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, 2018, 2017,
and 2016 and the selected consolidated balance sheet data as of December 31, 2018 and 2017 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, 2015 and 2014 and the selected consolidated balance sheet data as of December 31, 2016, 2015 and
2014, 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)
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products and related services
|
|
$
|
13,529
|
|
|
$
|
7,457
|
|
|
$
|
8,642
|
|
|
$
|
15,500
|
|
|
$
|
18,342
|
|
Projects
|
|
|
12,218
|
|
|
|
26,179
|
|
|
|
17,534
|
|
|
|
622
|
|
|
|
2,205
|
|
Warranty and Support
|
|
|
8,303
|
|
|
|
3,597
|
|
|
|
3,334
|
|
|
|
2,551
|
|
|
|
3,089
|
|
|
|
|
34,050
|
|
|
|
37,233
|
|
|
|
29,510
|
|
|
|
18,673
|
|
|
|
23,636
|
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products and related services
|
|
|
4,851
|
|
|
|
4,680
|
|
|
|
5,603
|
|
|
|
3,924
|
|
|
|
7,863
|
|
Projects
|
|
|
2,825
|
|
|
|
5,321
|
|
|
|
2,902
|
|
|
|
117
|
|
|
|
487
|
|
Warranty and Support
|
|
|
1,190
|
|
|
|
487
|
|
|
|
477
|
|
|
|
285
|
|
|
|
343
|
|
|
|
|
8,866
|
|
|
|
10,488
|
|
|
|
8,982
|
|
|
|
4,326
|
|
|
|
8,693
|
|
Gross profit
|
|
|
25,184
|
|
|
|
26,745
|
|
|
|
20,528
|
|
|
|
14,347
|
|
|
|
14,943
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
15,503
|
|
|
|
10,562
|
|
|
|
8,047
|
|
|
|
6,071
|
|
|
|
5,812
|
|
Less - royalty-bearing participation
|
|
|
1,648
|
|
|
|
1,599
|
|
|
|
1,693
|
|
|
|
1,582
|
|
|
|
1,664
|
|
Research and development, net
|
|
|
13,855
|
|
|
|
8,963
|
|
|
|
6,354
|
|
|
|
4,489
|
|
|
|
4,148
|
|
Sales and marketing, net
|
|
|
11,426
|
|
|
|
10,996
|
|
|
|
8,528
|
|
|
|
7,834
|
|
|
|
7,295
|
|
General and administrative
|
|
|
3,391
|
|
|
|
4,191
|
|
|
|
4,523
|
|
|
|
2,393
|
|
|
|
2,262
|
|
Total operating expenses
|
|
|
28,672
|
|
|
|
24,150
|
|
|
|
19,405
|
|
|
|
14,716
|
|
|
|
13,705
|
|
Operating income (loss)
|
|
|
(3,488
|
)
|
|
|
2,595
|
|
|
|
1,123
|
|
|
|
(369
|
)
|
|
|
1,238
|
|
Financial income (expenses), net
|
|
|
1,136
|
|
|
|
389
|
|
|
|
816
|
|
|
|
(433
|
)
|
|
|
(332
|
)
|
Income (loss) before taxes on income
|
|
|
(2,352
|
)
|
|
|
2,984
|
|
|
|
1,939
|
|
|
|
(802
|
)
|
|
|
906
|
|
Taxes on income
|
|
|
(63
|
)
|
|
|
(83
|
)
|
|
|
(24
|
)
|
|
|
(121
|
)
|
|
|
(180
|
)
|
Net income (loss)
|
|
$
|
(2,415
|
)
|
|
$
|
2,901
|
|
|
$
|
1,915
|
|
|
$
|
(923
|
)
|
|
$
|
726
|
|
Basic net income (loss) per ordinary share
|
|
$
|
(0.18
|
)
|
|
$
|
0.24
|
|
|
$
|
0.18
|
|
|
$
|
(0.11
|
)
|
|
$
|
0.09
|
|
Weighted average number of ordinary shares used to compute basic net income (loss) per ordinary share
|
|
|
13,630,793
|
|
|
|
12,039,176
|
|
|
|
10,406,897
|
|
|
|
8,572,681
|
|
|
|
8,088,974
|
|
Diluted net income (loss) per ordinary share
|
|
$
|
(0.18
|
)
|
|
$
|
0.23
|
|
|
$
|
0.18
|
|
|
$
|
(0.11
|
)
|
|
$
|
0.08
|
|
Weighted average number of ordinary shares used to compute diluted net income (loss) per ordinary share
|
|
|
13,630,793
|
|
|
|
12,351,566
|
|
|
|
10,779,547
|
|
|
|
8,572,681
|
|
|
|
8,592,387
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital
|
|
$
|
76,860
|
|
|
$
|
74,842
|
|
|
$
|
38,854
|
|
|
$
|
9,643
|
|
|
$
|
10,062
|
|
Total assets
|
|
$
|
89,531
|
|
|
$
|
91,909
|
|
|
$
|
54,568
|
|
|
$
|
20,135
|
|
|
$
|
20,318
|
|
Shareholders’ equity
|
|
$
|
78,480
|
|
|
$
|
76,396
|
|
|
$
|
40,143
|
|
|
$
|
9,863
|
|
|
$
|
10,262
|
|
Share capital
|
|
$
|
643
|
|
|
$
|
628
|
|
|
$
|
523
|
|
|
$
|
372
|
|
|
$
|
361
|
|
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)
|
|
April (through April 15, 2019)
|
|
|
3.626
|
|
|
|
3.561
|
|
March 2019
|
|
|
3.636
|
|
|
|
3.600
|
|
February 2019
|
|
|
3.662
|
|
|
|
3.604
|
|
January 2019
|
|
|
3.746
|
|
|
|
3.642
|
|
December 2018
|
|
|
3.781
|
|
|
|
3.718
|
|
November 2018
|
|
|
3.743
|
|
|
|
3.668
|
|
October 2018
|
|
|
3.721
|
|
|
|
3.620
|
|
September 2018
|
|
|
3.627
|
|
|
|
3.564
|
|
On
April 15, 2019, the daily representative rate of exchange between the NIS and U.S. dollar as published by the Bank of Israel was
NIS 3.561 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)
|
|
2019 (through April 15, 2019)
|
|
|
3.638
|
|
2018
|
|
|
3.597
|
|
2017
|
|
|
3.600
|
|
2016
|
|
|
3.841
|
|
2015
|
|
|
3.884
|
|
2014
|
|
|
3.577
|
|
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
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 two largest customers accounted for approximately
66% of our revenue in fiscal 2018 and 78% in fiscal 2017. 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.
The
pace of transition to NFV and timeframe for reaching a mature infrastructure for NFV is dependent on CSPs’ internal decisions
regarding NFV technology implementation, timing, nature of virtualization and budgeting. Such decisions may be affected by the
overall pace of NFV adoption 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, our sales cycles may lengthen, and the growth of our business may
be adversely affected.
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, 4G cellular, Triple Play networks, VoLTE, 5G and Internet of Things, 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. 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 and
Customer Experience Management, or CEM, 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
expectation that the NFV market will gain momentum may not materialize.
We
believe that most of the industry’s leading CSPs will transform their network to NFV or are at the very least, evaluating
their transformation to NFV. Our expectation is that the NFV market will materialize and gain momentum. However, our expectations
may not be correct, and the actual pace of NFV transformation may take longer than we anticipate or may not occur at all. If the
demand for NFV does not continue to grow, 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:
|
●
|
the
variation in size and timing of individual purchases by our customers;
|
|
●
|
seasonal
factors that may affect capital spending by customers, such as the varying fiscal year-ends
of customers;
|
|
●
|
the
relatively long sales cycles for our solutions;
|
|
●
|
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;
|
|
●
|
competitive
conditions in our markets;
|
|
●
|
the
timing of the introduction and market acceptance of new solutions or enhancements by
us and by our customers, competitors and suppliers;
|
|
●
|
changes
in the level of operating expenses relative to revenues;
|
|
●
|
changes
in global or regional economic conditions or in the telecommunications industry;
|
|
●
|
delays
in or cancellation of projects by customers;
|
|
●
|
changes
in the product mix;
|
|
●
|
the
size and timing of approval of grants from the Government of Israel; and
|
|
●
|
foreign
currency exchange rates.
|
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:
|
●
|
increased
price competition;
|
|
●
|
local
sales taxes which may be incurred for direct sales;
|
|
●
|
increased
industry consolidation among our customers, which may lead to decreased demand for and
downward pricing pressure on our solutions;
|
|
●
|
changes
in customer, geographic or product mix;
|
|
●
|
increases
in costs such as employment costs or third-party service or component costs;
|
|
●
|
changes
in distribution channels;
|
|
●
|
losses
on customer contracts; and
|
|
●
|
increases
in warranty costs.
|
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.
In
parallel to our increased sales focus going forward in North America, Western Europe and additional developed markets, we plan
to continue to generate revenue from various emerging market countries. As these countries 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
2016, 2017, and 2018 we increased the size of our workforce and we may continue to do so, during 2019, 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 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, our 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, Mr. Yaron Ravkaie, the Chief Executive Officer of our U.S. subsidiary, RADCOM, Inc., or RADCOM US,
Mr. Eyal Harari, and our Vice President of Research and Development, Mr. Hilik Itman. 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, we may be required to disclose our
own source code to the public, which could enable our competitors to eliminate any technological advantage that our solutions
may have over theirs. Any such requirement to disclose 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, five pending patent applications and we are in
the process of filing additional 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 $44.8 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, 2018. 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 24% of our ordinary shares and therefore have significant
influence over the outcome of matters requiring shareholder approval including the election of directors.
As
of April 15, 2019, Zohar Zisapel (the former Chairman of our Board of Directors) and Yehuda Zisapel, who are brothers, may be
deemed to beneficially own an aggregate of 3,226,481 ordinary shares, including options exercisable for 14,000 ordinary shares
that are exercisable within 60 days of April 15, 2019, representing approximately 24% 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
2018 we incurred a net loss of approximately $2.4 million. 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 98% of our sales in 2018, 90% of our sales in 2017, and 98% of our sales in 2016
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 new lease accounting standard, which became effective on January 1, 2019, the associated lease liabilities will be 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, 2018 and April 15, 2019, our ordinary shares have traded on the Nasdaq Capital Market, or the Nasdaq, as high as $21.50
and as low as $7.10 per share. As of April 15, 2019, the closing price of our ordinary shares on Nasdaq was $7.93 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 those risks identified in “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.
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 the composition of
the board of directors, compensation of officers, director nomination process and quorum at shareholders’ meetings. In addition,
we may follow home country practice instead of the Nasdaq requirement to obtain 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).
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.
|
INFORMATION ON
THE COMPANY
|
|
A.
|
HISTORY AND DEVELOPMENT
OF THE COMPANY
|
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. 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, 2018, 2017 and 2016, our capital expenditures were approximately $662 thousand, $790 thousand, and
$1.3 million, 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
(formerly known as MaveriQ) – a “first to market”
fully virtualized, on-demand service assurance solution that integrates an automated,
and efficient data acquisition layer of virtual probes with a smart mediation layer thus
providing critical customer and service insights for operators in the form of RADCOM
Network Insights;
|
|
●
|
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
|
|
●
|
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. With RADCOM Network Insights we are able to
offer a comprehensive CEM solution to CSPs.
|
Since
2016, we have adapted our solutions to meet the highest-level requirements of AT&T, the first CSP launching a full NFV eco-system.
We built on that success in 2017 and 2018 with our selection as NFV solution provider to additional tier 1 CSPs and the expansion
of 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.
We
specialize in solutions for next-generation mobile and fixed networks, including LTE, LTE-A VoLTE, IMS, VoIP, WiFi, VoWiFi, UMTS/GSM,
mobile broadband, and 5G.
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 rate of
transition between physical and virtualized networks taking place gradually, CSPs will need to manage ‘hybrid’ networks
for the foreseeable future. As a result, service assurance solutions that provide service and network performance visibility in
both physical and virtual environments are expected to become an important step in CSPs’ NFV transition.
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 acquired by partnering
with many of the industry’s leading CSPs for over two decades. 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 LTE, LTE-A,
VoLTE, IMS, VoIP, WiFi, VoWiFi, UMTS/GSM, mobile broadband and 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;
|
|
●
|
ease
of deployment and management;
|
|
●
|
improved
customer retention;
|
|
●
|
reduced
subscriber churn rates;
|
|
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|
improved
service availability and quality;
|
|
●
|
ability
to correlate session information and provide an end-to-end view of the customer experience;
|
|
●
|
full
ability to install the solution as a virtual network function for seamless integration
into all NFV infrastructures;
|
|
●
|
on-demand
monitoring capabilities;
|
|
●
|
scalability
for next-generation services;
|
|
●
|
enhanced
ability to collect all network packets for a complete and comprehensive view of the network
and the customer experience;
|
|
●
|
increased
operational efficiency and lower costs;
|
|
●
|
support
for multiple protocols for end-to-end network coverage;
|
|
●
|
the
existence of both network-wide views and drilldown to an individual subscriber level
and down to each session;
|
|
●
|
support
for the largest scale multi-market networks;
|
|
●
|
accelerated
deployment and migration to NFV and 5G; and
|
|
●
|
real-time
capabilities.
|
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. In February 2014, we launched our service assurance solution which incorporates
software-based probes, and which subsequently replaced our OmniQ hardware-based solution. During 2015 and 2016, we launched and
substantially enhanced our NFV solution for service assurance and our CEM solution.
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. We have 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
December 2015, our service assurance solution was selected 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 we continued the deployment
of our software-based NFV solution with AT&T and commenced deployment with an additional tier 1 CSP following its selection
of our solution. We are leveraging this experience and success in discussions with other CSPs that are looking to manage existing
networks while evaluating their transformation to the next-generation NFV architectures. In 2018 we further expanded our
solutions to support existing customers in their transition to NFV and meeting their initial requirements for 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, major CSPs are currently evaluating and/or moving parts of their network to support NFV. 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 solutions both for virtualized and hybrid networks.
We plan to increase sales by leveraging our leadership and innovation around NFV and cloud-based solutions, as well as take advantage
of the experience gained from implementing the largest, most advanced NFV deployment to date (with AT&T) and another NFV implementation
with a top tier CSP. In addition, we also offer our solutions and expertise to new and existing tier 1 CSPs in our targeted geographical
regions. We plan to maintain our technical advantage over competitors by further extensively investing in our NFV and cloud-based
solutions.
Key
elements of our strategy include:
|
●
|
Targeting
CSPs who are evaluating and/or migrating to NFV and 5G
. Most of the industry’s
largest CSPs are either evaluating NFV or have started deploying virtualized solutions
for their network functionality. The introduction of 5G networks also 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 and 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. The deployment of our solutions with AT&T has
been noted by many CSPs. As a result, 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.
|
|
●
|
Engaging
Tier 1 Customers and CSPs actively transitioning to NFV
. With our advanced deployment
and our reputation as the NFV technology leader, we are focusing our sales and marketing
activities on tier 1 and galaxy (multi-carrier) operators and other operators seeking
to migrate or actively migrating to NFV.
|
|
●
|
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.
|
|
●
|
Focusing
our network 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.
|
Products
and Solutions
Our
Network Intelligence portfolio includes RADCOM Service Assurance, RADCOM Network Visibility and RADCOM Network Insights.
RADCOM
Service Assurance (formerly MaveriQ)
RADCOM
Service Assurance is a class-leading cloud-native, fully virtualized (NFV), next-generation, probe-based service assurance solution.
RADCOM Service Assurance integrates an automated and efficient data acquisition layer of virtual probes with a smart mediation
layer which correlates and enriches probe-based data with network events to provide critical customer and service insights for
operators. RADCOM Service Assurance is the first solution to support NFV networks and can be deployed, in its entirety, on virtualized
and/or bare metal servers using the same software. 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 allows CSPs to carry out end-to-end data and voice quality monitoring and to manage their networks and services.
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 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 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 monitors multiple types of services such as voice, video and data, employing a comprehensive array of services
and network performance and measurement methodologies to continuously analyze service performance and quality. With its enhanced
correlation capabilities, RADCOM Service Assurance offers the service provider full end-to-end visibility of the network across
technologies. 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 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 LTE and 5G;
|
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|
migration
to and integration of new network architectures;
|
|
●
|
delivery
of advanced, complex services such as VoIP IMS and video quality analytics; and
|
|
●
|
proactive
management and quality assurance for all data sessions and calls on existing and next-generation
service providers’ production networks.
|
CSPs
use RADCOM Service Assurance for a wide array of use cases, such as:
Customer
and Service Assurance
|
●
|
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.
|
|
●
|
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.
|
|
●
|
Fault
detection
– automatic fault detection and service KPIs alert CSPs to network
problems as they arise.
|
|
●
|
Pre-Mediation
– generates call detail records needed to feed the solutions’ smart mediation
layer as well as third-party operations support systems and other solutions.
|
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.
Customer
Experience Management, or CEM
We
have developed and are constantly expanding and enhancing our solutions’ CEM capabilities in line with CSPs’ key business
drivers.
CSPs need to know what their customers are experiencing in order to retain their
customers and maintain their profitability. Our solutions allow CSPs to
optimize their customer experience, increase their
revenues, and reduce their costs.
Revenue-generating services require a well-managed network
and mature service-delivery processes to meet the high service-level demands of CSPs’ customers.
RADCOM
Service Assurance
provides the visibility and invaluable data for CSPs to manage both network
and service performance and to ensure quality of experience for its subscribers.
RADCOM Service Assurance
monitors
a wide range of measurement sessions that are meaningful to CSPs. By analyzing these measurements in real time and applying business
intelligence,
Service Assurance
provides CSPs with insight not only into the customer
quality of experience but also into the corresponding quality of the service provider’s network.
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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●
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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.
|
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 2018, 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 marketing, 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:
|
|
Year ended December 31,
(in millions of U.S. dollars)
|
|
|
Year ended December 31,
(in percentages)
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
North America
|
|
|
22.2
|
|
|
|
25.1
|
|
|
|
19.2
|
|
|
|
65.1
|
|
|
|
67.5
|
|
|
|
65.1
|
|
Europe
|
|
|
0.4
|
|
|
|
0.8
|
|
|
|
0.9
|
|
|
|
1.2
|
|
|
|
2.2
|
|
|
|
3.1
|
|
Asia (excluding Philippines)
|
|
|
0.9
|
|
|
|
0.4
|
|
|
|
0.3
|
|
|
|
2.6
|
|
|
|
1.1
|
|
|
|
1.0
|
|
Philippines
|
|
|
6.2
|
|
|
|
4.5
|
|
|
|
5.0
|
|
|
|
18.2
|
|
|
|
12.1
|
|
|
|
16.9
|
|
South America (excluding Brazil)
|
|
|
0.7
|
|
|
|
0.9
|
|
|
|
0.8
|
|
|
|
2.1
|
|
|
|
2.4
|
|
|
|
2.7
|
|
Brazil
|
|
|
2.9
|
|
|
|
1.8
|
|
|
|
2.5
|
|
|
|
8.5
|
|
|
|
4.8
|
|
|
|
8.5
|
|
Others (including Israel)
|
|
|
0.8
|
|
|
|
3.7
|
|
|
|
0.8
|
|
|
|
2.3
|
|
|
|
9.9
|
|
|
|
2.7
|
|
Total revenues
|
|
|
34.1
|
|
|
|
37.2
|
|
|
|
29.5
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
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, Exfo,
Huawei, NetScout, Polystar, EXFO, Nexus, Samsung and Viavi
.
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 Sandvine, Neumetrics, 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:
|
●
|
our
recognized class-leading, cloud-native NFV service assurance solutions;
|
|
●
|
our
experience deploying and scaling NFV solutions with Tier 1 CSPs such as AT&T;
|
|
●
|
our
advanced technology offering which provides end-to-end network visibility from virtual
tapping point to network insights;
|
|
●
|
our
multi-technology correlation capabilities that can support all major technologies –
4G, 5G, LTE, IMS, VoLTE, VoIP and legacy 3G - within the same solution;
|
|
●
|
our
development of service assurance solutions for the deployment of 5G networks;
|
|
●
|
our
solution full software-based solutions provide cost-efficiency, rapid deployment times
and agility in development;
|
|
●
|
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
|
|
●
|
our
proven flexibility and responsiveness in a dynamic customer and technology environment.
|
Following
our strategic deployment with AT&T and an additional tier 1 CSP and our progress in engaging new customers thereafter, we
believe that we are 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 our strategic
goal list to establish RADCOM as an industry leader in customer satisfaction. Investments that we are making to achieve this goal
include:
|
●
|
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.
|
|
●
|
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.
|
|
●
|
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).
|
|
●
|
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.
|
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
In
2018, most of our research and development efforts focused on developing and enhancing our NFV solutions to meet the stringent
requirements of top tier CSPs having a large subscriber base and a high level of expertise. We expect to continue to invest significant
efforts in enhancing our NFV solutions in 2019 and in developing new features and new solution offerings to meet the requirements
of 5G networks.
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.
We
intend to continue developing solutions that meet key industry standards, support important protocols as they emerge, and maintain
our technological leadership.
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, 2018, 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.
In
each of the last ten fiscal years, we have received royalty-bearing grants from the IIA. As of December 31, 2018, our total contingent
liability to the IIA in respect of grants received including accumulated interest and accumulated royalties paid was approximately
$48.4 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, 2018, our contingent liability to the BIRD Foundation for funding received
was approximately $381 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, 2018, 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. During the year ended December 31, 2018, we recorded an amount of approximately
$9 thousand as royalty expenses to be paid to the MOE.
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 a registered trademark for the name Omni-Q
®
. Trademark registration for the name
RADCOM is pending before the USPTO. We currently have one registered patent and four pending patent applications in the United
States, and we are in the process of filing additional patent applications. 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, 2018 was 233 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
13.8% and 16.6% 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.
Effective
January 1, 2012, our employment agreements with new employees in Israel are in accordance with Section 14 of the Israeli Severance
Pay Law – 1963, which provide 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 aggregate amount equal to approximately 16.1% 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% - 26% 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.
|
C.
|
ORGANIZATIONAL
STRUCTURE
|
In
January 1993, we established RADCOM US, which conducts the sales, marketing, and customer support of our products in North
America. In July 1996, we incorporated a wholly-owned subsidiary in Israel, RADCOM Investments, for the purpose
of making various investments, including the purchase of securities. In 2010, we established RADCOM Brazil, which conducts
the sales, marketing and customer support of our products in Brazil. In 2012, we established RADCOM India, which primarily provides
marketing, customer support and development services worldwide. The following is a list of our subsidiaries, each of which is
wholly-owned:
Name
of Subsidiary
|
|
Jurisdiction
of Incorporation
|
RADCOM, Inc.
|
|
New Jersey
|
RADCOM Investments (96) Ltd
|
|
Israel
|
RADCOM do Brasil
Comercio, Importacaoe Exportacao Ltda
|
|
Brazil
|
RADCOM Trading India
Private Limited
|
|
India
|
|
D.
|
PROPERTY, PLANTS
AND EQUIPMENT
|
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
2018 we paid to affiliates of our principal shareholders aggregate annual lease and maintenance payments in the sum of approximately
$787 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 2018, 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 952 square feet in India. The aggregate
annual lease payments for those premises in 2018 were approximately $27 thousand and $113 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.
|
UNRESOLVED STAFF
COMMENTS
|
Not
applicable.
ITEM
5.
|
OPERATING AND
FINANCIAL REVIEW AND PROSPECTS
|
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 2018 in order to expand our sales pipeline and revenues:
|
●
|
We
focused on leveraging our NFV implementations with AT&T and other customers to expand
our value proposition to additional carriers;
|
|
●
|
We
expanded our business with our key existing customers;
|
|
●
|
We
continued our investment in our sales and marketing resources and have expanded our reach
through the engagement of local representatives;
|
|
●
|
We
invested in marketing campaigns globally to enhance our market positioning and open new
opportunities;
|
|
●
|
We
increased our investment in research and development to maintain our recognized technological
leadership in cloud-based NFV solutions, to meet the requirements of our customers, and
to develop new product offerings and capabilities;
|
|
●
|
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
|
|
●
|
We
pursued strategic partnerships, including OEM partnerships, and teaming agreements.
|
In
2018, we continued expanding the capability and solution offerings of our RADCOM Network Intelligence portfolio. Our leadership
in virtualized solutions has contributed to our 2018 results.
Revenues
.
In general, our revenues are derived from sales of our products or solutions, fixed-price projects, and sales of extended warranty
and support 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 consists of 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 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
and customer support, integration of third-party software components into our own, and product mix.
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 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 additional 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 2018 Compared to the Fiscal Year Ended 2017
For
the year ended December 31, 2018, our revenues were approximately $34.1 million, compared to approximately $37.2 million in 2017,
reflecting a decrease of approximately 8%. We used approximately $1.9 million in cash in operating activities during 2018, compared
to approximately $10.6 million used in 2017. Our net loss for the year ended December 31, 2018 was approximately $2.4 million,
compared with a net income of approximately $2.9 million for 2017.
As
of December 31, 2018, our cash and cash equivalents totaled approximately $62.0 million, compared with cash and cash equivalents
and short-term bank deposit of approximately $62.6 million as of December 31, 2017.
Our
2018 net loss includes non-cash expenses due to share-based compensation of approximately $2.1 million compared to approximately
$2.2 million in 2017.
Our
revenues decreased relatively less than our cost of revenues which resulted in an increase of our gross margin to approximately
74% in 2018 compared with approximately 72% in 2017.
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.
Financial
Data for Year Ended December 31, 2018 compared with Year Ended December 31, 2017
The
following table sets forth, for the periods indicated, certain financial data expressed as a percentage of revenues:
|
|
Year ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Revenues
|
|
|
100
|
%
|
|
|
100
|
%
|
Cost of revenues
|
|
|
26.0
|
|
|
|
28.2
|
|
Gross profit
|
|
|
74.0
|
|
|
|
71.8
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
45.5
|
|
|
|
28.4
|
|
Less royalty-bearing participation
|
|
|
4.8
|
|
|
|
4.3
|
|
Research and development, net
|
|
|
40.7
|
|
|
|
24.1
|
|
Sales and marketing, net
|
|
|
33.5
|
|
|
|
29.5
|
|
General and administrative
|
|
|
10.0
|
|
|
|
11.2
|
|
Total operating expenses
|
|
|
84.2
|
|
|
|
64.8
|
|
Operating income (loss)
|
|
|
(10.2
|
)
|
|
|
7.0
|
|
Financial income, net
|
|
|
3.3
|
|
|
|
1.0
|
|
Income (loss) before taxes on income
|
|
|
(6.9
|
)
|
|
|
8.0
|
|
Taxes on income
|
|
|
(0.2
|
)
|
|
|
(0.2
|
)
|
Net income (loss)
|
|
|
(7.1
|
)
|
|
|
7.8
|
|
Revenues
. In
2018, our revenues decreased by approximately $3.2 million, or approximately 8% compared to 2017 as follows: a decrease of approximately
$14.0 million in revenues from projects, offset by an increase of approximately $6.1 million in revenues from products and related
services and an increase of approximately $4.7 million in warranty and support. The decrease in project revenues primarily reflects
the completion in 2018 of certain deployment phases of the AT&T engagement.
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)
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
North America
|
|
|
22.2
|
|
|
|
25.1
|
|
|
|
65.1
|
|
|
|
67.5
|
|
Europe
|
|
|
0.4
|
|
|
|
0.8
|
|
|
|
1.2
|
|
|
|
2.2
|
|
Asia (excluding Philippines)
|
|
|
0.9
|
|
|
|
0.4
|
|
|
|
2.6
|
|
|
|
1.1
|
|
Philippines
|
|
|
6.2
|
|
|
|
4.5
|
|
|
|
18.2
|
|
|
|
12.1
|
|
South America (excluding Brazil)
|
|
|
0.7
|
|
|
|
0.9
|
|
|
|
2.1
|
|
|
|
2.4
|
|
Brazil
|
|
|
2.9
|
|
|
|
1.8
|
|
|
|
8.5
|
|
|
|
4.8
|
|
Others (including Israel)
|
|
|
0.8
|
|
|
|
3.7
|
|
|
|
2.3
|
|
|
|
9.9
|
|
Total revenues
|
|
|
34.1
|
|
|
|
37.2
|
|
|
|
100
|
%
|
|
|
100
|
%
|
In 2018, the Company
had two customers in the United States and one in the Philippines that amounted to approximately $21.4 million and approximately
$6.2 million, respectively, of the total consolidated revenues. In 2017, the Company had one customer in the United States and
one in the Philippines, that amounted to approximately $24.5 million and approximately $4.5 million, respectively, of the total
consolidated revenues.
Cost of Revenues and Gross Profit
|
|
|
|
|
|
|
|
|
Year Ended December 31,
(in millions of U.S. dollars)
|
|
|
|
2018
|
|
|
2017
|
|
Products and related services
|
|
|
4.9
|
|
|
|
4.7
|
|
Projects
|
|
|
2.8
|
|
|
|
5.3
|
|
Warranty and support
|
|
|
1.2
|
|
|
|
0.5
|
|
Total cost of revenues
|
|
|
8.9
|
|
|
|
10.5
|
|
Gross profit
|
|
|
25.2
|
|
|
|
26.7
|
|
Cost
of Revenues
. During 2018, our gross profit as a percentage of revenues, calculated to include variable costs which
include salaries and related expenses, software development customization, use of hardware, royalties to the IIA, license fees
paid to third parties, warranty expenses and inventory write-off, was approximately 74% compared to approximately 72% in 2017,
which reflected a larger relative decrease in our cost of revenues as compared to the decrease in our revenues. The decrease in
our cost of revenues is attributed mainly to cost of salaries and related expenses associated with software development customizations
incurred in projects.
Our
cost of revenues for 2018 includes an expense of approximately $112 thousand for share-based compensation in 2018, as compared
to approximately $189 thousand for share-based compensation in 2017.
The
following table provides the operating costs and expenses of the Company in 2018 and 2017 as well as the percentage change of
such expenses in 2018 as compared to 2017.
|
|
Year ended December 31,
(in millions of U.S. dollars)
|
|
|
% Change
|
|
|
|
2018
|
|
|
2017
|
|
|
2018 vs 2017
|
|
Research and development
|
|
|
15.5
|
|
|
|
10.6
|
|
|
|
46.2
|
|
Less royalty-bearing participation
|
|
|
1.6
|
|
|
|
1.6
|
|
|
|
-
|
|
Research and development, net
|
|
|
13.9
|
|
|
|
9.0
|
|
|
|
54.4
|
|
Sales and marketing, net
|
|
|
11.4
|
|
|
|
11.0
|
|
|
|
3.6
|
|
General and administrative
|
|
|
3.4
|
|
|
|
4.2
|
|
|
|
(19.0
|
)
|
Total operating expenses
|
|
|
28.7
|
|
|
|
24.2
|
|
|
|
18.6
|
|
Research
and Development Expenses
. Research and development expenses, gross, increased from approximately $10.6 million in 2017 to
approximately $15.5 million in 2018. As a percentage of total revenues, research and development expenses, gross, increased from
approximately 28.4% in 2017 to approximately 45.5% in 2018. The increase in our gross research and development expenses is attributable
mostly to the increase in the number of employees, sub-contractors and related expenses as well as to a decrease in the allocation
of research and development employees’ salaries and related expenses to cost of projects associated with software development
customizations, in line with the decrease in project revenues. As of December 31, 2018, our total research and development headcount,
including contractors, was 116, compared to 89 as of December 31, 2017. Our research and development costs included an expense
of approximately $808 thousand for share-based compensation in 2018, as compared to approximately $473 thousand for share-based
compensation in 2017.
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, Net.
Sales and marketing expenses increased from approximately $11.0 million in 2017 to approximately
$11.4 million in 2018. The increase in our sales and marketing expenses from 2017 to 2018 is mainly attributable to the full impact
of employees recruited during the second half of 2017. As a percentage of total revenues, sales and marketing expenses increased
from 29.5% in 2017 to 33.5% in 2018. Our sales and marketing expenses included an expense of approximately $698 thousand for share-based
compensation in 2018, as compared to approximately $499 thousand for share-based compensation in 2017.
General
and Administrative Expenses
. General and administrative expenses decreased from approximately $4.2 million in 2017
to approximately $3.4 million in 2018. The decrease in our general and administrative expenses from 2017 is mainly attributed
to a decrease in share-based compensation and bonus accruals. As a percentage of total revenues, general and administrative expenses
decreased from 11.2% in 2017 to 10.0% in 2018. Our general and administrative expenses included approximately $0.5 million for
share-based compensation in 2018, as compared to approximately $1.1 million for share-based compensation in 2017.
Financial
Income, Net
. In 2018, the financial income, net, was approximately $1.1 million, as compared to financial income, net,
of approximately $389 thousand in 2017. The increase in our financial income, net from 2017 is attributed to an increase in the
interest from a short-term bank deposit.
Taxes
on Income
. In 2018, we recorded tax expenses of approximately $63 thousand, as compared to tax expenses of approximately
$83 thousand in 2017, reflecting withholding taxes that were deducted by our customers as well as tax expenses of RADCOM India
and RADCOM US.
Financial
Data for Year Ended December 31, 2017 compared with Year Ended December 31, 2016
The
following table sets forth, for the periods indicated, certain financial data expressed as a percentage of revenues:
|
|
Year ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Revenues
|
|
|
100
|
%
|
|
|
100
|
%
|
Cost of revenues
|
|
|
28.2
|
|
|
|
30.4
|
|
Gross profit
|
|
|
71.8
|
|
|
|
69.6
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
28.4
|
|
|
|
27.3
|
|
Less royalty-bearing participation
|
|
|
4.3
|
|
|
|
5.7
|
|
Research and development, net
|
|
|
24.1
|
|
|
|
21.6
|
|
Sales and marketing, net
|
|
|
29.5
|
|
|
|
28.9
|
|
General and administrative
|
|
|
11.2
|
|
|
|
15.3
|
|
Total operating expenses
|
|
|
64.8
|
|
|
|
65.8
|
|
Operating income
|
|
|
7.0
|
|
|
|
3.8
|
|
Financial income, net
|
|
|
1.0
|
|
|
|
2.8
|
|
Income before taxes on income
|
|
|
8.0
|
|
|
|
6.6
|
|
Taxes on income
|
|
|
(0.2
|
)
|
|
|
(0.1
|
)
|
Net income
|
|
|
7.8
|
|
|
|
6.5
|
|
Revenues
. In
2017, our revenues increased by approximately 26% compared to 2016 as follows: an increase of approximately $8.6 million in project
revenues and an increase of approximately $0.3 million in warranty and support revenues, offset by a decrease of approximately
$1.2 million in revenues from product and related services. The increase in project revenues reflects mainly the execution and
expansion of the deal with Amdocs software, in connection with the AT&T engagement.
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)
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
North America
|
|
|
25.1
|
|
|
|
19.2
|
|
|
|
67.5
|
|
|
|
65.1
|
|
Europe
|
|
|
0.8
|
|
|
|
0.9
|
|
|
|
2.2
|
|
|
|
3.1
|
|
Asia (excluding Philippines)
|
|
|
0.4
|
|
|
|
0.3
|
|
|
|
1.1
|
|
|
|
1.0
|
|
Philippines
|
|
|
4.5
|
|
|
|
5.0
|
|
|
|
12.1
|
|
|
|
16.9
|
|
South America (excluding Brazil)
|
|
|
0.9
|
|
|
|
0.8
|
|
|
|
2.4
|
|
|
|
2.7
|
|
Brazil
|
|
|
1.8
|
|
|
|
2.5
|
|
|
|
4.8
|
|
|
|
8.5
|
|
Others (including Israel)
|
|
|
3.7
|
|
|
|
0.8
|
|
|
|
9.9
|
|
|
|
2.7
|
|
Total revenues
|
|
|
37.2
|
|
|
|
29.5
|
|
|
|
100
|
%
|
|
|
100
|
%
|
In
2017, the Company had one customer in the United States and one in the Philippines that amounted to approximately $24.5 million
and approximately $4.5 million, respectively, of the total consolidated revenues. In 2016, the Company had one customer in the
United States and one in the Philippines, which amounted to approximately $18.3 million and $5.0 million, respectively, of the
total consolidated revenues.
Cost of Revenues and Gross Profit
|
|
|
|
|
|
|
|
|
Year Ended December 31,
(in millions of U.S. dollars)
|
|
|
|
2017
|
|
|
2016
|
|
Products and related services
|
|
|
4.7
|
|
|
|
5.6
|
|
Projects
|
|
|
5.3
|
|
|
|
2.9
|
|
Warranty and support
|
|
|
0.5
|
|
|
|
0.5
|
|
Total Cost of revenues
|
|
|
10.5
|
|
|
|
9.0
|
|
Gross profit
|
|
|
26.7
|
|
|
|
20.5
|
|
Cost
of Revenues
. During 2017, our gross profit as a percentage of revenues, calculated to include variable costs, which
include salaries and related expenses, purchasing, royalties to the IIA, license fees paid to third parties, warranty expenses
and write-off of inventory and import taxes, was approximately 72% compared to approximately 70% in 2016, which reflected the
increase in our cost of revenues, mainly cost of salaries and related expenses associated with software development customization
incurred in projects, costs of third party hardware and inventory write-offs.
Our
cost of revenues included an expense of approximately $189 thousand for share-based compensation in 2017, as compared to approximately
$118 thousand for share-based compensation in 2016.
The
following table provides the operating costs and expenses of the Company in 2017 and 2016, as well as the percentage change of
such expenses in 2017 compared to 2016.
|
|
Year ended December 31,
(in millions of U.S. dollars)
|
|
|
% Change
|
|
|
|
2017
|
|
|
2016
|
|
|
2017 vs 2016
|
|
Research and development
|
|
|
10.6
|
|
|
|
8.0
|
|
|
|
32.5
|
|
Less royalty-bearing participation
|
|
|
1.6
|
|
|
|
1.7
|
|
|
|
(5.9
|
)
|
Research and development, net
|
|
|
9.0
|
|
|
|
6.4
|
|
|
|
40.6
|
|
Sales and marketing, net
|
|
|
11.0
|
|
|
|
8.5
|
|
|
|
29.4
|
|
General and administrative
|
|
|
4.2
|
|
|
|
4.5
|
|
|
|
(6.7
|
)
|
Total operating expenses
|
|
|
24.2
|
|
|
|
19.4
|
|
|
|
24.7
|
|
Research
and Development Expenses
. Research and development expenses, gross, increased from approximately $8 million in 2016 to approximately
$10.6 million in 2017. As a percentage of total revenues, research and development expenses, gross, increased from approximately
27.3% in 2016 to approximately 28.4% in 2017. The increase in our gross research and development expenses is attributable mostly
to the increase in the number of employees, sub-contractors and related expenses. As of December 31, 2017, we employed 89 research
and development engineers, compared to 78 as of December 31, 2016. Our research and development costs included an expense of approximately
$473 thousand for share-based compensation in 2017 compared to approximately $625 thousand for share-based compensation in 2016.
Sales
and Marketing Expenses, Net.
Sales and marketing expenses increased from approximately $8.5 million in 2016 to
approximately $11.0 million in 2017. The increase in our sales and marketing expenses from 2016 to 2017 is mainly attributable
to an increase in the number of employees. As a percentage of total revenues, sales and marketing expenses increased from 28.9%
in 2016 to 29.5% in 2017. Our sales and marketing expenses included an expense of approximately $499 thousand for share-based
compensation in 2017, as compared to approximately $199 thousand for share-based compensation in 2016.
General
and Administrative Expenses
. General and administrative expenses decreased from approximately $4.5 million in 2016
to approximately $4.2 million in 2017. The decrease in our general and administrative expenses from 2016 is mainly attributed
to a decrease in share-based compensation. As a percentage of total revenues, general and administrative expenses decreased from
15.3% in 2016 to 11.2% in 2017. Our general and administrative expenses included approximately $1.1 million for share-based compensation
in 2017, as compared to approximately $1.5 million for share-based compensation in 2016.
Financial
Income, Net
. In 2017, the financial income, net, was approximately $389 thousand, as compared to financial income, net,
of approximately $816 thousand in 2016. The change in our financial expenses, net from 2016 is attributed to an increase in foreign
currency translation expenses.
Taxes
on Income
. In 2017, we recorded tax expenses of approximately $83 thousand, as compared to approximately $24 thousand
in 2016, reflecting withholding taxes that were deducted by our customers as well as tax expenses of RADCOM India.
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 are
reported in our financial statements as financial income or expense. Based on our budget for 2019, 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
$567 thousand per fiscal year and vice versa.
Effective
Corporate Tax Rate
As
of January 1, 2018, 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 $31.2 million
as of December 31, 2018. 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 $12.6 million at December 31, 2018 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 deposit at December 31, 2018, and 2017 were approximately $62.0 million and $62.6 million.
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 2019. 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 used in operating activities was approximately $1.9 million and
$10.6 million in 2018 and 2017, respectively.
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 accounts payable 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
negative net cash flow in 2017 was primarily due to an increase in the trade receivables of approximately $15.9 million, a decrease
in trade payables of approximately $1.2 million, an increase in inventories of approximately $0.6 million and an increase in other
accounts receivable and prepaid expenses of approximately $0.5 million. This was partially offset by net income of approximately
$2.9 million, share-based and restricted share compensation expenses of approximately $2.2 million, an increase in other accounts
payable and accrued expenses of approximately $1.4 million, depreciation of approximately $0.5 million and an increase in employees
and payroll accruals of approximately $0.5 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 2018 increased to approximately $20.4 million
from approximately $20.3 million in 2017. We believe that continued expansion of our business may require continued investments
in working capital as many customers require commercial terms which result in longer payment terms.
The
decrease in inventories in 2018 was mainly due to the inventory delivered to customers for which revenue criteria have 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 a short-term bank deposit. Net cash provided from investing activities in 2018 was approximately $39.3
million, compared to net cash used in investing activities in 2017 of $40.8 million. 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. In 2017,
we invested approximately $40.0 million in a short-term bank deposit and approximately $0.8 million for the purchase of equipment.
Net
Cash provided by Financing Activities.
In 2018, net cash provided by financing activities was approximately $2.1 million from
the exercise of options. In 2017, net cash provided by financing activities was approximately $31.1 million, including net proceeds
received from our follow-on public offering completed in October 2017 of approximately $30.2 million and exercise of options of
approximately $0.9 million.
Recent
Offering
In
October 2017, we raised a net amount of approximately $30.2 million, after deducting underwriters’ discounts, commissions
and other offering expenses, in a public offering, or the “2017 Public Offering”, by issuance of ordinary shares.
Under the 2017 Public Offering, we issued 1,661,536 ordinary shares for aggregate gross proceeds of approximately $32.4 million,
at a price to the public of $19.50 per ordinary share.
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.
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 $1.6 million in 2018, $1.6 million in 2017 and $1.7 million in 2016. 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, 2018,
2017, and 2016 were approximately $922 thousand, $1.3 million, and $1.0 million, respectively. The total grants regarding projects
that we have received from the IIA as of December 31, 2018 were approximately $44.8 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, 2018, the accumulated interest was approximately $18.5 million, the accumulated royalties paid to the IIA were approximately
$14.9 million and our total amount of contingent liability to the IIA in respect of grants received was, according to our records,
approximately $48.4 million. 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, 2018, we had a contingent obligation to pay the BIRD Foundation aggregate royalties in the amount of approximately
$381 thousand. For additional information, see “Item 4.B—Information on the Company—Business Overview—Binational
Industrial Research and Development Foundation.”
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 the year ended December 31, 2018, we accrued approximately $9 thousand as royalty expenses
to be paid to the MOE. For additional information, see “Item 4.B—Information on the Company—Business Overview—Israel
Innovation Authority.”
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
. In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). Under this standard,
which we adopted effective January 1, 2018, as described below, revenue is recognized when a customer obtains control of promised
goods or services and is recognized in an amount that reflects the consideration which the entity expects to receive in exchange
for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue
and cash flows arising from contracts with customers. The FASB also issued several amendments to the standard, including clarification
on identifying performance obligations.
The
guidance permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method),
or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application
(the modified retrospective method). We adopted the new standard, effective January 1, 2018, using the modified retrospective
method applied to those contracts which were not substantially completed as of January 1, 2018 and recognized the cumulative effect
of initially adopting as an adjustment to the opening balance of accumulated deficit as of that date. As a result of this adoption,
we revised our accounting policy for revenue recognition as follows:
We
recognize revenue when (or as) it satisfies performance obligations by transferring promised goods or services to its customers
in an amount that reflects the consideration we expect to receive.
We
apply the following five-step approach:
|
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, 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.
|
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.
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.
Products
and related services
. 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.
Warranty
and support
. Revenues related to service type warranty and post-contract customer support are recognized over time on a straight-line
basis.
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.
The
most significant impact of the standard on our financial statements relates to differences in timing of revenue recognition under
the new standard. The cumulative adjustment as a result of the adoption of this new standard decreased our accumulated deficit
as of January 1, 2018 by approximately $337 thousand, while decreasing our deferred revenues by approximately $80 thousand, increasing
our trade receivables by approximately $233 thousand and increasing our other accounts receivable and prepaid expenses by approximately
$24 thousand.
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
2018, 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 2017 and 2018 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 2018 has been slower than
anticipated. Due to the complexity of NFV transformations, 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, 2018, 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 leases obligation (1)
|
|
$
|
2,146
|
|
|
$
|
994
|
|
|
$
|
988
|
|
|
$
|
164
|
|
|
$
|
-
|
|
Open purchase orders (2)
|
|
|
801
|
|
|
|
801
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other long-term commitments (3)
|
|
|
458
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
3,405
|
|
|
$
|
1,795
|
|
|
$
|
988
|
|
|
$
|
164
|
|
|
$
|
-
|
|
|
(1)
|
Represents
operating lease costs, consisting of leases for facilities and vehicles.
|
|
(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, 2018, was approximately $3.4 million, of which approximately $3.0
million was funded through deposits in severance pay funds, leaving a net obligation of approximately $458 thousand. 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, 2018, our contingent
liability to the IIA in respect of grants received was approximately $48.4 million, and our contingent liability to the BIRD Foundation
in respect of funding received was approximately $381 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, 2017
were approximately $668 thousand. No further grants are expected to be received from such plans. During the year ended December
31, 2018, we accrued an amount of approximately $9 thousand of royalty expenses to be paid to the MOE.
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
|
|
65
|
|
Executive Chairman of our Board of Directors
|
Uri Har (1)(2)(3)(4)(5)
|
|
82
|
|
Director
|
Irit Hillel (1)(2)(4)(5)
|
|
56
|
|
Director
|
Matty Karp (2)(4)(5)
|
|
69
|
|
Director
|
Zohar Zisapel
|
|
70
|
|
Director
|
Yaron Ravkaie
|
|
50
|
|
Chief Executive Officer
|
Eyal Harari
|
|
42
|
|
Chief Executive Officer of RADCOM US
|
Amir Hai
|
|
53
|
|
Chief Financial Officer
|
Hilik Itman
|
|
47
|
|
Vice President, Research and Development
|
Rami Amit
|
|
53
|
|
Chief Technology Officer and Head of Product
|
(1)
|
External Director, pursuant to the Israeli Companies Law.
|
(2)
|
Independent Director, under Nasdaq Stock Market Rules, or the Nasdaq Listing Rules.
|
(3)
|
Chairman of Audit and Compensation Committees.
|
(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. Uri Har
has served as a director since September 2006. He was the Director General of the Electronics and Software Industries Association
of Israel from 1984 until 2006. Prior to that, Mr. Har served for 26 years in engineering and managerial positions in the
Israeli Navy where his last assignment was the Israeli Naval Attaché in the United States and Canada. Among his various
positions in the Israeli Navy, he served for three years (1977 - 1980) as Head of the Budget and Comptroller Department. He
holds a B.Sc. and a M.Sc. in Mechanical Engineering from the Technion - Israel Institute of Technology.
Ms. Irit Hillel
has served as a director since October 2007. She has spent the last 20 years as an entrepreneur and senior executive in digital
media, technology and investment firms. She currently serves as Venture Partner at HP Tech Ventures, the corporate venture arm
of HP Inc. (Nasdaq: HPQ), leading partnerships and strategic investments in early stage technology startups. She is also a board
member of Imagesat NV. From 2005 until 2008 she was Managing Director at Magnolia Capital Partners, managing the operations in
Israel of Thomas Weisel Partners and Nomura, providing investment banking services to Israeli high tech and healthcare companies.
In 2008 to 2009 she served as Head of Interactive at Animation Lab, a JVP 3D feature animation company. Ms. Hillel served as Head
of Mattel Interactive Europe, bringing to market some of Europe’s best-selling computer game titles. Previously, Ms. Hillel
founded and served as EVP business development and board director for PrintPaks, acquired by Mattel Inc. (NYSE: MAT) in 1997. Prior
experience also includes VP at Power Paper Ltd., Advisor to Hewlett Packard Co. (NYSE: HPQ), and Investment Manager at Columbia
Savings in Beverly Hills, California. Ms. Hillel holds an M.B.A. from the Anderson Graduate School of Business at UCLA, and a B.Sc.
in Mathematics and Computer Science from Tel Aviv 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.
Mr. Zohar
Zisapel,
a co-founder of our Company, has served as our Chairman of the Board from inception in 1985 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. Yaron Ravkaie
,
our Chief Executive Officer, joined us in January 2016. 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., Mr. Ravkaie
served as the President of the Mobile Financial Services Division in Amdocs Ltd. (Nasdaq: DOX) for two years executing an M&A
and a successful post-merger integration with a global organization offering mobile payments and mobile commerce. From 2008 through
2012, Mr. Ravkaie served as President of the AT&T division, the largest in Amdocs, running sales, client management, strategy,
projects, programs, long-term outsourcing and managed services activities. Mr. Ravkaie joined Amdocs in 1998 and, after a brief
stint in the Israel Development Center, he relocated to the U.S., where he performed various 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
.
Eyal
Harari,
CEO of RADCOM US, joined us in November 2000 as a software R&D group manager and was appointed to his current position
in November 2016. 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 Vice President of Research and Development joined us in June 1997 as a software engineer and was appointed to his current position
in 2014. 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 an electrical engineering degree 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, CEO
|
|
2018
|
|
|
268,530
|
|
|
|
45,000
|
|
|
|
179,037
|
|
|
|
64,000
|
|
|
|
556,567
|
|
Rami Amit, CTO and Head of Product
|
|
2018
|
|
|
221,779
|
|
|
|
40,000
|
|
|
|
193,717
|
|
|
|
51,000
|
|
|
|
506,496
|
|
Hilik Itman, VP R&D
|
|
2018
|
|
|
169,030
|
|
|
|
40,000
|
|
|
|
250,834
|
|
|
|
39,000
|
|
|
|
498,864
|
|
Eyal Harari, CEO of RADCOM US
|
|
2018
|
|
|
250,000
|
|
|
|
45,000
|
|
|
|
144,915
|
|
|
|
53,479
|
|
|
|
493,394
|
|
Rachel (Heli) Bennun, Executive Chairman
|
|
2018
|
|
|
83,240
|
|
|
|
-
|
|
|
|
122,412
|
|
|
|
23,307
|
|
|
|
228,959
|
|
|
(1)
|
Equity based compensation includes the cost of non-cash share-based compensation of the Company in 2018. The grants awarded
during 2018, 2017 and 2016, were for a vesting term of 3 or 4 years.
|
|
(2)
|
All other compensation includes social benefits and car
leasing costs.
|
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 general meeting of our shareholders on August 16, 2016.
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 August 16, 2016.
The aggregate direct
remuneration paid to all our directors and executive officers as a group for the year ended December 31, 2018 was approximately
$2.0 million in salaries, bonus, commissions and directors’ fees. This amount includes approximately $280 thousand 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 2018, our officers
received, in the aggregate, 20,000 restricted share units, or RSUs, under our 2013 Share Option Plan, or the 2013 Plan. The RSUs
have a vesting schedule of 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,
2018, our current directors and officers, as a group, held options to purchase an aggregate of 188,260 ordinary shares of the Company
and 87,571 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 and external directors (other than to our Executive Chairman, as of September 10, 2015), is an
annual fee of NIS 36,746 (currently equivalent to approximately $10,193) and a per meeting attendance fee of NIS 1,841 (currently
equivalent to approximately $510), 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.
On
January 29, 2018, our Compensation Committee of our Board of Directors and Board of Directors and on July 19, 2018, our shareholders,
approved Ms. Bennun’s 2017 cash bonus of $50,000.
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 April
15, 2019, we have granted 1,238,802 options and 653,148 RSUs under the 2013 Plan. 113,800 RSUs granted to our CEO and Board of
Directors during February 2019 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 $2.1 million for share-based compensation plans during 2018. During 2018, we granted
32,700 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 April 15, 2019,
we have under the 2013 Plan a total of 403,760 outstanding options to purchase ordinary shares and 406,207 unvested RSUs.
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 July 10,
2016, 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 August 16, 2016. 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), Uri Har, Irit Hillel, Matty Karp 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. Mr.
Zisapel is currently serving a one-year term which will expire on our next annual general meeting. Ms. Bennun and Mr. Karp are
currently serving three-year terms which commenced on our annual general meeting which took place in August 2016 and will expire
on our next annual general meeting. Our external directors serve for three-year periods. The three-year term of office for our
external directors, Mr. Har and Ms. Hillel, expires in August 2019. 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
We are subject to the provisions of the
Israeli Companies Law.
Under the Israeli Companies
Law and the regulations promulgated pursuant thereto, Israeli public companies, namely companies whose shares have been offered
to the public or are publicly traded, are required to appoint at least two natural persons as “external directors”.
Pursuant to the Israeli
Companies Law, (1) an external director must have either “accounting and financial expertise” or “professional
qualifications” (as such terms are defined in regulations promulgated under the Israeli Companies Law) and (2) at least one
of the external directors must have “accounting and financial expertise.” Our external directors are Mr. Uri Har and
Ms. Irit Hillel. We have determined that Ms. Hillel has the requisite “accounting and financial expertise” and that
Mr. Har has the requisite “professional qualifications.”
External directors
are to be elected by a majority vote at a shareholders meeting, provided that either:
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a majority of the shares of non-controlling shareholders and shareholders
who do not have a personal interest in the election of the candidate (other than a personal interest that is unrelated to a relationship
with the controlling shareholders) voted at the meeting, voted in favor of the external director’s election; or
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●
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the total number of shares of non-controlling shareholders and shareholders
who do not have a personal interest in the election of the candidate (other than a personal interest that is unrelated to a relationship
with the controlling shareholders) that voted against the election of the external director, does not exceed two percent of the
aggregate number of voting rights in the company.
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The initial term of
an external director is three years and may be extended subject to the shareholders’ approval, for up to two additional three-year
terms. In certain special situations, the term may be extended beyond these periods. Each committee of a company’s
board of directors is required to include at least one external director except for the audit committee and the compensation committee,
of which all the external directors are to be members. At our 2016 annual general meeting, held on August 16, 2016, our shareholders
approved the re-election of Mr. Uri Har and Ms. Irit Hillel as our external directors, each for a fourth three-year term. Both
Mr. Uri Har and Ms. Irit Hillel qualify as external directors under the Israeli Companies Law, and both are members of the Company’s
Audit Committee and Compensation Committee.
Audit Committee
Our ordinary shares
are listed on Nasdaq, and we are subject to the Nasdaq Listing Rules applicable to listed companies. Under the current Nasdaq
Listing Rules, a listed company is required to have an audit committee consisting of at least three independent directors, all
of whom are financially literate and one of whom has accounting or related financial management expertise. Uri Har, Irit Hillel
and Matty Karp qualify as independent directors under the current Nasdaq requirements, and each is a member of the Audit Committee.
Irit Hillel is our “audit committee financial expert.” In addition, we have adopted an Audit Committee charter, which
sets forth the Audit Committee’s responsibilities.
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.
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Israeli Companies Law Requirements
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Under the Israeli Companies
Law, the board of directors of a public company is required to appoint an audit committee, which must be comprised of at least
three directors and include all of the external directors. The majority of the members of the audit committee are required
to be “independent” (as such term is defined in the Israeli Companies Law) and the chairman of the audit committee
is required to be an external director. Our independent directors are Irit Hillel, Uri Har and Matty Karp.
In addition: (1) all
audit committee decisions must be made by a majority of the committee members, of which the majority of members present are
independent and external directors, and (2) any person who is not eligible to serve on the audit committee is further restricted
from participating in its meetings and votes, unless the chairman of the audit committee determines that such person’s presence
is necessary in order to present a certain matter, provided however, that company employees who are not controlling shareholders
or relatives of such shareholders may be present in the meetings but not in the actual votes and likewise, company counsel and
secretary who are not controlling shareholders or relatives of such shareholders may be present in meetings and decisions if such
presence is requested by the audit committee.
The function of the
audit committee is to determine if there are any irregularities in the management of our business and if there are any, to recommend
remedial measures. The audit committee is also required, under the Israeli Companies Law, to approve certain related party transactions.
In addition, the responsibilities of the audit committee shall also include classifying company transactions as extraordinary transactions
or non-extraordinary transactions and as material or non-material transactions, in which an officer has an interest (which will
have the effect of determining the kind of corporate approvals required for such transaction); assessing the proper function of
the company’s internal audit regime, overseeing the activities of the internal auditor, determining whether the internal
auditor has the requisite tools and resources required to perform his role, and reviewing his work plan; and to regulate the company’s
rules on employee complaints, reviewing the scope of work of the company’s independent accountants and their fees, and implementing
a whistleblower protection plan with respect to employee complaints of business irregularities.
An audit committee of a public company
may not approve a related-party transaction under the Israeli Companies Law unless at the time of such approval, the external directors
are serving as members of the audit committee and at least one of them is present at the meeting at which such approval is granted.
All related party transactions have been approved in accordance with this requirement.
Compensation Committee
Nasdaq Requirements
Under the Nasdaq Listing
Rules, a listed company is required to have a compensation committee comprised solely of independent directors. Our Compensation
Committee consists of Uri Har (Chairman), Irit Hillel and Matty Karp, each of whom satisfies the independence requirements under
the current Nasdaq Listing Rules. The Company has adopted a Compensation Committee charter, which sets forth the responsibilities
of the Compensation Committee. The Compensation Committee is responsible for, among other things, assisting the Board of Directors
in the reviewing and approving the compensation structure and policy, including all forms of compensation relating to our directors
and executive officers.
As stated
in our Compensation Committee Charter, the purpose of the Compensation Committee is to review and approve, or, where required under
the Israeli Companies Law or appropriate at the Compensation Committee’s discretion, recommend to the Audit Committee of
the Board of Directors (the “Audit Committee”) and/or the Board of Directors for approval, the compensation policy
for “office holders” (office holder is defined in the Israeli Companies Law as a director, the chief executive officer,
the chief financial officer and any manager who is directly subordinate to the chief executive officer) of the Company, the compensation
policy for executive officers of the Company (including renewal and reassessment thereof) who are not “office holders”
of the Company within the meaning of the Israeli Companies Law, but who are defined as such according to the Nasdaq Listing Rules
(as defined below), the compensation (including exculpation, indemnification and insurance) of such office holders, and the administration
of the Company’s equity-based plans.
Israeli Companies Law Requirements
Under the Israeli Companies
Law, the board of directors of a public company must establish a compensation committee. The compensation committee must consist
of at least three directors who satisfy certain independence qualifications. Under the Israeli Companies Law, the role of the compensation
committee is to recommend to the board of directors, for ultimate shareholder approval by a special majority, a policy governing
the compensation of office holders based on specified criteria, to review modifications to the compensation policy from time to
time, to review its implementation, and to approve the actual compensation terms of office holders prior to approval by the board
of directors.
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:
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the knowledge, skills, expertise and accomplishments of the relevant
office holder;
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the office holder’s roles and responsibilities and prior compensation
agreements with him or her;
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the relationship between the terms offered and the average compensation
of the other employees of the company, including those employed through human resource companies;
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the impact of disparities in salary upon work relationships in the
company;
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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
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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.
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The compensation policy
must also include the following principles:
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the link between variable compensation and long-term performance and
measurable criteria;
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the relationship between variable and fixed compensation, and the
ceiling for the value of variable compensation;
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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;
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the minimum holding or vesting period for variable, equity-based compensation;
and
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maximum limits for severance compensation.
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On July 11, 2016, 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 August 16, 2016.
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, 2018 was 233, including employees and contractors, broken down geographically and by function as follows:
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Research and
Development
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Sales, Marketing and
Customer Support
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Operations
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Administration and
Management
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Total
Headcount
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Israel
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90
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40
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3
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13
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146
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India
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8
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14
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-
|
|
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2
|
|
|
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24
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United States
|
|
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-
|
|
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22
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-
|
|
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4
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26
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Brazil
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|
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-
|
|
|
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7
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|
|
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-
|
|
|
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1
|
|
|
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8
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Other
|
|
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18
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|
|
|
11
|
|
|
|
-
|
|
|
|
-
|
|
|
|
29
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|
Total
|
|
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116
|
|
|
|
94
|
|
|
|
3
|
|
|
|
20
|
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233
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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 13,718,709 ordinary shares outstanding as of April 15, 2019. Except for Mr. Zohar Zisapel,
none of our executive officers or directors beneficially owns 1% or more of our outstanding ordinary shares.
Name
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|
Number of
Ordinary
Shares
Beneficially
Owned(1)
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|
|
Percentage
of
Outstanding
Ordinary
Shares
Beneficially
Owned(2)(3)
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Zohar Zisapel
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2,881,672
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(4)
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21.0
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%
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All directors and executive officers as a group, except Zohar Zisapel (10 persons)
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164,016
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(5)
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1.2
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%
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(1)
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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 April 15, 2019.
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(2)
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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 April 15, 2019.
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(3)
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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.
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(4)
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Includes (i)
2,325,525 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, and (iv) 14,000 ordinary shares issuable upon exercise of
options, with an average exercise price per share of $13.71, expiring between the years 2020 and 2021. The options listed
above are exercisable currently or within 60 days of April 15, 2019. 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 outstanding options of which 15,258 are exercisable, 9,000
unvested RSUs and 17,900 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.
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(5)
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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 April 15, 2019 and have, therefore, not been separately disclosed. The number of shares is comprised of 112,259
ordinary shares issuable upon exercise of options exercisable within 60 days April 15, 2019 and 51,757 ordinary shares.
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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.
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MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
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The following table
sets forth certain information regarding the beneficial ownership of our ordinary shares as of April 15, 2019, 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 April 15, 2019, our ordinary shares had a total of 21 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 April 15, 2019, 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
|
|
|
2,881,672
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(3)
|
|
|
21.0
|
%
|
|
|
|
|
|
|
|
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Yelin Lapidot Holdings Management Ltd.
|
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1,542,975
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(4)
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|
|
11.2
|
%
|
|
|
|
|
|
|
|
|
|
Raging Capital Management, LLC
|
|
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1,115,053
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(5)
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|
|
8.1
|
%
|
(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 April 15, 2019.
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(2)
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The percentage of outstanding ordinary shares is based on 13,718,709 ordinary shares outstanding as of April 15, 2019. 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 April 15, 2019. 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.
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(3)
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Includes
(i) 2,325,525 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, and (iv) 14,000 ordinary shares issuable upon exercise
of options, with an average exercise price per share of $13.71, expiring between the years 2020 and 2021. The options
listed above are exercisable currently or within 60 days of April 15, 2019. 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 outstanding options of which 15,258
are exercisable, 9,000 unvested RSUs and 17,900 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.
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(4)
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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 11, 2019 and reflects the holdings of such persons as of December 31, 2018.
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(5)
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The information with respect to the holdings of Raging Capital Management, LLC is based on a Schedule 13G filed with the SEC by Raging Capital Management, LLC and William C. Martin on February 14, 2019 and reflects the holdings of such persons as of December 31, 2018.
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B.
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RELATED PARTY TRANSACTIONS
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The Amdocs/AT&T engagements
In 2015, we entered
into several material contracts with subsidiaries of Amdocs Ltd., a company with limited liability under the laws of the Island
of Guernsey, or Amdocs. Mr. Zohar Zisapel, the Company’s controlling shareholder and director, also served as a director
of Amdocs until January 31, 2019.
On March 23, 2015,
RADCOM US, entered into a Master Subcontractor Agreement, or MSA, with Amdocs, Inc., a Delaware corporation and a significant subsidiary
of Amdocs, or Amdocs US, which MSA was subsequently assigned to us by RADCOM US. At the time the MSA was entered into, there
were no business commitments pursuant to such agreement.
On December 30, 2015,
we entered into a multi-year supplemental agreement, or the Supplemental Agreement, and together with the MSA, the Subcontractor
Agreement with Amdocs Software Systems Limited, a company formed under the laws of Ireland and a significant subsidiary of Amdocs
Software.
On December 30, 2015,
we entered into a value-added reseller agreement with Amdocs Software, or the VAR Agreement, as amended by the addendum to the
VAR Agreement, dated December 30, 2015, or the Addendum. Pursuant to the VAR Agreement and the Addendum, Amdocs Software is
authorized to resell our products to various end user customers as may be agreed upon from time to time by the parties.
On December 28, 2015,
we entered into an End User License Agreement with AT&T Services Inc., or AT&T, pursuant to which we granted a license
to use our software. As per the Supplemental Agreement, and in addition to the licenses to our MaveriQ solutions which we granted
under the End User License Agreement and in connection with the Supplemental Agreement, we provide related services in our capacity
as a subcontractor of Amdocs US in accordance with the Subcontractor Agreement.
During the years 2016,
2017 and 2018, we expanded our above engagement, including maintenance agreements.
The pricing and other
terms of the abovementioned agreements were determined based on negotiations between the applicable parties.
In March 2019, we entered
into a series of agreements with AT&T for the delivery of our solutions and related services. For more information, see “Item
10.C—Additional Information—Material Contracts.”
RAD-BYNET Group
Mr. Zohar Zisapel,
the Company’s controlling shareholder and a director, 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
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. In
some cases, the RAD-BYNET Group obtains volume discounts for services from unrelated parties, and we pay our pro rata cost of such
services. Based on our experience, the volume discounts provide better terms than we would be able to obtain on our own. The
aggregate amount of such purchases was approximately $2 thousand in 2018.
Members of the RAD-BYNET
group may provide personnel, administrative and IT services to us, for which we pay on market terms and rates. The aggregate amount
of such payments was approximately $32 thousand in 2018.
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, together with reimbursement of expenses in connection with the renovation of our New Jersey office, was
approximately $967 thousand in 2018.
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 2018, we entered into engagements with Matrix affiliates as a related party in the amount of approximately $221 thousand
of which approximately $4 thousand was incurred in 2018.
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C.
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INTERESTS OF EXPERTS AND COUNSEL
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Not applicable.
ITEM 8.
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FINANCIAL INFORMATION
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A.
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CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
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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 2018 and 2017, the
amount of our export sales was approximately $33.3 million and $33.5 million respectively, which represented 98% and 90% 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,
2018.
ITEM 9.
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THE OFFER AND LISTING
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A.
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OFFER AND LISTING DETAILS
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Our ordinary shares
are traded on the Nasdaq Capital Market under the symbol “RDCM.”
Not applicable.
Our ordinary shares
have been traded on the Nasdaq Capital Market since October 1, 2007. Prior to October 1, 2007, and from the date of our initial
public offering on September 24, 1997 our ordinary shares were traded on the Nasdaq Global Market.
Not applicable.
Not applicable.
Not applicable.
ITEM 10.
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ADDITIONAL INFORMATION
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Not applicable.
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B.
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MEMORANDUM AND ARTICLES OF ASSOCIATION
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Our memorandum of association
was last amended on December 30, 2015, and our articles of association were last amended on August 16, 2016. The following is a
summary description of certain provisions of our memorandum of association and articles of association, in each case as is currently
in effect, and certain relevant provisions of the Israeli Companies Law (as currently in effect) which apply to us. This description
is only a summary and does not purport to be complete and is qualified by reference to the full text of the memorandum and articles,
which are incorporated by reference and/or filed as exhibits to this Annual Report, and to the Israeli Companies Law.
Objectives and Purposes
We were first registered
by the Israeli Registrar of Companies on July 5, 1985, as a private company under the name Big Blue Catalogue Ltd. and changed
our name to RADCOM Ltd. in 1989. We later became a public company, registered by the Israeli Registrar of Companies on October 1,
1997 with the company number 52-004345-6.
The full details of
our objectives and purposes can be found in Section 2 of our memorandum of association, as filed with the Israeli Registrar of
Companies and amended from time to time by resolutions of our shareholders. One of our objectives is to manufacture, market
and deal – in all ways – with computer equipment, including communications equipment and all other equipment related
in any way to such equipment. Some additional objectives of our listing include: having business relationships
with representatives and agents; engaging in research and development; acquiring intellectual property; engaging in business actions
with other business owners; lending money when we deem it proper to do so; dealing in any form of business (e.g., import, export,
marketing, etc.); and many other general business activities, whether in Israel or in any other country.
Directors
According to our articles
of association, our Board of Directors is to consist of not less than three and not more than nine directors, the exact number
to be determined from time to time by resolutions of our shareholders. On December 9, 2009, our shareholders determined that
the number of directors on our Board of Directors would be five. The three-year term of office for our external directors,
Mr. Har and Ms. Hillel, expires in 2019.
Election of Directors
Directors, other than
external directors, are elected by the shareholders at the annual general meeting of the shareholders or appointed by the board
of directors. In the event that any directors are appointed by the board of directors, their appointment is required to be
ratified by the shareholders at the next shareholders’ meeting following such appointment. Our shareholders may remove
a director from office in certain circumstances. There is no requirement that a director own any of our capital shares. Directors
may appoint alternative directors in their place, with the exception of external directors, who may appoint an alternate director
only in very limited circumstances. See “Item 6.C-Directors, Senior Management and Employees-Board Practices”.
Remuneration of Directors
Directors’ remuneration
is subject to our compensation policy and to shareholder approval. Monetary compensation to external directors is mandated by Israeli
regulations, which is subject to approval by the board of directors only in certain circumstances.
Powers of the Board of Directors
Our Board of Directors
may resolve to take action at a meeting when a quorum is present, and resolutions must be passed by a vote of at least a majority
of the directors present at the meeting who are entitled to participate in the meeting. A quorum of directors requires
at least a majority of the directors then in office who are lawfully entitled to participate in the meeting, but shall not be less
than two.
Our Board of Directors
may elect one director to serve as Chairman of the Board to preside at the meetings of our Board of Directors and may also remove
such director.
Our Board of Directors
retains all power in running the Company that is not specifically granted to the shareholders. Our Board of Directors may,
at its discretion, cause us to borrow or secure the payment of any sum or sums of money for our purposes at such times and upon
such terms and conditions in all respects as it deems fit, and, in particular, through the issuance of bonds, perpetual or redeemable
debentures, debenture stock, or any mortgages, charges, or other securities on the undertaking or the whole or any part of our
property, both present and future, including our uncalled or called but unpaid capital for the time being.
Subject to the provisions
of the Israeli Companies Law, the Company may enter into any contract or otherwise transact any business with any director in which
contract or business such director has a personal interest, directly or indirectly; and may enter into any contract of otherwise
transact any business with any third party in which contract or business a director has a personal interest, directly or indirectly.
No person shall be
disqualified to serve as a director by reason of his not holding shares in the Company.
Dividends
Our Board of Directors
may declare dividends as it deems justified. Dividends may be paid in assets or shares of capital stock, debentures
or debenture stock of us or of other companies. Our Board of Directors may decide to distribute our profits among the shareholders. Dividends
that remain unclaimed after seven years will be forfeited and returned to us. Unless there are shareholders with special
dividend rights, any dividend declared will be distributed among the shareholders in proportion to their respective holdings of
our shares for which the dividend is being declared.
Neither our memorandum
of association or our articles of association nor the laws of the State of Israel restrict in any way, the ownership or voting
of ordinary shares by non-residents of Israel, except with regard to subjects of countries which are in a state of war with Israel
who may not be recognized as owners of ordinary shares. If we are wound up, then aside from any special rights of shareholders
our remaining assets will be distributed among the shareholders in proportion to their respective holdings.
Our articles of association
allow us to create redeemable shares, although at the present time we do not have any such redeemable shares.
External Directors
See “Item 6.C—Directors,
Senior Management and Employees—Board Practices—External Directors.”
Fiduciary Duties of Office Holders
The Israeli
Companies Law imposes a duty of care and a duty of loyalty on all office holders of a company.
The duty of care requires
an office holder to act with the level of care with which a reasonable office holder in the same position would have acted under
the same circumstances. The duty of care of an office holder includes a duty to utilize reasonable means to obtain:
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information regarding the advisability of a given action submitted
for his or her approval or performed by him or her by virtue of his position; and
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all other important information pertaining to such actions.
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The duty of loyalty
of an office holder includes a duty to:
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refrain from any conflict of interest between the performance of his
or her duties for the company and the performance of his or her other duties or personal affairs;
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refrain from any activity that is competitive with the company;
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refrain from exploiting any business opportunity of the company to
receive a personal gain for himself or herself, or for others; and
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disclose to the company any information or documents relating to the
company’s affairs which the office holder has received due to his or her position as an office holder.
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Each person listed
in the table above under “Item 6.A—Directors, Senior Management and Employees—Directors and Senior Management”
above is an office holder. Under the Israeli Companies Law, all arrangements as to compensation of office holders who
are not directors, or controlling parties, require approval of the compensation committee to the extent that it complies with the
statutory requirements which apply to the compensation committee, and the Board of Directors. Arrangements regarding the terms
of employment and compensation of directors also require approval by the compensation committee, the Board of Directors and the
shareholders.
Approval of Officeholder Compensation
The Israeli
Companies Law imposes approval requirements for the compensation of office holders. Every Israeli public company must adopt a compensation
policy, recommended by the compensation committee, and approved by the board of directors and the shareholders, in that order.
The shareholder approval requires a majority of the votes cast by shareholders, excluding any controlling shareholder and those
who have a personal interest in the matter (similar to the threshold described below under ” – Duties of Shareholders”).
In general, all office holders’ terms of compensation – including fixed remuneration, bonuses, equity compensation,
retirement or termination payments, indemnification, liability insurance and the grant of an exemption from liability – must
comply with the company’s compensation policy. In addition, any arrangement between a company and one of the company’s
office holders must be approved by the company’s compensation committee and the board of directors. The approval of the company’s
shareholders is required with respect to the compensation of a company’s directors (including a director that also serves
as an executive officer) and the chief executive officer.
Additionally, a special
majority of the shareholders is required for the approval of the compensation of the chief executive officer, and in the event
that the compensation to an office holder is not consistent with the company’s compensation policy.
Conflict of Interest
The Israeli Companies
Law requires that an office holder of a company disclose to the company, promptly and in any event no later than the board of directors
meeting in which the transaction is first discussed, any personal interest that he or she may have and all related material information
known to him or her in connection with any existing or proposed transaction by the company. A personal interest of an office
holder includes an interest of a company in which the office holder is a 5% or greater shareholder, director or general manager
or in which the office holder has the right to appoint at least one director or the general manager.
Extraordinary Transactions
In addition, if the
transaction is an extraordinary transaction as defined under Israeli law, the office holder must also disclose any personal interest
held by the office holder’s spouse, siblings, parents, grandparents, descendants, spouse’s descendants, as well as
the siblings and parents of the office holder’s spouse and the spouses of any of the foregoing. Under Israeli law, an extraordinary
transaction is a transaction which is:
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not in the ordinary course of business;
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not on market terms; or
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is likely to have a material impact of the Company’s profitability,
assets or liabilities.
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Under the Israeli Companies
Law, the board of directors may approve a transaction between the company and an office holder or a third party in which an office
holder has a personal interest, but only if the transaction is in the best interests of the company. If the transaction is
an extraordinary transaction, the transaction requires the approval of the audit committee and the board of directors, in that
order. In certain circumstances, shareholder approval may also be required. An office holder who has a personal
interest in a matter that is considered at a meeting of the board of directors or the audit committee may not be present at the
deliberations or vote on this matter, however, with respect to an office holder, he/she may be present at the meeting discussions
if the chairman determines that the office holder has to present the matter or a majority of the members of the board of directors
or the audit committee, as the case may be, also have a personal interest. If a majority of the members of the board of directors
or the audit committee, as the case may be, also have a personal interest, shareholder approval is also required.
Amending the Rights of Shareholders
Pursuant to the Israeli
Companies Law and the Company’s articles of association, the Company may change the rights of owners of shares of a class
of capital stock only with the approval of a majority of the holders of such class of stock present and voting at a separate general
meeting called for such class of stock. An enlargement of a class of stock is not considered changing the rights of such class
of stock.
Shareholder Meetings
The Company has two
types of general shareholder meetings: the annual general meeting and the extraordinary general meeting. An
annual general meeting must be held once in every calendar year, but not more than 15 months after the last annual general meeting. We
are required to give notice of general meetings (annual or extraordinary) no less than seven days before the general meetings. We
may provide notice of our general meetings by publishing such notice, either (1) on our website and/or (2) in one international
wire service and/or (3) in any other common form of electronic dissemination. A quorum in a general meeting consists of two or
more holders of ordinary shares (present in person or by proxy), who together hold at least one-third (1/3) of the voting power
of the company. If there is no quorum within an hour of the time set, the meeting is postponed until the following week
(or any other time upon which the Chairman of the Board and the majority of the voting power represented at the meeting agree). Every
ordinary share has one vote. A shareholder may only vote the shares for which all calls have been paid, except in separate
general meetings of a particular class. A shareholder may vote in person or by proxy, or, if the shareholder is a corporate
body, by its representative. We are exempted by the Nasdaq Listing Rules from the requirement to distribute our annual report to
our shareholders, but we have undertaken to post a copy of it on our website, www.radcom.com, after filing it with the SEC. See
also “Item 16G—Corporate Governance.”
Duties of Shareholders; Extraordinary
Transactions with Controlling Shareholders
Under the Israeli Companies
Law, the disclosure requirements that apply to an office holder also apply to a controlling shareholder of a public company. A
controlling shareholder is a shareholder who has the ability to direct the activities of a company, including a shareholder that
holds 25% or more of the voting power of a company if no other shareholder owns more than 50% of the voting power of the company,
but excluding a shareholder whose power derives solely from his or her position as a director of the company or any other position
with the company. Extraordinary transactions of a public company with a controlling shareholder or with a third party in which
a controlling shareholder has a personal interest, and the terms of engagement of a controlling shareholder as an office holder
or employee, require the approval of the audit committee, the board of directors and the shareholders of the company, in such order. The
shareholder approval must be by a majority vote, provided that either:
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a majority of the shares of shareholders who have no personal interest
in the transaction and are present and voting, in person, by proxy or by written ballot, at the meeting, vote in favor of the transaction;
or
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the shareholders who have no personal interest in the transaction
who vote against the transaction do not represent more than two percent of the voting power of the company.
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It is the responsibility
of the audit committee to determine whether or not a transaction is extraordinary. In addition, the audit committee must also establish:
(i) procedures for the consideration of any transaction with a controlling shareholder, even if it is not extraordinary, such as
a competitive process with third parties or negotiation by independent directors; and (ii) approval requirements for controlling
shareholder transactions that are not material.
Agreements and extraordinary
transactions with a duration exceeding three years are subject to re-approval once every three years by the audit committee (or
compensation committee, in certain circumstances under applicable law), board of directors and the shareholders of the company.
Extraordinary transactions may be approved in advance for a period exceeding three years if the audit committee determines such
approval is reasonable under the circumstances.
For information concerning
the direct and indirect personal interests of certain of our office holders and principal shareholders in certain transactions
with us, see “Item 7—Major Shareholders and Related Party Transactions.”
In addition, under
the Israeli Companies Law each shareholder has a duty to act in good faith in exercising his or her rights and fulfilling his or
her obligations toward the company and other shareholders and to refrain from abusing any power he or she has in the company, such
as in shareholder votes. In addition, certain shareholders have a duty of fairness toward the company, although such
duty is not defined in the Israeli Companies Law. These shareholders include any controlling shareholder, any shareholder who knows
that he or she possesses the power to determine the outcome of a shareholder vote and any shareholder who, pursuant to the provisions
of the articles of association, has the power to appoint or to prevent the appointment of an office holder or any other power in
regard to the company.
Exculpation of Office Holders
Under the Israeli Companies
Law, an Israeli company may not exculpate an office holder from liability with respect to a breach of his duty of loyalty nevertheless
may exculpate in advance an office holder from his liability to the company, in whole or in part, with respect to a breach of his
duty of care (except in connection with distributions), provided that the articles of association of the company permit it to do
so. Our articles of association allow us, subject to the provisions of the Israeli Companies Law, to prospectively exculpate
an office holder from all or some of the office holder’s responsibility for damage resulting from the office holder’s
breach of the office holder’s duty of care to the Company.
Insurance of Office Holders
Our articles of association
further provide that, subject to the provisions of the Israeli Companies Law, we may enter into a contract for the insurance of
the liability of any of our office holders with respect to an act performed by such individual in his or her capacity as an office
holder, in respect of each of the following:
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a breach of an office holder’s duty of care to us or to another
person;
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a breach of an office holder’s duty of loyalty to us, provided
that the office holder acted in good faith and had reasonable cause to assume that his or her act would not prejudice our interests;
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a financial obligation imposed on him in favor of another person;
and
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reasonable litigation expenses, including attorneys’ fees, incurred
by the office holder as a result of administrative enforcement proceedings instituted against him. Without derogating from the
generality of the foregoing, such expenses will include a payment imposed on the office holder in favor of an injured party as
set forth in Section 52(54)(a)(1)(a) of the Israeli Securities Law, 5728-1968, as amended, or the Israeli Securities Law, and
expenses that the office holder incurred in connection with a proceeding under Chapters H’3, H’4 or I’1 of the
Israeli Securities Law, including reasonable legal expenses, which term includes attorneys’ fees.
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Indemnification of Office Holders
Our articles of association
also provide that we may indemnify an office holder in respect of an obligation or expense imposed on the office holder in respect
of an act performed in his or her capacity as an office holder, as follows:
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a financial obligation imposed on him in favor of another person by
a court judgment, including a compromise judgment or an arbitrator’s award approved by court;
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reasonable litigation expenses, including attorneys’ fees, expended
by the office holder as a result of an investigation or proceeding instituted against him by a competent authority, provided that
such investigation or proceeding was concluded without the filing of an indictment against him and either (A) concluded without
the imposition of any financial liability in lieu of criminal proceedings or (B) concluded with the imposition of a financial liability
in lieu of criminal proceedings but relates to a criminal offense that does not require proof of criminal intent; or in connection
with an administrative enforcement proceeding or a financial sanction. Without derogating from the generality of the
foregoing, such expenses will include a payment imposed on the office holder in favor of an injured party as set forth in Section
52(54)(a)(1)(a) of the Israeli Securities Law, and expenses that the office holder incurred in connection with a proceeding under
Chapters H’3, H’4 or I’1 of the Israeli Securities Law, including reasonable legal expenses, which term includes
attorney fees; and
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reasonable litigation expenses, including attorneys’ fees, expended
by an office holder or charged to the office holder by a court, in a proceeding instituted against the office holder by the Company
or on its behalf or by another person, or in a criminal charge from which the office holder was acquitted, or in a criminal proceeding
in which the office holder was convicted of an offense that does not require proof of criminal intent.
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Our articles
of association also include provisions allowing us to undertake to indemnify an office holder as aforesaid:
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in advance, provided that in respect of bullet number 1 above, the
undertaking is restricted to events which our Board of Directors deems to be foreseeable in light of our actual operations at the
time of the undertaking and limited to an amount or criteria determined by our Board of Directors to be reasonable under the circumstances,
and further provided that such events and amounts or criteria are set forth in the undertaking to indemnify; and
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Limitations on Exculpation, Indemnification
and Insurance
The Israeli Companies
Law provides that a company may not exempt or indemnify an office holder, or enter into an insurance contract, which would provide
coverage for any monetary liability incurred as a result of any of the following:
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a breach by the office holder of his duty of loyalty unless, with
respect to insurance coverage or indemnification, the office holder acted in good faith and had a reasonable basis to believe that
the act would not prejudice the company;
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a breach by the office holder of his duty of care if the breach was
done intentionally or recklessly (other than if solely done in negligence);
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any act or omission done with the intent to derive an illegal personal
benefit
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a fine, civil fine or ransom levied on an office holder, or a financial
sanction imposed upon an office holder under Israeli Law.
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Required Approvals
In addition,
under the Israeli Companies Law, any exculpation of, indemnification of, or procurement of insurance coverage for, the Company’s
office holders must be approved by the Company’s compensation committee and the Company’s board of directors and, if
the beneficiary is a director or the chief executive officer, by the Company’s shareholders. The Company’s audit committee,
board of directors and shareholders resolved to indemnify and exculpate the Company’s office holders by providing them with
indemnification agreements and by approving the purchase of a directors and officers liability insurance policy. We currently maintain
directors’ and officers’ liability insurance policy limited to $23 million, at an annual premium of $200 thousand.
Anti-Takeover Provisions; Mergers and
Acquisitions
The Israeli Companies
Law prohibits the purchase of our shares if the purchaser’s holding following such purchase increases above certain percentages
without conducting a tender offer or obtaining shareholder approval. See “Item 3.D-Risk Factors - Risks Related to Our Location
in Israel - 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” above.
Delivery of Financial Statements
Our articles of association
provide that we will only mail out copies of our annual financial statements to those shareholders that submit a written request
for such statements. In accordance with applicable law, our annual financial statements are filed with the SEC and are
available at the SEC’s website, www.sec.gov, and on our website, www.radcom.com.
For the agreements
with Amdocs, see “Item 7.B- Related Party Transactions.”
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:
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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.
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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.
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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.
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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.
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General Corporate Tax Structure
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Taxable income
of the Company is subject to the Israeli corporate tax at the rate as follows: 2016 – 25%, 2017 - 24% and 2018 – 23%.
In December
2016, the Israeli Parliament approved the Economic Efficiency Law (Legislative Amendments for Applying the Economic Policy for
the 2017 and 2018 Budget Years), 2016 which reduces the corporate income tax rate from 25% to 24% effective January 1, 2017 and
to 23% effective January 1, 2018.
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, 2018.
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Capital Gains Tax on Sales of Our Ordinary Shares
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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 2016, 2017 and 2018, up to 50% for individuals and for Israeli
resident corporations, the corporate tax rate is 25%, 24% 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.
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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.
On December 22, 2017,
the Tax Cuts and Jobs Act of 2017, or TCJA, was signed into law making significant changes to U.S. income tax law, including a
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.
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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●
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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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●
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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.
|
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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●
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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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●
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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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●
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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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●
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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.
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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.
Brazilian Tax Considerations
RADCOM Brazil
is taxed under Brazilian tax rules. Income tax is calculated based on a 34% rate.
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F.
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DIVIDENDS AND PAYING AGENTS
|
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
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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 are held mainly in U.S. dollars
with financial banks and bear annual average interest range of approximately 1.37-2.70%. 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 2019, 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 $2.0 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 $102 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
|
Not applicable.
The accompanying notes are an integral
part of the consolidated financial statements
.
RADCOM LTD. AND ITS SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
U.S. dollars in thousands, except
share and per share data
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
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LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
Trade payables
|
|
$
|
1,559
|
|
|
$
|
1,828
|
|
Employees and payroll accruals
|
|
|
3,420
|
|
|
|
4,062
|
|
Deferred revenues and advances from customers
|
|
|
266
|
|
|
|
2,601
|
|
Other accounts payable and accrued expenses
|
|
|
2,281
|
|
|
|
3,428
|
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
7,526
|
|
|
|
11,919
|
|
|
|
|
|
|
|
|
|
|
NON-CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
Deferred revenues
|
|
|
100
|
|
|
|
21
|
|
Accrued severance pay
|
|
|
3,425
|
|
|
|
3,573
|
|
|
|
|
|
|
|
|
|
|
Total
non-current liabilities
|
|
|
3,525
|
|
|
|
3,594
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
$
|
11,051
|
|
|
$
|
15,513
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS’ EQUITY:
|
|
|
|
|
|
|
|
|
Share capital:
|
|
|
|
|
|
|
|
|
Ordinary Shares of NIS 0.20 par value: Authorized: 20,000,000 shares at December 31, 2018 and 2017; 13,735,759 and 13,446,007 shares issued and 13,699,727 and 13,409,975 shares outstanding at December 31, 2018 and 2017, respectively
|
|
$
|
643
|
|
|
$
|
628
|
|
Additional paid-in capital
|
|
|
135,730
|
|
|
|
131,491
|
|
Accumulated other comprehensive loss
|
|
|
(2,612
|
)
|
|
|
(2,520
|
)
|
Accumulated deficit
|
|
|
(55,281
|
)
|
|
|
(53,203
|
)
|
|
|
|
|
|
|
|
|
|
Total
shareholders’ equity
|
|
|
78,480
|
|
|
|
76,396
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and shareholders’ equity
|
|
$
|
89,531
|
|
|
$
|
91,909
|
|
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,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
Products and related services
|
|
$
|
13,529
|
|
|
$
|
7,457
|
|
|
$
|
8,642
|
|
Projects
|
|
|
12,218
|
|
|
|
26,179
|
|
|
|
17,534
|
|
Warranty and support
|
|
|
8,303
|
|
|
|
3,597
|
|
|
|
3,334
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34,050
|
|
|
|
37,233
|
|
|
|
29,510
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Products and related services
|
|
|
4,851
|
|
|
|
4,680
|
|
|
|
5,603
|
|
Projects
|
|
|
2,825
|
|
|
|
5,321
|
|
|
|
2,902
|
|
Warranty and support
|
|
|
1,190
|
|
|
|
487
|
|
|
|
477
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,866
|
|
|
|
10,488
|
|
|
|
8,982
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
25,184
|
|
|
|
26,745
|
|
|
|
20,528
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
15,503
|
|
|
|
10,562
|
|
|
|
8,047
|
|
Less - royalty-bearing participation
|
|
|
1,648
|
|
|
|
1,599
|
|
|
|
1,693
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development, net
|
|
|
13,855
|
|
|
|
8,963
|
|
|
|
6,354
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing, net
|
|
|
11,426
|
|
|
|
10,996
|
|
|
|
8,528
|
|
General and administrative
|
|
|
3,391
|
|
|
|
4,191
|
|
|
|
4,523
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
28,672
|
|
|
|
24,150
|
|
|
|
19,405
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(3,488
|
)
|
|
|
2,595
|
|
|
|
1,123
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial income, net
|
|
|
1,136
|
|
|
|
389
|
|
|
|
816
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before taxes on income
|
|
|
(2,352
|
)
|
|
|
2,984
|
|
|
|
1,939
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxes on income
|
|
|
(63
|
)
|
|
|
(83
|
)
|
|
|
(24
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(2,415
|
)
|
|
$
|
2,901
|
|
|
$
|
1,915
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per Ordinary Share
|
|
$
|
(0.18
|
)
|
|
$
|
0.24
|
|
|
$
|
0.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per Ordinary Share
|
|
$
|
(0.18
|
)
|
|
$
|
0.23
|
|
|
$
|
0.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of Ordinary Share used in computing basic net income (loss) per Ordinary Share
|
|
|
13,630,793
|
|
|
|
12,039,176
|
|
|
|
10,406,897
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of Ordinary Share used in computing diluted net income (loss) per Ordinary Share
|
|
|
13,630,793
|
|
|
|
12,351,566
|
|
|
|
10,779,547
|
|
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,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(2,415
|
)
|
|
$
|
2,901
|
|
|
$
|
1,915
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
(92
|
)
|
|
|
39
|
|
|
|
201
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income (loss)
|
|
|
(92
|
)
|
|
|
39
|
|
|
|
201
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
$
|
(2,507
|
)
|
|
$
|
2,940
|
|
|
$
|
2,116
|
|
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, 2016
|
|
|
8,638,685
|
|
|
$
|
372
|
|
|
$
|
70,270
|
|
|
$
|
(2,760
|
)
|
|
$
|
(58,019
|
)
|
|
$
|
9,863
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Ordinary Shares, net of issuance costs of $1,721, upon follow-on public offering
|
|
|
2,090,909
|
|
|
|
108
|
|
|
|
21,171
|
|
|
|
-
|
|
|
|
-
|
|
|
|
21,279
|
|
Share-based compensation and RSUs
|
|
|
-
|
|
|
|
-
|
|
|
|
2,471
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,471
|
|
Exercise of warrants into Ordinary Shares
|
|
|
310,985
|
|
|
|
16
|
|
|
|
1,069
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,085
|
|
Exercise of options into Ordinary Shares
|
|
|
508,149
|
|
|
|
25
|
|
|
|
3,304
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,329
|
|
RSUs vested
|
|
|
37,500
|
|
|
|
2
|
|
|
|
(2
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Net income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,915
|
|
|
|
1,915
|
|
Other comprehensive income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
201
|
|
|
|
-
|
|
|
|
201
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2016
|
|
|
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
|
|
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,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(2,415
|
)
|
|
$
|
2,901
|
|
|
$
|
1,915
|
|
Adjustments to reconcile net income (loss) to net cash provided (used in) by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
657
|
|
|
|
537
|
|
|
|
286
|
|
Share-based compensation and RSUs
|
|
|
2,121
|
|
|
|
2,216
|
|
|
|
2,471
|
|
Change in:
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance pay, net
|
|
|
(63
|
)
|
|
|
42
|
|
|
|
4
|
|
Trade receivables, net
|
|
|
13
|
|
|
|
(15,865
|
)
|
|
|
(329
|
)
|
Other account receivables and prepaid expenses
|
|
|
658
|
|
|
|
(520
|
)
|
|
|
524
|
|
Inventories
|
|
|
901
|
|
|
|
(560
|
)
|
|
|
794
|
|
Trade payables
|
|
|
(182
|
)
|
|
|
(1,150
|
)
|
|
|
1,273
|
|
Employees and payroll accruals
|
|
|
(622
|
)
|
|
|
524
|
|
|
|
999
|
|
Other accounts payable and accrued expenses
|
|
|
(848
|
)
|
|
|
1,385
|
|
|
|
266
|
|
Deferred revenue and advances from customers
|
|
|
(2,169
|
)
|
|
|
(109
|
)
|
|
|
1,248
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided (used in) by operating activities
|
|
|
(1,949
|
)
|
|
|
(10,599
|
)
|
|
|
9,451
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayment of (investment in) a short-term bank deposit
|
|
|
40,000
|
|
|
|
(40,000
|
)
|
|
|
-
|
|
Purchase of property and equipment
|
|
|
(662
|
)
|
|
|
(790
|
)
|
|
|
(1,331
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
39,338
|
|
|
|
(40,790
|
)
|
|
|
(1,331
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of Ordinary Shares, net of issuance costs upon follow-on public offering
|
|
|
-
|
|
|
|
30,206
|
|
|
|
21,279
|
|
Exercise of warrants into Ordinary Shares
|
|
|
-
|
|
|
|
-
|
|
|
|
1,085
|
|
Exercise of options into Ordinary Shares
|
|
|
2,133
|
|
|
|
891
|
|
|
|
3,329
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
$
|
2,133
|
|
|
$
|
31,097
|
|
|
$
|
25,693
|
|
RADCOM LTD. AND ITS SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
U.S. dollars in thousands
|
|
Year ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments on cash and cash equivalents
|
|
$
|
(145
|
)
|
|
$
|
(15
|
)
|
|
$
|
346
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
39,377
|
|
|
|
(20,307
|
)
|
|
|
34,159
|
|
Cash and cash equivalents and restricted bank deposit at beginning of the period
|
|
|
22,611
|
|
|
|
42,918
|
|
|
|
8,759
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents and restricted bank deposit at end of the period
|
|
$
|
61,988
|
|
|
$
|
22,611
|
|
|
$
|
42,918
|
|
(a)
|
|
Non-cash investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
$
|
152
|
|
|
$
|
239
|
|
|
$
|
81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(b)
|
|
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxes on income
|
|
$
|
25
|
|
|
$
|
83
|
|
|
$
|
24
|
|
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”) is an Israeli corporation which provides 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 fully virtualized, on-demand service assurance solution that integrates an automated,
and efficient data acquisition layer of virtual probes with a smart mediation layer thus providing critical customer and service
insights; 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 LTE, LTE-A, VoLTE, IMS, VoIP, WiFi, VoWiFi, UMTS/GSM, mobile
broadband and 5G. 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 marketing, 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.
|
In December 2015, the Company entered to a multi-year sales agreement with Amdocs Software Systems
Limited (“Amdocs”) for the resale of the Company’s solutions to AT&T Services, Inc. (“AT&T”),
a leading North American Tier-1 telecom operator (the “AT&T Engagement”). Since then, the Company signed additional
agreements with Amdocs in connection with the AT&T Engagement. During 2018, 2017 and 2016, the Company recognized revenues
in the amount of $16,296, $24,528 and $18,310 pursuant to the AT&T Engagement and the additional agreements, which represent
approximately 48%, 66% and 62% of the total consolidated revenues of the Company, respectively. (See also Note 13c).
|
On March
29, 2019 the Company entered into a series of agreements with AT&T to provide the Company’s solutions to AT&T.
The
Company depends on a limited number of contract customers for selling its solution.
If these
customers become unable or unwilling to continue to buy the Company’s solution, a loss of any significant customer, a significant
decrease in business from any such customer, a reduction in customer revenue due to adverse changes in the market, economic or
competitive conditions or other factors could adversely affect the Company’s business, results of operations and financial
position.
RADCOM LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except
share and per share data
NOTE 1: -
|
GENERAL (Cont.)
|
|
c.
|
Follow-on Public Offerings:
|
In May 2016,
a “shelf” registration statement covering the public sale of up to $50,000 of the Company’s Ordinary Shares was
declared effective by the U.S. Securities and Exchange Commission (“SEC”).
Following
such registration, during May 2016, the Company closed a follow-on public offering (as further described in Note 11b1 and Note
13e) for a total consideration of approximately $21,279, net of underwriting discounts, commissions and other offering expenses
of $1,721 payable by the Company.
In October
2017, the Company closed a follow-on public offering (as further described in Note 11b2) for a total consideration of approximately
$30,206, net of underwriting discounts, commissions and other offering expenses of $2,194 payable by the Company.
NOTE 2: -
|
SIGNIFICANT ACCOUNTING POLICIES
|
The consolidated
financial statements are prepared according to United States generally accepted accounting principles (“U.S. GAAP”).
The preparation
of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates, judgments and assumptions.
The Company’s management believes that the estimates, judgments and assumptions used are reasonable based upon information available
at the time they are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the dates of the financial statements, and the reported amounts of revenue
and expenses during the reporting period. Actual results could differ from those estimates.
RADCOM LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except
share and per share data
NOTE 2: -
|
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|
|
b.
|
Financial statements in U.S. dollars (“$” “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.
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.
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.
|
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.
|
Restricted bank deposit:
|
Restricted
bank deposit represents restricted cash which is pledged in favor of the bank that provides guarantees to the Company.
|
f.
|
Short-term bank deposit:
|
Short-term
bank deposit is a deposit with an original maturity of more than three months but equal or less than one year from the date of
investment and which does not meet the definition of cash equivalents. The deposit is presented according to its terms of deposit.
|
g.
|
Concentration of credit risk:
|
Financial
instruments that may subject the Company to significant concentration of credit risk consist mainly of cash and cash equivalents,
restricted bank deposit, short-term bank deposit, 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.
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. During the year ended December 31, 2018 and December 31, 2016, the Company recorded allowance
for doubtful accounts of $10 and $9, respectively. No additional allowances for doubtful accounts were recorded during the year
ended December 31, 2017. No bad debt expenses were recorded during the years ended December 31, 2018, 2017 and 2016.
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.)
|
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.
No inventory
write-offs were recorded during the year ended December 31, 2018. The total inventory write-offs during the years ended 2017 and
2016 amounted to $369 and $498, respectively.
|
i.
|
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
|
|
j.
|
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, 2018, 2017 and 2016, no impairment
losses were identified.
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’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 revenue
when (or as) it satisfies performance obligations by transferring promised goods or services to its customers in an amount that
reflects the consideration the Company expects to receive.
The Company applies the following
five-step approach:
|
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.
|
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 its software solutions
(which may include significant customization), professional 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.
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 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.
|
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.
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.
Products and related services
:
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.
Warranty and support:
Revenues related to service type warranty and post-contract customer support are recognized over time on a straight-line basis.
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.
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.)
|
See also Note 3 for details
about the impact from adopting the new revenue standard and other required disclosures.
Cost of revenues
are 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.
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.)
|
No options
were granted in 2018. The fair value for options granted in 2017 and 2016 is estimated at the date of grant with the following
weighted average assumptions:
|
|
2017
|
|
2016
|
|
|
|
|
|
Dividend yield
|
|
0%
|
|
0%
|
Expected volatility
|
|
46.4%-55.9%
|
|
50.7%-59.4%
|
Risk-free interest
|
|
1.6%-2.1%
|
|
0.8%-1.4%
|
Expected life (in years)
|
|
3.43-4.76
|
|
2.79-4.99
|
|
n.
|
Research and development costs:
|
Research
and development costs are charged to the statement of operations as incurred except 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 9a1).
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 and amounted to $6 and $75 for the years
ended December 31, 2017 and 2016, respectively (see also Note 9a2).
|
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.
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.)
|
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, 731,542 and 70,801 as of December 31, 2018 and 2017, respectively. As of December 31,
2016, there were no anti-dilutive securities.
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. 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,
“Income Taxes”, 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, 2018 and 2017, no liability for unrecognized tax benefits was recorded.
The Company’s
liability for severance pay for its Israeli employees 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, 2018, 2017 and 2016 amounted to $1,065, $1,007 and $905, respectively.
|
t.
|
Fair value of financial instruments:
|
The financial
instruments of the Company consist mainly of cash and cash equivalents, restricted bank deposit, short-term bank deposit, trade
receivables, trade payables and other accounts payable and accrued expenses. Due to the short-term nature of such financial instruments,
their fair value approximates their carrying value.
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.
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.)
|
|
w.
|
Recently issued and adopted accounting standards:
|
|
1.
|
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic
606)”. The standard replaced the revenue recognition guidance in US GAAP under ASC Topic 605 and was required to be applied
retrospectively to each prior period presented or applied using a modified retrospective method with the cumulative effect recognized
to retained earnings in the beginning of the period of initial application. Subsequently, the FASB issued several additional ASUs
related to ASU No. 2014-09, collectively referred to as the “new revenue standards”, which became effective for the
Company beginning January 1, 2018.
|
On January 1, 2018, the Company
adopted ASC 606 using the modified retrospective method and applied the standard to those contracts which were not substantially
completed as of January 1, 2018 and recognized the cumulative effect of initial adoption as an adjustment to the opening balance
of accumulated deficit as of such date. As a result of this adoption, the Company revised its accounting policy for revenue recognition
as detailed in Note 2k (see also Note 3).
|
2.
|
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted
Cash (“ASU 2016-18”), which requires companies to include amounts generally described as restricted cash and restricted
cash equivalents in cash and cash equivalents when reconciling beginning-of-period and end-of-period total amounts shown on the
statement of cash flows. The Company adopted ASU 2016-18 effective January 1, 2018. The adoption of this new guidance had an immaterial
impact on the Company’s consolidated financial statements.
|
|
3.
|
In May 2017, the FASB issued ASU No. 2017-09, “Compensation – Stock Compensation (Topic
718): Scope of Modification Accounting” (“ASU 2017-09”). ASU 2017-09 was issued to provide clarity and
reduce both 1) diversity in practice and 2) cost and complexity when applying the guidance in ASC 718 to a change in the terms
or conditions of a share-based payment award. ASU 2017-09 provides guidance about which changes to the terms or conditions
of a share-based payment award require an entity to apply modification accounting under ASC 718. The Company adopted ASU 2017-09
during the first quarter of 2018. The adoption of this new guidance had no impact 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
NOTE 2: -
|
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|
|
x.
|
New accounting standards not yet effective:
|
In February 2016, the FASB
issued ASU No. 2016-02 (Topic 842) “Leases” (“ASU 2016-02”). ASU 2016-02 supersedes the lease requirements
in ASC 840, “Leases”. According to ASU 2016-02, lessees are required to recognize assets and liabilities on the balance
sheet for most leases and provide enhanced disclosures. Lessees will also recognize interest expense and depreciation expense separately.
ASU 2016-02 is effective for interim and annual reporting periods beginning after December 15, 2018. In July 2018, the FASB issued
amendments in ASU 2018-11, which provide a transition election to not restate comparative periods for the effects of applying the
new standard. This transition election permits entities to change the date of initial application to the beginning of the earliest
comparative period presented, or retrospectively at the beginning of the period of adoption through a cumulative-effect adjustment.
The
Company will implement ASU 2016-02 on January 1, 2019 by using the modified retrospective method, with right-of-use assets
measured at an amount equal to the lease liability, with certain relief options offered in ASU 2016-02 including certain
available transitional practical expedients. The Company expects adoption of the standard to have a material impact on its
consolidated balance sheets which will result in the recognition of lease assets and liabilities in an amount within the
range of $5,600 to $6,200. The most significant impact from recognition of lease assets and liabilities relates to real
estate and car leases. However, the Company does not anticipate that the adoption of this standard will have a material
impact on the operating expenses in its consolidated statements of operations and its cash flows since the expense
recognition under this new standard will be similar to current practice. The Company’s financial income (expenses), net
will be impacted by the revaluation of the lease liabilities in non dollar denominated currencies.
RADCOM LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except
share and per share data
The most significant impact
of the standard on the Company’s financial statements relates to differences in timing of revenue recognition under the new
standard as disclosed in the tables below.
The cumulative effect of the changes made to the consolidated balance sheet as of January 1, 2018 for the adoption of ASC 606 were
as follows:
|
|
Balance as of December 31, 2017
|
|
|
Adjustments following the adoption of ASC 606
|
|
|
Balance as of January 1, 2018
|
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue and advances from customers
|
|
$
|
(2,601
|
)
|
|
$
|
80
|
|
|
$
|
(2,521
|
)
|
Trade receivables, net
|
|
|
20,266
|
|
|
|
233
|
|
|
|
20,499
|
|
Other accounts receivable and prepaid expenses
|
|
|
2,685
|
|
|
|
24
|
|
|
|
2,709
|
|
Accumulated deficit
|
|
$
|
53,203
|
|
|
$
|
(337
|
)
|
|
$
|
52,866
|
|
In accordance with the new revenue
standard requirements, the disclosure of the impact of adoption on the Company’s consolidated statements of operations, cash
flows, and balance sheets were as follows:
|
|
Year ended December 31, 2018
|
|
|
|
As reported
|
|
|
Balances before adoption of ASC 606
|
|
|
Effect of change
|
|
Statements of operations
|
|
|
|
|
|
|
|
|
|
Revenues - Products and related services
|
|
$
|
13,529
|
|
|
$
|
13,068
|
|
|
$
|
461
|
|
Revenues - Warranty and support
|
|
|
8,303
|
|
|
|
8,311
|
|
|
|
(8
|
)
|
Cost of revenues - Products and related services
|
|
|
4,851
|
|
|
|
4,838
|
|
|
|
13
|
|
Sales and marketing, net
|
|
|
11,426
|
|
|
|
11,392
|
|
|
|
34
|
|
Net loss
|
|
|
(2,415
|
)
|
|
|
(2,821
|
)
|
|
|
406
|
|
Loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
(0.18
|
)
|
|
|
(0.21
|
)
|
|
|
0.03
|
|
Diluted
|
|
|
(0.18
|
)
|
|
|
(0.21
|
)
|
|
|
0.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(2,415
|
)
|
|
|
(2,821
|
)
|
|
|
406
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade receivables, net
|
|
|
13
|
|
|
|
316
|
|
|
|
(303
|
)
|
Other account receivables and prepaid expenses
|
|
|
658
|
|
|
|
624
|
|
|
|
34
|
|
Other accounts payables and accrued expenses
|
|
|
(848
|
)
|
|
|
(861
|
)
|
|
|
13
|
|
Deferred revenue and advances from customers
|
|
|
(2,169
|
)
|
|
|
(2,019
|
)
|
|
|
(150
|
)
|
RADCOM LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except
share and per share data
NOTE 3: -
|
REVENUES (Cont.)
|
|
|
December 31, 2018
|
|
|
|
As reported
|
|
|
Balances before adoption of ASC 606
|
|
|
Effect of change
|
|
Balance sheets
|
|
|
|
|
|
|
|
|
|
Trade receivables, net
|
|
$
|
20,381
|
|
|
$
|
19,845
|
|
|
$
|
536
|
|
Other accounts receivable and prepaid expenses
|
|
|
1,766
|
|
|
|
1,776
|
|
|
|
(10
|
)
|
Deferred revenues and advances from customers
|
|
|
(266
|
)
|
|
|
(596
|
)
|
|
|
330
|
|
Other accounts payable and accrued expenses
|
|
|
(2,281
|
)
|
|
|
(2,268
|
)
|
|
|
(13
|
)
|
Deferred revenues – long term
|
|
|
(100
|
)
|
|
|
-
|
|
|
|
(100
|
)
|
Accumulated deficit
|
|
$
|
55,281
|
|
|
$
|
56,024
|
|
|
$
|
(743
|
)
|
The
following table presents the significant changes in the deferred revenue balance during the year ended December 31, 2018:
|
|
Year ended December 31, 2018
|
|
Balance, beginning of the period
|
|
$
|
2,622
|
|
Cumulative effect of changes in accounting principles (ASC 606)
|
|
|
(80
|
)
|
New performance obligations
|
|
|
345
|
|
Reclassification to revenue as a result of satisfying performance obligation
|
|
|
(2,521
|
)
|
Balance, end of the period
|
|
|
366
|
|
Less: long-term portion of deferred revenue
|
|
|
(100
|
)
|
|
|
|
|
|
Current portion, end of the period
|
|
$
|
266
|
|
As
of December 31, 2018, the Company had $10,859 of remaining performance obligations not yet satisfied or partly satisfied related
to revenues. The Company expects to recognize approximately 72% of this amount as revenues during the next 12 months and the rest
thereafter.
NOTE 4: -
|
SHORT-TERM BANK DEPOSIT
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Deposit amount
|
|
$
|
-
|
|
|
$
|
40,000
|
|
Interest rate (%)
|
|
|
-
|
|
|
|
2.28
|
|
Maturity date
|
|
|
-
|
|
|
|
December 27, 2018
|
|
RADCOM LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except
share and per share data
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Finished products (*)
|
|
$
|
251
|
|
|
$
|
1,199
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
251
|
|
|
$
|
1,199
|
|
|
(*)
|
Includes amounts of $35 and $612 for 2018 and 2017, respectively, with respect to inventory delivered
to customers but for which revenue criteria have not been met yet.
|
NOTE 6: -
|
OTHER ACCOUNTS RECEIVABLE AND PREPAID EXPENSES
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Indirect taxes
|
|
$
|
667
|
|
|
$
|
980
|
|
Grant receivables
|
|
|
10
|
|
|
|
740
|
|
Prepaid expenses and advances to suppliers
|
|
|
752
|
|
|
|
460
|
|
Others
|
|
|
337
|
|
|
|
505
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,766
|
|
|
$
|
2,685
|
|
NOTE 7: -
|
PROPERTY AND EQUIPMENT, NET
|
Composition
of assets, grouped by major classification, is as follows:
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Cost:
|
|
|
|
|
|
|
Computers and electronic equipment
|
|
$
|
3,122
|
|
|
$
|
2,719
|
|
Office furniture and equipment
|
|
|
294
|
|
|
|
231
|
|
Leasehold improvements
|
|
|
169
|
|
|
|
97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,585
|
|
|
|
3,047
|
|
Accumulated depreciation:
|
|
|
|
|
|
|
|
|
Computers and electronic equipment
|
|
|
1,640
|
|
|
|
1,024
|
|
Office furniture and equipment
|
|
|
93
|
|
|
|
83
|
|
Leasehold improvements
|
|
|
20
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,753
|
|
|
|
1,123
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,832
|
|
|
$
|
1,924
|
|
Depreciation
expenses for the years ended December 31, 2018, 2017 and 2016 amounted to $657, $537 and $286, respectively.
RADCOM LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except
share and per share data
NOTE 8: -
|
OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Royalties - IIA payable
|
|
$
|
761
|
|
|
$
|
1,096
|
|
Commissions to distributors
|
|
|
430
|
|
|
|
429
|
|
Accrued expenses
|
|
|
1,090
|
|
|
|
1,903
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,281
|
|
|
$
|
3,428
|
|
NOTE 9: -
|
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,
2018, the Company’s total commitment with respect to royalty-bearing participation received or accrued, net of royalties paid or
accrued, amounted to $48,452. The total research and development grants that the Company has received from the IIA as of December
31, 2018 were $44,833. The accumulated interest as of December 31, 2018, was $18,516 and the accumulated royalties paid to
the IIA were $14,897.
Royalty expenses
relating to the IIA grants included in cost of revenues during the years ended December 31, 2018, 2017 and 2016 were $922, $1,303
and $1,033, 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 9: -
|
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 is 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 recorded an amount of $9 as royalty expenses to be paid to the MOE.
|
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 Consumer
Price Index (“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 $566). According to
the above, as of December 31, 2018, the total royalties commitment the Company may be required to pay is an amount of up to $849
out of which $468 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 $381 as of December 31, 2018.
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.
RADCOM LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except
share and per share data
NOTE 9: -
|
COMMITMENTS AND CONTINGENCIES (Cont.)
|
Premises
occupied by the Company and its subsidiaries are leased under various agreements, part of which are with related parties (see also
Note 13). The rental agreements for the premises of the Company and its subsidiaries expire up to April 30, 2023. The Company also
has several motor vehicle lease agreements for up to 48 months period. As of December 31, 2018, the Company maintains 30 leased
cars.
As of December 31, 2018, the
future minimum aggregate lease commitments under non-cancelable operating lease agreements are as follows:
As of the year ended December 31,
|
|
Premises
|
|
|
Motor
vehicles
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
928
|
|
|
|
66
|
|
|
|
994
|
|
2020
|
|
|
865
|
|
|
|
-
|
|
|
|
865
|
|
2021
|
|
|
123
|
|
|
|
-
|
|
|
|
123
|
|
2022
|
|
|
123
|
|
|
|
-
|
|
|
|
123
|
|
2023
|
|
|
41
|
|
|
|
-
|
|
|
|
41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,080
|
|
|
$
|
66
|
|
|
$
|
2,146
|
|
Total lease
expenses amounted to $1,341, $1,248 and $1,023 for the years ended December 31, 2018, 2017 and 2016, respectively.
As of December 31, 2018, the
Company established a bank guarantee to the Israeli Customs Authority that amounted to $33, which will expire on April 30, 2019.
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
|
Taxable income
of the Company is subject to the Israeli corporate tax at the rate as follows: 2016 – 25%, 2017 - 24% and 2018 – 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).
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, 2018.
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.)
|
In accordance
with the tax laws, tax returns submitted up to and including the 2013 tax year can be regarded as final. As of December 31,
2018, no final tax assessments have been received for such years.
Tax loss
carryforward:
As of December 31,
2018, the Company’s estimated tax loss carryforward and capital loss were $31,234 and $716, respectively. Such losses can be carried
forward indefinitely to offset any future taxable income of the Company.
Research
and development expenses carryforward for tax purposes in Israel amounted to approximately $8,837.
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 (the “TCJA”) 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 $7,682 as of December
31, 2018. Such losses are available to offset any future U.S. taxable income of the U.S. subsidiary and will expire in the years 2019-2026
for federal tax purposes.
|
|
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 2014 tax year can be regarded as final.
|
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.)
|
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 $3,336 as of December 31, 2018, 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 2013 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 25%
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 2016 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,
|
|
|
|
2018
|
|
|
2017
|
|
Deferred tax assets:
|
|
|
|
|
|
|
Carryforward tax losses
|
|
$
|
10,096
|
|
|
$
|
10,591
|
|
Research and development credit
|
|
|
2,032
|
|
|
|
1,120
|
|
Accrued social benefits and other
|
|
|
472
|
|
|
|
909
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,600
|
|
|
|
12,620
|
|
Less - valuation allowance
|
|
|
(12,600
|
)
|
|
|
(12,620
|
)
|
|
|
|
|
|
|
|
|
|
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, 2018 was a decrease of $20. 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,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
(2,372
|
)
|
|
$
|
4,751
|
|
|
$
|
3,018
|
|
Foreign
|
|
|
20
|
|
|
|
(1,767
|
)
|
|
|
(1,079
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
$
|
(2,352
|
)
|
|
$
|
2,984
|
|
|
$
|
1,939
|
|
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,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes, as reported in the statements of operations
|
|
$
|
(2,352
|
)
|
|
$
|
2,984
|
|
|
$
|
1,939
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statutory tax rate in Israel
|
|
|
23
|
%
|
|
|
24
|
%
|
|
|
25
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Theoretical tax benefit
|
|
$
|
(541
|
)
|
|
$
|
716
|
|
|
$
|
485
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in income taxes resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax rate differential on foreign subsidiaries
|
|
|
(55
|
)
|
|
|
(166
|
)
|
|
|
(98
|
)
|
Non-deductible expenses and other permanent differences
|
|
|
446
|
|
|
|
987
|
|
|
|
683
|
|
Differences in taxes arising from foreign currency exchange, net
|
|
|
208
|
|
|
|
(856
|
)
|
|
|
(324
|
)
|
Utilization of carry forward tax losses and other temporary differences for which valuation allowance was provided
|
|
|
(20
|
)
|
|
|
(554
|
)
|
|
|
(1,102
|
)
|
Withholding taxes that were deducted by the Company’s customers
|
|
|
10
|
|
|
|
32
|
|
|
|
6
|
|
Other
|
|
|
15
|
|
|
|
(76
|
)
|
|
|
374
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes
|
|
$
|
63
|
|
|
$
|
83
|
|
|
$
|
24
|
|
|
g.
|
Accounting for uncertainty in income taxes:
|
For the years
ended December 31, 2018, 2017 and 2016, 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, 2018 and 2017 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 offerings:
|
|
1.
|
On May 25, 2016, the Company closed a follow-on public
offering of 2,090,909 Ordinary Shares, at an offering price of $11.00 per share for a total consideration of approximately $21,279,
net of issuance costs of $1,721. (See also Note 13e).
|
|
2.
|
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.
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.)
|
|
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.
|
b)
|
During the year ended December 31, 2017, the Company’s Board approved the grant of 179,002 options
and 105,428 RSUs to certain employees and officers of the Company. The options were granted at exercise prices ranging between
$18.90 to $19.85 per share, which was equal to the market value of the Company’s Ordinary Shares at the date of grant. Such
options and RSUs have vesting schedules of four years, commencing as of the date of grant and an exercise term for the options
of five years from date of grant.
|
|
c)
|
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.
|
As
of December 31, 2018, the total number of shares reserved under the 2013 Share Option Plan, is 2,450,000, out of which
947,245 Ordinary Shares are still available for future grants under the 2013 Share Option Plan as of that date.
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.)
|
|
2.
|
Stock options for the year ended December 31, 2018 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, 2018
|
|
|
679,552
|
|
|
$
|
13.20
|
|
|
|
3.35
|
|
|
$
|
4,517
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(215,542
|
)
|
|
|
9.87
|
|
|
|
|
|
|
|
|
|
Expired and forfeited
|
|
|
(48,500
|
)
|
|
|
15.76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2018
|
|
|
415,510
|
|
|
$
|
14.62
|
|
|
|
2.69
|
|
|
$
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at December 31, 2018
|
|
|
415,510
|
|
|
$
|
14.62
|
|
|
|
2.69
|
|
|
$
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable as of December 31, 2018
|
|
|
159,058
|
|
|
$
|
11.81
|
|
|
|
2.02
|
|
|
$
|
3
|
|
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 2018 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,
2018. This amount is impacted by the changes in the fair market value of the Company’s Ordinary Shares.
The aggregate
intrinsic value of options outstanding and exercisable at December 31, 2018 represents the intrinsic value of 2,250 outstanding
and exercisable options that are in-the-money as of December 31, 2018.
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, 2018, stock options under the 2013
Share Option Plan are as follows:
|
|
|
Options outstanding
at December 31, 2018
|
|
Options exercisable
at December 31, 2018
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6.00
|
|
|
2,250
|
|
|
6.00
|
|
0.56
|
|
|
2,250
|
|
|
6.00
|
|
0.56
|
11.12-14.52
|
|
|
259,558
|
|
|
11.86
|
|
2.22
|
|
|
156,808
|
|
|
11.89
|
|
2.05
|
18.90-19.85
|
|
|
153,702
|
|
|
19.42
|
|
3.52
|
|
|
-
|
|
|
-
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
415,510
|
|
|
|
|
|
|
|
159,058
|
|
|
|
|
|
|
4.
|
RSUs for the year ended December 31, 2018 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, 2018
|
|
|
240,054
|
|
|
|
1.74
|
|
|
$
|
4,765
|
|
Granted
|
|
|
32,700
|
|
|
|
|
|
|
|
|
|
Vested
|
|
|
(74,210
|
)
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(29,675
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2018
|
|
|
168,869
|
|
|
|
1.40
|
|
|
$
|
1,253
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest as of December 31, 2018
|
|
|
168,869
|
|
|
|
1.40
|
|
|
$
|
1,253
|
|
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 year ended December 31, 2018. The weighted average fair values
of options granted during the years ended December 31, 2017 and 2016 were, $8.08 and $6.68, respectively. Grants of options in
2017 and 2016 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 year ended December 31, 2018, 2017
and 2016 were $19.68, $19.52 and $14.69 per share, respectively.
|
|
7.
|
The following table summarizes the department allocation of the Company’s share-based compensation
charges:
|
|
|
Year ended December 31,
|
|
|
|
2018(*)
|
|
|
2017(*)
|
|
|
2016(*)
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
$
|
112
|
|
|
$
|
189
|
|
|
$
|
118
|
|
Research and development, net
|
|
|
808
|
|
|
|
473
|
|
|
|
625
|
|
Sales and marketing, net
|
|
|
698
|
|
|
|
499
|
|
|
|
199
|
|
General and administrative
|
|
|
503
|
|
|
|
1,055
|
|
|
|
1,529
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,121
|
|
|
$
|
2,216
|
|
|
$
|
2,471
|
|
|
(*)
|
Including $1,359, $1,335 and $1,331 of compensation cost related
to RSUs for the year ended December 31, 2018, 2017 and 2016, respectively.
|
|
8.
|
As of December 31, 2018, there are $1,967 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 1.03 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, 2018, 2017 and 2016
and long-lived assets as of December 31, 2018 and 2017:
|
|
1.
|
Revenues by geographic region are as follows (prior period amounts have not been adjusted under
the modified retrospective method):
|
|
|
Year ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
22,164
|
|
|
$
|
25,157
|
|
|
$
|
19,167
|
|
Europe
|
|
|
362
|
|
|
|
778
|
|
|
|
946
|
|
Asia (excluding Philippines)
|
|
|
923
|
|
|
|
374
|
|
|
|
355
|
|
Philippines
|
|
|
6,235
|
|
|
|
4,501
|
|
|
|
4,959
|
|
South America (excluding Brazil)
|
|
|
671
|
|
|
|
883
|
|
|
|
785
|
|
Brazil
|
|
|
2,908
|
|
|
|
1,783
|
|
|
|
2,496
|
|
Other (including Israel)
|
|
|
787
|
|
|
|
3,757
|
|
|
|
802
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
34,050
|
|
|
$
|
37,233
|
|
|
$
|
29,510
|
|
Total
revenues are attributed to geographic areas based on the location of the end-customer.
In
2018, 2017 and 2016, the amount of export revenues represented 98%, 90% and 98% of the Company’s total revenues.
|
2.
|
Major customer data as a percentage of total revenues:
|
In 2018,
the Company had two customers in the United States and one in the Philippines that amounted 63% and 18%, respectively, of the total
consolidated revenues. In 2017, the Company had one customer in the United States and one in the Philippines that amounted 66%
and 12%, respectively, of the total consolidated revenues. In 2016, the Company had one customer in the United States and one in
the Philippines that amounted 62% and 17%, respectively, of the total consolidated revenues.
|
3.
|
Property and equipment, net, by geographic areas:
|
|
|
Year ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Israel
|
|
$
|
1,535
|
|
|
$
|
1,781
|
|
Other
|
|
|
297
|
|
|
|
143
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,832
|
|
|
$
|
1,924
|
|
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,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
Financial Income:
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
1,455
|
|
|
$
|
572
|
|
|
$
|
489
|
|
Foreign currency exchange gain
|
|
|
784
|
|
|
|
215
|
|
|
|
424
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,239
|
|
|
|
787
|
|
|
|
913
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank charges
|
|
|
(15
|
)
|
|
|
(58
|
)
|
|
|
(23
|
)
|
Foreign currency exchange loss
|
|
|
(1,088
|
)
|
|
|
(340
|
)
|
|
|
(74
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,103
|
)
|
|
|
(398
|
)
|
|
|
(97
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,136
|
|
|
$
|
389
|
|
|
$
|
816
|
|
|
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,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for basic net income (loss) per Ordinary Share
|
|
$
|
(2,415
|
)
|
|
$
|
2,901
|
|
|
$
|
1,915
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for dilutive net income (loss) per Ordinary Share
|
|
$
|
(2,415
|
)
|
|
$
|
2,901
|
|
|
$
|
1,915
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for dilutive net income (loss) per Ordinary Share - weighted average number of Ordinary Shares
|
|
|
13,630,793
|
|
|
|
12,039,176
|
|
|
|
10,406,897
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation granted
|
|
|
-
|
|
|
|
312,390
|
|
|
|
372,650
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted net income (loss) per Ordinary Share - adjusted weighted average number of Ordinary Shares
|
|
|
13,630,793
|
|
|
|
12,351,566
|
|
|
|
10,779,547
|
|
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. Certain principal
shareholders of the Company are also principal shareholders of affiliates known as the RAD-BYNET Group.
|
|
1.
|
The Company is a party to a reseller agreement with Allot Communications Inc, (“Allot”),
a company to which the Company’s controlling shareholder is an interested party, giving Allot the right to distribute the
Company’s products.
|
Revenues
related to this reseller agreement are included in Note 13g below as “Revenues”. For the years ended December 31, 2018,
2017 and 2016, revenues aggregated to amounts of $73, $31 and $139, respectively.
Subsequent
to the balance sheet date, effective January 2019, Allot is no longer considered a related party.
|
2.
|
Certain premises occupied by the Company and its U.S. subsidiary are rented from related parties
(see also Note 9b). 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 $967, $843 and $624 in 2018, 2017 and 2016, respectively. The amount in 2018 includes
$40 reimbursement of expenses in connection with the renovation of the U.S. subsidiary office. Such amounts expensed by the Company
are disclosed in Note 13g below as part of “Expenses” and “Capital expenses”.
|
|
3.
|
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 $32, $39 and $35 in 2018, 2017 and 2016,
respectively. Such amounts expensed by the Company are disclosed in Note 13g below as part of “Expenses” and “Capital
expenses”.
|
|
4.
|
The Company purchases certain products and services from members of the RAD-BYNET Group. The aggregate
amounts of such purchases were approximately $2, $15 and $1 in 2018, 2017 and 2016 respectively. Such amounts expensed by the Company
are disclosed in Note 13g 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 (the “Executive Chairman”) since September 10,
2015 is, among other things, also the life partner of the Company’s former chairman of the Board, a currently serving director
and a controlling shareholder of the Company. The Executive Chairman is entitled to a fixed monthly salary. During the years ended
December 2018, 2017 and 2016 the Company recorded salary expenses with respect to the Executive Chairman in the amount of $108,
$183 and $180, respectively. Such amounts expensed by the Company are disclosed in Note 13g below as part of “Expenses”.
|
|
c.
|
Since 2015, the Company entered several agreements with Amdocs to sell its solution, pursuant to
which the Company recorded revenues in the amount of $16,296, $24,528 and $18,310 related to the AT&T Engagement during the
years ended December 31, 2018, 2017 and 2016, respectively (See also Note 1b). Revenues related to this engagement are included
in Note 13g below as “Revenues”. The Company’s controlling shareholder and director served as a director in Amdocs
until January 31, 2019.
|
|
d.
|
The Company’s Chief Financial Officer from October 2018 is a member of the board and Chairman
of the Audit Committee of Matrix IT Ltd., (“Matrix”). 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 the engagements entered with Matrix or its affiliates as a related party, aggregated to $4 in 2018. Such amount expensed
by the Company is disclosed in Note 13g below as part of “Expenses”.
|
|
e.
|
As described in Note 11b1, on May 25, 2016, the Company closed its follow-on public offering at
a price of $11.00 per share, pursuant to which an aggregate net amount of $21,279 was raised. The Company’s controlling shareholder
and director invested $2,200 for the purchase of 200,000 Ordinary Shares in such public offering.
|
|
f.
|
Balances with related parties:
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade receivables, net
|
|
$
|
13,596
|
|
|
$
|
14,329
|
|
Other accounts receivable and prepaid expenses
|
|
$
|
-
|
|
|
$
|
2
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade payables
|
|
$
|
81
|
|
|
$
|
63
|
|
Other accounts payables and accrued expenses
|
|
$
|
12
|
|
|
$
|
140
|
|
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.)
|
|
g.
|
Transactions with related parties:
|
|
|
Year ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
16,369
|
|
|
$
|
24,559
|
|
|
$
|
18,461
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
$
|
163
|
|
|
$
|
201
|
|
|
$
|
210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development, net
|
|
$
|
507
|
|
|
$
|
371
|
|
|
$
|
224
|
|
Sales and marketing, net
|
|
$
|
212
|
|
|
$
|
217
|
|
|
$
|
142
|
|
General and administrative
|
|
$
|
191
|
|
|
$
|
293
|
|
|
$
|
250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenses
|
|
$
|
40
|
|
|
$
|
9
|
|
|
$
|
21
|
|
NOTE 14: -
|
SUBSEQUENT EVENTS
|
During
February 2019, the Company’s Board approved the grant of 377,020 RSUs to certain employees, officers and Board members of
the Company out of which 113,800 RSUs are subject to the approval of the shareholders. Such RSUs have vesting schedules of four
years, commencing as of the date of grant.
F-44
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