses
on uncompleted contracts are made in the period in which such losses are determined.
Deferred revenues represent
unrecognized fees collected as well as other advances and payments received from customers, for which revenue has not yet been
recognized. Deferred revenues are classified as short-term and long-term deferred revenues based on the period in which revenues
are expected to be recognized.
See also Note 3 for other required
disclosures.
RADCOM 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.)
|
Cost of revenues is comprised of cost of third-party hardware
and software license fees, maintenance fees related to such third-party hardware and software, employees’ salaries and related
costs, shipping and handling costs, subcontractors, inventory write-offs, indirect taxes, importation taxes and royalties to the
Israel Innovation Authority (the “IIA”).
|
m.
|
Share-based compensation:
|
The Company
accounts for share-based compensation in accordance with ASC 718, “Compensation — Stock Compensation”, which requires
companies to estimate the fair value of share-based payment awards on the grant date using an option-pricing model.
The Company
recognizes compensation expenses for the value of its awards granted based on the accelerated attribution method over the requisite
service period of each of the awards. The Company selected the Black-Scholes option-pricing model as the most appropriate fair
value method for its share-options awards. The option-pricing model requires a number of assumptions, of which the most significant
are the expected share price volatility and the expected option term. Expected volatility was calculated based upon actual historical
share price movements over the most recent periods ending on the grant date, equal to the expected option term. The expected term
was generated by running the Monte Carlo model pursuant to which historical post-vesting forfeitures and suboptimal exercise factor
are estimated by using historical option exercise information. The suboptimal exercise factor is the ratio by which the share price
must increase over the exercise price before employees are expected to exercise their share options. The expected term of the options
granted is derived from the output of the options valuation model and represents the period of time that options granted are expected
to be outstanding. The risk-free interest rate is based on the yield from U.S. Treasury zero-coupon bonds with an equivalent term
to the expected term of the options. Forfeitures account as they occur. Historically the Company has not paid dividends and in
addition has no foreseeable plans to pay dividends, and therefore uses an expected dividend yield of zero in the option-pricing
model.
No options
were granted in 2019 and 2018. The fair value for options granted in 2017 is estimated at the date of grant with the following
weighted average assumptions:
|
|
2017
|
|
|
|
Dividend yield
|
|
0%
|
Expected volatility
|
|
46.4%-55.9%
|
Risk-free interest
|
|
1.6%-2.1%
|
Expected life (in years)
|
|
3.43-4.76
|
RADCOM 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.)
|
|
n.
|
Research and development costs:
|
Research
and development costs are charged to the statement of operations as incurred except for royalty-bearing participation from
the IIA as described in Note 2o.
ASC 985-20,
“Software - Costs of Computer Software to be Sold, Leased or Otherwise Marketed”, requires capitalization of certain
software development costs subsequent to the establishment of technological feasibility. Based on the Company’s product development
process, technological feasibility is established upon completion of a working model. Costs incurred by the Company between completion
of the working models and the point at which the products are ready for general release have been insignificant. Therefore, all
research and development costs have been expensed.
The Company
receives royalty-bearing grants, which represent participation of the IIA in approved programs for research and development. These
amounts are recognized on the accrual basis as a reduction of research and development costs as such costs are incurred. Royalties
to the IIA are recorded under cost of revenues, when the related sales are recognized (see also Note 8a1).
During the years 2012 to 2017, the Company also received grants
from the Israeli Ministry of Economy (the “MOE”), up to 50% of relevant marketing expenses. These grants were presented
as a reduction of marketing expenses (see also Note 8a2).
|
p.
|
Income (loss) per share:
|
Basic and
diluted income (loss) per Ordinary Share is presented in conformity with ASC 260, “Earnings Per Share”, for all years
presented. Basic income (loss) per Ordinary Share is computed by dividing net income (loss) for each reporting period by the weighted
average number of Ordinary Shares outstanding during the period. Diluted income (loss) per Ordinary Share is computed by dividing
net income (loss) for each reporting period by the weighted average number of Ordinary Shares outstanding during the period plus
any additional Ordinary Shares that would have been outstanding if potentially dilutive securities had been exercised during the
period, calculated under the treasury stock method.
Certain securities
were not included in the computation of diluted income (loss) per share since they were anti-dilutive. The total weighted average
number of shares related to the outstanding options and restricted share units (“RSUs”) excluded from the calculation
of diluted net income (loss) per share was, 802,159, 731,542 and 70,801 as of December 31, 2019, 2018 and 2017, respectively.
RADCOM 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 accounts for income taxes in accordance with ASC
740, “Income Taxes”. Deferred tax asset and liability account balances are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective
tax bases, and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the consolidated statement of operations
in the period that includes the enactment date. Accounting Standards Update (“ASU”) No. 2015-17, Income Taxes (Topic
740): Balance Sheet Classification of Deferred Taxes, requires a reporting entity to classify all deferred tax assets and liabilities
as noncurrent in a classified balance sheet.
The Company provides a full valuation allowance to reduce deferred
tax assets to the extent it believes it is more likely than not that such benefits will be realized.
|
r.
|
Income tax uncertainties:
|
In accordance with ASC 740, the Company recognizes the effect
of income tax positions only if those positions are more likely than not to be sustained. Recognized income tax positions are measured
at the largest amount that is greater than 50% of the amount likely to be realized. Changes in recognition or measurement are reflected
in the period in which the change in judgment occurs. When applicable, the Company accounts for interest and penalties related
to unrecognized tax benefits as a component of income tax expense. As of December 31, 2019 and 2018, no liability for unrecognized
tax benefits was recorded.
The
Company’s liability for severance pay is recorded mainly with respect to its Israeli employees and is calculated
pursuant to Israeli severance pay law based on the most recent salary of the employees multiplied by the number of years of
employment as of the balance sheet date. After completing one full year of employment, the Company’s Israeli employees
are entitled to one month’s salary for each year of employment or a portion thereof. The Company’s liability is
partially provided by monthly deposits with severance pay funds, insurance policies and by an accrual. The liability for
employee severance pay benefits included on the balance sheet represents the total liability for such severance benefits,
while the assets held for severance benefits included on the balance sheet represent the current redemption value of the
Company’s contributions made to severance pay funds and to insurance policies.
The carrying
value of deposited funds includes profits (losses) accumulated up to the balance sheet date. The deposited funds may be withdrawn
only upon the fulfillment of the obligation pursuant to Israeli severance pay law or labor agreements.
RADCOM 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.)
|
Effective
January 1, 2012, the Company’s agreements with new employees in Israel are in accordance with section 14 of the Severance Pay Law
– 1963, which provides that the Company’s contributions to the severance pay fund shall cover its entire severance obligation.
Upon termination, the release of the contributed amounts from the fund to the employee shall relieve the Company from any further
severance obligation and no additional payments shall be made by the Company to the employee. As a result, the related obligation
and amounts deposited on behalf of such obligation are not recorded as part of the balance sheet, as the Company is legally released
from its severance obligation to employees once the amounts have been deposited, and the Company has no further legal ownership
of the amounts deposited.
Severance
expenses for the years ended December 31, 2019, 2018 and 2017 amounted to $1,150, $1,065, and $1,007, respectively.
|
t.
|
Fair value of financial instruments:
|
The financial instruments of the Company consist mainly of cash
and cash equivalents, short-term bank deposits, trade receivables, trade payables and other liabilities and accrued expenses. The
fair values of the Company cash and cash equivalents, account receivables, and account payables approximate their carrying amounts
due to their short-term nature.
The Company follows the provisions of ASC No. 820, “Fair
Value Measurement”, which defines fair value as the price that would be received to sell an asset or paid to transfer a liability
in an orderly transaction between market participants at the measurement date.
In determining a fair value,
the Company uses various valuation approaches. ASC 820 establishes a hierarchy for inputs used in measuring fair value that maximizes
the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used
when available. Observable inputs are inputs that market participants would use in pricing an asset or liability, based on market
data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect assumptions that market participants
would use in pricing an asset or liability, based on the best information available under given circumstances.
The hierarchy is broken down
into three levels, based on the observability of inputs and assumptions, as follows:
Level 1 - Observable inputs
obtained from independent sources, such as quoted prices for identical assets and liabilities in active markets.
Level 2 - Other inputs that
are directly or indirectly observable in the market place.
Level 3 - Unobservable inputs
which are supported by little or no market activity.
RADCOM 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.)
|
From time
to time, the Company may be involved in various claims and legal proceedings. The Company reviews the status of each matter and
assesses its potential financial exposure. If the potential loss from any claim or legal proceeding is considered probable and
the amount can be reasonably estimated, the Company accrues a liability for the estimated loss. The Company’s estimations
and related accruals if any are reviewed at least quarterly and adjusted to reflect the impact of negotiations, settlements, rulings,
advice of legal counsel and other information and events relating to a particular matter.
The
Company accounts for comprehensive income in accordance with ASC 220, “Comprehensive Income”, which establishes standards
for the reporting and displays of comprehensive income and its components in a full set of general-purpose financial statements.
Comprehensive income 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 only item of other comprehensive income relates
to foreign currency translation adjustment and gains or losses on intercompany foreign currency transactions that are of a long-term
investment nature in connection with its subsidiary in Brazil.
|
w.
|
Recently issued and adopted accounting standards:
|
On January 1, 2019, the Company adopted ASC 842, as amended,
which supersedes the lease accounting guidance under ASC 840, and generally requires lessees to recognize operating and financing
lease liabilities and corresponding ROU assets on the balance sheet and to provide enhanced disclosures surrounding the amount,
timing and uncertainty of cash flows arising from leasing arrangements. The Company adopted the new guidance using the modified
retrospective transition approach by applying the new standard to all leases existing at the date of initial application and not
restating comparative periods. For information regarding the impact of ASC 842 adoption and enhances disclosure, see Note 9 and
2(j).
|
x.
|
New accounting standards not yet effective:
|
|
1.
|
In January 2016, the Financial Accounting Standards Board (“FASB”)
issued ASU No. 2016-13, “Financial Instruments – Credit Losses on Financial Instruments,” which requires that
expected credit losses relating to financial assets be measured on an amortized cost basis and available-for-sale debt securities
be recorded through an allowance for credit losses. ASU 2016-13 limits the amount of credit losses to be recognized for available-for-sale
debt securities to the amount by which carrying value exceeds fair value and also requires the reversal of previously recognized
credit losses if fair value increases. The new standard will be effective for interim and annual periods beginning after January
1, 2020, and early adoption is permitted. The Company does not expect that this new guidance will have a material impact on the
Company’s consolidated financial statements.
|
|
2.
|
In December 2019, the FASB issued ASU No. 2019-12, “Income
Taxes (Topic 740): Simplifying the Accounting for Income Taxes”, which simplifies the accounting for income taxes. ASU 2019-12
is effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2020. The Company
is currently evaluating the impact of the new guidance on the Company’s consolidated financial statements.
|
RADCOM LTD. AND ITS SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except
share and per share data
Revenue is recognized when or as
performance obligations are satisfied by transferring control of a promised good or service to a customer. Control is either transferred
over time or at a point in time, which affects the revenue recognition schedule.
Costs
to obtain contracts:
The Company capitalizes an asset
for the incremental costs of obtaining a contract whenever such expenses are expected to be recovered. Capitalized costs derive
primarily from sales commissions or incentives granted to employees and partners. The Company’s contracts with customers include
performance obligations related to products and services, some of which are satisfied at a point in time and others over time.
Commission costs related to performance obligations satisfied at a point in time are expensed at the time of sale, which is when
revenue is recognized. Commission costs related to long-term service contracts and performance obligations satisfied over time
are deferred and recognized on a systematic basis that is consistent with the transfer of the products or services to which the
asset relates. Amortization expense is included in sales and marketing expenses in the accompanying consolidated statements of
income (loss).
Deferred commission costs capitalized are periodically reviewed
for impairment. As of December 31, 2019 and 2018, the deferred commission costs capitalized included within other long-term receivables
in the consolidated balance sheets were $2,098 and $35, respectively. During the year ended December 31, 2019, the Company created
new contract acquisition assets in the amount of $3,609 and amortized $1,546 of capitalized contract acquisition costs into sales
and marketing expense. No impairment losses were recognized during such period.
Contract
balances:
The
Company receives payments from customers based upon contractual payment schedules. Trade receivables are recorded when the right
to consideration becomes unconditional, and an invoice is issued to the customer. Unbilled receivables include amounts related
to the Company’s contractual right to consideration for completed performance obligations not yet invoiced. As of December
31, 2019 and 2018, unbilled receivables balances amounted to $1,497 and $419, respectively and are included within trade receivables
balance in the Company’s balance sheets.
As
of December 31, 2019, the Company had $49,687 of remaining performance obligations not yet satisfied or partly satisfied related
to revenues. The Company expects to recognize approximately 61% of this amount as revenues during the next 12 months and the rest
thereafter.
During the year ended December
31, 2019, the Company recognized $266 that was included in deferred revenues (short-term contract liability) balance at January
1, 2019.
For disaggregation
of revenues please see Note 12b.
RADCOM LTD. AND ITS SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except
share and per share data
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Finished products (*)
|
|
$
|
1,356
|
|
|
$
|
251
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,356
|
|
|
$
|
251
|
|
|
(*)
|
Includes amounts of $1,074 and $35 as of December 31,
2019 and 2018, respectively, with respect to inventory delivered to customers but for which revenue criteria have not been met
yet.
|
|
NOTE 5: -
|
OTHER
ACCOUNTS RECEIVABLE AND PREPAID EXPENSES
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Indirect taxes
|
|
$
|
620
|
|
|
$
|
667
|
|
Prepaid expenses and advances to suppliers
|
|
|
790
|
|
|
|
752
|
|
Others
|
|
|
126
|
|
|
|
347
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,536
|
|
|
$
|
1,766
|
|
|
NOTE 6: -
|
PROPERTY AND EQUIPMENT, NET
|
Composition
of assets, grouped by major classification, is as follows:
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Cost:
|
|
|
|
|
|
|
Computers and electronic equipment
|
|
$
|
3,531
|
|
|
$
|
3,122
|
|
Office furniture and equipment
|
|
|
361
|
|
|
|
294
|
|
Leasehold improvements
|
|
|
264
|
|
|
|
169
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,156
|
|
|
|
3,585
|
|
Accumulated depreciation:
|
|
|
|
|
|
|
|
|
Computers and electronic equipment
|
|
|
2,325
|
|
|
|
1,640
|
|
Office furniture and equipment
|
|
|
121
|
|
|
|
93
|
|
Leasehold improvements
|
|
|
41
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,487
|
|
|
|
1,753
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,669
|
|
|
$
|
1,832
|
|
Depreciation
expenses for the years ended December 31, 2019, 2018 and 2017 amounted to $752, $657 and $537, respectively.
RADCOM LTD. AND ITS SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except
share and per share data
|
NOTE 7: -
|
OTHER CURRENT LIABILITIES AND ACCRUED EXPENSES
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Royalties - IIA payable
|
|
$
|
938
|
|
|
$
|
761
|
|
Commissions to third parties
|
|
|
1,748
|
|
|
|
430
|
|
Accrued expenses
|
|
|
1,364
|
|
|
|
1,090
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,050
|
|
|
$
|
2,281
|
|
|
NOTE 8: -
|
COMMITMENTS AND CONTINGENCIES
|
|
1.
|
The Company receives research and development grants from
the IIA. In consideration for the research and development grants received from the IIA, the Company has undertaken to pay royalties
as a percentage of revenues from products developed from research and development projects financed. If the Company does not generate
sales of products developed with funds provided by the IIA, the Company is not obligated to pay royalties or repay the grants.
|
Royalties
are payable at the rate of 3% from the time of commencement of sales of all of the Company’s products until the cumulative
amount of the royalties paid equals 100% of the dollar-linked amounts of the grants received, plus interest at LIBOR.
As of December 31,
2019, the Company’s total commitment with respect to royalty-bearing participation received or accrued, net of royalties paid or
accrued, amounted to $51,008. The total research and development grants that the Company has received from the IIA as of December
31, 2019 were $46,660. The accumulated interest as of December 31, 2019, was $20,064 and the accumulated royalties paid to
the IIA were $15,716.
Royalty expenses
relating to the IIA grants included in cost of revenues during the years ended December 31, 2019, 2018 and 2017 were $990, $922
and $1,303, respectively.
In May 2010, the Company received
a notice from the IIA regarding alleged miscalculations of the amount of royalties paid by the Company to the IIA for the years
1992-2009 and the revenues basis on which the Company had to pay royalties. The Company believes that all royalties due to the
IIA from the sale of products developed with funding provided by the IIA during such years were properly paid or were otherwise
accrued. During 2011, the Company reviewed with the IIA the alleged miscalculations. The Company assessed the merits of the aforesaid
arguments raised by the IIA and recorded a liability for an estimated loss.
RADCOM LTD. AND ITS SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except
share and per share data
|
NOTE 8: -
|
COMMITMENTS AND CONTINGENCIES (Cont.)
|
|
2.
|
In April 2012 and in April 2014, the MOE approved the Company’s application for participation in
funding the setting up of the Company’s India subsidiary and China branch as part of a designated grants plan for setting
up and establishing a marketing agency in India and China. The grant was intended to cover up to 50% from the costs of the office
establishment, logistics expenses and hiring employees and consultants in India and China, based on the approved budget for the
plan over a period of three years. The Company is currently in the process of winding down its operations at the China office.
The total marketing grants that the Company had received from the MOE as of December 31, 2017 were in the amount of $668. No further
grants are expected to be received from such plans.
|
The Company
is obligated to pay to the MOE royalties of 3% on the increased sales in the target market, with respect to the year during which
the grant was approved over a period of five years but not more than the total linked amount of the grant received.
During the
year ended December 31, 2018, the Company paid an aggregate amount of $9 of royalties to the MOE. No royalties were paid during
the year ended December 31, 2019.
|
3.
|
According to the Company’s agreements with the Israel-U.S Bi-National
Industrial Research and Development Foundation (“BIRD-F”), the Company is required to pay royalties at a rate of 5% of
sales of products developed with funds provided by the BIRD-F, up to an amount equal to 150% of the BIRD-F’s grant, linked to the
United States CPI relating to such products. The last funds from the BIRD-F were received in 1996. In the event the Company does
not generate sales of products developed with funds provided by the BIRD-F, the Company is not obligated to pay royalties or repay
the grants.
|
The total
research and development funds that the Company has received from the BIRD-F were $340 (CPI linked amount of $578). According to
the above, as of December 31, 2019, the total royalties commitment the Company may be required to pay is an amount of up to $867
out of which $477 was paid by the Company in previous years. The remaining commitment with respect to royalty-bearing participation
received, net of royalties paid or accrued, amounted to $390 as of December 31, 2019.
Since 2003,
the Company has not generated sales of products developed with the funds provided by the BIRD-F. Therefore, the Company has not
been obligated to pay royalties or repay the grant since such date.
As of December 31, 2019, the Company issued a bank guarantee
to one of the Company’s customers that amounted to $271, which will expire on March 2, 2020 and to the Israeli Customs Authority
that amounted to $36, which will expire on April 30, 2020.
RADCOM LTD. AND ITS SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except
share and per share data
The Company has entered into various operating lease agreements
for certain of its offices and car leases with original lease periods expiring between 2020 and 2028. Most of the lease agreements
include one or more options to renew. The Company does not assume renewals in determination of the lease term unless the renewals
are deemed to be reasonably assured at lease commencement.
Lease payments
included in the measurement of the operating lease liability comprise the following: the fixed non-cancelable lease payments and
payments for optional renewal periods where it is reasonably certain the renewal period will be exercised. The Company’s lease
agreements do not contain any material residual value guarantees or material restrictive covenants.
As of December 31, 2019, the Company’s assessment for
the remaining lease term range between 0.9 years to 8.3 years, including options to extend part of the lease agreements for an
additional 2 years and up to 5 years.
The following
table represents the weighted-average remaining lease term and discount rate:
|
|
December 31,
|
|
|
2019
|
|
|
|
Weighted average remaining lease term
|
|
2.83 years
|
|
|
|
Weighted average discount rate
|
|
3.75%
|
The
components of lease expense for the year ended December 31, 2019 were as follows:
|
|
Year ended
|
|
|
|
December 31,
2019
|
|
|
|
|
|
Operating lease
|
|
$
|
1,325
|
|
Short-term lease
|
|
$
|
79
|
|
Total lease expense
|
|
$
|
1,404
|
|
Cash
paid for amounts included in the measurement of operating lease liabilities was $1,252 during the year ended December 31, 2019.
RADCOM LTD. AND ITS SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except
share and per share data
The
following is a schedule, by years, of maturities of lease liabilities as of December 31, 2019:
|
|
Operating
Leases
|
|
|
|
|
|
2020
|
|
|
1,410
|
|
2021
|
|
|
1,384
|
|
2022
|
|
|
1,313
|
|
2023
|
|
|
1,168
|
|
2024 and thereafter
|
|
|
1,445
|
|
Total operating lease payments
|
|
$
|
6,720
|
|
Less: imputed interest
|
|
|
490
|
|
Present value of lease liabilities
|
|
$
|
6,230
|
|
|
NOTE 10: -
|
TAXES ON INCOME
|
Taxable income
of the Company is subject to the Israeli corporate tax at the rate as follows: 2017 - 24% 2018 and 2019 – 23%.
Tax benefits
under the Law for the Encouragement of Capital Investments, 1959 (“the Law”):
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 (“Amendment 71”) was enacted. Per Amendment 71, the tax rate on preferred income from
a preferred enterprise in 2014-2016 will be 9% in certain areas in Israel (“Development Area A”) and 16% in other areas.
In 2017, the tax rate at Development Area A was reduced to 7.5%.
The
Company may claim the tax benefits offered by Amendment 71 in its tax returns, provided that its facilities meet the criteria for
tax benefits set out by Amendment 71. A company is also granted a right to approach the Israeli Tax Authorities for a pre-ruling
regarding its eligibility for benefits under Amendment 71 (and in some cases is required to apply for such approval).
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 (“Amendment 73”) was published. Amendment 73, which came into effect in January
2017, prescribes special tax tracks for technological enterprises, granting such enterprises a tax rate of 7.5% (in Development
Area A) and 12% (in other areas).
RADCOM LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S. dollars in thousands, except share and per share data
|
NOTE 10: -
|
TAXES ON INCOME (Cont.)
|
Under Amendment 73, any dividends
distributed to “foreign companies”, as defined in such law, by companies having over 90% foreign (i.e., non-Israeli)
ownership, deriving from income from the technological enterprises will be subject to tax at a rate of 4%.
In order to comply with the
new track determined in Amendment 73, a company must meet certain criteria defined within law (among others R&D expenses and
employees at a certain rate).
The Company
has yet to claim the above-mentioned tax benefits offered and accordingly such reduced taxes were not considered in the computation
of the deferred taxes and valuation allowance as of December 31, 2019.
In accordance
with the tax laws, tax returns submitted up to and including the 2014 tax year can be regarded as final. As of December 31,
2019, no final tax assessments have been received for such years.
Tax loss
carryforward:
As of December 31, 2019, the Company’s estimated tax loss
carryforward and capital loss were $33,659 and $893, respectively. Such losses can be carried forward indefinitely to offset any
future taxable income of the Company.
The Company’s research and development expenses carryforward
for tax purposes in Israel amounted to approximately $11,810.
U.S.
subsidiary:
|
1.
|
The U.S. subsidiary is taxed under United States federal and state tax rules. Income tax is calculated
based on a U.S. federal tax rate of 21%.
|
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 was
signed into law making significant changes to U.S. income tax law. Changes include, but are not limited to, a U.S. federal corporate
tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017, the transition of U.S. international
taxation from a worldwide tax system to a territorial system, and a one-time transition tax on the mandatory deemed repatriation
of cumulative foreign earnings as of December 31, 2017.
|
2.
|
The U.S. subsidiary’s estimated federal tax loss carryforward amounted to $6,246 as of December
31, 2019. Such losses are available to offset any future U.S. taxable income of the U.S. subsidiary and will expire in the years 2020-2026
for federal tax purposes.
|
RADCOM LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S. dollars in thousands, except share and per share data
|
NOTE 10: -
|
TAXES ON INCOME (Cont.)
|
|
3.
|
The U.S. subsidiary has not received final tax assessments since incorporation. In accordance with
the tax laws, tax returns submitted up to and including the 2015 tax year can be regarded as final.
|
Brazilian
subsidiary:
|
1.
|
The Brazilian subsidiary is taxed under Brazilian tax rules. Income tax is calculated based on
a 34% rate.
|
|
2.
|
The Brazilian subsidiary’s tax loss carryforward amounted to $3,265 as of December 31, 2019, for
tax purposes. Tax losses may be carried forward indefinitely but can only be offset up to 30% of the subsidiary’s taxable income
for a tax period.
|
|
3.
|
The Brazilian subsidiary has not received final tax assessments since incorporation. In accordance
with the tax laws, tax returns submitted up to and including the 2014 tax year can be regarded as final.
|
Indian
subsidiary:
|
1.
|
The Indian subsidiary is taxed under Indian tax rules. Income tax is calculated based on a 22%
rate.
|
|
2.
|
The Indian subsidiary has not received final tax assessments since incorporation. In accordance
with the tax laws, tax returns submitted up to and including the 2017 tax year can be regarded as final.
|
Deferred
taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial
reporting purposes and for tax purposes. Significant components of the Company’s deferred tax assets and liabilities are as follows:
|
|
December 31
|
|
|
|
2019
|
|
|
2018
|
|
Deferred tax assets:
|
|
|
|
|
|
|
Carryforward tax losses
|
|
$
|
10,369
|
|
|
$
|
10,096
|
|
Research and development credit
|
|
|
2,716
|
|
|
|
2,032
|
|
Accrued social benefits and other
|
|
|
425
|
|
|
|
472
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,510
|
|
|
|
12,600
|
|
Less - valuation allowance
|
|
|
(13,510
|
)
|
|
|
(12,600
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
-
|
|
|
$
|
-
|
|
RADCOM LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S. dollars in thousands, except share and per share data
|
NOTE 10: -
|
TAXES ON INCOME (Cont.)
|
The net change in the total valuation allowance for the year
ended December 31, 2019 was an increase of $910. In assessing the realization of deferred tax assets, management considers whether
it is more likely than not that some or all of the deferred tax assets will not be realized. The ultimate realization of deferred
tax assets depends on the generation of future taxable income during the periods in which those temporary differences and tax loss
carryforward are deductible. Management considers the projected taxable income and tax-planning strategies in making this assessment.
In consideration of the Company’s accumulated losses and the uncertainty of its ability to utilize its deferred tax assets in the
future, management currently believes that it is more likely than not that the Company will not realize its deferred tax assets
and accordingly recorded a valuation allowance to fully offset all the deferred tax assets.
|
d.
|
Taxes on income are comprised from state tax accrual with regards to the U.S. subsidiary, withholding
taxes that were deducted by the Company’s customers as well as tax expenses of the Indian subsidiary.
|
|
e.
|
The components of income (loss) before income taxes are as follows:
|
|
|
Year ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
(7,107
|
)
|
|
$
|
(2,372
|
)
|
|
$
|
4,751
|
|
Foreign
|
|
|
444
|
|
|
|
20
|
|
|
|
(1,767
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
$
|
(6,663
|
)
|
|
$
|
(2,352
|
)
|
|
$
|
2,984
|
|
RADCOM LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S. dollars in thousands, except share and per share data
|
NOTE 10: -
|
TAXES ON INCOME (Cont.)
|
|
f.
|
Reconciliation of the theoretical tax benefit and the actual tax expense:
|
|
|
Year ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes, as reported in the statements of operations
|
|
$
|
(6,663
|
)
|
|
$
|
(2,352
|
)
|
|
$
|
2,984
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statutory tax rate in Israel
|
|
|
23
|
%
|
|
|
23
|
%
|
|
|
24
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Theoretical tax benefit
|
|
$
|
(1,532
|
)
|
|
$
|
(541
|
)
|
|
$
|
716
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in income taxes resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax rate differential on foreign subsidiaries
|
|
|
12
|
|
|
|
(55
|
)
|
|
|
(166
|
)
|
Non-deductible expenses and other permanent differences
|
|
|
473
|
|
|
|
446
|
|
|
|
987
|
|
Differences in taxes arising from foreign currency exchange, net
|
|
|
42
|
|
|
|
208
|
|
|
|
(856
|
)
|
Changes in carry forward tax losses and other temporary differences for which valuation allowance was provided
|
|
|
910
|
|
|
|
(20
|
)
|
|
|
(554
|
)
|
Withholding taxes that were deducted by the Company’s customers
|
|
|
-
|
|
|
|
10
|
|
|
|
32
|
|
Other
|
|
|
264
|
|
|
|
15
|
|
|
|
(76
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes
|
|
$
|
169
|
|
|
$
|
63
|
|
|
$
|
83
|
|
|
g.
|
Accounting for uncertainty in income taxes:
|
For the years
ended December 31, 2019, 2018 and 2017, the Company did not have any unrecognized tax benefits and no interest and penalties related
to unrecognized tax benefits have been accrued. The Company does not expect that its position related to unrecognized tax benefits
will change significantly within the next 12 months.
RADCOM LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S. dollars in thousands, except share and per share data
|
NOTE 11: -
|
SHAREHOLDERS’ EQUITY
|
|
a.
|
The number of Ordinary Shares outstanding at December 31, 2019 and 2018 does not include 5,189
Ordinary Shares issued, which are held by a subsidiary, and 30,843 Ordinary Shares issued which are held by the Company.
|
Ordinary
Shares confer all rights to their holders, e.g. voting, equity and receipt of dividends.
|
b.
|
Follow-on public offering:
|
On October 20, 2017, the Company
entered an underwriting agreement related to a follow-on public offering of 1,444,814 Ordinary Shares, at an offering price of
$19.50 per share for gross proceeds that amounted to $28,174, before underwriting discounts and commissions and other offering
expenses that amounted to $1,940 (the “2017 Public Offering”).
Under such agreement, the Company
granted the underwriters an option, exercisable for 30 days, to purchase up to an additional 216,722 Ordinary Shares at $19.50
per share.
On October 25, 2017, upon the
closing of the 2017 Public Offering, the Company issued 1,661,536 Ordinary Shares, including 216,722 shares sold pursuant to full
exercise of the underwriters’ option to purchase additional shares, for a total consideration of approximately $30,206, net of
issuance costs of $2,194.
|
1.
|
The Company has granted options under an option plan as follows:
|
|
a)
|
The 2013 Share Option Plan:
|
On April
3, 2013, the Company approved a new Share Option Plan (the “2013 Share Option Plan”). The 2013 Share Option Plan provides
for the grant of options to purchase Ordinary Shares to provide incentives to employees, directors, consultants and contractors
of the Company. In accordance with Section 102 of the Income Tax Ordinance (New Version) - 1961, the Company’s Board of Directors
(the “Board”) elected the “Capital Gains Route”.
On February
19, 2015, the Board adopted an amendment to the 2013 Share Option Plan pursuant to which the Company may grant options to purchase
its Ordinary Shares and RSUs to its employees, directors, consultants and contractors. The 2013 Share Option Plan expires on April
2, 2023.
RADCOM LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S. dollars in thousands, except share and per share data
|
NOTE 11: -
|
SHAREHOLDERS’ EQUITY (Cont.)
|
|
b)
|
During the year ended December 31, 2018, the Company’s Board approved the grant of 32,700 RSUs
to certain employees and officers of the Company. Such RSUs have vesting schedules of four years, commencing as of the date of
grant.
|
|
c)
|
During the year ended December 31, 2019, the Company’s Board
approved the grant of 388,020 RSUs to certain employees, officers and directors of the Company. Such RSUs have vesting schedules
of up to four years, commencing as of the date of grant.
|
As of December
31, 2019, the total number of shares reserved under the 2013 Share Option Plan, is 2,450,000, out of which 614,475 Ordinary Shares
are still available for future grants under the 2013 Share Option Plan as of that date.
|
2.
|
Stock options for the year ended December 31, 2019 under the Company’s plans are as follows:
|
|
|
Number of options
|
|
|
Weighted average exercise price
|
|
|
Weighted average remaining contractual term (in years)
|
|
|
Aggregate intrinsic value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of January 1, 2019
|
|
|
415,510
|
|
|
$
|
14.62
|
|
|
|
2.69
|
|
|
$
|
3
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(2,250
|
)
|
|
|
6.00
|
|
|
|
|
|
|
|
|
|
Expired and forfeited
|
|
|
(31,350
|
)
|
|
|
15.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2019
|
|
|
381,910
|
|
|
$
|
14.62
|
|
|
|
1.64
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at December 31, 2019
|
|
|
381,910
|
|
|
$
|
14.62
|
|
|
|
1.64
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable as of December 31, 2019
|
|
|
274,008
|
|
|
$
|
13.85
|
|
|
|
1.44
|
|
|
$
|
-
|
|
The aggregate
intrinsic value in the table above represents the total intrinsic value (the difference between the deemed fair value of the Company’s
Ordinary Shares on the last day of fiscal 2019 and the exercise price, multiplied by the number of in-the-money options) that would
have been received by the option holders had all option holders exercised their options on December 31, 2019. This amount
is impacted by the changes in the fair market value of the Company’s Ordinary Shares.
As of December 31, 2019, all the outstanding and exercisable
options are out-of-the-money.
RADCOM LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S. dollars in thousands, except share and per share data
|
NOTE 11: -
|
SHAREHOLDERS’ EQUITY (Cont.)
|
|
3.
|
As of December 31, 2019, stock options under the 2013 Share Option Plan are as follows:
|
|
|
Options outstanding
at December 31, 2019
|
|
|
Options exercisable
at December 31, 2019
|
|
Exercise price
|
|
Number outstanding
|
|
|
Weighted average exercise price
|
|
|
Weighted average remaining contractual life
|
|
|
Number exercisable
|
|
|
Weighted average exercise price
|
|
|
Weighted average remaining contractual life
|
|
$
|
|
|
|
|
$
|
|
|
In years
|
|
|
|
|
|
$
|
|
|
In years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11.12-14.52
|
|
|
243,358
|
|
|
|
11.90
|
|
|
|
1.17
|
|
|
|
202,533
|
|
|
|
11.90
|
|
|
|
1.10
|
|
18.90-19.85
|
|
|
138,552
|
|
|
|
19.39
|
|
|
|
2.46
|
|
|
|
71,475
|
|
|
|
19.38
|
|
|
|
2.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
381,910
|
|
|
|
|
|
|
|
|
|
|
|
274,008
|
|
|
|
|
|
|
|
|
|
|
4.
|
RSUs for the year ended December 31, 2019 under the Company’s 2013 Share Option Plan are
as follows:
|
|
|
Number of RSUs
|
|
|
Weighted average remaining contractual term (in years)
|
|
|
Aggregate intrinsic value
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of January 1, 2019
|
|
|
168,869
|
|
|
|
1.40
|
|
|
$
|
1,253
|
|
Granted
|
|
|
388,020
|
|
|
|
|
|
|
|
|
|
Vested
|
|
|
(84,176
|
)
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(23,900
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2019
|
|
|
448,813
|
|
|
|
1.53
|
|
|
$
|
3,824
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RADCOM LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S. dollars in thousands, except share and per share data
|
NOTE 11: -
|
SHAREHOLDERS’ EQUITY (Cont.)
|
|
5.
|
No options were granted during the years ended December 31,
2019 and 2018. The weighted average fair value of options granted during the year ended December 31, 2017 was $8.08. Grants of
options in 2017 were at exercise prices equal to the market value of the Ordinary Shares at the date of grant.
|
|
6.
|
The weighted average fair values of RSUs granted during the years ended December 31, 2019, 2018
and 2017 were $7.86, $19.68 and $19.52 per share, respectively.
|
|
7.
|
The following table summarizes the department allocation of the Company’s share-based compensation
charges:
|
|
|
Year ended December 31,
|
|
|
|
2019 (*)
|
|
|
2018 (*)
|
|
|
2017 (*)
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
$
|
204
|
|
|
$
|
112
|
|
|
$
|
189
|
|
Research and development, net
|
|
|
729
|
|
|
|
808
|
|
|
|
473
|
|
Sales and marketing, net
|
|
|
638
|
|
|
|
698
|
|
|
|
499
|
|
General and administrative
|
|
|
657
|
|
|
|
503
|
|
|
|
1,055
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,228
|
|
|
$
|
2,121
|
|
|
$
|
2,216
|
|
|
(*)
|
Including $1,887, $1,359
and $1,335 of compensation cost related to RSUs for the years ended December 31, 2019, 2018 and 2017, respectively.
|
|
8.
|
As of December 31, 2019, there are $2,187 of total unrecognized costs related to non-vested share-based
compensation and RSUs that are expected to be recognized over a weighted average period of 1.04 years.
|
RADCOM LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S. dollars in thousands, except share and per share data
|
NOTE 12: -
|
SELECTED STATEMENTS OF OPERATIONS DATA
|
|
a.
|
The Company applies ASC 280, “Segment Reporting”. The Company operates in one reportable
segment (see also Note 1 for a brief description of the Company’s business).
|
|
b.
|
The following table presents total revenues for the years ended
December 31, 2019, 2018 and 2017 and property and equipment, net as of December 31, 2019 and 2018:
|
|
1.
|
Revenues by geographic region are as follows:
|
|
|
Year ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
14,500
|
|
|
$
|
22,164
|
|
|
$
|
25,157
|
|
Asia*
|
|
|
14,146
|
|
|
|
7,158
|
|
|
|
4,874
|
|
Latin America
|
|
|
2,653
|
|
|
|
3,579
|
|
|
|
2,666
|
|
Other
|
|
|
1,711
|
|
|
|
1,149
|
|
|
|
4,536
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
33,010
|
|
|
$
|
34,050
|
|
|
$
|
37,233
|
|
(*) Includes
Japan and the Philippines which each of them accounted for more than 10% of Company’s revenues in 2019.
Total revenues
are attributed to geographic areas based on the location of the end-customer.
In 2019,
2018 and 2017, the amount of export revenues represented 96%, 98% and 90% of the Company’s total revenues.
|
2.
|
Major customer data as a percentage of total revenues:
|
|
|
Year ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
A
|
|
|
41
|
|
|
|
48
|
|
|
|
66
|
|
B
|
|
|
20
|
|
|
|
18
|
|
|
|
12
|
|
C
|
|
|
22
|
|
|
|
-
|
|
|
|
-
|
|
D
|
|
|
-
|
|
|
|
15
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
83
|
%
|
|
|
81
|
%
|
|
|
78
|
%
|
|
3.
|
Property and equipment, net, by geographic areas:
|
|
|
Year ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Israel
|
|
$
|
1,240
|
|
|
$
|
1,535
|
|
United States
|
|
|
246
|
|
|
|
230
|
|
Other
|
|
|
183
|
|
|
|
67
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,669
|
|
|
$
|
1,832
|
|
RADCOM LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S. dollars in thousands, except share and per share data
|
NOTE 12: -
|
SELECTED STATEMENTS OF OPERATIONS DATA (Cont.)
|
|
c.
|
Financial income, net:
|
|
|
Years ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
Financial Income:
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
1,775
|
|
|
$
|
1,455
|
|
|
$
|
572
|
|
Foreign currency exchange gain
|
|
|
338
|
|
|
|
784
|
|
|
|
215
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,113
|
|
|
|
2,239
|
|
|
|
787
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank charges
|
|
|
(16
|
)
|
|
|
(15
|
)
|
|
|
(58
|
)
|
Foreign currency exchange loss
|
|
|
(925
|
)
|
|
|
(1,088
|
)
|
|
|
(340
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(941
|
)
|
|
|
(1,103
|
)
|
|
|
(398
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,172
|
|
|
$
|
1,136
|
|
|
$
|
389
|
|
|
d.
|
Net income (loss) per Ordinary Share:
|
The following
table sets forth the computation of basic and diluted net income (loss) per Ordinary Share:
|
|
Years ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for basic net income (loss) per Ordinary Share
|
|
$
|
(6,832
|
)
|
|
$
|
(2,415
|
)
|
|
$
|
2,901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for dilutive net income (loss) per Ordinary Share
|
|
$
|
(6,832
|
)
|
|
$
|
(2,415
|
)
|
|
$
|
2,901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for dilutive net income (loss) per Ordinary Share - weighted average number of Ordinary Shares
|
|
|
13,779,885
|
|
|
|
13,630,793
|
|
|
|
12,039,176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation granted
|
|
|
-
|
|
|
|
-
|
|
|
|
312,390
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted net income (loss) per Ordinary Share - adjusted weighted average number of Ordinary Shares
|
|
|
13,779,885
|
|
|
|
13,630,793
|
|
|
|
12,351,566
|
|
RADCOM LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S. dollars in thousands, except share and per share data
|
NOTE 13: -
|
RELATED PARTY BALANCES AND TRANSACTIONS
|
|
a.
|
The Company carries out transactions with related parties as detailed below.
|
|
1.
|
The Company is a party to a reseller agreement with Allot Communications
Inc, (“Allot”) giving Allot the right to distribute the Company’s products. Until January 2019, Zohar Zisapel, a member
of the Company’s Board held an interest in Allot, making it a related party. As of January 2019, Mr. Zisapel divested all
of his interest in Allot and therefore Allot is no longer a related party.
|
Revenues related to this reseller agreement are included in
Note 13f below as “Revenues”. For the years ended December 31, 2018 and 2017, revenues aggregated to $73 and $31, respectively.
|
2.
|
Certain premises occupied by the Company and its U.S.
subsidiary are rented from related parties in which Mr. Zisapel holds an interest (see also Note 9). The U.S. subsidiary sub-leased
certain premises to a related party until April 30, 2017. The aggregate net amounts of lease and maintenance expenses were $912,
$967 and $843 in 2019, 2018 and 2017, respectively. The amount presented in “Capital expenditures” in Note 13f below
refers to $40 reimbursement of expenses in connection with the renovation of the U.S subsidiary office during the year ended December
31, 2018. Following the adoption of ASC 842 commencing January 1, 2019, the Company also recorded operating lease right-of use
assets and operating lease liabilities related to such lease and maintenance expenses which are presented in Note 13e below.
|
|
3.
|
Mr. Zisapel also holds an interest in and serves as director
for various entities known as the RAD-BYNET Group. Certain entities within the RAD-BYNET Group provide the Company and its U.S.
subsidiary with administrative and IT services. The aggregate amounts of administrative and IT services provided were $49, $32
and $39 in 2019, 2018 and 2017, respectively. Such amounts expensed by the Company are disclosed in Note 13f below as part of
“Expenses” and “Capital expenses”.
|
|
4.
|
From time to time, the Company also purchases certain products and services from members of the
RAD-BYNET Group. No such purchases were made in 2019, however, in 2018 and 2017, the aggregate amounts of such purchases were approximately
$2 and $15 respectively. Such amounts expensed by the Company are disclosed in Note 13f below as part of “Expenses”.
|
RADCOM LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S. dollars in thousands, except share and per share data
|
NOTE 13: -
|
RELATED PARTY BALANCES AND TRANSACTIONS (Cont.)
|
|
b.
|
The executive chairman of the Board, Ms. Rachel (Heli) Bennun (the “Executive Chairman”)
is, among other things, Mr. Zisapel’s life partner. The Executive Chairman is entitled to a fixed monthly salary. During
the years ended December 31, 2019, 2018 and 2017 the Company recorded salary expenses with respect to the Executive Chairman in
the amount of $108, $108 and $183, respectively. Such amounts expensed by the Company are disclosed in Note 13f below as part of
“Expenses”.
|
|
c.
|
Between 2015 and March 2019, the Company entered into several agreements with Amdocs Software Systems
Limited (“Amdocs”) for the sale of the Company’s solutions and services. Until January 31, 2019, Mr. Zisapel
served as a member of the board of directors of Amdocs. As of January 31, 2019, Amdocs is no longer considered a related party.
|
Revenues
related to this reseller agreement are included in Note 13f below as “Revenues”. For the years ended December 31,
2018 and 2017, revenues aggregated to $16,296 and $24,528, respectively.
|
d.
|
The Company’s current Chief Financial Officer is a member of the board of directors and chairman
of the audit committee of Matrix IT Ltd. (“Matrix”). Accordingly, as of October 2018, Matrix is considered a related
party. The Company has entered into certain limited term engagements with Matrix or its affiliated companies in connection with
specific development projects and/or use of software platform. The aggregate amount of services provided by Matrix or its affiliates,
as a related party, aggregated to $288 and $4 during the years ended December 31, 2019 and 2018, respectively. Such amount expensed
by the Company is disclosed in Note 13f below as part of “Expenses”.
|
|
e.
|
Balances with related parties:
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade receivables, net
|
|
$
|
-
|
|
|
$
|
13,596
|
|
Other accounts receivable and prepaid expenses
|
|
$
|
37
|
|
|
$
|
-
|
|
Operating lease right-of-use assets
|
|
$
|
4,499
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade payables
|
|
$
|
105
|
|
|
$
|
81
|
|
Other liabilities and accrued expenses
|
|
$
|
31
|
|
|
$
|
12
|
|
Operating lease liabilities - current
|
|
$
|
816
|
|
|
$
|
-
|
|
Operating lease liabilities – non-current
|
|
$
|
4,016
|
|
|
$
|
-
|
|
RADCOM LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S. dollars in thousands, except share and per share data
|
NOTE 13: -
|
RELATED PARTY BALANCES AND TRANSACTIONS (Cont.)
|
|
f.
|
Transactions with related parties:
|
|
|
Year ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
-
|
|
|
$
|
16,369
|
|
|
$
|
24,559
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
$
|
297
|
|
|
$
|
163
|
|
|
$
|
201
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development, net
|
|
$
|
716
|
|
|
$
|
507
|
|
|
$
|
371
|
|
Sales and marketing, net
|
|
$
|
155
|
|
|
$
|
212
|
|
|
$
|
217
|
|
General and administrative
|
|
$
|
177
|
|
|
$
|
191
|
|
|
$
|
293
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenses
|
|
$
|
12
|
|
|
$
|
40
|
|
|
$
|
9
|
|
NOTE 14: -
|
SUBSEQUENT EVENTS
|
|
1.
|
In February 2020, the Company’s issued, with the
approval of its Board of Directors, 279,000 RSUs to certain employees and officers out of which 40,000 RSUs are subject to
the approval of the shareholders. Such RSUs have vesting schedules of up to four years, commencing as of the date of
grant.
|
|
2.
|
The
ongoing coronavirus outbreak has resulted in increased travel restrictions and extended disruptions to business activities globally.
Such restrictions and disruptions, and any potential future travel restrictions, quarantine requirements, government ordered shutdowns
or similar actions in countries in which the Company or its customers operate could interfere with its ability to deliver products
and solutions, impact potential customers’ procurement decisions, and have other additional negative impacts on the Company’s
operations and business.
|
-------------------------------
F-42
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