zk1618211.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
|
o
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REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
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OR
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x
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2015
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OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
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OR
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o
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SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of event requiring this shell company report ____________
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Commission file number 0-29452
RADCOM LTD.
(Exact Name of Registrant as Specified in its Charter)
N/A
(Translation of Registrant's Name into English)
Israel
(Jurisdiction of Incorporation or Organization)
24 Raoul Wallenberg Street, Tel-Aviv 69719, Israel
(Address of Principal Executive Offices)
Uri Birenberg: (+972) 77-7745-060 (tel), (+972) 3-647-4681 (fax)
24 Raoul Wallenberg Street, Tel Aviv 69719, Israel
(Name, Telephone, E-mail and/or Facsimile Number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Ordinary Shares, NIS 0.20 par value per share
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NASDAQ Capital Market
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Securities registered or to be registered pursuant to Section 12(g) of the Act: None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None
Indicate the number of outstanding shares of each of the issuer's classes of capital or common stock as of the close of the period covered by the annual report: As of December 31, 2015, there were 8,638,685 ordinary shares, NIS 0.20 par value per share, outstanding.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes o No x
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
Yes o No x
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer o Accelerated Filer o Non-Accelerated Filer x
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
U.S. GAAP x
International Financial Reporting Standards as issued by the International Accounting Standards Board o
Other o
If "Other" has been checked in response to the previous question, indicate by check mark which financial statement item the registrant elected to follow.
Item 17 o Item 18 o
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x
INTRODUCTION
Except for the historical information contained herein, the statements contained in this annual report on Form 20-F (this "Annual Report") are forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, regarding future events and our future results that are subject to the safe harbors created under the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These statements are based on current expectations, estimates, forecasts and projections about the industries in which we operate and the beliefs and assumptions of our management.
As used in this Annual Report, the terms "we," "us," "our," "RADCOM" and the "Company" mean RADCOM Ltd. and its subsidiaries, unless otherwise indicated.
Omni-Q® is our only registered trademark. All other trademarks and trade names appearing in this Annual Report are owned by their respective holders.
Below are definitions of certain technical terms that are used throughout this Annual Report that are important for understanding this Annual Report.
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GLOSSARY
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3G
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Third-generation digital cellular networks.
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4G
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Fourth-generation digital cellular networks.
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BSS
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Business Support System. The components that a telephone CSP uses to run its business operations that relate to the customer/subscriber usage; handles taking orders, processing bills, and collecting payments.
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CODEC
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CODer/DECoder. Converts and compresses voice signals from their analog form to digital signals acceptable to modern digital PBXs (private branch exchanges) and digital transmission systems. It then converts and decompresses those digital signals back to analog signals so that they can be heard and understood.
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| |
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| CEM |
Customer Experience Management. A solution to support the strategy that focuses the operations and processes of a business around the needs of the individual customer.
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| CSP |
Communication Service Provider. Includes all service providers offering telecommunication services or some combination of information and media services, content, entertainment and applications services over communication networks. CSPs include the following categories: Telecommunications carrier and cable service provider.
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| GSM |
Global System for Mobile Communications. A digital wireless technology that is widely deployed in Europe and, increasingly, in other parts of the world.
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GPRS
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General Packet Radio Service. A packet-based digital intermediate speed wireless technology based on GSM (2.5 generation).
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IMS
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IP Multimedia Subsystem. An internationally recognized standard defining a generic architecture for offering Voice Over IP and multimedia services to multiple-access technologies.
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| |
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| LTE |
Long Term Evolution. LTE is a set of enhancements to the Universal Mobile Telecommunications System (UMTS) which was introduced in 3rd Generation Partnership Project (3GPP) Release 8. Much of 3GPP Release 8 focuses on adopting 4G mobile communications technology, including an all-IP flat networking architecture. |
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NFV
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Network Function Virtualization. NFV is a software-centric design approach for building complex information technology (IT) networks and applications, particularly for use by CSPs. NFV 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 offers a new way to design, deploy and manage networking services. NFV decouples network functions, such as network address translation (NAT), firewalling, intrusion detection, domain name service (DNS), caching, etc., from proprietary hardware appliances, so that these functions can run as virtualized software applications. It is designed to consolidate and deliver the networking components needed to support a fully virtualized infrastructure – including virtual servers, storage and even other networks. It utilizes standard IT virtualization technologies that run on high-volume service, switch and storage hardware to virtualize network functions. It is applicable to any data plane processing or control plane function in both wired and wireless network infrastructures.
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NGN
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Next Generation Network. General term for packet-based networks, whether wireline (Voice Over IP, Video Over IP, etc.) or 3G networks.
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OSS
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Operational Support System. A suite of programs that enables the enterprise to monitor, analyze and manage a network system. Used in general to mean a system that supports an organization's network operations.
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Protocol
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A specific set of rules, procedures or conventions governing the format, means and timing of transmissions between two devices.
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Session
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A lasting connection between a user (or a user agent) and a peer, typically a server, usually involving the exchange of many packets between the user's computer and the server. A session is typically implemented as a layer in a network protocol.
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RAN
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Radio Access Network. A part of a mobile telecommunication system. It implements a radio access technology. Conceptually, it sits between the mobile phone, and the core network.
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SIGTRAN
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The name, derived from signaling transport, of a defunct Internet Engineering Task Force (IETF) working group that produced specifications for a family of protocols that provide reliable datagram service and user layer adaptations for Signaling System 7 (SS7) and ISDN communications protocols. The SIGTRAN protocols are an extension of the SS7 protocol family and are used today together with IMS.
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SIP
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Session Initiation Protocol. A simple application layer signaling protocol for VoIP implementations. It is a textual client server based protocol and provides the necessary mechanisms so that end user systems and proxy servers can provide various different services.
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TCP
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Transmission Control Protocol. TCP provides a reliable stream delivery and virtual connection service to applications through the use of sequenced acknowledgment with retransmission of packets when necessary. It is one of the core protocols of the Internet Protocol Suite. TCP is one of the two original components of the suite (the other being Internet Protocol, or IP), so the entire suite is commonly referred to as TCP/IP. Whereas IP handles lower-level transmissions from computer to computer as a message makes its way across the Internet, TCP operates at a higher level, concerned only with the two end systems, for example a Web browser and a Web server.
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Triple Play
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A marketing term for the provisioning of the three services: high-speed Internet, television (Video on Demand or regular broadcasts) and telephone service over a single broadband connection.
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UMTS
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Universal Mobile Telecommunications Service. A third-generation digital high-speed wireless technology for packet-based transmission of text, digitized voice, video, and multimedia that is the successor to GSM.
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| VoIP |
Voice Over IP. A telephone service that uses the Internet as a global telephone network.
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VoLTE
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Voice over Long Term Evolution. VoLTE is GSM's adoption of the "One Voice" initiative, which describes standard configurations for carrying (packet) voice over LTE. VoLTE eliminates the need for 2G/3G voice, the whole problem of multiple networks, certain extra components and costs of devices by carrying the voice over the LTE channel using adaptive multi rate (AMR) coding. Using IP Multimedia Subsystems (IM S) specifications developed by 3GPP as its basis, GSM has expanded upon the original scope of One Voice work to address the entire end-to-end voice and short message service (SMS) ecosystem by also focusing on roaming and interconnect interfaces, in addition the interface between customer and network.
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NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report contains express or implied “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and other U.S. Federal securities laws.
These forward-looking statements include, but are not limited to:
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•
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our plans to become the market leader for service assurance and CEM to leading CSPs and increase our sales;
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•
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our plans to focus our expansion efforts in Tier 1 and other leading CSPs in the North American, European, and Asian markets and our success in doing so;
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•
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our ability to leverage our technology leadership and the accumulative experience to implement one of the largest and most comprehensive NFV deployments;
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•
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our expectations to maintain our technological advantage over our competitors;
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•
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maintaining our relationship with Amdocs and its affiliates;
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•
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delivering and implementing successfully our solutions to the leading North American mobile operator that was recently announced;;
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•
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our ability to expand our foothold with Tier1 CSPs as a result, among other things, of the selection of a Tier 1 CSP in North American mobile operator of our solutions;
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•
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our ability to identify, market and sell our solutions to CSPs migrating to LTE, VoLTE and 5G;
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•
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our expectation that the NFV market will continue gaining momentum during 2016;
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•
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mobile data services to become a significant revenue source for CSPs; and
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•
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increased spending by CSPs of next-generation services and increased usage of such services and increase of the potential need for service assurance solutions.
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In some cases, forward-looking statements are identified by terminology such as "may," "will," "could," "should," "expects," "plans," "anticipates," "believes," "intends," "estimates," "predicts," "potential," or "continue" or the negative of these terms or other comparable terminology. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results or performance to differ materially from those projected. These statements are only current predictions and are subject to known and unknown risks, uncertainties, and other factors that may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from those anticipated by the forward-looking statements. The forward-looking statements contained in this annual report are subject to risks and uncertainties, including those discussed under Item 3.D. Risk Factors and in our other filings with the Securities and Exchange Commission. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. Except as required by law, we are under no duty to (and expressly disclaim any such obligation to) update or revise any of the forward-looking statements, whether as a result of new information, future events or otherwise, after the date of this Annual Report.
TABLE OF CONTENTS
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IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
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OFFER STATISTICS AND EXPECTED TIMETABLE
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| |
A.
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SELECTED FINANCIAL DATA
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We have derived the following selected consolidated statements of operations data for the years ended December 31, 2015, 2014 and 2013 and the selected consolidated balance sheet data as of December 31, 2015 and 2014 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, 2011 and 2012 and the selected consolidated balance sheet data as of December 31, 2013, 2012 and 2011, 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 ("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 "dollar," "dollars" or "$" in this Annual Report are to the "U.S. dollar" or "U.S. dollars." All references to "NIS" are to the New Israeli Shekels.
Statement of Operations Data:
| |
|
Year Ended December 31,
|
|
| |
|
2015
|
|
|
2014
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Products
|
|
$ |
16,122 |
|
|
$ |
20,547 |
|
|
$ |
17,917 |
|
|
$ |
12,480 |
|
|
$ |
19,199 |
|
|
Services
|
|
|
2,551 |
|
|
|
3,089 |
|
|
|
2,565 |
|
|
|
3,306 |
|
|
|
2,788 |
|
| |
|
|
18,673 |
|
|
|
23,636 |
|
|
|
20,482 |
|
|
|
15,786 |
|
|
|
21,987 |
|
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
|
4,041 |
|
|
|
8,350 |
|
|
|
7,540 |
|
|
|
5,765 |
|
|
|
6,074 |
|
|
Services
|
|
|
285 |
|
|
|
343 |
|
|
|
350 |
|
|
|
417 |
|
|
|
606 |
|
| |
|
|
4,326 |
|
|
|
8,693 |
|
|
|
7,890 |
|
|
|
6,182 |
|
|
|
6,680 |
|
|
Gross profit
|
|
|
14,347 |
|
|
|
14,943 |
|
|
|
12,592 |
|
|
|
9,604 |
|
|
|
15,307 |
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
6,071 |
|
|
|
5,812 |
|
|
|
5,615 |
|
|
|
6,102 |
|
|
|
5,866 |
|
|
Less - royalty-bearing participation
|
|
|
1,582 |
|
|
|
1,664 |
|
|
|
1,537 |
|
|
|
1,567 |
|
|
|
1,235 |
|
|
Research and development, net
|
|
|
4,489 |
|
|
|
4,148 |
|
|
|
4,078 |
|
|
|
4,535 |
|
|
|
4,631 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing, net
|
|
|
7,834 |
|
|
|
7,295 |
|
|
|
7,592 |
|
|
|
8,515 |
|
|
|
9,962 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
General and administrative
|
|
|
2,393 |
|
|
|
2,262 |
|
|
|
2,051 |
|
|
|
2,107 |
|
|
|
2,234 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
14,716 |
|
|
|
13,705 |
|
|
|
13,721 |
|
|
|
15,157 |
|
|
|
16,827 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
|
|
(369 |
) |
|
|
1,238 |
|
|
|
(1,129 |
) |
|
|
(5,553 |
) |
|
|
(1,520 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing expenses, net
|
|
|
(433 |
) |
|
|
(332 |
) |
|
|
(291 |
) |
|
|
(314 |
) |
|
|
(384 |
) |
|
Income (loss) before taxes on income
|
|
|
(802 |
) |
|
|
906 |
|
|
|
(1,420 |
) |
|
|
(5,867 |
) |
|
|
(1,904 |
) |
|
Taxes on Income
|
|
|
(121 |
) |
|
|
(180 |
) |
|
|
--- |
|
|
|
(120 |
) |
|
|
--- |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
|
(923 |
) |
|
|
726 |
|
|
|
(1,420 |
) |
|
|
(5,987 |
) |
|
|
(1,904 |
) |
|
Basic net (loss) income per ordinary share
|
|
$ |
(0.11 |
) |
|
$ |
0.09 |
|
|
$ |
(0.19 |
) |
|
$ |
(0.93 |
) |
|
$ |
(0.30 |
) |
|
Weighted average number of ordinary shares used to compute basic net income (loss) per ordinary share
|
|
|
8,572,681 |
|
|
|
8,088,974 |
|
|
|
7,340,056 |
|
|
|
6,442,068 |
|
|
|
6,367,560 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net (loss) income per ordinary share
|
|
$ |
(0.11 |
) |
|
$ |
0.08 |
|
|
$ |
(0.19 |
) |
|
$ |
(0.93 |
) |
|
$ |
(0.30 |
) |
|
Weighted average number of ordinary shares used to compute diluted net (loss) income per ordinary share
|
|
|
8,572,681 |
|
|
|
8,592,387 |
|
|
|
7,340,056 |
|
|
|
6,442,068 |
|
|
|
6,367,560 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital
|
|
$ |
9,643 |
|
|
$ |
10,062 |
|
|
$ |
7,762 |
|
|
$ |
5,194 |
|
|
$ |
10,670 |
|
|
Total assets
|
|
$ |
20,135 |
|
|
$ |
20,318 |
|
|
$ |
19,645 |
|
|
$ |
19,867 |
|
|
$ |
21,345 |
|
|
Shareholders' equity
|
|
$ |
9,863 |
|
|
$ |
10,262 |
|
|
$ |
7,499 |
|
|
$ |
4,997 |
|
|
$ |
10,392 |
|
|
Share capital
|
|
$ |
372 |
|
|
$ |
361 |
|
|
$ |
335 |
|
|
$ |
251 |
|
|
$ |
250 |
|
Exchange Rate Information
The following table shows, for each of the months indicated the high and low exchange rates between the NIS and the U.S. dollar, expressed as NIS per U.S. dollar and based upon the daily representative rate of exchange as published by the Bank of Israel:
|
Month
|
|
High (NIS)
|
|
|
Low (NIS)
|
|
|
March (through March 24, 2016)
|
|
|
3.912
|
|
|
|
3.842
|
|
|
February 2016
|
|
|
3.964
|
|
|
|
3.871
|
|
|
January 2016
|
|
|
3.983
|
|
|
|
3.913
|
|
|
December 2015
|
|
|
3.905
|
|
|
|
3.855
|
|
|
November 2015
|
|
|
3.921
|
|
|
|
3.868
|
|
|
October 2015
|
|
|
3.923
|
|
|
|
3.816
|
|
|
September 2015
|
|
|
3.949
|
|
|
|
3.863
|
|
On March 24, 2016, the daily representative rate of exchange between the NIS and U.S. dollar as published by the Bank of Israel was NIS 3.842 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)
|
|
|
2016 (through March 24, 2016)
|
|
|
3.915
|
|
|
2015
|
|
|
3.884
|
|
|
2014
|
|
|
3.577
|
|
|
2013
|
|
|
3.609
|
|
|
2012
|
|
|
3.858
|
|
|
2011
|
|
|
3.582
|
|
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
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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 our significant customers could harm our results of operations.
We expect to depend on sales of our solutions to a limited number of customers for the substantial majority of our revenues in 2016. 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 market, economic or competitive conditions or other factors could have a material adverse effect on our business, results of operations and financial condition. For more information, see "Item 7.B—Major Shareholders and Related Party Transactions—Related Party Transactions" below.
A reduction in some CSPs' revenues and profitability, which may lead them to decrease their investment in capital equipment and infrastructure, may in turn affect our revenues and results of operations. A continued slowdown in our customers' investment in capital equipment and infrastructure may 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 3G and 4G cellular and triple-play networks, and NFV. During the last few years, some of the CSPs experienced a reduction in their revenues from subscribers and lower profitability, which affected the spending budget of such telecommunications carriers. The global telecommunications industry, as well as the various sectors within the industry, is evolving rapidly, and it is difficult to predict its potential growth rate or future trends in technology development. The deregulation, privatization and economic globalization of the worldwide telecommunications market that have resulted in increased competition and escalating demand for new technologies and services may not continue in a manner favorable to us or our business strategies. In addition, the growth in demand for Internet and data services and the resulting need for high speed or enhanced telecommunications equipment may not continue at its current rate or at all.
Our future success also depends upon the increased utilization of our monitoring solutions by next-generation network operators. CSPs may not adopt our technology. Furthermore, any such new technology may not lead to greater demand for our products.
During the last few years, developments in the communications industry such as the impact of general global economic conditions, industry consolidation, emergence of new competitors, commoditization of voice services, the plans of CSPs to shift, transform and adapt their network operations to the NFV and changes in the regulatory environment, have had a material adverse effect on our existing and/or potential customers, and may continue to have such an effect in the future. In the past, these conditions reduced the high growth rates that the communications industry had previously experienced, and caused the market value, financial results, prospects, and capital spending levels of many communications companies to decline. Over the last few years, the telecommunications industry experienced significant financial pressures that caused many in the industry to cut expenses and limit investment in capital intensive projects, and in some cases, led to restructurings.
Recent and future economic conditions, including turmoil in the financial and credit markets, may adversely affect our business.
The recent economic environment had a significant negative impact on business around the world. The impact of these conditions on the technology industry and our major customers has been quite severe. Conditions may continue to be depressed, or may be subject to further deterioration, which could lead to a further reduction in consumer and customer spending overall, which could have an adverse impact on sales of our products. 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 products and the inability or failure on their part, to meet their payment obligations to us, any of which could have a material adverse effect on our business, financial condition, results of operations and liquidity. In addition, any disruption in the ability of customers to access liquidity could lead customers to request longer payment terms from us or long-term financing of their purchases from us. If we are unable to grant extended payment terms when requested by customers, our sales could decrease. Granting extended payment terms or a significant adverse change in a customer's financial and/or credit position, would have an immediate negative effect on our cash balance, and could require us to assume greater credit risk relating to that customer's receivables, or could limit our ability to collect receivables related to purchases by that customer. 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 our losses may increase.
Our plans to focus our sales efforts in Tier 1 and other leading CSPs in the North American and European markets may not be successful.
With the recognition of our technological leadership in the service assurance for NFV we have started to enhance our presence in North America, Europe, and Asia where a significant share of the NFV activity is taking place. We plan to expand our foothold in these markets, both directly and indirectly through partnerships. Although our recent selection by a top tier 1 leading North American mobile operator is expected to significantly help open doors to a relatively untapped market for us, we may not be successful in expanding our business in said markets.
Our expectation that the NFV market will continue gaining momentum during 2016 and thereafter may not materialize.
Although the majority of the industry’s leading CSPs are either evaluating NFV or have started deploying virtualized solutions for their network functionality, and despite our expectation that the NFV market will continue to gain momentum during year 2016 and thereafter, the actual pace of NFV transformation may take time, and as a result the market’s need for our NFV solution may take more time to materialize.
We may not deliver and implement successfully our solutions to a leading North American mobile operator
On December 28, 2015, we entered into an End User License Agreement with one of Amdocs Software’s customers, a top-tier leading North American mobile operator, pursuant to which we would grant a license to use our NFV solutions. We may not deliver and implement successfully or timely our solutions to this CSP and as a result, we may incur losses.
We have a history of net losses and may not achieve or sustain profitability in the future.
We have a history of net losses. Although we were profitable in 2014, in 2015 and 2013 we incurred net losses of $0.9 million and $1.4 million, respectively. We may continue not to be profitable in the future, which could materially affect our cash and liquidity and could adversely affect the value and market price of our shares.
Our actual cash flows may not be sufficient to meet our obligations.
If our cash flow does not meet or exceed our current projections, then our ability to pay our obligations could be materially impaired. We believe that our existing capital resources and cash flows from operations will be adequate to satisfy our expected liquidity requirements to meet our operating obligations, as they come due, at least through the next twelve months. However, if our actual sales and spending differ materially from our projections, we may be required to raise capital, borrow additional funds or reduce discretionary spending in order to provide the required liquidity. We cannot assure you that our business will generate sufficient cash flows or that future capital raising or borrowings will be available to us in amounts and on terms sufficient to enable us to fund our liquidity needs. Our ability to continue as a going concern is substantially dependent on the successful achievement of our sales and spending projections.
While we believe that our existing capital resources and cash flows from operations will be adequate to satisfy our expected liquidity requirements at least through the next twelve months, there is no assurance that, if required, we will be able to raise additional capital or reduce discretionary spending to provide the required liquidity in order to continue as a going concern.
The market for our products is characterized by changing technology, and its requirements, standards and products, and we may be materially adversely affected if we do not respond promptly and effectively to such changes.
The telecommunications market for our products is characterized by rapidly changing technology, network infrastructure, changing customer requirements, evolving industry standards and frequent new product introductions. These changes could reduce the market for our products or require us to develop new products and to keep adapting them, in order to remain up to date with our customers' requirements.
The 3G, LTE (Long Term Evolution), VoLTE (Voice over Long Term Evolution) networks and NFV (Network Function Virtualization) required us to develop a new product, MaveriQ, which was launched in 2014 and which replaced the OmniQ, our hardware-based solutions.
In 2015 we invested in R&D, and such R&D efforts will continue in the future to develop our NFV solutions, in anticipation of further disruptive changes in the telecommunication market from software-centric architectures and NFV.
New or enhanced telecommunications and data communications-related products developed by other companies could be incompatible with our products. Therefore, our timely access to information concerning, and our ability to anticipate, changes in technology and customer requirements and the emergence of new industry standards, as well as our ability to develop, manufacture and market new and enhanced products successfully and on a timely basis, will be significant factors in our ability to remain competitive. For example, many of our strategic initiatives and investments are aimed at meeting the requirements of application providers of 3G and LTE cellular, triple-play networks and NFV. If networking evolves toward greater emphasis on application providers, we believe that we have positioned ourselves well relative to our key competitors. However, if networking does not evolve toward a greater emphasis on application providers, our initiatives and investments in this area may be of no or limited value.
In addition, a 2014 cooperation agreement among Huawei, Ericsson and NSN called "OSSii" (Operations Support Systems interoperability initiative) aims to facilitate interoperability between network management systems from different vendors. If this initiative succeeds, it could lead to a decreased need for our probe-based solutions, as network elements could supply the performance and quality measurements provided by our probe-based solutions. As a result, we cannot quantify the impact of new product introductions on our future operations.
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.
In 2015, we experienced, and expect to experience in the future, significant fluctuations in our quarterly results of operations. Factors that may contribute to fluctuations in our quarterly results of operations include:
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the variation in size and timing of individual purchases by our customers;
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seasonal factors that may affect capital spending by customers, such as the varying fiscal year-ends of customers and the reduction in business during the summer months, particularly in Europe;
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the relatively long sales cycles for our products;
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the request for longer payment terms from us or long-term financing of customers' purchases from us, as well as additional conditions tied to such payment terms;
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competitive conditions in our markets;
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the timing of the introduction and market acceptance of new products or product enhancements by us and by our customers, competitors and suppliers;
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changes in the level of operating expenses relative to revenues;
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product quality problems;
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changes in global or regional economic conditions or in the telecommunications industry;
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delays in or cancellation of projects by customers;
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changes in the mix of products sold;
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the size and timing of approval of grants from the Government of Israel; and
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foreign currency exchange rates.
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Our costs of sales consist of variable costs, which include hardware purchasing, packaging, royalties to the Chief Scientist (as defined below), license fees paid to third parties and import taxes, recurring and non-recurring write-off of inventory, subcontractors’ expenses and of fixed costs which include facilities' payments, employees' salaries and related costs and overhead expenses. A major of our costs of sales are relatively variable, and the costs are determined based on our anticipated revenue. 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 a number of reasons, including based on revenue recognition accounting requirements. In many cases we cannot recognize revenue from an order prior to customer acceptance, which may take 3 to 12 months. Therefore, a major part of the revenue of a fiscal quarter is derived from the backlog of shipped orders and generally is not tied to the date of a customer's order or the shipment date.
Our revenues for a particular 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 may not be delivered within the quarter due to our production and development lead times. These orders are booked within the quarter, but 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 the expectations of public market analysts or investors. If this occurs, the price of our ordinary shares may fall, as was the case in previous years.
We expect our gross margins to vary over time, and we may not be able to sustain or improve upon our recent level of gross margins, which may have a material adverse effect on our future profitability.
We may not be able to sustain or improve upon our recent level of gross margins. Our gross margins may be adversely affected by numerous factors, including:
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increased price competition;
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local sales taxes which may be incurred for direct sales;
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increased industry consolidation among our customers, which may lead to decreased demand for and downward pricing pressure on our products;
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changes in customer, geographic or product mix;
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our ability to reduce and control production costs;
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increases in material or labor costs;
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excess inventory and inventory holding costs;
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reductions in cost savings due to changes in component pricing or charges incurred due to inventory holding periods if parts ordering does not correctly anticipate product demand;
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changes in distribution channels;
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losses on customer contracts; and
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Increases in warranty costs.
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Further deterioration in gross margins, due to these or other factors, may have a material adverse effect on our business, financial condition and results of operations.
Our sales derived from emerging market countries may be materially adversely affected by economic, exchange rates, regulatory and political developments in those countries.
We generate sales from various emerging market countries. As sales from these countries represent a significant portion of our total sales, and as these countries represent a significant portion of our expected growth, economic or political turmoil in these countries could materially adversely affect our sales 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.
Any reversal or slowdown in the deregulation of telecommunications markets could materially harm the markets for our products.
Future growth in the markets for our products will depend, in part, on the continued privatization, deregulation and the restructuring of telecommunications markets worldwide, as the demand for our products is generally higher when a competitive environment exists. Any reversal or slowdown in the pace of this privatization, deregulation or restructuring could materially harm the markets for our products. Moreover, the consequences of deregulation are subject to many uncertainties, including judicial and administrative proceedings that affect the pace at which the changes contemplated by deregulation occur, and other regulatory, economic and political factors. Furthermore, the uncertainties associated with deregulation have in the past, and could in the future, cause our customers to delay purchasing decisions pending the resolutions of these uncertainties.
Our growing international presence exposes us to risks associated with varied and changing political, cultural, legal and economic conditions worldwide.
We are affected by risks associated with conducting business internationally. We maintain development facilities in Israel, and have operations in North America, Europe, Latin America and Asia. We obtain significant revenues from customers in Latin America, Asia and North America and our strategy is to continue to broaden and expand into those markets. Conducting business internationally exposes us to certain risks inherent in doing business in international markets, including:
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legal and cultural differences in the conduct of business;
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difficulties in staffing and managing foreign operations;
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difficulties in collecting accounts receivable and withholding taxes that limit the repatriation of earnings;
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difficulties in complying with varied legal and regulatory requirements across jurisdictions, including additional labor laws, particularly in Brazil;
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variations in effective income tax rates among countries where we conduct business;
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fluctuations in foreign currency exchange rates; and
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laws and business practices favoring local competitors;
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One or more of these factors could have a material adverse effect on our international operations, which could have a material adverse effect on our business, financial condition and results of operations.
Our inventory may become obsolete or unusable.
We make advance purchases of various component parts to ensure that we have an adequate and readily available supply. Our failure to accurately project our needs for these components and the demand for our products that incorporate them, or changes in our business strategy or technology that reduce our need for these components, could result in these components becoming obsolete prior to their intended use or otherwise unusable in our business. This would result in a write-off of inventories for these components. In addition, a portion of our inventory is located on our customers' premises as it has not yet been accepted in accordance with the terms of their orders and therefore, has not yet been recognized as revenue, making the control of such inventory more difficult.
Many of our customers usually require a detailed and comprehensive evaluation process before they order our products. Our sales process may be subject to delays that may significantly decrease our revenues and which could result in the eventual cancellations of some sale opportunities.
We derive all of our revenues from the sale of products and related services for CSPs. The purchase of our products represents a relatively significant capital expenditure for our customers. As a result, our products 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 products and decisions are subject to additional levels of internal review. As a result, the sales cycle generally takes between 3 to 6 months for small transactions, and between 9 to 18 months for large transactions. 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 products 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 continue to delay project approval, delays are further lengthened, or such continued delays result in the eventual cancellation of any sale opportunities, it would have a material adverse effect on our business, financial condition and results of operations.
We have experienced periods of growth and consolidation of our business. If we cannot adequately manage our business, our results of operations may suffer.
During 2013 and 2014, in order to decrease our expenses, we undertook a series of reorganizations of our operations involving, among other things, the reduction of our workforce. However, beginning in the second half of 2015, we increased the size of our workforce and we plan to continue to increase our workforce, in North America and other regions during 2016 in order to enable us to meet our projections for 2016 and beyond. Future growth or consolidation may place a significant strain on our managerial, operational and financial resources. We are currently expending significant time and resources with respect to research and development related to a project for one of our major customers.
We cannot be sure that we have made adequate allowances for the costs and risks associated with possible expansion and consolidation of our business, or 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 engineering, technical support, sales, administrative and operational personnel. Competition for qualified personnel can be intense in the areas where we operate. The process 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, 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 assure you that the confidential nature of our proprietary information will not be compromised by any such employees who terminate their employment with us. Furthermore, we believe that our future success will largely depend upon our ability to attract, incentivize and retain highly skilled personnel.
We may lose significant market share as a result of intense competition in the markets for our existing and future products.
Many companies compete with us in the market for service monitoring, customer experience management and service assurance solutions. We expect that competition will increase in the future, both with respect to products and solutions that we currently offer and products and solutions that we are developing. Moreover, manufacturers of data communications and telecommunications equipment which are current and potential customers of ours, may in the future incorporate into their products capabilities similar to ours, which would reduce the demand for our products.
Many 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.
In July 2015, NetScout Systems Inc. announced that it had completed the acquisition of Danaher Corporation's communications business, which includes Tektronix Communications, enabling it to expand its network performance monitoring and security monitoring capabilities. This transaction results in NetScout Systems Inc. holding a very significant market share, making it a stronger competitor, and may as a result have a negative impact on our competitive environment.
Our non-competition agreements with our employees may not be enforceable. 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 currently have non-competition agreements with our key and certain 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. Under current applicable law, we may not be able to enforce these non-competition agreements. If we are unable to enforce any of these agreements, competitors that employ our former employees could benefit from the expertise our former employees gained while working for us.
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 depends to a significant extent upon the continuing services of our executive officers and other key employees, namely our Chief Executive Officer, Mr. Yaron Ravkaie, our Chief Operating Officer (“COO”), Mr. Eyal Harari, and our Vice President of R&D, 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.
We are partially dependent upon the success of distributors and resellers who are under no obligation to distribute our products.
Approximately 9.4% of our revenues in 2015 were generated by distributors and resellers. We are partially dependent upon our distributors for their active marketing and sales efforts for the distribution of our products. Typically, arrangements with our distributors do not prevent such distributors from distributing competing products, or require them to distribute our products in the future and, therefore, our distributors may not give a high priority to marketing and supporting our products. Additionally, our results of operations could be affected by changes in the financial situation, business or marketing strategies of our distributors. Any such changes could occur suddenly and rapidly.
We may lose customers, distributors, or resellers on whom we currently depend and we may not succeed in developing new distribution channels.
Our seven largest distributors and resellers accounted for approximately 8.9% of our sales in 2015, 13.6% of our sales in 2014 and 27.4% of our sales in 2013. In 2015 and 2014, no individual distributor or reseller accounted for more than 4% of the total respective consolidated revenues. If we terminate or lose any of our distributors or if they downsize significantly, we may not be successful in replacing them on a timely basis, or at all. Any changes in our distribution and sales channels, particularly the loss of a major distributor or our inability to establish effective distribution and sales channels for new products, may impact our ability to sell our products and may result in a loss of revenues.
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 sell more products to large CSPs, we may be required to agree to these less advantageous terms and conditions, which may decrease our revenues and/or increase the time it takes to convert orders into revenues, and could result in a material adverse effect on our business, financial condition and results of operations.
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 and services 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 risks include failure to fully integrate our products into the service provider's network with third party products and complex environments, 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, or increase the difficulty in collecting payment and recognizing revenues from such project
We could be subject to claims under our warranties and extended maintenance agreements and product recalls, which could be very expensive and harm our financial condition.
Products as complex as ours sometimes contain undetected errors. These errors can cause delays in product introductions or require design modifications. In addition, we are dependent on other suppliers for key components that are incorporated in our products. Defects in systems in which our products are deployed, whether resulting from faults in our products or products supplied by others, due to faulty installation or any other cause, may result in customer dissatisfaction, product returns and, potentially, product liability claims being filed against us. Our warranties permit customers to return defective products for repair. The warranty period is mostly for one year but could be extended either in the initial purchase of our product or after the initial warranty period ends ("extended maintenance agreements"). During the past few years, customer returns have not been substantial, however, there can be no assurance that this recent trend will continue. Any failure of a system in which our products are deployed (whether or not our products are the cause), any product recall, or product liability claims with any associated negative publicity, could result in the loss of, or delay in, market acceptance of our products 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 products, which may expose us to liability and have a material impact on our product development and sales.
Some of our products utilize open source technologies. These technologies are licensed to us under varying license structures. These licenses pose a potential risk to products in the event they are inappropriately integrated. In the event that we have not, or do not in the future, properly integrate software that is subject to such licenses into our products, 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 products may have over theirs. Any such requirement to disclose our source code or other confidential information related to our products 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 will experience delays in delivering our products.
We currently obtain key components for our products from a limited number of suppliers. We have one long term contract with a supplier of hardware and servers, which is a major supplier in its field. The agreement is scheduled to expire in 2017, with a one year extension option. We do not have long-term supply contracts with any other of our existing suppliers. This presents the following risks:
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Delays in delivery could interrupt and delay delivery and result in cancellations of orders for our products.
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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 alternative sources for product components.
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Suppliers could discontinue the supply of components used in our products. This may require us to modify our products, which may cause delays in product shipments and/or delivery, increased production costs and increased product prices.
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We may be required to hold more inventory than would be immediately required in order to avoid problems from shortages or discontinuance.
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Since we shifted in February 2014 to software-based solutions, which are installed on and deployed with standard, non-proprietary third-party hardware that function together with our software to deliver the product's essential functionality , we are less vulnerable to such delays and shortages. The shift to software-based solutions is discussed in "Item 4—Information on the Company- Business Review".
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 products 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. However, we have no registered patents and 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 products.
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 products 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.
Because we received grants from the Israeli Office of the Chief Scientist, we are subject to ongoing restrictions.
We received royalty-bearing grants from the Office of the Chief Scientist (the "Chief Scientist") of the Israeli Ministry of Economy and Industry (the "MoE"), for research and development programs that meet specified criteria. In addition to our obligation to pay to the Chief Scientist royalties on revenues from products developed pursuant to such programs or deriving therefrom (and related services), our ability to transfer such resulting know-how, especially outside of Israel, is limited, regardless of whether the royalties were fully paid. Any non-Israeli citizen, resident or entity that, among other things, (i) becomes a holder of 5% or more of our share capital or voting rights, (ii) is entitled to appoint one or more of our directors or our chief executive officer, or (iii) serves as one of our directors or as our chief executive officer (including holders of 25% or more of the voting power, equity or the right to nominate directors in such direct holder, if applicable), is required to notify the Chief Scientist of the same and to undertake to the Chief Scientist to observe the law governing the grant programs of the Chief Scientist, the principal restrictions of which are the transferability limits described above. Furthermore, a recent amendment to the Law for the Encouragement of Research, Development and Technological Innovation, 1984-5744 (formerly known as the Law for Encouragement of Research and Development in the Industry, 5744-1984) and the regulations promulgated thereunder (the "R&D Law") mandates the formation of a new governmental authority to replace the Chief Scientist by July 28, 2018. This authority may establish new guidelines regarding the R&D Law, which may affect our existing or future Chief Scientist programs and incentives. We cannot predict what changes, if any, the new authority may make. For more information, see "Item 4.B—Information on the Company—Business Overview—Israeli Office of the Chief Scientist."
We may be subject to litigation and other claims, including, without limitation, infringement claims or claims that we have violated intellectual property rights, which could seriously harm 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.
Additionally, in May 2010, we received a notice from the Chief Scientist regarding alleged miscalculations in the amount of royalties paid by us to the Chief Scientist for the years 1992 through 2009 and the revenues on which the Company has to pay royalties. During 2011, we reviewed with the Chief Scientist these alleged miscalculations. We believe that all royalties due to the Chief Scientist from the sale of products developed with funding provided by the Chief Scientist during such years were properly paid or were otherwise accrued as of December 31, 2015. However, there can be no assurance that such royalties were properly paid or accrued for. A determination that these royalties have not been paid or accrued for could result in the expenditure of significant financial resources.
Yehuda Zisapel and Zohar Zisapel beneficially own, in the aggregate, approximately [36%] of our ordinary shares and therefore have significant influence over the outcome of matters requiring shareholder approval, including the election of directors.
As of March 24 2016, Yehuda Zisapel and Zohar Zisapel (the former Chairman of our Board of Directors), who are brothers, may be deemed to beneficially own an aggregate of 3,258,213 ordinary shares, including options and warrants exercisable for 285,537 ordinary shares that are exercisable within 60 days of March 24, 2016, representing approximately 36% 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, Yehuda Zisapel and Zohar Zisapel have significant influence over the outcome of various actions that require shareholder approval, including the election of our directors. In addition, Yehuda Zisapel and Zohar 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 Yehuda Zisapel and Zohar 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 Yehuda Zisapel and/or Zohar 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.
For more information, see Item 7.B- Major Shareholders and Related Party Transactions—Related Party Transactions and Item 10.B- Fiduciary Duties of Shareholders.
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 93% of our sales in 2015, 86% of our sales in 2014, and 97% of our sales in 2013 were generated outside of Israel, including in North America, Europe, Asia and South America. Our international sales will be limited if we cannot 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 products. Our international operations are subject to a number of risks, including:
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challenges in staffing and managing foreign operations due to the limited number of qualified candidates, employment laws and business practices in foreign countries, any of which could increase the cost and reduce the efficiency of operating 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, 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 for indirect sales;
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tariffs and other trade barriers;
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economic instability in foreign markets;
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wars, acts of terrorism and political unrest;
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language and cultural barriers;
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lack of integration of foreign operations;
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potential foreign and domestic tax consequences;
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technology standards that differ from those on which our products are based, which could require expensive redesign and retention of personnel familiar with those standards;
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longer accounts receivable payment cycles and possible difficulties in collecting payments, which may increase our operating costs and hurt our financial performance; 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 a material adverse effect on our business, results of operations, 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 such as the Brazilian Real and the Euro), 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, Euro and other currencies. However, the majority of our cost of revenues is incurred in transactions denominated 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 the Brazilian Real, the Euro, and 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 significant portion of our revenues is denominated in Brazilian Real, devaluation in this currency caused in 2015 and 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.
Any inability to comply with Section 404 of the Sarbanes-Oxley Act of 2002 regarding having effective internal control procedures may negatively impact the report on our financial statements to be provided by our independent auditors.
We are subject to the reporting requirements of the United States Securities and Exchange Commission (the "SEC"). The SEC, as directed by Section 404 ("Section 404") of the Sarbanes-Oxley Act of 2002 (the "Sarbanes-Oxley Act"), adopted rules requiring public companies to include a report of management on the Company's internal control over financial reporting in its annual report on Form 10-K or Form 20-F, as the case may be, that contains an assessment by management of the effectiveness of the Company's internal control over financial reporting. In addition, if the public float of our shares were to exceed $75 million, the Company's independent registered public accounting firm would be required to attest to and report on the effectiveness of the Company's internal control over financial reporting. Our management may not conclude that our internal control over financial reporting is effective. Any of these possible outcomes 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, 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 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 advisors fees during the implementation of these changes and thereafter. Further, we may need to hire additional qualified personnel in order for us to be compliant 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.
If we are characterized as a passive foreign investment company, our U.S. shareholders may suffer adverse tax consequences.
As more fully described below in "Item 10.E—Additional Information—Taxation—United States Federal Income Tax Considerations—Taxation of U.S. Holders of Ordinary Shares—Passive Foreign Investment Company Status," if for any taxable year, after taking into account certain look-through rules, 75% or more of our gross income is passive income, or at least 50% of the fair market value of our assets, averaged quarterly over our taxable year, are comprised of assets that produce (or are held for the production of) passive income, we may be characterized as a passive foreign investment company ("PFIC") for U.S. federal income tax purposes. The market capitalization approach has generally been used to determine the fair market value of the assets of a publicly traded corporation, although the U.S. Internal Revenue Service (the "IRS") and the courts have accepted other valuation methods in certain valuation contexts. If we are classified as a PFIC, our U.S. shareholders could suffer adverse United States tax consequences, including gain on the disposition of our ordinary shares being treated as ordinary income and any resulting U.S. federal income tax being increased by an interest charge. Rules similar to those applicable to dispositions generally will apply to certain "excess distributions" in respect of our ordinary shares. For our 2015 taxable year, we believe that we should not be classified as a PFIC. However, there are no assurances that the IRS will agree with our conclusion or that we will not become a PFIC in 2016 or subsequent taxable years. U.S. shareholders should consult with their own U.S. tax advisors with respect to the U.S. tax consequences of investing in our ordinary shares.
The market price of our ordinary shares has and may continue to fluctuate widely, which could adversely affect us and our shareholders.
From January 1, 2015 to March 28, 2016, our ordinary shares have traded on the NASDAQ Capital Market ("NASDAQ") as high as $16.63 and as low as $9.59 per share. As of March 28, 2016, the closing price of our ordinary shares on NASDAQ was $13.41 per share. The market price of our ordinary shares has been and is likely to continue to be highly volatile and could be subject to wide fluctuations in response to numerous factors, including the following:
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our results of operations;
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market conditions or trends in our industry and the global economy as a whole;
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political, economic and other developments in the State of Israel and worldwide;
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actual or anticipated variations in our quarterly operating results;
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announcements by us or our competitors of technological innovations or new and enhanced products;
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announcements by us or our competitors of significant contracts or capital commitments;
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actual or anticipated variations in our competitors quarterly operating results, and changes in the market valuations of our competitors;
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introductions of new products or new pricing policies by us or our competitors;
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trends in the communications or software industries, including industry consolidation;
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regulatory changes that impact our pricing of products and services and competition in our markets;
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acquisitions or strategic alliances by us or others in our industry;
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changes in estimates of our performance or recommendations by financial analysts;
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operating results that vary from the expectations of financial analysts and investors;
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changes in our shareholder base;
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changes in status of our intellectual property rights;
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future sales of our ordinary shares;
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fluctuations in the trading volume of our ordinary shares; and
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addition or departure of key personnel.
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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, and we may not be able to raise capital through an offering of securities, which would adversely affect our financial condition and our ability to maintain or expand our operations.
From time to time we may choose to raise financing. If adequate funds are 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 financing 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. If adequate funds are 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.
Risks Related to Our Location in Israel
Conditions in Israel affect our operations and may limit our ability to produce and sell our products.
We are incorporated under Israeli law and our principal offices and manufacturing and research and development facilities are located in Israel. Accordingly, our operations and financial results could be adversely affected if political, economic and military events curtailed or interrupted trade between Israel and its present trading partners or if major hostilities involving Israel should occur in the Middle East.
Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its Arab neighbors. A state of hostility, varying in degree and intensity, has led to security and economic problems for Israel. Since the end of 2011, several countries in the region, including Egypt and Syria, have been experiencing civil unrest, political turbulence and violence which are affecting the political stability of those countries. This instability may lead to the deterioration of the political and economic relationships that exist between the State of Israel and some of these countries. In addition, Iran has threatened to attack Israel and is widely believed to be developing nuclear weapons. Iran is also believed to have a strong influence among extremist groups in the region, such as Hamas in Gaza and Hezbollah in Lebanon. These situations may potentially escalate in the future to more violent events which may affect Israel and us. These situations, including conflicts which involved missile strikes against civilian targets in various parts of Israel, have in the past negatively affected business conditions in Israel. Any hostilities involving Israel or the interruption or curtailment of trade between Israel and its present trading partners could have a material adverse effect on our business, operating results and financial condition. We do not believe that the political and security situation has had a material impact on our business to date; however, there can be no assurance that this will be the case for future operations. We could be adversely affected by any major hostilities, including acts of terrorism or any other hostilities involving or threatening Israel, the interruption or curtailment of trade between Israel and its trading partners, a significant downturn in the economic or financial condition of Israel, or a significant increase in the rate of inflation. Furthermore, several countries restrict business with Israel and Israeli companies, and additional countries or companies may restrict doing business with Israel and Israeli companies as the result of the aforementioned hostilities. No predictions can be made as to whether or when a final resolution of the area's problems will be achieved or the nature thereof and to what extent the situation will impact Israel's economic development or our operations.
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 manufacture 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. 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—Israeli Office of the Chief Scientist."
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 (the "Israeli Companies Law") generally requires that a merger be approved by a company's board of directors and by a majority of the shares voting on the proposed merger. Unless a court rules otherwise, a statutory merger will not be deemed approved if shares representing a majority of the voting power present at the shareholders meeting, and which are not held by the potential merger partner (or by any person who holds 25% or more of the shares of capital stock or the right to appoint 25% or more of the directors of the potential merger partner or its general manager), vote against the merger. Upon the request of any creditor of a party to the proposed merger, a court may delay or prevent the merger if it concludes that there is a reasonable concern that, as a result of the merger, the surviving company will be unable to satisfy its obligations. In addition, a merger may generally not be completed unless at least (i) 50 days have passed since the filing of the merger proposal with the Israeli Registrar of Companies by each of the merging companies, and (ii) 30 days have passed since the merger was approved by the shareholders of each of the parties to the merger.
Also, in certain circumstances an acquisition of shares in a public company must be made by means of a tender offer if as a result of the acquisition the purchaser would become a 25% or greater or 45% or greater shareholder of the company (unless there is already a 25% or greater or a 45% or greater shareholder of the company, respectively). If, as a result of an acquisition, the acquirer would hold more than 90% of a company's shares, the acquisition must be made by means of a tender offer for all of the shares. Shareholders may request an appraisal in connection with a tender offer for a period of six months following the consummation of the tender offer, but the purchaser is entitled to stipulate that any tendering shareholder surrender its appraisal rights.
Finally, Israeli tax law treats some acquisitions, such as stock-for-stock exchanges between an Israeli company and a foreign company, less favorably than do U.S. tax laws. For example, Israeli tax law may, under certain circumstances, subject a shareholder who exchanges his ordinary shares for shares in another corporation to taxation prior to the sale of the shares received in such a stock-for-stock swap.
These provisions of Israeli corporate and tax law, and the uncertainties surrounding such law, may have the effect of delaying, preventing or making more difficult a merger with us or an acquisition of us. This could prevent a change of control over us and depress our ordinary shares' market price which otherwise might rise as a result of such a change of control.
Our results of operations may be negatively affected by the obligation of our personnel to perform military service.
All male adult citizens and permanent residents of Israel under the age of 51 are, unless exempt, obligated to perform military reserve duty annually. Additionally, these residents are subject to being called to active duty at any time under emergency circumstances. Some of our officers and employees are currently obligated to perform military reserve duty from time to time. In the event of a military conflict, including the ongoing conflict with the Palestinians, these persons could be required to serve in the military for extended periods of time and on very short notice. The absence of a number of our officers and employees for significant periods could disrupt our operations and harm our business. Given these requirements, we believe that we have operated relatively efficiently since beginning our operations. However, we cannot assess what the full impact of these requirements on our workforce or business would be if the situation with the Palestinians or any other adversaries changes, and we cannot predict the effect on our business operations of any expansion or reduction of these military reserve requirements.
It may be difficult to (i) effect service of process, (ii) assert U.S. securities laws claims and (iii) enforce U.S. judgments in Israel against us or our directors, officers and auditors named in this Annual Report.
We are incorporated under the laws of the State of Israel. Service of process upon us, our Israeli subsidiary, our directors and officers and the Israeli experts, if any, named in this Annual Report, most of whom reside outside the United States, may be difficult to obtain within the United States. Furthermore, because the majority of our assets and investments, and all of our directors, executive officers and such Israeli experts are located outside the United States, any judgment obtained in the United States against us or any of them may be difficult to collect within the United States.
We have been informed by our legal counsel in Israel that it may also be difficult to assert U.S. securities law claims in original actions instituted in Israel. Israeli courts may refuse to hear a claim based on an alleged violation of U.S. securities laws if they determine that Israel is not the most appropriate forum 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 U.S. law is applicable to the claim. There is little binding case law in Israel addressing these matters. If U.S. law is found to be applicable, the content of applicable U.S. law must be proved as a fact, which can be a time-consuming and costly process. Certain matters of procedure will also be governed by Israeli law.
Subject to specified time limitations and legal procedures, Israeli courts may enforce a non-appealable U.S. judgment in a civil matter, provided that, among other things:
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the judgment is obtained after due process before a court of competent jurisdiction, according to the laws of the foreign state in which the judgment is given and the rules of private international law currently prevailing in Israel;
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the prevailing law of the foreign state in which the judgment is rendered allows for the enforcement of judgments of Israeli courts;
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adequate service of process has been effected and the defendant has had a reasonable opportunity to be heard and to present his or her evidence;
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the judgment is not contrary to the public policy of Israel, and the enforcement of the civil liabilities set forth in the judgment is not likely to impair the security or sovereignty of Israel;
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the judgment was not obtained by fraud and does not conflict with any other valid judgment in the same matter between the same parties;
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an action between the same parties in the same matter was not pending in any Israeli court at the time the lawsuit was instituted in the foreign court; and
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the judgment is enforceable according to the laws of Israel and according to the law of the foreign state in which the relief was granted.
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If a foreign judgment is enforced by an Israeli court, it generally will be payable in Israeli currency, which can then be converted into non-Israeli currency and transferred out of Israel. Traditionally, in an action before an Israeli court to recover an amount in a non-Israeli currency, the Israeli court issues a judgment for the equivalent amount in Israeli currency at the rate of exchange in force on the date of the judgment, but the judgment debtor may make payment in foreign currency. Pending collection, the amount of the judgment of an Israeli court stated in Israeli currency ordinarily will be linked to the Israeli consumer price index plus a per annum statutory rate of interest set on a quarterly basis by Israeli regulations. Judgment creditors must bear the risk of unfavorable exchange rates. The trend in recent years has increasingly been for Israeli courts to enforce a foreign judgment in the foreign currency specified in the judgment, in which case there are also applicable rules regarding the payment of interest.
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. As a foreign private issuer listed on the NASDAQ, we may follow home country practice with regard to, among other things, 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). A foreign private issuer that elects to follow a home country practice instead of NASDAQ requirements must submit to NASDAQ in advance a written statement from an independent counsel in such issuer's home country certifying that the issuer's practices are not prohibited by the home country's laws. In addition, a foreign private issuer must disclose in its annual reports filed with the SEC each such requirement that it does not follow and describe the home country practice followed by the issuer instead of any such requirement. Accordingly, our shareholders may not be afforded the same protection as provided under NASDAQ's corporate governance rules.
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.
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INFORMATION ON THE COMPANY
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HISTORY AND DEVELOPMENT OF THE COMPANY
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Both our legal and commercial name is RADCOM Ltd., and we are an Israeli company. RADCOM Ltd. was incorporated in 1985 under the laws of the State of Israel, and we 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, RADCOM Equipment, Inc. ("RADCOM Equipment"), a New Jersey corporation, which serves as our agent for sales and service of our products in North America. RADCOM Equipment is located at 6 Forest Avenue, Paramus, New Jersey 07652, and its telephone number is (201) 518-0033. In 1996, we incorporated a wholly-owned subsidiary in Israel, RADCOM Investments (96) Ltd. ("RADCOM Investments"), an Israeli company, located at our office in Tel Aviv, Israel; its telephone number is the same as ours (972-3-645-5055). In 2010, we established a wholly-owned subsidiary in Brazil, RADCOM do Brasil Comercio, Importacao E Exportacao Ltda. ("RADCOM Brazil"), a Brazilian company. RADCOM Brazil is located at 46 Rua Calcada Antares, Alphaville, Santana de Parnaiba, Sao Paulo, and its telephone number is 55(11) 41537430. In 2012, we incorporated a wholly-owned subsidiary in India, RADCOM Trading India Private Limited, ("RADCOM India"), an Indian company, located at Level 4, Rectangle 1, Commercial Complex D-4, Saket, New Delhi – 110017, and its telephone number is 91-11-4051-4079.
In the years ended December 31, 2015, 2014 and 2013, our capital expenditures were $97,000, $65,000, and $88,000, respectively, and were spent primarily on computers. We have no current significant commitments for capital expenditures
Overview
We provide service assurance and customer experience management solutions to communication service providers (CSPs). Over 50 CSPs in 25 countries 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. We have a strong track record of innovation, and we were the first to market with a software-based probe solution that supports NFV for next-generation networks. 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 software-based solutions and industry track record.
Our solutions deliver specialized capabilities for virtualized infrastructure and next-generation networks, such as LTE, LTE-A, VoLTE, IMS, VoIP, UMTS/GSM and mobile broadband. The key benefits of our solutions are:
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advanced software-based architecture for rapid deployment and ease of management;
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improved customer retention;
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reduced subscriber churn rates;
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improved service availability;
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ability to install the solution as a virtual network function for seamless integration into all NFV infrastructures;
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collection of all network packets for a complete and comprehensive view of the network and the customer experience;
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support for multiple protocols for end-to-end network coverage;
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both network-wide views and drilldown to an individual subscriber level; and
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support for terabyte networks.
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Our software-based solutions enable CSPs to manage both existing networks and next-generation, NFV-based architectures. In 2013, we recognized that CSPs would require a new approach for service assurance and customer experience management solutions in order to monitor huge volumes of data and support NFV-based network deployments. In February 2014, we launched our MaveriQ solution which incorporates software-based probes and replaced our OmniQ hardware-based solution. During 2015, we saw increased interest from CSPs in NFV-capable solutions for service assurance and customer experience management, and we enhanced our solutions to support NFV and remove dependencies from proprietary hardware-based devices.
In December 2015, our MaveriQ solution was selected by a top-tier North American mobile operator for its next-generation virtualized network environment. This deployment represents one of the first NFV networks of scale in the industry, and we were selected after a vigorous and lengthy validation process against several competing products. We are now in the process of deploying our software-based NFV solution with this leading CSP, and we are leveraging this success in discussions with other CSPs looking to manage existing networks while accelerating their roadmaps towards next-generation NFV architectures.
Industry Background
Our Customers and the Markets for Our Solutions
We operate in a large market undergoing significant transformation with strong potential. The customers in our market consist primarily of CSPs (mobile and fixed) 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 support 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 (M2M), the Internet of Things (IoT) and 5G. With the need to manage millions of various network elements and services from multiple vendors and technologies, deploying a service assurance and customer experience management solution is an essential part of a CSP’s network.
Similar to how virtualization has become widely deployed in many data centers and large enterprises, many CSPs are now looking to reduce costs and become more agile by transitioning from physical network elements to software-centric NFV architectures. NFV enables CSPs to replace dedicated physical network elements with software-based solutions that run on standard, non-proprietary third-party hardware. Although the pace of NFV transformation is uncertain, major CSPs are currently evaluating and/or moving parts of their network to support NFV.
While NFV provides many benefits, transitioning infrastructure to NFV adds significant complexity when it comes to service assurance and customer experience management. Prior probe and management solutions were not designed for NFV. Whereas prior solutions focused on monitoring physical network devices, new solutions must also monitor internal Virtual Machine-to-Virtual Machine (VM-to-VM) communications between various virtualized network functions all hosted on the same server as well as communications between servers.
Our Strategy
Our objective is to be the market leader for service assurance and customer experience management solutions. We plan to increase sales by leveraging our product leadership around software-based solutions and NFV, benefit from the experience gained as we implement one of the largest NFV deployments to date with a leading North American mobile operator. We also plan to offer our solutions and expertise to new and existing CSPs in our targeted geographical regions. We plan to maintain our technical advantage over competitors by investing to further enhance our software-based solutions. Key elements of our strategy include:
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Targeting CSPs who are evaluating and migrating to NFV. The majority of the industry’s largest CSPs are either evaluating NFV or have started deploying virtualized solutions for their network functionality. We believe we are better positioned than competitors who offer service assurance and customer experience management solutions that do not support (or have not yet been deployed) in large-scale NFV environments. In order to transition to NFV, CSPs generally need to replace or upgrade their service assurance solution with software that can support both existing networks as well as NFV-based architectures. Our solution, which monitors both existing networks and NFV, ensures a smooth migration and enables CSPs to future-proof their investment in a service assurance solution. Our selection in December 2015 by the top-tier North American mobile operator has been noted by many CSPs, as this CSP is well regarded in leading the industry. As a result, as other CSPs look for vendors to support their existing networks and NFV, we believe we are well positioned. We also believe that our current technological leadership will increase as we deploy our NFV-based solutions on one of the world’s largest NFV networks.
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Investing in North America, Europe and Asia. With our recent selection by a leading North American CSP for its NFV network deployment and growing recognition of our technological leadership to deliver service assurance and customer experience management, we plan to expand our presence in North America, Europe and Asia where we expect to see a large share of investments take place around NFV.
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Targeting service providers migrating to LTE, VoLTE and 5G. We have begun to benefit from the deployments by leading service providers of VoLTE and LTE networks. We are seeing increased deployments of multiple technology (3G, LTE, IMS and NGN) networks, which involve greater complexity and require more sophisticated service assurance and customer experience management solutions than legacy networks. We believe that our ability to secure customers with deployments of our solution in multiple types of networks positions us to benefit from this trend.
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Drive repeat sales from our install base. Our solutions are typically purchased initially for a specific purpose within a CSP. As other parts of a CSP’s organization seek to use our solution for other purposes, we benefit from additional sales. Furthermore, as CSPs upgrade and expand their networks, such as adding capacity or launching new services, our customers tend to purchase additional solutions from us.
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Products and Solutions
The MaveriQ Solution for Service Assurance and Customer Experience Management
The MaveriQ solution is a comprehensive, next-generation probe-based customer and service assurance solution designed to enable CSPs to carry out end-to-end voice and data quality monitoring and to manage their networks and services. The MaveriQ solution 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.
The MaveriQ solution monitors multiple services such as voice, video and data, employing a comprehensive array of service and network performance and measurement methodologies to continuously analyze service performance and quality. With its enhanced correlation capabilities, the MaveriQ solution offers the CSP full end-to-end visibility of the network across technologies. The MaveriQ solution displays performance and quality measurements from both the signaling and the user planes.
The MaveriQ solution 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 enhanced detail records (eDRs) collected from the probes in the QManager (the central site-management software) are stored in the solution's embedded database. These can then be used by either the QExpert (the Web-based analysis and reporting module) or the Dashboard (the Web-based user interface) to perform service performance analysis, drilldown and troubleshooting on key performance indicators (KPIs) and key quality indicators (KQIs).
The MaveriQ solution monitors multiple types of services such as voice, video and data, employing a comprehensive array of service and network performance and measurement methodologies to continuously analyze service performance and quality. With its enhanced correlation capabilities, the MaveriQ solution offers the service provider full end-to-end visibility of the network across technologies. The MaveriQ solution 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 the MaveriQ solution to deliver essential functionality.
This service assurance solution presents a seamless integration between traditional network monitoring and troubleshooting solutions, and it provides an advanced set of service assurance monitoring applications: network troubleshooting, network quality monitoring, service quality monitoring, customer experience management, customer quality of service monitoring, and customer service level agreements monitoring.
The MaveriQ solution 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, high-speed downlink packet access and Triple Play;
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integration of new architectures such as high-speed packet access ("HSPA"), LTE, VoLTE and IMS;
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migration of the network core to IP technology using IMS or SIGTRAN;
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successful delivery of advanced, complex services such as VoIP IMS and video conferencing; and
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pro-active management of call quality on existing and next-generation service providers' production networks, along with maintenance of high-availability, high-quality voice services over packet telephony.
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CSPs use the MaveriQ solution for a wide array of use cases:
Customer and Service Assurance
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Troubleshooting – the MaveriQ solution enables CSPs to "drill down" to identify the source of specific problems, using tools ranging from call or session tracing to a full decoding of the call flow.
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Performance monitoring – CSPs use the MaveriQ solution to analyze the behavior of network components and customer network usage to understand trends and performance level and optimization, with the goal of identifying faults before they compromise the end-user experience
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Fault detection – CSPs use the MaveriQ solution’s automatic fault detection and service KPIs to alert them to network problems as they arise.
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Pre-Mediation – the MaveriQ solution generates CDRs (call detail records) needed to feed third-party OSSs or other solutions
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Roaming and Interconnect Analysis:
The MaveriQ solution can be used by CSPs to monitor their roaming and interconnect traffic. By identifying problematic links, CSPs are able to avoid revenue loss, to detect problems with specific roaming partners, and to manage interconnection KPIs.
Customer Experience Management:
The MaveriQ solution provides Customer Experience Management, which provides insight into the customer experience for mobile broadband and smartphones. Revenue-generating services require a well-managed network and mature service-delivery processes. Customers have high expectations of their communications services. CSPs need to know what customers are experiencing, even before the customers do, in order to retain their subscribers and maintain their profitability.
The MaveriQ solution provides the visibility and invaluable data for CSPs to manage both network and service performance and to ensure quality of service for its subscribers. The MaveriQ solution monitors a wide range of measurement sessions that are meaningful to the end user. By analyzing these measurements in real time and applying business intelligence, the MaveriQ solution provides insight not only into the end user quality of experience but also into the corresponding quality of the service provider's TCP/IP network.
The CEM solutions include:
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Customer Care Application, or QiCare, helps CSPs to reduce churn by monitoring and maintaining a high level of satisfaction for the individual subscriber, groups of subscribers, and the entire subscriber base. QiCare enables CSPs to view subscriber reports for individual subscribers and helps them to understand the subscriber's behavior and the quality of the different services being used online.
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QVIP – reports SLA for defined subscriber groups. In today's saturated telecom market, subscribers often abandon their CSP due to frustration over quality of service, with customer churn contributing to significant loss of revenue. RADCOM's QVIP application helps CSPs to monitor and maintain a high level of satisfaction for the individual subscriber, a group of subscribers and an entire network.
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QMyHandset enables identification of problematic handsets, and provides analysis of the cause of the problem. By identifying problematic handsets, CSPs can quickly make the required adjustments to their network to provide support for more handset models, thus improving the customer experience and hopefully preventing customer churn.
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The following table shows the breakdown of our consolidated sales for the fiscal years 2015, 2014 and 2013 by product line:
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(in thousands of U.S. dollars)
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The MaveriQ (including OmniQ)
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$ |
18,498 |
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$ |
23,023 |
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$ |
19,976 |
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Others
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$ |
175 |
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$ |
613 |
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$ |
506 |
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Total
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$ |
18,673 |
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$ |
23,636 |
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$ |
20,482 |
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Sales and Marketing Organization
We sell to customers throughout the world mainly via direct channels but also via indirect channels.
Direct channels: Most of our sales are made through a direct channel, whereby our customers (the end-users) can enter into an agreement directly with us. During 2015, this direct channel was used mainly in North America, South America and Asia.
In North America we operate through our wholly-owned U.S. subsidiary, RADCOM Equipment, which primarily sells our products to end-users directly.
In Brazil we operate through a wholly-owned Brazilian subsidiary, RADCOM Brazil, which primarily sells our products to end-users in the Brazilian market directly.
RADCOM Brazil's employees engage primarily in the sales, marketing, deployment and customer support activities of our customers in Brazil.
In 2012, we established a wholly-owned Indian subsidiary, RADCOM India, which primarily provides marketing services and customer support worldwide. Our products are sold to the end-users directly by RADCOM Ltd.
We have regional sales support offices in China and Singapore. These offices support our distributors and direct sales in these regions.
Indirect channels: In several markets we sell our products through independent distributors and resellers who market communications-related hardware and software products.
We continue to search for new distributors and resellers to penetrate new geographical markets and to better serve our target markets.
Our distributors, agents and resellers serve as a local representative in certain countries as part of our sales, marketing and support team. They help sell, deploy and servicing our solutions, offer technical support in the end-user's native language, and attend to customer needs during local business hours. We have a standard contract with our distributors, agents and resellers. Based on this agreement, sales to distributors are generally final, and distributors have no right of return or price protection. The distributors do not need to disclose to us their customers' names, prices or date of order. To the best of our knowledge, a distributor places an order with us after it receives an order from its end-user, and does not hold our inventory for sale. Usually, we are not a party to the agreements between distributors and their customers.
Geographic Markets: The table below indicates the approximate breakdown of our revenue by territory:
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Year ended December 31,
(in millions of U.S. dollars)
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Year ended December 31,
(in percentages)
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2015
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2014
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2013
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2015
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2014
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2013
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Europe
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1.2 |
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3.2 |
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4.0 |
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6.4 |
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13.5 |
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19.7 |
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North America
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1.0 |
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1.9 |
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1.7 |
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5.4 |
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8.1 |
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8.2 |
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Asia (Excluding Philippines)
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0.6 |
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0.8 |
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0.4 |
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3.1 |
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3.6 |
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2.0 |
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Philippines
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8.1 |
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3.5 |
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3.2 |
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43.2 |
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15.0 |
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15.6 |
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South America (Excluding Brazil)
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2.4 |
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4.2 |
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4.6 |
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13.2 |
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17.9 |
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22.4 |
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Brazil
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3.5 |
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6.5 |
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5.5 |
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18.7 |
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27.3 |
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26.7 |
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Others
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1.9 |
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3.5 |
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1.1 |
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10.0 |
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14.6 |
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5.4 |
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Total revenues
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18.7 |
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23.6 |
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20.5 |
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100 |
% |
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100 |
% |
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100 |
% |
Competition
The markets for our products are competitive, and we expect that competition will continue in the future, both with respect to products that we are currently offering and products that we are developing. Our principal competitors include NetScout, JDSU, Polystar, Astelia, Anritsu, Commprove, Exfo, Empirix and IBM (which acquired The Now Factory) In addition to these competitors, we expect competition from established and emerging communications, network management and test equipment companies. 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. For more information, see Item 3.D - Risks Related to Our Business and Our Industry.
In July 2015, NetScout Systems Inc. announced that it had completed the acquisition of Danaher Corporation's communications business, which includes Tektronix Communications. Each of NetScout and Tektronix have a significant share in the markets for our products, and the competitive landscape pursuant to this purchase where two significant players have combined into one player, may change significantly. We believe that this may also open new opportunities for us, mainly due to potential new prospects with their install base.
We believe that we are differentiated from our competitors in six main areas:
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our leadership in providing full service assurance solutions for NFV networks
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the advanced technology (such as real-time processing, big data support and high capacity performance that underlies our solutions)
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the multi-technology correlation capabilities that supports all major technologies – 3G, 4G, LTE, IMS, VoLTE and VoIP - within the same solution
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our solution being software-based providing cost-efficiency, rapid deployment times and agility in development
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Support for both physical and NFV networks to allow CSPs who have yet to transform to the NFV, to accelerate NFV deployments and smoothly transition from physical infrastructure whilst using the same solutions; and
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proven flexibility and responsiveness in a dynamic customer and technology environment
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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:
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Enhancement of support: We are dedicated to the provision of timely, effective and professional support for all our customers. On-call support is provided by our direct sales/support force as well as by our representatives, distributors, and OEM partners. In addition, we routinely contact our customers to solicit feedback and promote full usage of our solutions. We provide all customers with a free one-year warranty, which includes bug-fixing solutions and a hardware warranty on our products. After the initial warranty period, we offer extended warranties which can be purchased for one, two, or three-year periods. Generally the cost of the extended warranty is an annual maintenance fee based on a percentage of the overall cost of the product..
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Customer-oriented product development: With the goal of continuously enhancing our customer relationships, we meet regularly with customers, and use the feedback from these discussions to improve our products and guide our R&D roadmap.
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Regional technical support: As the sale of a system and solutions requires a high level of technical skill, we decided to enhance our support with local experts located in our regional offices. For example, in our Brazil and India offices we established local support teams responsible for first level engagements with customers (Tier 1), which is advantageous in terms of the time zone, culture and language.
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Support of our representatives and distributors: We provide a high level of pre- and post-sale technical support to our distributors and representatives in the field. We use a broad range of channels to deliver this support, including help desks, technical training and others.
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Seasonality of Our Business
In addition to general market and economic conditions, such as overall industry consolidation, the pace of adoption of new technologies, and the general state of the economy, our orders are affected by our customers' capital spending plans and patterns. Our orders, and to a lesser degree revenues, are typically highest in our fourth fiscal quarter when our customers have historically increased their spending to fully utilize their annual capital budgets. Consequently, our first quarter orders are usually lower compared to the last quarter of the previous year, and often are the lowest of the year.
Development Facilities
Our corporate office and development facilities, which are located in Tel Aviv, Israel, consist Our corporate office and development facilities, which are located in Tel Aviv, Israel, consist primarily of software development, testing and quality control and installation. For our service assurance solutions, we deploy the MaveriQ solution with standard, non-proprietary third-party hardware that functions together with our software to deliver the product's essential functionality.
Research and Development
In 2015, most of our research and development efforts focused on the development for the NFV. We expect to continue to invest significant efforts in research and development for the NFV in 2016.
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, in part, depends upon our ability, on a cost-effective and timely basis, to continue to enhance our existing products and to develop and introduce new products that improve performance and reduce total costs.
We intend to continue developing products that meet key industry standards, to support important protocols as they emerge and maintain our technology leadership. Still, there can be no assurances that we will be able to successfully develop products to address new customer requirements and technological changes, or that such products will achieve market acceptance.
Our gross research and development costs were approximately $6.1 million in 2015, $5.8 million in 2014 and $5.6 million in 2013, representing 32.5%, 24.6% and 27.4% of our sales, respectively. Aggregate research and development expenses funded by the Office of the Chief Scientist were approximately $1.6 million in 2015, $1.7 million in 2014 and $1.5 million in 2013. For more information on the Chief Scientist, see "Israeli Office of the Chief Scientist" below. We expect to continue to invest significant resources in research and development.
As of December 31, 2015, our research and development staff consisted of 51employees, an increase of 5 employees compared to December 31, 2014. Research and development activities take place at our facilities in Tel Aviv. We occasionally use independent subcontractors for portions of our development projects.
Israeli Office of the Chief Scientist
Every year we file applications for grants under programs of the Office of the Chief Scientist of the Israeli Ministry of Economy (the "Chief Scientist" or "OCS"). Grants received under such programs are repaid through a mandatory royalty based on revenues from products developed pursuant to such programs or deriving therefrom (and related services). This government support is contingent upon our ability to comply with certain applicable requirements and conditions specified in the Chief Scientist's programs, with the provisions of the R&D Law. Generally, grants from the Chief Scientist constitute up to 50% of qualifying research and development expenditures for particular approved projects. Under the terms of these Chief Scientist projects, a royalty of 3% to 5% is 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 Chief Scientist. As of December 31, 2015, our royalty rate was 3.5%. Royalty obligations are usually 100% of the dollar-linked amount of the grant, plus interest.
The R&D Law provides that know-how developed under an approved research and development program and/or rights associated with such know-how may not be transferred to third parties in Israel without the approval of the Chief Scientist. Such approval is not required for the sale or export of any products resulting from such research or development. The R&D Law, as amended, further provides that the know-how developed under an approved research and development program or rights associated with such know-how may not be transferred to any third parties outside Israel, except in certain special circumstances and subject to the Chief Scientist's prior approval. The Chief Scientist may approve the transfer of Chief Scientist-funded know-how outside Israel, generally, in the following cases: (a) the grant recipient pays to the Chief Scientist up to 600% of the total dollar-linked amount of the grants in consideration for such Chief Scientist-funded know-how (according to certain formulas); (b) if the grant recipient receives know-how from a third party in exchange for its Chief Scientist-funded know-how; (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, in which case the payment set forth in (a) may be reduced. The R&D Law generally requires that the product developed under an OCS-funded program be manufactured in Israel. Upon notification to the OCS and provided that the OCS did not object within 30 days, a portion of up to 10% of the manufacturing volume may be performed outside of Israel. Upon the OCS approval, a greater portion of the manufacturing volume may be performed abroad. Any such approval will be conditioned upon acceleration of the rate of royalties and an increase in the total amount to be repaid to the OCS of up to 300% of the grants, depending on the portion of the total manufacturing volume that is performed abroad.
The R&D Law 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 and foreign interested parties to notify the Chief Scientist of any change in control of the recipient or a change in the holdings of the means of control of the recipient that results in a non-Israeli becoming an interested party directly in the recipient, and requires the new interested party to undertake to the Chief Scientist to comply with the R&D Law. In addition, the Chief Scientist may require additional information or representations in respect of certain of such events. For this purpose, "control" is defined as the ability to direct the activities of a company other than any ability arising solely from serving as an officer or director of the company. A person is presumed to have control if such person holds 50% or more of the means of control of a company. "Means of control" refers to voting rights or the right to appoint directors or the chief executive officer. An "interested party" of a company includes a holder of 5% or more of its outstanding share capital or voting rights, its chief executive officer and directors, someone who has the right to appoint its chief executive officer or at least one director, and a company with respect to which any of the foregoing interested parties owns 25% or more of the outstanding share capital or voting rights or has the right to appoint 25% or more of the directors. Accordingly, any non-Israeli who acquires 5% or more of our ordinary shares will be required to notify the Chief Scientist that it has become an interested party and to sign an undertaking to comply with the R&D Law. In case the new shareholder is an Israeli entity, there is no need to sign an undertaking, only a notification is required. Furthermore, the R&D Law imposes reporting requirements in the event that proceedings commence against the grant recipient, including under certain applicable liquidation, receivership or debtor's relief law or in the event that special officers, such as a receiver or liquidator, are appointed to the grant recipient.
A recent amendment to the R&D Law entered into effect on January 1, 2016. The amendment requires the formation of a new governmental authority to replace the Chief Scientist. Such new authority is required to be established and is expected to establish new guidelines regarding the R&D Law. Such amendment creates uncertainty with respect to the terms of our existing and/or future Chief Scientist programs and incentives as we do not know what guidelines will be adopted by such new authority.
In each of the last ten fiscal years, we have received such royalty-bearing grants from the Chief Scientist. As of December 31, 2015, our contingent liability to the Chief Scientist in respect of grants received including accumulated interest and accumulated royalties paid was approximately $38.4 million.
In May 2010, we received a notice from the Chief Scientist regarding alleged miscalculations in the amount of royalties paid by us to the Chief Scientist for the years 1992 through 2009. See "Item 3.D. Risk Factors – Risks related to our Business and Our Industry" - because we received grants from the Israeli Office of the Chief Scientist, we are subject to ongoing restrictions as detailed above.
Binational Industrial Research and Development Foundation
We received from the Israel-U.S. Binational Industrial Research and Development Foundation (the "BIRD Foundation") funding for the research and development of products. 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, 2015, our contingent liability to the BIRD Foundation for funding received was approximately $359,000. We have not received grants from the BIRD Foundation since 1995. Since 2003, we have not generated sales of products developed with the funds provided by the BIRD Foundation, and we have therefore not been required to pay royalties since such time.
Indian Subsidiary and China Office Funding
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 3 years.
We are obligated to pay to the MoE, over a period of five years commencing as of the lapse of the third year when we received the grant, royalties of 3% of sales in China and India, such amount not to exceed the amount of the grant received.
The total marketing grants that the Company has received from the MoE as of December 31, 2015, with respect to our offices in China and our subsidiary in India, were $523,000. As of December 31, 2015, no liability was accrued.
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 products and technologies. We own a registered trademark for the name Omni-Q®. In addition, we usually enter into non-disclosure and confidentiality agreements with our employees, distributors, sales representatives and with certain suppliers with access to sensitive information.
Employees
As of December 31, 2015, we have a total of 130 employees, out of which 90 employees are located in Israel, 3 employees of RADCOM Equipment are located in the United States, 11 employees of RADCOM Brazil are located in Brazil, 14 employees of RADCOM India are located in India and 12 employees in total are located in Spain, Singapore, China, Russia, Uruguay and Paraguay, collectively. Of the 90 employees located in Israel, 51 were employed in research and development, 5 in operations (including manufacturing and production), 25 in sales and marketing and customer support, and 9 in administration and management. Of the 3 employees located in the United States, 2 were employed in sales, marketing and customer support and 1 was employed in administration and management. Of the 11 employees located in the Brazil, 10 were employed in sales, marketing and customer support and 1 was employed in administration and management. Of the 14 employees located in India, 13 were employed in sales, marketing and customer support and 1 was employed in administration. Of the 12 employees located in Spain, Singapore, China, Russia, Uruguay and Paraguay, 11 were employed in sales, marketing and customer support and 1 was employed in administration and management. We consider our relations with our employees to be good and we have never experienced a strike or work stoppage. All of our employees have employment agreements and, with the exception of Brazil, none of them 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 Histadrut (General Federation of Labor in Israel) (“Histadrut”) and the Coordinating Bureau of Economic Organizations (including the Industrialists' Association) (“CBEO”) that are applicable to our Israeli employees by virtue of expansion orders of the Israeli Ministry of Economy (formerly known as the Ministry of Industry, Trade and Labor), 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 of 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 13.3% and 15.8% of the employee's base salary. Pursuant to a recent change to Israeli law as well as the recent collective bargaining agreement entered into by the Histadrut and the CBEO, the amounts that we are required to contribute may increase.
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. Consequently, effective from January 1, 2012, we increased our contribution to the deposited funds to cover the full amount of the employees' salaries.
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). In the United States we provide benefits in the form of health, dental, vision and disability coverage, in an amount equal to 21.1% of the employee's base salary. 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 Brazil, we provide benefits in the form of health coverage, including health, vision and dental coverage, in an amount equal to up to 20% of the employee's base salary.
In India, we provide benefits in form of health coverage, education fund, house rent allowance and life insurance fund.
In January 1993, we established our wholly-owned subsidiary in the United States, RADCOM Equipment, 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, our wholly-owned subsidiary in Brazil, which conducts the sales, marketing and customer support of our products in Brazil. In 2012, we established RADCOM India, our wholly-owned subsidiary in India, which conducts the sales, marketing and customer support of our products in India. The following is a list of our subsidiaries, each of which is wholly-owned:
|
Name of Subsidiary
|
|
Jurisdiction of Incorporation
|
|
RADCOM Equipment
|
|
New Jersey
|
|
RADCOM Investments
|
|
Israel
|
|
RADCOM Brazil
|
|
Brazil
|
|
RADCOM India
|
|
India
|
For more information, see "Item 7.B—Major Shareholders and Related Party Transactions—Related Party Transactions" below.
| |
D.
|
PROPERTY, PLANTS AND EQUIPMENT
|
We currently lease an aggregate of approximately 17,920 square feet of office space in Tel Aviv, Israel, which includes approximately 17,250 square feet leased from affiliates of our principal shareholders. This space includes our manufacturing facilities, which consist primarily of final assembly, testing and quality control of materials, wiring, subassemblies and systems. In 2015, the aggregate annual lease and maintenance payments for the Tel Aviv premises were approximately $495,000, of which approximately $378,000 was paid to affiliates of our principal shareholders. In 2015, we subleased approximately 646 square feet of our Tel Aviv premises, to unrelated parties, and our aggregate annual lease payments for such premises were approximately $22,000. We may, in the future, lease additional space from affiliated parties.
We also lease an aggregate of approximately 2,850 square feet of office space in Paramus, New Jersey, from an affiliate of our principal shareholders, and subleased approximately 1,260 square feet of such space to a related party. In 2015, our aggregate annual lease payments for such premises were approximately $57,000, and we received approximately $24,000 from the related party for the sub-lease.
We also lease an aggregate of approximately 1,480 square feet of office space in Brazil, 625 square feet in India, 400 square feet in Singapore, and 100 square feet in China. The aggregate annual lease payments for those premises were approximately $37,000, $50,000, $12,000 and $3,000 respectively.
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.
|
|
UNRESOLVED STAFF COMMENTS
|
Not applicable.
|
|
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 Service Assurance and Customer Experience Management solutions for CSPs. Our world leading, innovative solutions are uniquely 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 virtual (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 majority of our cost of revenues is incurred in transactions denominated 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 continue to believe that the leading indicator of our growth will be the deployment of 3G LTE, VoLTE, Triple Play networks.
Furthermore, we believe that the adoption of NFV by leading CSPs will be a major engine of our growth.
We focus our sales efforts on targeted emerging markets, in which CSPs are rolling out 3G and LTE cellular and VoIP networks, and on developed markets currently introducing Triple Play services based on the IMS platform and mobile broadband services.
We have been following the below sales strategy in 2015 designed to expand our sales pipeline and revenues:
|
|
·
|
Focusing during 2015 on a top Tier 1 North American mobile operator which is planning to transform its network into NFV in the upcoming years,
|
|
|
·
|
Focusing in emerging markets, including South America, Eastern Europe and Asia, where our strategy has been to target customers rolling out 3G cellular, LTE and VoIP services;
|
|
|
·
|
In developed markets, we have been targeting the IMS activities and deployments of top-tier wireline CSPs, and the LTE and mobile broadband networks of wireless CSPs;
|
|
|
·
|
Pursuing strategic partnering relationships, including OEM partnerships and teaming agreements; and
|
|
|
·
|
Initial sales activities on other leading Tier 1 CSPs planning to transform their networks into NFV in the future.
|
In February 2014, we officially launched and started selling MaveriQ, our new software-based solutions. The MaveriQ solutions replaced our OmniQ solutions, which are hardware-based solutions, and our transition from hardware-based solutions to software-based solutions has contributed to our 2015 results. We believe that our leading NFV-ready solutions will affect our revenues in 2016.
Revenues. In general, our revenues are derived from sales of our products and, to a lesser extent, from sales of extended warranty services. Product revenues consist of gross sales of products, less discounts and refunds, when applicable.
Cost of sales. Cost of sales consists primarily of our bill of materials, purchase of hardware and royalties for software components from third party, deployment costs, support, warranty expenses, packaging, import taxes, allocation of overhead expenses, recurring and non-recurring write-off of inventory and others, impairment of indirect taxes, subcontractors’ expenses, shipping and handling costs, license fees paid to third parties and royalties to the Chief Scientist. As part of our plan to reduce product cost and improve flexibility, we shifted during the last two 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.
The cost of sales has improved due to two main reasons: selling a software based probe and software as a standalone, and where we do sell a solutions which also includes the hardware component, less hardware components are needed as fewer probes are required to monitor the same amount of data, since the capacity covered by each of our new probe is higher than before. We are also benefitting from the developments made by the standard hardware manufacturers, without the need to do our own developments. The solutions are also more robust and easier to install and maintain on a worldwide basis.
Our gross profit is affected by several factors, including the introduction of new products, price erosion due to increasing competition, the number of people that we have in operations, deployment and in customer support, the bargaining power of larger clients, and product mix and integration of other companies' solutions into our own. Following an initial purchase of a product, a customer can add additional functions by purchasing software packages. These packages may add functions to the product such as retrieving additional reports and related information. Most of our products consist of a combination of hardware and software, that function together to deliver the product's essential functionality. Accordingly, since there is no incremental hardware costs associated with the sale of the add-on software, the gross margins on these sales are higher.
Research and Development expenses, net. Research and development expenses, net consist primarily of salaries and related expenses, including share-based compensation, and, to a lesser extent, payments to subcontractors and for materials and overhead expenses. The allocation of overhead expenses consists of a variety of costs, including rent, office and associated expenses (including telecommunications expenses). The methodology for allocating these expenses depends on the nature of the expense. Costs of rent and associated costs are based on the square meters used by the R&D department while the other expenses are allocated based on headcount. There has been no change in methodology from year to year. The R&D expenses have been partially offset by royalty-bearing grants from the Chief Scientist.
Sales and Marketing expenses, net. Sales and marketing expenses, net consist primarily of salaries and related expenses, including share-based compensation, commissions to representatives, advertising, trade shows, promotional expenses, domestic and international travels, web site maintenance, non-recurring write-off and overhead expenses.
General and Administrative Expenses. General and administrative expenses consist primarily of salaries and related expenses including share-based compensation, and related personnel expenses for executives, accounting and administrative personnel, professional fees (which include legal, audit and additional consulting fees), bad debt expenses, other general corporate expenses and overhead expenses.
Financial Expenses, Net. Financial expenses, net, in 2015 and 2014, consist primarily of interest earned on bank deposits, bank charges, and gains and losses from the exchange rate differences, including of monetary balance sheet items denominated in non-U.S. dollar currencies.
Summary of Our Financial Performance for the Fiscal Year Ended 2015 Compared to the Fiscal Year Ended 2014
For the year ended December 31, 2015, our revenues were $18.7 million, compared with $23.6 million in 2014, reflecting a decrease of 20.7%. On an operating basis, the Company provided $1.9 million in cash on operating activities during 2015, compared to the use of $3.4 million during 2014. The Company's net loss for the year ended December 31, 2015 was $923,000, compared with a net income of $726,000 for 2014. In 2015, the Company decreased revenues by 20.7% compared to 2014, decreased its cost of revenues by 50%, and increased its operating expenses by 7%, compared to 2014.
As of December 31, 2015, our cash and cash equivalents totaled $8.8 million, compared with $6.8 million as of December 31, 2014. The improvement in our cash and cash equivalents in 2015 is mainly as a result of our improved collection cycle and improving the management of our liquidity.
Although our 2015 net loss was $923,000, it includes non-cash expenses due to share-based compensation that totaled $1,409,000.
During 2015, we continued a trend of an increase in the relative portion of large-to-medium sized deals, reflecting our success in creating repeat sales and improving our business relationships with Tier-I and Tier-II CSPs as can be seen in our relationship with Amdocs which is more fully described in "Item 7.B—Major Shareholders and Related Party Transactions—Related Party Transactions" below, and which revenues from such transaction will be included in our 2016 financial results.
Our cost of revenues decreased relatively more than our revenues, which resulted in an increase of our gross margin to 77% in 2015 compared with 63% in 2014.
Reportable Segments
Management receives sales information by product groups 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.
The following table sets forth, for the periods indicated, certain financial data expressed as a percentage of sales:
| |
|
2015
|
|
|
2014
|
|
|
2013
|
|
|
Sales
|
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
Cost of sales
|
|
|
23.2 |
|
|
|
36.8 |
|
|
|
38.5 |
|
|
Gross profit
|
|
|
76.8 |
|
|
|
63.2 |
|
|
|
61.5 |
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
32.5 |
|
|
|
24.6 |
|
|
|
27.4 |
|
|
Less royalty-bearing participation
|
|
|
8.5 |
|
|
|
7.1 |
|
|
|
7.5 |
|
|
Research and development, net
|
|
|
24.0 |
|
|
|
17.5 |
|
|
|
19.9 |
|
|
Sales and marketing ,net
|
|
|
42.0 |
|
|
|
30.9 |
|
|
|
37.1 |
|
|
General and administrative
|
|
|
12.8 |
|
|
|
9.6 |
|
|
|
10.0 |
|
|
Total operating expenses
|
|
|
78.8 |
|
|
|
58.0 |
|
|
|
67.0 |
|
|
Operating income (loss)
|
|
|
(2.0 |
) |
|
|
5.2 |
|
|
|
(5.5 |
) |
|
Financial expenses, net
|
|
|
(2.3 |
) |
|
|
(1.4 |
) |
|
|
(1.4 |
) |
|
Income (loss) before taxes on income
|
|
|
(4.3 |
) |
|
|
3.8 |
|
|
|
(6.9 |
) |
|
Taxes on income
|
|
|
(0.7 |
) |
|
|
(0.8 |
) |
|
|
- |
|
|
Net income (loss)
|
|
|
(5.0 |
) |
|
|
3.0 |
|
|
|
(6.9 |
) |
Financial Data for Year Ended December 31, 2015 compared with Year Ended December 31, 2014
| |
|
Year Ended December 31,
|
|
|
% Change
|
|
|
% Change
|
|
| |
|
(in millions of U.S. dollars)
|
|
|
2015 vs.
|
|
|
2014 vs.
|
|
| |
|
2015
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
The MaveriQ (including the Omni-Q family)
|
|
|
18.5 |
|
|
|
23.0 |
|
|
|
20.0 |
|
|
|
(19 |
) |
|
|
15 |
|
|
Others
|
|
|
0.2 |
|
|
|
0.6 |
|
|
|
0.5 |
|
|
|
(100 |
) |
|
|
20 |
|
|
Total revenues
|
|
|
18.7 |
|
|
|
23.6 |
|
|
|
20.5 |
|
|
|
(21 |
) |
|
|
15 |
|
Revenues. In 2015, our revenues decreased by 20.7% compared to 2014. This decrease reflects the major effort made by the Company during 2015, focusing on winning the deal with Amdocs Software in connection with the top tier North American mobile operator.
For more information, see "Item 7.B—Major Shareholders and Related Party Transactions—Related Party Transactions".
| |
|
Year Ended December 31,
(in millions of U.S. dollars)
|
|
|
Year Ended December 31,
(as percentages)
|
|
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
|
Europe
|
|
|
1.2 |
|
|
|
3.2 |
|
|
|
4.0 |
|
|
|
6.4 |
|
|
|
13.5 |
|
|
|
19.7 |
|
|
North America
|
|
|
1.0 |
|
|
|
1.9 |
|
|
|
1.7 |
|
|
|
5.4 |
|
|
|
8.1 |
|
|
|
8.2 |
|
|
Asia (Excluding Philippines)
|
|
|
0.6 |
|
|
|
0.8 |
|
|
|
0.4 |
|
|
|
3.1 |
|
|
|
3.6 |
|
|
|
2.0 |
|
|
Philippines
|
|
|
8.1 |
|
|
|
3.5 |
|
|
|
3.2 |
|
|
|
43.2 |
|
|
|
15.0 |
|
|
|
15.6 |
|
|
South America (Excluding Brazil)
|
|
|
2.4 |
|
|
|
4.2 |
|
|
|
4.6 |
|
|
|
13.2 |
|
|
|
17.9 |
|
|
|
22.4 |
|
|
Brazil
|
|
|
3.5 |
|
|
|
6.5 |
|
|
|
5.5 |
|
|
|
18.7 |
|
|
|
27.3 |
|
|
|
26.7 |
|
|
Other
|
|
|
1.9 |
|
|
|
3.5 |
|
|
|
1.1 |
|
|
|
10.0 |
|
|
|
14.6 |
|
|
|
5.4 |
|
|
Total revenues
|
|
|
18.7 |
|
|
|
23.6 |
|
|
|
20.5 |
|
|
|
100 |
% |
|
|
100 |
% |
|
|
100.0 |
% |
In 2015, the Company had two customers, one in the Philippines and one in Brazil, that amounted to $8.1 million and $2.7 million, respectively, of the total consolidated revenues. During 2014, the Company had three customers, one in each of Brazil, the Philippines and Israel, that amounted to $5.2 million, $3.5 million and $2.8 million, respectively, of the total consolidated revenues.
Cost of Sales and Gross Profit
| |
|
Year ended December 31,
|
|
| |
|
(in millions of U.S. dollars)
|
|
| |
|
2015
|
|
|
2014
|
|
|
2013
|
|
|
Cost of sales - Product
|
|
|
4.0 |
|
|
|
8.4 |
|
|
|
7.5 |
|
|
Cost of sales - Services
|
|
|
0.3 |
|
|
|
0.3 |
|
|
|
0.4 |
|
|
Total Cost of sales
|
|
|
4.3 |
|
|
|
8.7 |
|
|
|
7.9 |
|
|
Gross profit
|
|
|
14.3 |
|
|
|
14.9 |
|
|
|
12.6 |
|
Cost of sales. During 2015, our gross profit as a percentage of revenues, calculated to include variable costs, which include purchasing, packaging, royalties to the Chief Scientist, license fees paid to third parties recurring and non-recurring write-off of inventory and import taxes, was 77% compared to 63% in 2014.
The fixed costs of our cost of sales also include employees' salaries and related costs and overhead expenses of approximately $1.5 million for 2015 and $2.1 million for 2014. Our cost of sales included an expense of $33,000 for share-based compensation in 2015 and $12,000 for share-based compensation in 2014.
Our gross profit in 2015 and 2014 was 77% and 63%, respectively, which reflected the decrease in our cost of sales due to our transition to a software based probe and the usage of third party hardware.
Operating Costs and Expenses
The following table provides the operating costs and expenses of the Company in 2015, 2014 and 2013, as well as the percentage change of such expenses in 2015 compared to 2014.
| |
|
Year ended December 31,
(in millions of U.S. dollars)
|
|
|
% Change
|
|
|
% Change
|
|
| |
|
2015
|
|
|
2014
|
|
|
2013
|
|
|
2015 vs. 2014
|
|
|
2014 vs. 2013
|
|
|
Research and development
|
|
|
6.1 |
|
|
|
5.8 |
|
|
|
5.6 |
|
|
|
5.2 |
|
|
|
3.6 |
|
|
Less royalty-bearing participation
|
|
|
1.6 |
|
|
|
1.7 |
|
|
|
1.5 |
|
|
|
(5.9 |
) |
|
|
13.3 |
|
|
Research and development, net
|
|
|
4.5 |
|
|
|
4.1 |
|
|
|
4.1 |
|
|
|
9.8 |
|
|
|
- |
|
|
Sales and marketing, net
|
|
|
7.8 |
|
|
|
7.3 |
|
|
|
7.6 |
|
|
|
6.8 |
|
|
|
(3.9 |
) |
|
General and administrative
|
|
|
2.4 |
|
|
|
2.3 |
|
|
|
2.0 |
|
|
|
4.3 |
|
|
|
15.0 |
|
|
Total operating expenses
|
|
|
14.7 |
|
|
|
13.7 |
|
|
|
13.7 |
|
|
|
7.3 |
|
|
|
- |
|
Research and Development expenses. Research and development expenses, gross, increased from $5.8 million in 2014 to $6.1 million in 2015. As a percentage of total revenues, research and development expenses, gross, increased from 24.6% in 2014 to 32.5% in 2015. The increase in our gross research and development expenses from $5.8 million in 2014 to $6.1 million in 2015 is attributable partially to the increase in the number of employees and related expenses. As of December 31, 2015, we employed 51 research and development engineers, compared to 46 as of December 31, 2014. 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 revenue 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. Our research and development costs included an expense of $529,000 for share-based compensation in 2015 and $178,000 for share-based compensation in 2014.
Sales and Marketing expenses, net. Sales and marketing expenses increased from approximately $7.3 million in 2014 to approximately $7.8 million in 2015. The increase in our sales and marketing expenses from 2014 to 2015 is mainly attributable to an increase in commissions to third parties. As a percentage of total revenues, sales and marketing expenses in 2015 and 2014 were 42% and 30.9%, respectively. Our sales and marketing expenses included an expense of $380,000 for share-based compensation in 2015 and $146,000 for share-based compensation in 2014.
General and Administrative expenses. General and administrative expenses increased from approximately $2.3 million in 2014 to approximately $2.4 million in 2015. As a percentage of total revenues, general and administrative expenses in 2015 and 2014 were 12.8% and 9.6%, respectively. Our general and administrative expenses included $467,000 for share-based compensation in 2015 and $243,000 for share-based compensation in 2014.
Financial Expenses, Net. Financial expenses, net, increased to approximately $433,000 in 2015 compared to approximately $332,000 in 2014. The increase in our financial expenses, net from 2014 to 2015 is attributable to an increase in foreign currency translation expenses of $101,000.
Taxes on Income. During 2015, we recorded tax expenses of $121,000, compared to $180,000 in 2014, reflecting withholding taxes that were due on payments from certain customers in Central America and Asia.
Summary of Our Financial Performance for the Fiscal Year Ended 2014 Compared to the Fiscal Year Ended 2013
Revenues. In 2014, our revenues increased by 15.4% compared to 2013, reflecting strong execution of our backlog and continued momentum in the emerging markets of Latin America and Asia.
Our sales network includes RADCOM Equipment, our wholly-owned subsidiary in the United States, RADCOM Brazil, our wholly-owned subsidiary in Brazil, RADCOM India, our wholly-owned subsidiary in India, as well as independent representatives, and more than 20 independent distributors in over 20 other countries. During 2014, our sales in South America, mainly in Brazil, increased as a result of large sized deals, and also from new medium sized deals with shorter execution cycle that we recognized during 2014. In addition, we didn’t experience a material increase in sales in North America mainly as a result of our strategy to focus on the emerging markets.
In 2014, the Company had three customers in Brazil, Philippines and Israel that amounted to $5.2 million, $3.5 million and $2.8 million, respectively, of the total consolidated revenues. During 2013, the Company had two customers, in Philippines and Brazil that accounted for $3.2 million and $2.2 million, respectively, of the total consolidated revenues.
Cost of sales. During 2014, our gross profit as a percentage of revenues, calculated to include variable costs, which include hardware production, packaging, royalties to the Chief Scientist, license fees paid to third parties, and import taxes, was 63% compared to 61% in 2013.
Our cost of sales consisted of fixed costs, which include employees' salaries and related costs and overhead expenses, of approximately $2.1 million for 2014 and $2.2 million for 2013. Our cost of sales included an expense of $12,000 for share-based compensation in 2014 and $7,000 for share-based compensation in 2013.
Our gross profit in 2014 and 2013 was 63% and 61%, respectively. The gross profit as a percentage of revenues in 2014 was at a similar level as in 2013 despite the substantial increase in our revenues, as a result of a non- recurring write off of approximately $1.6 million, due to an old project cancellation in year 2014 (an effect of about 7%).
Research and Development expenses. Research and development expenses, gross, increased from $5.6 million in 2013 to $5.8 million in 2014. As a percentage of total revenues, research and development expenses, gross, decreased from 27.4% in 2013 to 24.6% in 2014. The increase in our gross research and development expenses from $5.6 million in 2013 to $5.8 million in 2014 is attributable mostly to exchange rate differences on salary and related expenses. As of December 31, 2014, we employed 46 research and development engineers, compared to 49 as of December 31, 2013. 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 revenue 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. Our research and development costs included an expense of $178,000 for share-based compensation in 2014 and $117,000 for share-based compensation in 2013.
Sales and Marketing expenses, net. Sales and marketing expenses decreased from approximately $7.6 million in 2013 to approximately $7.3 million in 2014. The decrease in our sales and marketing expenses from 2013 to 2014 is mainly attributable to a decrease in the number of employees and related expenses by the amount of $0.3 million. As a percentage of total revenues, sales and marketing expenses in 2014 and 2013 were 30.9% and 37.1%, respectively. Our sales and marketing expenses included an expense of $146,000 for share-based compensation in 2014 and $82,000 for share-based compensation in 2013.
General and Administrative expenses. General and administrative expenses increased from approximately $2.0 million in 2013 to approximately $2.3 million in 2014. As a percentage of total revenues, general and administrative expenses in 2014 and 2013 were 9.6% and 10.0%, respectively. The increase in our general and administrative expenses from 2013 to 2014 is mainly attributable to salaries and bonuses payments. Our general and administrative expenses included $243,000 for share-based compensation in 2014 and $293,000 for share-based compensation in 2013.
Financial Expenses, Net. Financial expenses, net, increased to approximately $332,000 in 2014 compared to approximately $291,000 in 2013. The increase in our financial expenses, net from 2013 to 2014 is mainly attributable to an increase in foreign currency translation difference expenses of $239,000, a decrease in interest paid on short-term bank credit that was repaid during 2013 and bank charges of $77,000 and increase in interest received for certain investments of $121,000.
Taxes on Income. During 2014, we recorded tax expenses of $180,000, reflecting withholding taxes that were due on payments from certain customers in Central America and Asia, compared to no tax expenses in 2013.
Impact of Inflation and Foreign Currency Fluctuations
Most of our revenues are generated in U.S. dollars and the majority of our cost of revenues is incurred in transactions denominated in dollars. We also generate revenues in Brazilian Reals, Euros and other currencies; however, we consider the U.S. dollar to be our functional currency. A significant portion of our revenues is denominated in Brazilian Reals, and 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 dollar. Fluctuations in exchange rates between the U.S. dollar and the Real, 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 2016, 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 $90,000 per fiscal quarter and vice versa.
Effective Corporate Tax Rate
Israeli companies are generally subject to corporate tax at the rate of 26.5% for the 2015 tax year and 25% for the 2016 tax year (enacted January 2016). Israeli 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 $37 million as of December 31, 2015. We believe that we will be able to carry forward these tax losses to future tax years. Accordingly, we do not expect to pay taxes in Israel until we have taxable income after the full utilization of our carry forward tax losses. 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 activities.
We recorded a valuation allowance of $15,392 at December 31, 2015 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.
In 2014 and 2015, taxes on income included tax expenses which are reflecting withholding taxes that were due on payments from certain customers in Central and South America.
| |
B.
|
LIQUIDITY AND CAPITAL RESOURCES
|
In March 2016, we received the initial payment of $18 million from Amdocs Software. For more information, see "Item 7.B—Major Shareholders and Related Party Transactions—Related Party Transactions".
We have financed our operations through cash generated from operations, the proceeds of our 1997 initial public offering, our 2004, 2008, 2010, and 2013 private placement transactions, a venture lending loan secured in 2008 which is no longer effective, proceeds from exercise of options and warrants and receiving royalty-bearing participation from Chief Scientist and others. Cash and cash equivalents at December 31, 2015, 2014 and 2013 were approximately $8.8 million, $6.8 million and $1.2 million, respectively.
In previous years we generated losses attributable to our operations We have managed our liquidity during this time through a series of cost reduction initiatives, expansion of our sales into new markets, private placement transactions, a venture capital loan, a bank credit facility and a loan from a major shareholder all of which are no longer relevant. 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. Our foregoing estimate is based on, among other things, our current backlog and the pipeline for 2016. Without derogating from the foregoing estimate regarding our existing capital resources and cash flows from operations, we may decide to raise additional funds in 2016. 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 Used in Operating Activities. Net cash provided (used) in operating activities was approximately $1.9 million in 2015, $3.4 million in 2014, and $(2.1) million in 2013. The positive net cash flow in 2015 was primarily due to a decrease in trade receivables of $1.1 million, an increase of share-based compensation and restricted shares of approximately $1.4 million and an increase in deferred revenue and advances from customers of $0.7 million. This was partially offset by an increase of approximately $1.3 million in other accounts receivable and prepaid expenses. The positive net cash flow in 2014 was primarily due to a net profit of approximately $0.7 million, and an increase in deferred revenues and advances from customers of approximately $0.4 million. This was partially offset by the following: a decrease of $1.4 million in inventories, a decrease of $1.0 million in employees and payroll accruals and other current assets, an increase of approximately $0.7 million in trade payables, and a decrease in non-cash share options compensation of $0.6 million.
The trade receivables and days of sales outstanding ("DSO") are primarily impacted by payment terms, the variations in the levels of shipment in the quarter, and collections performance. Trade receivables for 2015 decreased to $3.7 million from $5.5 million in 2014, reflecting mainly the shortening of our DSOs, due to faster completion of our projects and faster collection from customers. We believe that continued expansion of our business, particularly in emerging markets, may require continued investments in working capital as many customers require commercial terms which result in longer payment terms.
The decrease in inventories in 2015 was mainly due to the decrease in inventory delivered to customers for which revenue criteria have been met and recognized, and due to non-recurring noncash write off due to old project cancellations of approximately $170,000.
Net Cash Used in Investing Activities. Our investing activities generally consist of the purchase of equipment; however, in 2013 we invested in short-term deposits in the amounts of $38,000, which was required in order to secure bonds provided to certain customers. Those short-term deposits matured during 2014 and provided $1.5 million in 2014. In 2015 and 2014, we invested $97,000 and $88,000, respectively, for the purchase of equipment. Net cash provided (used) in investing activities in 2015, 2014 and 2013 totaled approximately $(97,000), $1.4 million, and $(126,000), respectively.
Net Cash Used in Financing Activities. In 2015, net cash provided in financing activities totaled approximately $813,000, including exercise of options of $733,000 and warrants of $80,000. In 2014, net cash provided in financing activities totaled approximately $1.1 million, including exercise of options of $1.7 million and warrants of $21,000. In 2013, net cash provided in financing activities totaled approximately $1.9 million, including the $3.4 million from the private placement as described below under "Private Placement", and exercise of options of $226,000 and warrants of $256,000 which was offset by a repayment of short term credit from a bank of approximately $0.4 million and short term loans from the bank and from Mr. Zohar Zisapel of approximately $1.5 million.
Private Placement
During April and June 2013, we raised a gross amount of $3.5 million in a private placement, (or the “2013 PIPE”), from existing and new investors by issuance of ordinary shares and warrants to purchase ordinary shares. Under the 2013 PIPE transaction, we issued 1,239,639 ordinary shares for an aggregate purchase price of $3.5 million, or $2.79 per ordinary share (this price per share was based on the average closing price of our ordinary shares on the thirty trading days prior to the execution date of the definitive agreement, minus a discount of 12%). The investors in the 2013 PIPE also included Mr. David Ripstein, our then President and Chief Executive Officer, and Israeli companies wholly owned by Mr. Zohar Zisapel, our former Chairman of our Board of Directors and a controlling shareholder. We also issued to the investors warrants to purchase up to 413,213 ordinary shares at an exercise price of $3.49 per share (the price per share paid in the transaction plus 25%). The warrants are exercisable for three years from the closing date of the 2013 PIPE. As part of the 2013 PIPE, we filed with the SEC a resale registration statement covering the shares purchased in the 2013 PIPE (including the shares underlying the warrants). Our net proceeds from the offering were approximately $3.4 million. If the warrants are exercised in full for cash, we would realize additional proceeds before expenses, in the amount of approximately $1.4 million. As of December 31, 2015, 102,228 warrants had been exercised for approximately aggregate amount of $357,000.
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 agreements with the RAD-BYNET Group) (as described under Item 7.B). Of these agreements, the office space leases with affiliates of the RAD-BYNET Group are material to our operations. The pricing of the transactions with respect to such leases was determined based on negotiations between the parties. Members of our 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. In the event that the transactions with members of the RAD-BYNET Group are terminated and we enter into similar transactions with unaffiliated third parties, that flexibility may no longer be available to us.
For more information, see "Item 7.B—Major Shareholders and Related Party Transactions—Related Party Transactions" below.
In the 2013 PIPE we raised gross amount of $3.5 million from certain existing and new investors, including our then President and Chief Executive Officer, Mr. David Ripstein (who invested $50,000) and Israeli companies wholly owned by our controlling shareholder who was also serving at the time as our Chairman of the Board of Directors, Mr. Zohar Zisapel (who invested $1.1 million). For more information, see " — Private Placements" above.
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 Chief Scientist, encourages research and development projects pursuant to the R&D Law and the regulations promulgated thereunder. We may receive from the Chief Scientist up to 50% of certain approved research and development expenditures for particular projects. We recorded grants from the Chief Scientist totaling approximately $ 1.6 million in 2015, $ 1.7 million in 2014 and $1.5 million in 2013. Pursuant to the terms of these grants, we are obligated to pay royalties of 3.5% of revenues derived from sales of products (and related services) funded with these grants. In the event that a project funded by the Chief Scientist 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 Chief Scientist grants included in the cost of sales for years ended December 31, 2015, 2014 and 2013 were $655,000, $827,000, and $706,000, respectively. The total research and development grants that we have received from the Chief Scientist as of December 31, 2015 were $38.4 million. For projects authorized since January 1, 1999, the repayment interest rate is LIBOR. As of December 31, 2015, the accumulated interest was $14.0 million, the accumulated royalties paid to the Chief Scientist were $11.7 million and our contingent liability to the Chief Scientist in respect of grants received was according to our records approximately $40.7 million. For additional information, see "Item 4.B—Information on the Company—Business Overview—Israeli Office of the Chief Scientist."
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 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, 2015, we had a contingent obligation to pay the BIRD Foundation aggregate royalties in the amount of approximately $359,000. 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 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 3 years.
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. As of December 31, 2015, we have no contingent obligation to pay the MoE any royalties. For additional information, see "Item 4.B—Information on the Company—Business Overview—Israeli Ministry of Economy."
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 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 estimates 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. Revenues from sales of products are recognized when persuasive evidence of an agreement exists, delivery of the product has occurred, the fee is fixed or determinable, and collectability is probable. Our products contain software components and non-software components that function together to deliver the product's essential functionality.
Products are typically considered delivered upon shipment. In instances where final acceptance of the product is specified by the customer, and the acceptance is deemed substantive, revenue is deferred until all acceptance criteria have been met. Our arrangements generally do not include any provisions for cancellation, termination or refunds that would significantly impact recognized revenue. Large-size deals usually include acceptance criteria and since the delivery of such projects can take on average between 6-15 months, revenue recognition for such projects is delayed.
Our revenues are generated from sales to direct customers and independent distributors. We have a contract that is standard in substance with our distributors. In principle, based on this contract, sales to distributors are final and distributors have no rights of return or price protection. We are not a party to the agreements between distributors and their customers, however we recognize our revenue on a "sale through" basis and therefore, revenues from these distributors are deferred until all revenue recognition criteria of the sale to the end customer are met.
We also generate sales through independent representatives. These representatives do not hold any of the Company's inventories, and they do not buy products from us. We invoice the end-user customers directly, collect payment directly, and then pay commissions to the representative for the sales in their territory.
Revenues from fixed price contracts that require significant customization, integration and installation are recognized based on ASC 605-35, "Construction-Type and Production-Type Contracts", using the percentage-of-completion method of accounting based on the ratio of costs related to contract performance incurred to date to the total estimated amount of such costs. The amount of revenue recognized is based on the total fees under the arrangement and the percentage of completion achieved. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are first determined, in the amount of the estimated loss on the entire contact. During the year ended December 31, 2015, the Company recognized revenue amounted of $622,000 from one contract which was entered in 2014 for the entire sum of $2,827,000, which in addition to the revenue recognized by the Company in 2014 for the same contract, reflects a completion percentage of 100%.
Revenues in arrangements with multiple deliverables are allocated using the relative selling price method. The selling price for each deliverable is based on vendor-specific objective evidence ("VSOE") if available, third-party evidence ("TPE") if VSOE is not available, or estimated selling price ("ESP") if neither VSOE or TPE is available. The Company determines the ESP based on management estimated selling price by considering several external and internal factors including, but not limited to, pricing practices including discounting, margin objectives, and competition
Under our selling arrangements, we usually provide a one-year warranty, which includes bug fixing and a hardware warranty ("Warranty") for our products. After the Warranty period initially provided with our products, we may sell extended warranty contracts on a standalone basis, which include bug fixing and a hardware warranty. Revenue related to extended warranty contracts is recognized pursuant to ASC 605-20-25, "Separately Priced Extended Warranty and Product Maintenance Contracts." Pursuant to this provision, revenue related to separately priced product maintenance contracts is deferred and recognized over the term of the maintenance period.
Inventories. Inventory is written down based on excess and obsolete inventories determined primarily by future demand forecasts. Inventory write-downs are measured as the difference between the cost of the inventory and market, based upon assumptions about future demand, and are charged to the provision for inventory, which is a component of our cost of sales. 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.
If there were to be a sudden and significant decrease in demand for our products, or if there were a higher incidence of inventory obsolescence because of rapidly changing technology and customer requirements, we could be required to increase our inventory write-downs and our gross margin could be adversely affected. Inventory and supply chain management remain areas of focus as we balance the need to maintain supply chain flexibility, to help ensure competitive lead times with the risk of inventory obsolescence.
In addition, we add to the cost of finished products and work in process held in inventory the overhead from our manufacturing process. If these estimates change in the future, the amount of overhead allocated to cost of revenues would change.
Inventory also includes amounts with respect to inventory delivered to customers for certain projects but for which revenue criteria have not been met yet.
Share-based compensation. Our accounts for share-based compensation are in accordance with ASC 718 “Compensation – Stock-based Compensation” (“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, net of estimated forfeitures. ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
We selected the Black-Scholes option pricing model as the most appropriate fair value method for our stock options awards. This option-pricing model requires a number of 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 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. 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. In addition, the exercise of judgment is also required in estimating the amount of share-based awards that are expected to be forfeited. If actual results differ significantly from these estimates, share-based compensation expense and our results of operations could be materially affected.
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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 2015, we saw an increased interest in NFV capable service assurance solutions and continued demand for traditional service assurance solutions.
We expect that the NFV market will gain momentum during 2016 and beyond. Key benefits that CSPs will derive from NFV include faster time-to-market, enablement of new services, ability to rapidly scale resources up and down, and lower costs (both CAPEX and OPEX).
Many leading CSPs have commercial LTE offerings. Mobile data services are becoming a significant revenue source for CSP.
The competition in the CSPs’ market drives increased spending on the marketing of next-generation services, and therefore increased usage, which itself increases the potential need for service assurance solutions. As services become more technologically complex and their volumes increase, service quality becomes an issue that must be addressed.
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E.
|
OFF–BALANCE SHEET ARRANGEMENTS
|
None.
| |
F.
|
TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS
|
The following table of our material contractual obligations as of December 31, 2015, 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
|
|
|
3-5
years
|
|
|
More than
5 years
|
|
| |
|
|
|
|
(in thousands of U.S. dollars)
|
|
|
Operating leases obligation (1)
|
|
$ |
613
|
|
|
$ |
613
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
Open purchase orders (2)
|
|
|
136
|
|
|
|
136
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
Other long-term commitments (3)
|
|
|
475
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
Total
|
|
|
1,224
|
|
|
$ |
749
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
(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/or production 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, 2015 was approximately $3,656,000, of which approximately $3,181,000 was funded through deposits in severance pay funds, leaving a net obligation of approximately $475,000. 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 3.5% and 5% of the revenues derived from products incorporating know-how developed from research and development grants from the Chief Scientist and BIRD Foundation, respectively. As of December 31, 2015, our contingent liability to the Chief Scientist in respect of grants received was according to our records approximately $38.4 million, and our contingent liability to the BIRD Foundation in respect of funding received was approximately $359,000. 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—Israeli Office of the Chief Scientist.", 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, with respect to the year during which the grant was approved (2012), over a period of five years but not more than the total linked amount of the grant received by us. As of December 31, 2015, no liability was accrued.
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.
|
|
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
|
|
62
|
|
Active Chairwoman of our Board of Directors
|
|
Uri Har (1)(2)(3)(4)(5)
|
|
79
|
|
Director
|
|
Irit Hillel (1)(2)(4)(5)(6)
|
|
53
|
|
Director
|
|
Matty Karp (2)(4)(5)
|
|
67
|
|
Director
|
|
Zohar Zisapel
|
|
67
|
|
Director*
|
|
Yaron Ravkaie
|
|
47
|
|
Chief Executive Officer**
|
|
Eyal Harari
|
|
39
|
|
Chief Operating Officer***
|
|
Uri Birenberg
|
|
40
|
|
Chief Financial Officer
|
|
Hilik Itman
|
|
43
|
|
Vice President, Research and Development
|
|
Ronen Hovav
|
|
44
|
|
Vice President, Sales
|
(1) External Director, pursuant to the Israeli Companies Law
(2) Independent Director, under Rule 5000 of the NASDAQ Stock Market Rules currently in effect (the “NASDAQ Listing Rules”)
(3) Chairman of Audit Committee
(4) Audit Committee Member
(5) Compensation Committee Member
(6) Chairman of Compensation Committee
(*) On September 10, 2015, Zohar Zisapel resigned his position as the Chairman of our Board of Directors. Mr. Zisapel continues to serve as a director.
(**) On January 16 2016, Yaron Ravkaie was appointed as our Chief Executive Officer replacing Mr. David Ripstein who resigned from his role as President and Chief Executive Officer on December 31, 2015
(***) Eyal Harari, who was our Vice President Products and Marketing, was appointed as our Chief Operating Officer as of January 1, 2016.
Ms. Rachel (Heli) Bennun has served as a director since December 2012 and was appointed as our Active Chairwoman of our Board of Directors on September 10, 2015. In addition, Ms Bennun served as a consultant to Company’s management for almost four years, beginning January 2012. Ms. Bennun has over 25 years of professional experience in hi-tech companies. In 1988, Ms. Bennun co-founded Arel Communications & Software Ltd. (formerly NASDAQ:ARLC) ("Arel"), a company focused on offering integrated video, audio and data-enabled conferencing solutions, including real time Interactive Distance Learning. Ms. Bennun served as Arel's CEO and CFO from 1988 until 1998, during which time Arel went public on the NASDAQ (1994). In addition, Ms. Bennun served as a director of Arel from 1988 until 1998 and as the vice-chairman of Arel's board of directors from 1998 until 2001. In 1996, Ms. Bennun co-founded ArelNet Ltd. (formerly TASE: ARNT) ("ArelNet"), a pioneer in the field of Voice over IP. Ms. Bennun served as ArelNet's CEO from 1998 until 2001, during which time ArelNet went public on the TASE. In 2004, Ms. Bennun resumed her position as ArelNet's CEO and a director, until ArelNet was acquired by Airspan Network Inc. in 2005. From 2006 until 2009, Ms. Bennun served as the CEO and director of OrganiTech USA, Inc. (PINK:ORGT), a pioneer in the Cleantech industry. Ms. Bennun holds an M.Sc. and B.Sc. degree in Industrial and Management Engineering from Ben-Gurion University.
Mr. Uri Har has served as a director since October 2007. 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 Attache 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. degree and a M.Sc. degree 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 Senior Manager & Venture Outreach & Investment, Office of the CTO, at HP Inc. (Nasdaq: HPQ). She is also a board member of Imagesat NV, and is on the advisory board of BioGaming. 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 has an M.B.A. degree 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. From1996 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 is a director of Elta Ltd. He has served as a director of a number of companies, including: 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 10, 2015. Mr. Zisapel is the Chairman of Ceragon Networks Ltd. (NASDAQ: CRNT), RADWIN Ltd RADIFLOW Ltd., RADHEAR Ltd., ARGUS Cyber security Ltd,Innoviz Ltd. and director in the following companies: Amdocs Ltd., RAD Data Communications Ltd., RAD-Bynet Properties and Assets (1981) Ltd., Packetlight Networks Ltd., CyberInt Technologies Ltd., TopSpin Security Ltd., Armis Security Ltd Satixfy Ltd., Nucleix Ltd. and several other private holdings, real estate and medical devices companies. Mr. Zisapel has a B.Sc. degree and an M.Sc. degree in Electrical Engineering from the Technion - Israel Institute of Technology and an M.B.A. degree from Tel-Aviv University.
Mr. Yaron Ravkaie, is our Chief Executive Officer since January 16, 2016. Prior to joining our company, 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 (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, with a $1B P&L, 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, our Chief Operating Officer, has been with us since 2000. Mr. Harari began in the Development side of RADCOM in 2000 as a software R&D group manager, later becoming the Director of Product Management for VoIP Monitoring Solutions, then the Senior Director of RADCOM's Product Management department, the Vice President of Products and Marketing and finally in his current position since the beginning of year 2016. Before joining us, Mr. Harari served from 1995 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 also holds an M.B.A. from Tel-Aviv University and an LL.M in Business Law from Bar Ilan University.
Mr. Uri Birenberg, our Chief Financial Officer, joined us in May 2014. Prior to joining us, Mr. Birenberg was a VP Finance at SunGard, from June 2007 to May 2014. Previously, Mr. Birenberg served as Controller at HP (Indigo division) and before that, as an auditor at Ernst & Young. Mr. Birenberg holds a B.B. and M.B.A. in Accounting and Business Management from the College of Management in Israel, and is certified in Israel as a CPA.
Mr. Hilik Itman, our Vice President of Research and Development joined us in 1997 as a software engineer, and was appointed as VP R&D in 2014. Mr. Itman led the R70S software development, and also 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.
Ronen Hovav, our Vice President of Sales, joined RADCOM in 2000. Mr. Hovav performed several managerial positions in RADCOM’s Sales, Product Management and Quality Assurance departments, with several years in RADCOM’s U.S. office as the President of RADCOM’s Americas operation. His current position as the company Vice President of Global Sales. In 2006 to 2007, Mr. Hovav was the CEO of the USA IT and SW Testing Company - QualiTest-Ibase, a company owned by Malam Group. Prior to joining RADCOM in 1998, Mr. Hovav was a Software Engineer at EL-ON, developing a Robot for Israel TV Channel 2. Ronen holds MSCE and Computer Science degree from Robert Half College.
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 ($)***
|
|
|
Equity-Based
Compensation
($)*
|
|
|
All Other
Compensation
($)**
|
|
|
Total ($)
|
|
|
David Ripstein
Former CEO****
|
|
2015
|
|
|
265,236 |
|
|
|
98,411 |
|
|
|
163,153 |
|
|
|
74,925 |
|
|
|
601,725 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eyal Harari
COO
|
|
2015
|
|
|
136,720 |
|
|
|
125,962 |
|
|
|
101,936 |
|
|
|
54,135 |
|
|
|
418,753 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ronen Hovav
VP Sales
|
|
2015
|
|
|
184,645 |
|
|
|
175,431 |
|
|
|
8,369 |
|
|
|
2,792 |
|
|
|
371,237 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hilik Itman
VP R&D
|
|
2015
|
|
|
149,034 |
|
|
|
30,581 |
|
|
|
88,294 |
|
|
|
39,000 |
|
|
|
306,909 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Uri Birenberg
CFO
|
|
2015
|
|
|
123,966 |
|
|
|
12,916 |
|
|
|
48,882 |
|
|
|
52,885 |
|
|
|
238,649 |
|
*Equity based compensation includes the actual cost to the company in 2015.
**All other compensation includes social benefits and car leasing costs.
*** Except for the bonus payment of our CEO and CFO, the bonus payments of the other officers are comprised of bonus and commission payments.
****On December 31, 2015, David Ripstein retired from his role as our President and CEO, and the employer-employee relationship between the Company and Mr. Ripstein will remain in effect until November 2016, un