UNITED STATES

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 20-F

☐  REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

☒   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 20212022

OR

☐   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to __________

OR

☐   SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Date of event requiring this shell company report ____________

Commission file number 0-29452

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)

Ms. Hadar Rahav

(+972) 77-774-5060 (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:

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, 2021,2022, there were 14,155,18614,739,082 ordinary shares outstanding, NIS 0.20 par value per share.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  

Yes ☐ No ☒

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.  

Yes ☐ No ☒

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  

Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  

Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See definition of “large accelerated filer, “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

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

†The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒

If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐

Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

U.S. GAAP☒

International Financial Reporting Standards as issued by the International Accounting Standards Board ☐

Other ☐

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

Item 17 ☐

Item 18 ☐

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  

Yes ☐ No ☒

INTRODUCTION

Except for the historical information contained herein, the statements contained in this annual report on Form 20-F, or this Annual Report, are forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, regarding future events and our future results that are subject to the safe harbors created under the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, or the Exchange Act. These statements are based on current expectations, estimates, forecasts and projections about the industries in which we operate and the beliefs and assumptions of our management.

As used in this Annual Report, the terms “we,” “us,” “our,” “RADCOM” and the “Company” mean RADCOM Ltd. and its subsidiaries, unless otherwise indicated.

References herein to our “solutions” or “solution” are intended to refer to our products and related services as the context requires.

We have registered with the United States Patent and Trademark Office, or USPTO, and hold the trademark “RADCOM” in the United States. All other trademarks and trade names appearing in this Annual Report are owned by their respective holders.

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:

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

PART I

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not applicable.

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable.

ITEM 3. KEY INFORMATION

Not applicable.

Not applicable.

Investing in our ordinary shares involves a high degree of risk. You should carefully consider the risks described below before investing in our ordinary shares.

Our business, operating results and financial condition could be seriously harmed due to any of the following risks, among others.  If we do not successfully address the risks to which we are subject, we could experience a material adverse effect on our business, results of operations and financial condition and our share price may decline.  We cannot assure you that we will successfully address any of these risks.

Risks Related to Our Business and Our Industry

Our business is dependent on a limited number of significant customers and the loss of a significant customer could materially adversely affect our results of operations.

Our business is dependent on a limited number of significant customers. For example, our threetwo largest customers accounted for approximately 88%77% of our revenue in fiscal year 2021.2022. The loss of any significant customer, a significant decrease in business from any such customer, or a reduction in customer revenue due to adverse changes in the terms of our contractual arrangements, market conditions, customer circumstances or other factors could have a material adverse effect on our results of operations and financial condition. Revenue from individual customers may fluctuate from time to time based on the commencement, scope and completion of projects or other engagements, the timing and magnitude of which may be affected by market or other conditions.

We may lose significant market share as a result of intense competition in the market for our existing and future solutions.

ManySeveral companies compete with us in the market for service assurance and Customer Experience Management and Service Operations Center that provideoffer cloud-native, software-based, virtualized networkservice assurance solutions. We expect that competition will increase in the future, both with respect to solutions that we currently offer and solutions that we are developing.  Moreover, manufacturers of data communications and telecommunications equipmentnetworks with whom we partner or may partner, may in the future incorporate into their products capabilities similar to ours, thus reducing the demand for our solutions. Some of our existing and potential competitors have substantially greater resources, including financial, technological, engineering, manufacturing, and marketing and distribution capabilities, and several of them may enjoy greater market recognition than us. We may not be able to compete effectively with our competitors. A failure to do so could adversely affect our revenues and profitability.

The pace at which we grow our business depends on our current and potential customers’ internal processes and decisions regarding the transition to 5G or to fully virtualized networks and our ability to secure new customers. Our expectations regarding the pace of 5G rollout may not materialize.

The pace of transition to 5G and timeframe for reaching a mature infrastructure for 5G is dependent on CSPs’ internal decisions regarding 5G technology implementation, timing, nature of virtualization and budgeting. Such decisions may be affected by the overall pace of 5G deployment in the industry as well as by other technology trends such as the transition to fully virtualized cloud-native networks. Our ability to grow our business is further dependent on our ability to secure new customers. To the extent that CSPs will not choose our solution, the pace in which we could grow of our business may be adversely affected.

The pace at which we deploy our solutions is directly affected by the pace of CSPs’ internal processes and the pace of maturation of the 5G market. To the extent that CSPs require more time to reach the decision to virtualize, decide to delay virtualization while the market develops, elect not to deploy 5G, or to delay the transition to fully virtualized cloud-native networks our sales cycles may lengthen, and the growth of our business may be adversely affected.

We believe that most of the industry’s leading CSPs will rollout 5G networks which will in turn promote the adoption of cloud-native, software-based, virtualized network solutions. Our expectation is that the market for our solutions will materialize and gain momentum as a result. However, our expectations may not be correct, and the actual pace of cloud-native, software-based, virtualized network transformation and/or 5G rollout may take longer than we anticipate or may not occur at all. If the demand for cloud-native, software-based, virtualized network does not continue to grow or the 5G rollout does not materialize, our business, financial condition and results of operations may suffer.

Disruptions to our information technology, or IT, systems due to system failures or cybersecurity attacks may impact our operations, result in sensitive customer information being compromised, which would negatively materially adversely affect our reputation and business.

We believe that an appropriate IT infrastructure is important in order to support our daily operations and the growth of our business. If we experience difficulties in implementing new or upgraded information systems or experience significant system failures, or if we are unable to successfully modify our management information systems or respond to changes in our business needs, we may not be able to effectively manage our business, and we may fail to meet our reporting obligations. Additionally, if our current business continuity plan, back-up storage arrangements and our disaster recovery plan are not operated as planned, we may not be able to effectively recover our information system in the event of a crisis, which may materially adversely affect our business and results of operations.

In the current environment, there are numerous and evolving risks to cybersecurity and privacy, including criminal hackers, hacktivists, state-sponsored intrusions, industrial espionage, employee malfeasance and human or technological error. High-profile security breaches at other companies and in government agencies have increased in recent years, and security industry experts and government officials have warned about the risks of hackers and cyberattacks targeting businesses such as ours. Computer hackers and others routinely attempt to breach the security of technology products, services and systems, and to fraudulently induce employees, customers, or others to disclose information or unwittingly provide access to systems or data. Although we have invested in measures to reduce these risks, we can provide no assurance that our current IT systems are fully protected against third-party intrusions, viruses, hacker attacks, information or data theft or other similar threats. Legislative or regulatory action in these areas is also evolving, and we may be unable to adapt our IT system to accommodate these changes. We have experienced and expect to continue to experience attempted cyberattacks of our IT networks. Although none of these attempted cyberattacks has had a material adverse effect on our operations or financial condition thus far, we cannot guarantee that any such incidents will not have a material adverse effect on our operations or financial condition in the future. Furthermore, a cyberattack that bypasses our IT security systems, causing an IT security breach, could lead to a material disruption of our information systems, the loss of business information and loss of service to our customers. Additionally, we have access to sensitive customer information in the ordinary course of business. If a significant data breach occurs and we lose customer information, our reputation may be materially and adversely affected, our customers’ confidence in us may be diminished, or we may be subject to legal claims, any of which may contribute to the loss of customers and have a material adverse effect on our business and result of operations. In addition, the continued worldwide threat of terrorism and heightened security in response to such threat may cause further disruptions and create further uncertainties or may otherwise materially adversely affect our business. To the extent that such disruptions or uncertainties result in delays or cancellations of customer orders, or in theft, destruction, loss, misappropriation or release of our confidential data or our intellectual property, our business and results of operations could be materially and adversely affected. 

A reduction in some CSPs’ revenues and profitability could lead to decreased investment in capital equipment and infrastructure which may, in turn, affect our revenues and results of operations. A continued slowdown in our customers’ investment in capital equipment and infrastructure might materially and adversely affect our revenues and results of operations.

Our future success is dependent upon the continued growth of the telecommunications industry as well as the specific sectors that we target, which currently include, among others, 5G, Internet of Things, or IoT, 4G cellular, Triple Play networks and Voice over Long Term Evolution, or VoLTE. During the last few years, some of the CSPs have experienced a reduction in their revenues from subscribers and lower profitability, which affected their investment budgets. This trend may continue. The global telecommunications industry and various sectors within the industry are evolving rapidly and it is difficult to predict its potential growth rate or future trends in technology development. Our future success also depends upon the increased utilization of our solutions by next-generation network operators and specifically virtualized cloud-native networks on private and public clouds, who may not adopt our technology.

During the last few years, developments in the telecommunications industry have had a material effect on our existing and/or potential customers and may continue to have such an effect in the future. Such developments include changes in general global economic conditions, industry consolidation, emergence of new competitors, commoditization of voice services, regulatory changes, and changes in the plans of CSPs to shift, transform and adapt their network operations to rollout 5G networks and cloud-native virtualized networks. Over the last few years, the telecommunications industry has experienced financial pressures that have caused many in the industry to reduce investment in capital intensive projects, and in some cases, have led to restructurings. While the transformation of network operations to cloud-native virtualized networks arise out of the desire of CSPs to reduce network infrastructure expense, thus creating opportunities for us, it also creates a downward pressure on the prices of our solutions.

The market for our solutions is characterized by rapidly changing technology and we may be materially adversely affected if we do not respond promptly and effectively to such changes.

The telecommunications industry is characterized by rapidly changing technology, network infrastructure, and customer requirements and by evolving industry standards and frequent new product introductions. These changes require us to constantly adapt and improve our solutions to meet changing industry requirements. If we are unable to stay ahead of industry trends or to timely and successfully complete the development of solutions supporting new standards and technologies such as 5G, our business may be affected as new requirements could reduce or shift the market for our solutions or require us to develop new solutions. Additionally, because new or enhanced telecommunications and data communications-related products developed by other companies could be incompatible with our solutions, our timely access to information concerning changes in technology, in customer requirements, and in industry standards, as well as our ability to anticipate such changes and develop and market new and enhanced solutions successfully and on a timely basis, will be significant factors in our ability to remain competitive. 

Our future success will depend on our ability to develop and maintain long-term relationships with our customers and to meet their expectations in providing solutions and related services.

We believe that our future success will depend to a significant extent on our ability to develop and maintain long-term relationships with successful CSPs who have the financial and other resources required to invest in significant ongoing network intelligence solutions. Our business and our results of operations could be adversely affected if we are unable to develop sustainable customer relationships, or to meet customers’ expectations in providing solutions and related services.

We may enter into long-term sales agreements with large customers. Such agreements may prove unprofitable as our costs and product mix shift over the terms of the agreements.

We may enter from time to time into long-term sales agreements with large customers. We may be required under such agreements to sell our solutions at fixed prices over the terms of the agreements. The costs we incur in fulfilling the agreements may vary substantially from our initial cost estimates. Any cost overruns that we cannot pass on to our customers could adversely affect our results of operations. In the future, we may also be required under such agreements to sell solutions that we may otherwise wish to discontinue, thereby diverting our resources from developing more profitable or strategically important solutions.

Our large customers have substantial negotiating leverage, which may require that we agree to terms and conditions that may have an adverse effect on our business.

Large CSPs have substantial purchasing power and leverage in negotiating contractual arrangements with us. These customers may require us to develop additional features and may impose penalties on us for failure to deliver such features on a timely basis, or failure to meet performance standards. As we seek to increase our sales to large CSPs, we may be required to agree to unfavorable terms and conditions which may decrease our revenues and/or increase the time it takes to convert orders into revenues and could result in an adverse effect on our business, financial condition and results of operations. Similarly, some of our contracts may contain change in control provisions which may have an adverse effect on our business and results if exercised following a change in control transaction or, in the alternative, may act as an impediment to certain change in control transactions.

Our strategy to focus most of our sales efforts on Tier 1, Greenfield Operators and other leading CSPs in the North American, European and select other markets may not be successful.

We believe that the significant share of cloud-native, software-based, virtualized networks and 5G deployment activity is expected to take place in North America, Europe, selected CSPs in Asia-Pacific and selected CSPs in developing markets such as Latin America. We have accordingly enhanced our presence and focused our sales and marketing resources in these markets. While we focus our sales and marketing resources in such selected markets, we cannot assure the selection of our solutions by tier 1, CSPs that build new networks from scratch, or Greenfield Operators, or other leading CSPs operating in such markets and therefore we may not be successful in expanding our business as we plan.

We have a history of quarterlyQuarterly fluctuations and unpredictability in our results of operations and expect these fluctuations to continue. This may cause our share price to fluctuate or to decline.

We have experienced, and in the future may also experience, significant fluctuations in our quarterly results of operations. Factors that may contribute to fluctuations in our quarterly results of operations including,

Our costs of revenues consist of variable costs, which include labor and related costs, including costs incurred in software development customization for projects and deployment costs, the use of hardware, inventory write-offs, packaging, importation taxes, shipping and handling costs, license fees for software components of third parties, warranty expenses, allocation of overhead expenses, subcontractors’ expenses, royalties to the Israel Innovation Authority, or IIA, and share-based compensation. A major part of our costs of sales is relatively variable and determined based on our anticipated revenues. We believe, therefore, that quarter-to-quarter comparisons of our operating results may not be a reliable indication of future performance.

Our revenues in any quarter generally have been, and may continue to be, derived from a relatively small number of orders with relatively high average revenues per order. Therefore, the loss of any order or a delay in closing a transaction could have a significant impact on our quarterly revenues and results of operations.

In addition, we may experience a delay in generating or recognizing revenues for several reasons, including revenue recognition accounting requirements. In many cases, we cannot recognize revenue from an order prior to customer acceptance, which may take multiple months from the commencement of the engagement and in some extreme cases may take more than twelve months. Therefore, a major part of the revenue for any fiscal quarter may be derived from a backlog of orders under delivery and may not correlate to the customer’s order date or the delivery date.

Our revenues for a specific quarter may also be difficult to predict and may be affected if we experience a non-linear sales pattern. We generally experience significantly higher levels of sales orders towards the end of a quarter as a result of customers submitting their orders late in the quarter. Furthermore, orders received towards the end of the quarter are usually not delivered within the same quarter and are usually only recognized as revenue at a later stage. If our revenues in any quarter remain level or decline in comparison to any prior quarter, our financial results for that quarter could be adversely affected.

Due to the factors described above, as well as other unanticipated factors, our results of operations in future quarters could fail to meet the guidance we may from time to time give to the public or the expectations of public market analysts or investors. If this occurs, the price of our ordinary shares may be adversely affected.

We expect ourOur gross margins tomay vary over time and we may not be able to sustain or improve upon our recent levels of gross margin which may have a materialan adverse effect on our future profitability.

We may not be able to sustain or improve upon our recent levels of gross margin. Our gross margins may be adversely affected by numerous factors, including, increased price competition, local taxes which may be incurred for direct sales, increased industry consolidation among our customers, which may lead to decreased demand for and downward pricing pressure on our solutions, changes in our customer mix, geographic, product mix, distribution channels, increases in costs such as employment costs or third-party service or component costs, losses on customer contracts, and increases in warranty costs. Further deterioration in gross margins, due to these or other factors, may have a material adverse effect on our business, financial condition and results of operations.

Current market conditions, including inflation and recessionary pressures could affect our growth and profitability.

The recent inflation, geopolitical issues, increase in energy costs, increases in interest rates, unstable global conditions and changes in currency exchange rates have led to global economic instability. Such changes, and their impact on the global macro-economic environment, may result in a slow in the level of investments made by CSPs, including, the transition of CSPs to 5G, which can impact our business, operating results, and financial condition.

Our sales derived from emerging market countries may be materially adversely affected by economic, exchange rates, regulatory and political developments in those countries.

We plan to continue to generate revenue from various emerging market countries which represent a portion of our existing business and our expected growth. Economic or political turmoil in these countries could materially adversely affect our revenues and results of operations. Our investments in emerging market countries may also be subject to risks and uncertainties, including unfavorable taxation treatment, exchange rates, challenges in protecting our intellectual property rights, nationalization, inflation, currency fluctuations, or the absence of, or unexpected changes in, regulation as well as other unforeseeable operational risks.

Most of our customers usually require a detailed and comprehensive evaluation process before they order our solutions. Our sales process may be subject to delays that could significantly decrease our revenues and result in the eventual cancellations of some sale opportunities.

We derive all of our revenues from the sale of solutions and related services for CSPs. As common practice in our industry, our solutions generally undergo a lengthy evaluation process before we can sell them. In recent years, our customers have been conducting a more stringent and detailed evaluation of our solutions and decisions are subject to additional levels of internal review. As a result, the sales cycle may be longer than anticipated. Multiple factors affect the length of the approval and evaluation process, including among others, the time involved for our customers to determine and announce their specifications, the time required for our customers to process approvals for purchasing decisions, the technological priorities and budgets of our customers and the complexity of the solutions involved, and the need for our customers to obtain or comply with any required regulatory approvals. If customers delay project approval or extend anticipated decision-making timelines, or if continued delays result in the eventual cancellation of any sale opportunities, it may have an adverse effect on our ability to sell our solutions, which will materially adversely affect our business, financial condition and results of operations.

We have experienced periods of growth of our business. If we cannot adequately manage our business, our results of operations may suffer.

We cannot be sure that our systems, procedures and managerial controls will be adequate to support our operations. Any delay in implementing, or transitioning to, new or enhanced systems, procedures or controls may adversely affect our ability to record and report financial and management information on a timely and accurate basis. We believe that significant growth may require us to hire additional personnel.  

Our non-competition agreements with our employees and consultants may not be enforceable under applicable law. If any of these employees leaves us and joins a competitor, such competitor could benefit from the expertise our former employee gained while working for us.

We generally enter into non-competition agreements with our key employees and consultants. These agreements prohibit those employees and consultants, while they work for us and for a specified length of time after they cease to work for or provide services to us, from directly competing with us or working for our competitors for a limited period. Under applicable law, we may be unable to enforce these agreements or any part thereof against our employees and consultants, including our Israeli employees and consultants. If we cannot enforce our non-competition agreements against our Israeli (or any other) employees, then we may be unable to prevent our competitors from benefiting from the expertise of these former employees, which could impair our business, results of operations and ability to capitalize on our proprietary information.

Our business could be harmed if we were to lose the services of one or more members of our senior management team, or if we are unable to attract and retain qualified personnel.

Our future growth and success depend to an extent upon the continuing services of our executive officers and other key employees including our Chief Executive Officer, Eyal Harari, our Chief Operating Officer, Hilik Itman, and our Chief Technology Officer, Rami Amit. 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.

Competition for highly skilled technical and other personnel is intense, and as a result we may fail to attract, recruit and retain qualified employees, which could materially and adversely impact our business, financial condition and results of operations.

In order for us to successfully compete and grow, we must attract, recruit, retain and develop personnel with requisite qualifications to provide expertise across the entire spectrum of our intellectual capital and business needs.

Our principal research and development as well as significant elements of our marketing and general and administrative activities are conducted at our headquarters in Israel, where we face significant competition. While there has been intense competition for qualified human resources in the Israeli high-tech industry historically, the industry experienced record growth and activity in 2021 and 2022, both at the earlier stages of venture capital and growth equity financings, and at the exit stage of initial public offerings and mergers and acquisitions. This growth in activity has caused a sharp increase in job openings in both Israeli high-tech companies and Israeli research and development centers of foreign companies, and intensification of competition between these employers to attract qualified employees in Israel. As a result, the high-tech industry in Israel has experienced significant levels of employee attrition and is currently facing a severe shortage of skilled human capital, including research and development, marketing, operations and customer service professionals. Although we also engage a talented team in the United States, India and Romania to benefit from the significant pool of talent that is available in such markets, we have also witnessed increased competition in those markets as well during the last year.

Many of the companies with which we compete for qualified personnel have significant resources, and we may not succeed in recruiting additional experienced or professional personnel, retaining personnel or effectively replacing current personnel who may depart with qualified or effective successors. In addition, due to the reasons outlined above, our employees may be increasingly targeted for recruitment by competitors and other companies in the technology industry, which may make it more difficult for us to retain employees and may increase retention costs. Training of new employees with no prior relevant experience could be time-consuming and require significant resources.

In addition, as a result of the intense competition for qualified human resources, the high-tech market has also experienced and may continue to experience significant increases in the levels of salaries and other compensation. Accordingly, our efforts to attract, retain and develop personnel may also result in significant additional expenses, which could adversely affect our profitability. Furthermore, in making employment decisions, particularly in the high-technology industry, job candidates often consider the value of the equity they are to receive in connection with their employment. Employees may be more likely to leave us if the shares they own or the shares underlying their equity incentive awards have significantly appreciated or significantly decreased in value. In light of the foregoing, there can be no assurance that qualified employees will remain in our employ or that we will be able to attract and retain qualified personnel in the future and failure to do so could have a material adverse effect on our business, financial condition and results of operations.

A regional or global health pandemic including COVID-19, could severelyadversely affect our business, results of operations and financial condition due to impacts from remote work arrangements, actions taken to contain the disease or treat its impact and the speed and extent of the recovery.

A regional or global health pandemic, depending upon its duration and severity, could have a material adverse effect on our business. For example, the COVID-19 pandemic has had numerous effects on the global economy and governmental authorities around the world have implemented measures to reduce the spread of COVID-19. These measures, including shutdowns and “shelter-in-place” orders suggested or mandated by governmental authorities or otherwise elected by companies as a preventive measure, have adversely affected workforces, economies and financial markets, and, along with decreased consumer spending, have led to an economic downturn in many markets.

As a result of the COVID-19 pandemic, as near-term measures, we have transitioned many of our employees to remote working arrangements. The transition has had little impact on our employee productivity and has not caused any interruption to our business. Due to the uncertainty of COVID-19, we will continue to assess the situation, including abiding by any government-imposed restrictions globally. The transition to remotely working of many of our personnel could have a negative impact on the execution of our business plans and operations. If a natural disaster, power outage, connectivity issue, or other event occurred that impacted our employees’ ability to work remotely, it may be difficult or, in certain cases, impossible, for us to continue our business for a substantial period of time. The increase in remote working may also result in consumer privacy, IT security and fraud concerns as well as increase our exposure to potential wage and hour issues.

Although we believe that COVID-19 will not have a material impact on our operations going forward, we are unable to accurately predict such impact due to uncertainties that will be dictated by the length of time that the pandemic and related disruptions continue, the impact of governmental regulations that might be imposed in response to the pandemic and overall changes in consumer behavior. Such orders or restrictions have and are continuing to result in temporary store closures, work stoppages, slowdowns and delays, travel restrictions and cancellation of events, among other effects, any of which may negatively impact workforces globally, and as a result, may adversely affect our operations. As infections may continue to become more widespread, we could experience a severe negative impact on our business, financial condition and results of operations. Specifically, the COVID-19 pandemic may lead to a global economic downturn and could affect the rollout of 5G networks, which could lead to decreased demand across all of our services. There can be no assurance that the analysis that we have undertaken or remedial measures that have been enacted will enable us to avoid part or all of any impact from the spread of COVID-19 or its consequences, including downturns in business sentiment generally or in our sector in particular. In addition, the impact of COVID-19 may cause delays to all future development, marketing and sales operations due to, among others, travel restrictions.

To the extent the COVID-19 or any other pandemic adversely affects our business and financial results, it may also have the effect of heightening many of the other risks described in this “Risk factors” section.

The complexity and scope of the solutions we provide to larger CSPs is increasing. Larger projects entail greater operational risk and an increased chance of failure.

The complexity and scope of the solutions we provide to larger CSPs is increasing. The larger and more complex such projects are, the greater the operational risks associated with such projects. These potential risks include failure to successfully deliver our solution, failure to fully integrate our solutions with third party products and complex environments in the CSP’s network, and our dependence on subcontractors and partners for the successful and timely completion of such projects. Failure to complete a larger project successfully could expose us to potential contractual penalties, claims for breach of contract and in extreme cases, to cancellation of the entire project, and may result in difficulty in collecting payment and recognizing revenues from such project.

Cyber-attacks on our customers’ networks involving our products could have an adverse effect on our business.

Maintaining the security of our products which are installed with our customers is a critical issue for us, therefore we invest resources and technologies to better protect our assets. However, security researchers, criminal hackers and other third parties regularly develop new techniques to penetrate computer and network security measures. Cyber-attacks, or other breaches of security on our customers’ networks, may be initiated at any network location or device including initiation through our products. Although we maintain high levels of cyber-security aware development processes, we cannot assure that such attacks, or other breaches of security through our products, will fail and therefore may negatively affect our customers’ business. While we maintain insurance coverage for some of these events, we cannot be certain that our coverage will be adequate for liabilities actually incurred. In addition, these events could also result in damage to our reputation which will further negatively impact our business.

More and more CSPs require us to perform a product hardening in order to prevent security vulnerabilities via our products that may result in security breaches in our customers’ data. Although we dedicate substantial efforts to improve our development processes in order to address the customers’ security requirements, we may not be able to implement improvements in an efficient or timely manner and may discover deficiencies in existing controls, programs, systems and procedures, and we may not be able to fully comply with such requirements, which may cause cancellation of contracts or damages as well as loss of reputation and claims by our CSP customers and may have an adverse effect on our business and financial results. 

We could be subject to claims under our warranties and extended maintenance and support agreements which may affect our financial condition.

Our solutions are complex and may sometimes contain undetected errors which can delay introductions or necessitate redesign.  Failures in networks in which our solutions are deployed arising out of our solutions may result in customer dissatisfaction, contractual claims and, potentially, liability claims being filed against us. Our warranties require us to correct any errors or defects in our solutions. The warranty period we provide for our services is mostly for one year but could be extended either in the initial purchase of our solution or after the initial warranty period ends through the purchase of extended support and maintenance. Moreover, 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. Any failure of a network in which our solutions are deployed (whether or not our solutions are the cause) and any customer claims against us, along with any associated negative publicity, could result in the loss of, or delay in, market acceptance of our solutions and harm to our business.

We incorporate open-source technology in our solutions which may expose us to liability and have a material impact on our product development and sales.

Some of our solutions utilize open-source technologies. These technologies are licensed to us under varying license structures. These licenses pose a potential risk to our solution in the event they are inappropriately integrated. If we have not, or do not in the future, properly integrate software that is subject to such licenses into our solutions or if we utilize open-source software that is subject to licensing terms that are incompatible with our use, we may be required to disclose our own source code to the public or may lose rights to our solutions. Any such requirement to disclose or grant rights in our source code or other confidential information related to our solutions could, therefore, materially adversely affect our competitive advantage and impact our business, financial condition and results of operations.

We depend on limited sources for key components and if we are unable to obtain these components when needed we may experience delays in delivering our solutions.

We currently obtain key components of our software solutions from a limited number of suppliers.  With some of our suppliers, we do not have long-term supply contracts. Therefore, we may be subject to delays in delivery, which could interrupt and delay delivery and result in cancellations of orders. In addition suppliers could increase component prices significantly and with immediate effect we may not be able to locate alternatives for such components, and suppliers could discontinue the supply or support of such components which may require us to modify our solutions, and cause delays in delivery, increased development costs and increased solution prices. All of the above may materially adversely affect our competitive advantage and impact our business, financial condition and results of operations.

Our proprietary technology is difficult to protect and unauthorized use of our proprietary technology by third parties may impair our ability to compete effectively.

Our success and ability to compete depend in large part upon protecting our proprietary technology. We rely upon a combination of contractual rights, software licenses, trade secrets, copyrights, non-disclosure agreements and technical measures to establish and protect our intellectual property rights in our solutions and technologies. In addition, we sometimes enter into non-competition, non-disclosure and confidentiality agreements with our employees, distributors, sales representatives and certain suppliers with access to sensitive information. We currently have three registered patents and five pending patent applications. However, these measures may not be adequate to protect our technology from third-party infringement. Additionally, effective intellectual property protection may not be available in every country in which we offer, or intend to offer, our solutions.

We may expand our business or enhance our technology through partnerships and acquisitions that could result in diversion of resources and extra expenses. This could disrupt our business and adversely affect our financial condition.

Part of our growth strategy may be to selectively pursue partnerships and acquisitions that provide us access to complementary technologies and accelerate our penetration into new markets. The negotiation of acquisitions, investments or joint ventures, as well as the integration of acquired or jointly developed businesses or technologies, could divert our management’s time and resources. Acquired businesses, technologies or joint ventures may not be successfully integrated with our solutions and operations. We may not realize the intended benefits of any acquisition, investment or joint venture and we may incur future losses from any acquisition, investment or joint venture.

In addition, acquisitions could result in, among other things, substantial cash expenditures, potentially dilutive issuances of equity securities, the incurrence of debt and contingent liabilities, a decrease in our profit margins, and amortization of intangibles and potential impairment of goodwill.

If we implementthe implementation of our growth strategy by acquiring other businesses and this disrupts our operations,will result operational disruption, 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 IIA, we are subject to ongoing restrictions.

We have received an aggregate of $48.4 million in royalty-bearing grants for certain research and development activities pursuant to an incentive program. Accordingly, we are obligated to pay royalties to the IIA on revenues from products developed pursuant to the program or deriving therefrom. In addition, under the terms of the program our ability to transfer any resulting know-how, especially to parties outside of Israel, is subject to certain terms and conditions. The Law for the Encouragement of Research, Development and Technological Innovation in the Industry, 1984-5744, or the R&D Law, generally requires a grant recipient and its controlling shareholders to notify the IIA of changes in the ownership of the recipient company and to undertake to the IIA to observe the laws governing the grant programs. We are committed to pay royalties with respect to aforesaid grants until 100% of the U.S. dollar-linked grant plus annual London Interbank Offered Rate, or LIBOR, interest is repaid. Nonetheless, the amount of royalties that we may be required to pay, may be higher in certain circumstances, such as when the manufacturing activity or know how is transferred outside of Israel. The United Kingdom’s Financial Conduct Authority, which regulates the LIBOR, announced in July 2017 that it will no longer persuade or require banks to submit rates for LIBOR after 2021. In September 2021, the Bank of Israel, which determines annual interest rates, published a directive which stated that annual interest at a variable rate linked to the LIBOR rate for loans in U.S. dollars will be replaced by the Secured Overnight Financing Rate, or the SOFR, in June 2023. While it is not currently possible to determine precisely whether, or to what extent, the replacement of LIBOR with SOFR would affect us, and given that, as of the date of this Annual Report, the IIA has not yet published the alternative interest that will be applied on the grants that the Company received from the IIA, the implementation of SOFR (if so implied) may increase our financial liabilities to the IIA. Management continues to monitor the status and discussions regarding SOFR. We are not yet able to reasonably estimate the expected impact.

Additionally, in May 2010, we received a notice from the IIA regarding alleged miscalculations in the amount of royalties paid by us to the IIA for the years 1992 through 2009 and the revenues on which the Company must pay royalties. During 2011, we reviewed with the IIA these alleged miscalculations. We believe that all royalties due to the IIA from the sale of products developed with funding provided by the IIA during such years were properly paid or were otherwise accrued as of December 31, 2021.2022. However, we cannot be sure that the IIA will accept our arguments mentioned above, which, if not accepted, may result in the expenditure of financial resources.

We may be subject to claims of infringement of third-party intellectual property which may have an adverse effect on our business.

Third parties may from time to time assert against us infringement claims or claims that we have violated a patent or infringed a copyright, trademark or other proprietary right belonging to them.  If such infringement were found to exist, we might be required to modify our products or intellectual property or to obtain a license or right to use such technology or intellectual property.  Any infringement claim, even if not meritorious, could result in the expenditure of significant financial and managerial resources.

Zohar Zisapel and Yehuda Zisapel beneficially own, in the aggregate, approximately 22.5%22% of our ordinary shares and therefore have significant influence over the outcome of matters requiring shareholder approval including the election of directors.

As of March 25, 2022,23, 2023, Zohar Zisapel, a member of our Board of Directors, and Yehuda Zisapel, who are brothers, may be deemed to beneficially own an aggregate of 3,240,5913,256,381 ordinary shares, including options exercisable for 21,45037,240 ordinary shares that are exercisable within 60 days of March 25, 2022,23, 2023, representing approximately 22.5%22% of our outstanding ordinary shares.  As a result, despite the fact that each one of them, to our knowledge, operates independently from the other with respect to his respective shareholding of our shares, Zohar Zisapel and Yehuda Zisapel have significant influence over the outcome of various actions that require shareholder approval including the election of our directors. In addition, Zohar Zisapel and Yehuda Zisapel may be able to delay or prevent a transaction in which shareholders might receive a premium over the prevailing market price for their shares and prevent changes in control or in management.

We engage in transactions and may compete with companies controlled by Zohar Zisapel and Yehuda Zisapel, which may result in potential conflicts.

We are engaged in, and expect to continue to be engaged in, numerous transactions with companies controlled by Zohar Zisapel and/or Yehuda Zisapel.  We believe that such transactions are beneficial to us and are generally conducted upon terms that are no less favorable to us than would be available from unaffiliated third parties. Nevertheless, these transactions may result in a conflict of interest between what is best for us and the interests of the other parties in such transactions. Furthermore, in some cases we may compete, or buy third party components from other companies who compete, with companies controlled by Zohar Zisapel and/or Yehuda Zisapel. For more information, see “Item 7.B-Major Shareholders and Related Party Transactions—Related Party Transactions” and “Item 10.B-Fiduciary Duties of Shareholders.”

We incurred net losses on a GAAP-basis in the past and may not achieve or sustain profitability in the future.

In 2022, 2021 2020 and 2019,2020, we incurred net losses of approximately $2.3 million, $5.3 million $4 million and $6.8$4.0 million respectively. We may continue to incur losses in the future or may be unable to sustain profitability, which could materially affect our cash and liquidity and could adversely affect the value and market price of our shares.

Our international presence exposes us to risks associated with varied and changing political, cultural, legal and economic conditions worldwide and if we fail to adapt appropriately to the challenges associated with operating internationally the expected growth of our business may be impeded, and our operating results may be affected.

While we are headquartered in Israel, approximately 97% of our sales in 2022, 94% of our sales in 2021 and 96% of our sales both in 2020 and in 2019 were generated outside of Israel. Our international sales will be limited if we cannot continue to establish and maintain relationships with international distributors and resellers, set up additional foreign operations, expand international sales channel management, hire additional personnel, develop relationships with international CSPs and operate adequate after-sales support internationally. 

Even if we are able to successfully further expand our international operations, we may not be able to maintain or increase international market demand for our solutions. Our international operations are subject to a number of risks, including:

Any of these factors could harm our international operations and have an adverse effect on our business, operating efficiency, results of operations, financial performance and financial condition. The continuing weakness in foreign economies could have a significant negative effect on our future operating results.

The Russia-Ukraine conflict may affect our business

Our business may be affected by sanctions, export controls and similar measures targeting Russia and other countries and territories in response to Russia’s military conflict in Ukraine, including by indefinite suspension of operations in Russia and dealings with Russian entities.

Because our revenues are generated primarily in foreign currencies (mostly in U.S. dollars but also in other currencies), but a significant portion of our expenses are incurred in New Israeli Shekels, our results of operations may be seriously harmed by currency fluctuations.

We sell in markets throughout the world and most of our revenues are generated in U.S. dollars. We also generate revenues in Euro, Brazilian real, or BRL, and other currencies. Our financing activities are also made in U.S. dollars. Accordingly, we consider the U.S. dollar to be our functional currency. However, a significant portion of our expenses is in NIS, mainly related to employee expenses. Therefore, fluctuations in exchange rates between the NIS and the U.S. dollar as well as between other currencies and the U.S. dollar may have an adverse effect on our results of operations and financial condition. As of today, we have not entered into any hedging transactions in order to mitigate these risks.

Moreover, as our revenues are currently denominated primarily in U.S. dollars, devaluation in the local currencies of our customers relative to the U.S. dollar could cause customers to default on payment. Also, as a portion of our revenues is denominated in BRL,Brazilian real, devaluation in this currency may cause financial expenses related to our intercompany short-term balances. In the future, additional revenues may be denominated in currencies other than U.S. dollars, thereby exposing us to gains and losses on non-U.S. currency transactions.

We incur expenses in different currencies, including U.S. dollars and NIS, but our financial statements are denominated in U.S. dollars. U.S. dollars is our functional currency and is the currency that represents the principal economic environment in which we operate. As a result, we are affected by foreign currency exchange fluctuations through both translation risk and transaction risk. As a result, we are exposed to the risk that the NIS may appreciate relative to the dollar, or, if the NIS instead devalues relative to the dollar, that the inflation rate in Israel may exceed such rate of devaluation of the NIS, or that the timing of such devaluation may lag behind inflation in Israel. In any such event, the dollar cost of our operations in Israel would increase and our dollar-denominated results of operations would be adversely affected.

Risks Related to our Ordinary Shares

Wide fluctuations in the market price of our ordinary shares could adversely affect us and our shareholders.

Between January 1, 2021,2022, and March 25, 2022,23, 2023, our ordinary sharesshares’ closing price on the Nasdaq Capital Market, or the Nasdaq, was as high as $14.70$14.28 and as low as $8.93$9.38 per share. As of March 25, 2022,23, 2023, the closing price of our ordinary shares on Nasdaq was $12.40$9.95 per share. The market price of our ordinary shares has been and is likely to continue to be highly volatile and could be subject to wide fluctuations in response to numerous factors, including the other risks identified in this “Item 3.D—Risk Factors”.

In addition, the stock market in general, and the market for Israeli and technology companies in particular, has been highly volatile. Many of these factors are beyond our control and may materially adversely affect the market price of our ordinary shares, regardless of our performance. Shareholders may not be able to resell their ordinary shares following periods of volatility because of the market’s adverse reaction to such volatility.

The trading volume of our shares is relatively low, and it may remain low in the future.

Our shares have been traded at low volumes in the past and may be traded at low volumes in the future for reasons related or unrelated to our performance. This low trading volume may result in lesser liquidity and lower than expected market prices for our ordinary shares, and our shareholders may not be able to resell their shares for more than they paid for them. This low trading volume may also result in greater share price volatility as result of short trading activities or the acquisition or disposition of shares by any single larger or institutional shareholder.

Risks Related to Our Location in Israel

Security, political and economic instability in the Middle East may harm our business.

We are incorporated under the laws of the State of Israel, and our principal offices and research and development facilities are located in Central Israel. Accordingly, security, political and economic conditions in the Middle East in general, and in Israel in particular, may directly affect our business. Any armed conflicts, political instability, terrorism, cyberattacks or any other hostilities involving Israel or the interruption or curtailment of trade between Israel and its present trading partners could affect adversely our operations. Ongoing and revived hostilities in the Middle East or other Israeli political or economic factors, could harm our operations and solution development and cause any future sales to decrease.

Furthermore, many Israeli citizens are obligated to perform several days, and in some cases more, of annual military reserve duty each year until they reach the age of 40 (or older, for reservists who are military officers or who have certain occupations) and, in the event of a military conflict, may be called to active duty. In response to increases in terrorist activity, there have been periods of significant call-ups of military reservists. It is possible that there will be military reserve duty call-ups in the future. Our operations could be disrupted by such call-ups, which may include the call-up of members of our management. Such disruption could materially adversely affect our business, prospects, financial condition and results of operations. 

In addition, the Israeli government is currently pursuing extensive changes to Israel’s judicial system. This has sparked extensive political debate and protests. In response to the foregoing developments, many individuals, organizations and institutions, both within and outside of Israel, have voiced concerns that the proposed changes may negatively impact the business environment in Israel, including due to reluctance of foreign investors to invest or transact business in Israel, increased currency fluctuations, downgrades in credit rating, increased interest rates, increased volatility in security markets, and other changes in the Israeli macroeconomic conditions. To the extent that any of these negative developments do occur, they may have an adverse effect on our business, our results of operations and our ability to hire and preserve our employees and to raise additional funds, if deemed necessary by our management and board of directors.

Provisions of Israeli law may make it easy for our shareholders to demand that we convene a shareholders meeting, and/or allow shareholders to convene a shareholder meeting without the consent of our management, which may disrupt our management’s ability to run our company.

Section 63(b) of the Companies Law may allow any one or more of our shareholders holding at least 5% of our voting rights to demand that we convene an extraordinary shareholders meeting. Also, in the event that we choose not to convene an extraordinary shareholders meeting pursuant to such a request, Sections 64-65 of the Companies Law provide, among others, that such shareholders may independently convene an extraordinary shareholders meeting within three months (or under court’s ruling) and require us to cover the costs, within reason, and as a result thereof, our directors might be required to repay us such costs. If our shareholders decide to exercise these rights in a way inconsistent with our management’s strategic plans, our management’s ability to run our company may be disrupted, and this process may entail significant costs to us.

Security, political and economic instability in the Middle East may harm our business.

We are incorporated under the laws of the State of Israel, and our principal offices and research and development facilities are located in Northern Israel. Accordingly, security, political and economic conditions in the Middle East in general, and in Israel in particular, may directly affect our business. Any armed conflicts, political instability, terrorism, cyberattacks or any other hostilities involving Israel or the interruption or curtailment of trade between Israel and its present trading partners could affect adversely our operations. Ongoing and revived hostilities in the Middle East or other Israeli political or economic factors, could harm our operations and solution development and cause any future sales to decrease.

Finally, many Israeli citizens are obligated to perform several days, and in some cases more, of annual military reserve duty each year until they reach the age of 40 (or older, for reservists who are military officers or who have certain occupations) and, in the event of a military conflict, may be called to active duty. In response to increases in terrorist activity, there have been periods of significant call-ups of military reservists. It is possible that there will be military reserve duty call-ups in the future. Our operations could be disrupted by such call-ups, which may include the call-up of members of our management. Such disruption could materially adversely affect our business, prospects, financial condition and results of 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 develop particular products outside of Israel or to transfer particular technology. If we fail to comply with these conditions in the future, the benefits received could be canceledcancelled and we could be required to refund any payments previously received under these programs. Additionally, these programs may be discontinued or curtailed in the future.  If we do not receive these grants in the future, we will have to allocate funds to product development at the expense of other operational costs. If the Government of Israel discontinues or curtails these programs, our business, financial condition and results of operations could be materially adversely affected.  For more information, see “Item 4.B—Information on the Company—Business Overview—Israel Innovation Authority.”

Provisions of Israeli law may delay, prevent or make difficult a merger or acquisition of us, which could prevent a change of control and depress the market price of our shares.

The Israeli Companies Law, 5759-1999, or the Israeli Companies Law, regulates acquisitions of shares through tender offers, requires special approvals for transactions involving shareholders holding 25% or more of the company’s capital, and regulates other matters that may be relevant to these types of transactions. These provisions of Israeli law could have the effect of delaying or preventing a change in control and may make it more difficult for a third party to acquire us, even if doing so would be beneficial to our shareholders. These provisions may limit the price that investors may be willing to pay in the future for our ordinary shares. Furthermore, Israeli tax considerations may make potential transactions undesirable to us or to some of our shareholders.

It may be difficult to effect service of process, assert U.S. securities laws claims and enforce U.S. judgments in Israel against us or our directors, officers and auditors named in this Annual Report.

We were incorporated in Israel. All our directors reside outside of the United States, and most of our assets are located outside of the United States. Therefore, a judgment obtained against us, or any of these persons, including a judgment based on the civil liability provisions of the U.S. federal securities laws, may not be collectible in the United States and may not necessarily be enforced by an Israeli court. It also may be difficult to effect service of process on these persons in the United States or to assert U.S. securities law claims in original actions instituted in Israel. Additionally, it may be difficult for an investor, or any other person or entity, to initiate an action with respect to United States securities laws in Israel. Israeli courts may refuse to hear a claim based on an alleged violation of United States securities laws reasoning that Israel is not the most appropriate forum in which to bring such a claim. In addition, even if an Israeli court agrees to hear a claim, it may determine that Israeli law and not United States law is applicable to the claim. If United States law is found to be applicable, the content of applicable United States law must be proven as a fact by expert witnesses, which can be a time consuming and costly process. Certain matters of procedure will also be governed by Israeli law. There is little binding case law in Israel that addresses the matters described above. As a result of the difficulty associated with enforcing a judgment against us in Israel, you may not be able to collect any damages awarded by either a United States or foreign court.

As a foreign private issuer whose shares are listed on the Nasdaq, we may follow certain home country corporate governance practices instead of certain Nasdaq requirements.

As a foreign private issuer whose shares are listed on the Nasdaq, we are permitted to follow certain home country corporate governance practices instead of certain requirements of the Nasdaq Stock Market Rules including requirements regarding compensation of officers, shareholder approval for certain dilutive events (such as for the establishment or amendment of certain equity-based compensation plans, an issuance that will result in a change of control of the company, certain transactions other than a public offering involving issuances of a 20% or more interest in the company and certain acquisitions of the stock or assets of another company) and other matters.

Accordingly, our shareholders may not be afforded the same protection as provided under Nasdaq’s corporate governance rules. For more information, see “Item 16G—Corporate Governance”.

General Risk Factors

Natural disasters and other events beyond our control could harm our business. 

Natural disasters or other catastrophic events may cause damage or disruption to our operations, international commerce and the global economy, and thus could have a negative effect on us. Our business operations are subject to interruption by natural disasters, flooding, fire, power shortages, pandemics such as the recent spread of the coronavirus, terrorism, political unrest, telecommunications failure, vandalism, cyber-attacks, geopolitical instability, war, the effects of climate change (such as drought, wildfires, increased storm severity and sea level rise) and other events beyond our control. Although we maintain crisis management and disaster response plans, such events could make it difficult or impossible for us to deliver our solutions and services to our customers, could decrease demand for our solutions and services, and could cause us to incur substantial expense.

Global economic conditions may adversely affect our business.

Changes in global economic conditions could have a negative impact on business around the world and on the telecommunications sector. Conditions may be depressed, or may be subject to deterioration, which could lead to a reduction in consumer and customer spending overall and may in turn have an adverse impact on sales of our solutions. A disruption in the ability of our significant customers to access liquidity could cause serious disruptions or an overall deterioration of their businesses, which could lead to a significant reduction in their orders of our solutions and the inability or failure on their part, to meet their payment obligations to us, any of which could have an adverse effect on our business, financial condition, results of operations and liquidity. In addition, any disruption in the ability of our customers to access liquidity could require us to assume greater credit risk relating to our receivables or could limit our ability to collect receivables related to purchases by affected customers. As a result, we may have to defer recognition of revenues, our reserves for doubtful accounts and write-offs of accounts receivable may increase and we may incur losses.

Certain privacy and data security laws and regulations may affect the use of our solutions.

Our solutions and their use may be subject to certain laws and regulations regarding privacy and data security including United States federal and state laws and European privacy laws. Generally, attention to privacy and data security requirements is increasing worldwide and is resulting in increased regulation.

Such regulations may impose significant penalties for non-compliance, such as the penalties proposed under the European data protection regulations, or GDPR. The GDPR further implemented through binding guidance by the European Data Protection Board (and supplemented by national laws in individual European Union member states), imposes more stringent data protection compliance requirements and provides for more significant penalties for noncompliance in Europe. The GDPR created additional compliance obligations applicable to our business and users, which could cause us to change our business practices, and increases financial penalties for noncompliance (including possible fines of up to the greater of €20 million and 4% of our global annual turnover for the preceding financial year for the most serious violations, as well as the right to compensation for financial or non-financial damages claimed by any individuals under Article 82 of the GDPR). Compliance with the GDPR is an ongoing process.

Additionally, in California passed the California Consumer Privacy Act, or CCPA, which became effective on January 1, 2020. The CCPA, provides new data privacy rights for consumers and new operational requirements for companies. California voters also passedFurther, the California Privacy Rights Act, or CPRA came into laweffect on November 3, 2020, which will not take substantial effect until January 1, 2023. The CPRA will significantly modifymodifies the CCPA, including adding new privacy rights and increasing regulation on online advertising. Additionally, the CCPA, eventually the CPRA, and other legal and regulatory changes are making it easier for certain individuals to opt-out of having their personal data processed and disclosed to third parties through various opt-out mechanisms, which could result in an increase to our operational costs to ensure compliance with such legal and regulatory changes.

Use of our solutions could be subject to such regulations, which could significantly increase the cost of implementing our solutions and impact our ability to compete in the marketplace. Such regulations could also impose additional data security requirements which will impact the cost of developing new solutions and limit the return we can expect to achieve on past and future investments in our solutions.

Our international sales and operations are subject to complex laws relating to foreign corrupt practices and bribery, among many other subjects. A violation of, or change in, these laws could adversely affect our business, financial condition or results of operations.

Our operations in countries outside the United States are subject, among others, to the Foreign Corrupt Practices Act of 1977 as amended from time to time, or FCPA, which prohibits U.S. companies or foreign companies whose shares traded on a U.S. stock exchange, or their agents and employees, from providing anything of value to a foreign public official, as defined in the FCPA, for the purposes of influencing any act or decision of these individuals in their official capacity to help obtain or retain business, direct business to any person or corporate entity, or obtain any unfair advantage. We have internal control policies and procedures with respect to the FCPA. However, we cannot assure that our policies and procedures will always protect us from reckless or criminal acts that may be committed by our employees or agents. Violations of the FCPA may result in severe criminal or civil sanctions, and we may be subject to other liabilities, which could have a material adverse effect on our business, results of operations and financial condition. In addition, investigations by governmental authorities as well as legal, social, economic and political issues in countries where we operate could have a material adverse effect on our business and results of operations. We are also subject to the risks that our employees or agents outside of the United States may fail to comply with other applicable laws. The costs of complying with these and similar laws may be significant and may require significant management time and focus. Any violation of these or similar laws, intentional or unintentional, could have a material adverse effect on our business, financial condition or results of operations.

Any inability to comply with Section 404 of the Sarbanes-Oxley Act of 2002 regarding effective internal control procedures may negatively impact the report on our financial statements to be provided by our independent auditors.

Pursuant to rules of the U.S. Securities and Exchange Commission, or SEC, adopted pursuant to Section 404, or Section 404, of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, we are required to include in our annual report a report of management on our internal control over financial reporting including an assessment by management of the effectiveness of our internal control over financial reporting. In addition, because we are an accelerated filer under the SEC rules, our independent registered public accounting firm is required to attest to and report on the effectiveness of our internal control over financial reporting. Our management or our auditors may conclude that our internal control over financial reporting is not effective. Such conclusion could result in a loss of investor confidence in the reliability of our financial statements, which could negatively impact the market price of our shares. Further, our auditors or we may identify material weaknesses or significant deficiencies in our assessments of our internal control over financial reporting. Failure to maintain effective internal control over financial reporting could result in investigation or sanctions by regulatory authorities and could have an adverse effect on our business, financial condition and results of operations, and on investor confidence in our reported financial information.

If we determine that we are not in compliance with Section 404, we may be required to implement new internal controls and procedures and re-evaluate our financial reporting. We may experience higher than anticipated operating expenses as well as third party advisory fees during the implementation of these changes and thereafter. Further, we may need to hire additional qualified personnel in order to comply with Section 404. If we are unable to implement these changes effectively or efficiently, it could have a material adverse effect on our business, financial condition, results of operations, financial reporting or financial results and could result in our conclusion that our internal controls over financial reporting are not effective. 

We may choose to raise funds from time to time. If adequate financing is not available on terms favorable to us or to our shareholders, our operations and growth strategy may be affected.

We may choose to raise funds from time to time in connection with our operations and growth strategy. We do not know whether additional financing will be available when needed, or whether it will be available on terms favorable to us. Any such financings may dilute the ownership of existing shareholders and could adversely affect the market price of our ordinary shares. In addition, if adequate financing is not available on terms favorable to us or to our shareholders, our operations and growth strategy may be affected.

ITEM 4. INFORMATION ON THE COMPANY

Both our legal and commercial name is RADCOM Ltd., and we are an Israeli company. We were incorporated in 1985 under the laws of the State of Israel and commenced operations in 1991. The principal legislation under which we operate is the Israeli Companies Law. Our principal executive offices are located at 24 Raoul Wallenberg Street, Tel Aviv 69719, Israel, and our telephone and fax numbers are 972-3-645-5055 and 972-3-647-4681, respectively. Our website is www.radcom.com. Information on our website and other information that can be accessed through it are not part of, or incorporated by reference into, this Annual Report.

In 1993, we established a wholly-owned subsidiary in the United States, currently named RADCOM, Inc., or RADCOM US. In 1996, we incorporated a wholly-owned subsidiary in Israel, RADCOM Investments (96) Ltd., or RADCOM Investments, located at our office in Tel Aviv, Israel. In 2010, we established a wholly-owned subsidiary in Brazil, RADCOM do Brasil Comercio, Importacao e Exportacao Ltda., or RADCOM Brazil. In 2012, we incorporated a wholly-owned subsidiary in India, RADCOM Trading India Private Limited, or RADCOM India. In 2022, we incorporated a wholly-owned subsidiary in Canada, RADCOM Canada Limited, or RADCOM Canada.

In the years ended December 31, 2022, 2021 2020 and 2019,2020, our capital expenditures were approximately $150,000, $437,000, $427,000, and $699,000,$427,000 respectively, and were spent primarily on computers and electronic equipment. We have no current significant commitments for capital expenditures.

For more information, the SEC maintains an Internet site (http://www.sec.gov) that contains reports, proxy and information statements, and other information regarding us that has been filed electronically with the SEC.

Overview

We are a leading provider of 5G ready cloud-native network intelligence and service assurance solutions for CSPs. Our solutions support CSPs in their transition to virtualizationwhile launching and running 5G networks (as well as 4G and 3G), delivering dynamic, on-demand service assurance and network troubleshooting for real time customer and service insights.

The 5G telecommunications infrastructure introduces a transformational approach for the design of a new network core and an Open-RAN (a standard for cellular radio-access networks) solution, which is a fully cloud-native, software-based, virtualized network architecture. This new core network architecture uses building blocks, or containers, to enable a wide range of new services envisioned using 5G. The new 5G network is designed in an agile approach, which virtualizes entire classes of network functions into containers, which may dynamically create various services. The new cloud-native nature of the core network is designed to consolidate and deliver the components needed to support fully virtualized networks, utilizing standard technologies that run on high-volume services and switch and storage hardware to virtualize network functions. The fully cloud native approach is a key enabler of the coming 5G telecommunications infrastructure, which drives a major change in the way CSPs design and build their new 5G networks. Such a major change drives the need to assure that it is done safely and with the right set of tools.

By using this software design approach, we were able to deploy our system on Rakuten Cloud Platform, or RCP, Amazon Web Services, or AWS, and Microsoft Azure. This also proved to be a very efficient approach, as we are already starting to see operators moving to a hybrid approach of private and public cloud, which requires the solution to be very dynamic in deployment options.

We offer an advanced 5G network intelligence portfolio of solutions for large scale networks, providing operators with a smart, efficient and on-demand approach to network intelligence that meets the challenges of assuring the customer experience and service quality in the 5G era. Our solutions leverage the move to an all container based cloud-native architecture and the use of Kubernetes (an open-source system for automating deployment, scaling, and management of containerized applications) for the orchestration of the complete solution. This new approach is based on moving the whole design to a Kubernetes-based micro-service architecture, such that it can be deployed on multiple types of clouds, both private and public. Our solution allows CSPs to have an in depth understanding of their customer experience, receive insights and effectively troubleshoot the network performance. RADCOM ACE, our recently launchedflagship 5G network intelligenceautomated assurance solution, is built to ensure that the transition of CSPs’ customers to the 5G network is seamless. RADCOM ACE is explicitly designed to deliver automated, containerized 5G assurance for end-to-end network intelligence (from the radio access network, or RAN to the network core), delivering AI-driven insights for 5G network operations, which we believe to be the cornerstone to CSPs’ customer experience strategy. RADCOM ACEenables CSPs to collect and analyze multiple data types using artificial intelligence/machine learning, or AI/ML, technology, automatically generating insights for a wide-range of use cases, including automated assurance, cost optimization, monetization, network advanced troubleshooting and much more. RADCOM solutions are cloud-native and cloud-agnostic, providing automation and seamless integration with Kubernetes, using a Continuous Development/Continuous Integration, or CI/CD software development pipeline for faster time to market and integration into multiple clouds.

The RADCOM Portfolio is comprised of RADCOM ACE – our RADCOM Network Visibility, RADCOM Service Assurance,portfolio of automated assurance solutions, and RADCOM NWDAF – Network Insights.Data Analytics Function for closed loop automation:

We specialize in solutions for next-generation mobile and fixed networks, including 5G, Long Term Evolution, or LTE, VoLTE, Voice over Wifi, or VoWifi, IP Multimedia Subsystem, or IMS, Voice over IP, or VoIP, and Universal Mobile Telecommunication Service or UMTS.

Our solution portfolio enables CSPs that are deploying 5G networks as well as CSPs that are evaluating or migrating their 4G, 3G and 2G legacy networks to fully virtualized cloud-native networks to have one platform that covers their entire network, from 5G, 4G, and 2G, providing fully virtualized cloud-native network intelligence and service assurance.

Our solution is deployed at multiple operators (CSPs) globally, such as AT&T, Dish, Beeline, Globe, Rakuten and Telefonica and has received wide industry recognition, winning a Frost & Sullivan Product Differentiation Innovation Awards three times, winning multiple TMC Labs Innovation Awards, and winning the Technology Marketing Corp. Award for NFV Innovation.Innovation and being recommended for the most innovative cloud offering in the Glotel Awards competition.

By developing and adapting our solutions to meet the industry’s most stringent requirements we have expanded our customer base to include new opportunities and markets while expanding our footprint with existing customers by supporting them in their transition to cloud-native virtualized network environments anda 5G network. As new and existing customers seek to manage their existing networks while evaluating and deploying cloud-native virtualized network5G networks and container-based architectures, we believe that we are well positioned with our advanced cloud-native network intelligenceautomated assurance solutions and our growing industry track record to provide both CSPs that are deploying 5G networks and CSPs that are evaluating or migrating their 4G, 3G and 2G legacy networks to fully virtualized cloud-native networks with one complete platform to cover their entire network intelligence needs, including 5G, 4G, 3G, and 2G.

CSPs across the globe use our solutions to deliver high quality services, reduce churn, manage network performance, analyze traffic and enhance customer care.experiences. Our solutions incorporate cutting edge technologies and a vast knowledge gained in our advanced work with some of the most technologically innovative CSPs in the industry. Our carrier-grade solutions support both mobile and fixed networks and scale to terabit data bandwidths to enable big data analytics.

Our technological leadership was reinforced by Rakuten Mobile’s 2019 selection of our solutions as their “eyes to the network” in support of their launch of the world’s first end-to-end cloud-native virtualized network. Using our solutions, Rakuten monitors its entire network end-to-end, including the world’s first fully virtualized RAN.

During 2020, we entered into one of the industry’s first 5G network intelligence contract with Rakuten for its recently launched 5G NSA 5G service and upcoming 5G SA 5G service, expected to be launched during 2022.2023.

During 2021, we announced partnerships with AWS and Microsoft Azure through which we are offering our RADCOM ACE solution with real-time subscriber analytics and advanced troubleshooting for both telecom operators that are rolling out 5G, Internet of Things, and edge services and operators already running 4G and VoLTE networks.

During 2022, we announced our selection by DISH Purchasing Corporation, or Dish, to provide our best-in-class RADCOM ACE solution to monitor customers’ experience across Dish’s 5G Smart Network™ — the first cloud-native, open radio access network, or OpenRAN-based 5G network in the United States. With that selection, we were able to strengthen our cooperation with AWS, using Amazon Elastic Kubernetes Service (Amazon EKS) and Amazon Elastic Compute Cloud (Amazon EC2) which provide DISH with an innovative approach to assurance in the cloud, using minimal data center resources while providing real-time insights into the subscribers’ experience as soon as new services launch.

We also announced an additional multi-year 5G contract with a mobile operator in Europe to provide the RADCOM ACE to enhance its end-to-end customer experience by providing real-time analytics for 5G services, which will help the operator deploy and launch 5G smoothly, maintain the highest quality of services and ensure a highly optimized and automated network.

In addition, we renewed our multi-year contract with AT&T with which we continue our long-lasting and fruitful relationship, providing automated service assurance for its cloud network to ensure the network performance and service quality.

Our solutions portfolio enables CSPs to smoothly transition their networks to cloud-native virtualized networks5G networks. RADCOM’s solutions provide automated assurance with built-in AI/ML capabilities that enable operators to adopt a more automated approach to network operations while enhancing the customer experience. With automated insights enabled by AI/ML, operators can also gain rich analytics that improve service quality, save operational costs, boost revenue, and 5G networks.raise network efficiency. It provides a unified, multi-functional cloud-native and containerized portfolio of network visibility, serviceautomated assurance, and network insights and visibility solutions that seamlessly integrates into an operator’s virtualized5G environment. OurWe offer solutions portfolio will also enable one of the key future targets, whichfor CSPs to gain real-time data and insights into what is to automate processes, save on cost and managehappening inside the network based on correlated networkto ensure excellent customer experiences and subscriber key performance indicators, or KPIs, rather than based on just performance indicators. Our solution has built-in AI and Machine Learning, or ML capabilities to increase the benefits ofoptimize the network intelligence solution. By deploying cloud-native network intelligence solutions with built-in AI/ML, the CSP can utilize the data already collected through our containerized probes. Our solutions further deliver specialized capabilities for virtualized infrastructureperformance while saving operating expenses and next-generation networks, such as 5G networks, and allow CSPs to monitor and proactively improve quality of experience for their subscribers.capital expenditures.

The key benefits of our solutions are:

In December 2015, we were selected by AT&T for its next-generation virtualized network environment. AT&T’s deployment represents the first NFV networks of scale in the industry and since then, we have been working with AT&T, in its continuing efforts to transition to a full NFV network.

From 2016 until 2018, we improved our cloud-native virtualized network capabilities while working on one of the world’s first and biggest virtual networks. We also continued the development and enhancement of our solutions to meet the complicated needs of monitoring virtualized networks and to offer a smart mediation layer which allows us to offer a full end-to-end customer and service view which addresses CSPs’ requirements for a smart network intelligence solution, including for 5G networks.

We also launched our Network Visibility solution to allow CSPs to gain more visibility into their network. RADCOM Network Visibility offers an integrated cloud-native solution with advanced packet broker capabilities that ensure intelligent traffic distribution, smart load balancing, and intelligent sampling for full end-to-end visibility across the network. RADCOM Network Visibility helps to distribute network traffic from multiple cloud environments to service assurance probes, security tools, and other systems. During such period we increased our development efforts, focusing on enhancing automation and analytics capabilities and offering containerized solutions so as to maintain our technological leadership.

Our continued and increased investment in research and development was validated in 2019 by our renewed engagement with AT&T, when we entered into a multi-year engagement continuing our relationship and expanding the integration of our solutions into AT&T’s network.

In May 2019, we entered into a multi-year agreement with Rakuten to provide our Network Intelligence solution for Rakuten’s unique and innovative mobile network. Rakuten’s network is considered the world’s first fully virtualized, end-to-end cloud-native mobile network that adopts 5G systems architecture from launch. Rakuten chose RADCOM Network Intelligence because of its ability to monitor the entire end-to-end network, including the world’s first fully virtualized RAN.

In April 2020 we announced that we successfully supported Rakuten’s commercial launch of the world’s first fully virtualized mobile network. Our solution helped Rakuten to launch its new virtualized network and ensured the delivery of superior customer experience. Our solutions are tightly integrated across Rakuten’s distributed telecommunications cloud to assure the highest service quality is delivered to customers for voice, video, VoLTE and data services from the mobile edge up to the network core.

In August 2020, we announced the launch of RADCOM ACE. RADCOM ACE is an automated, containerized, end-to-end assurance solution for 5G networks, built based on our cloud-native expertise and designed so CSPs can manage their networks in a more dynamic and agile way. RADCOM ACE is built to ensure that 5G services continuously run at optimal quality, while at the same time improving the operators’ operational efficiency through automation.

In October 2020, we entered into a new multi-year agreement with Rakuten to provide our RADCOM ACE solution for Rakuten’s recently launched 5G NSA service and future 5G SA service launch, which is expected to be deployed during 2021,2023, or the Rakuten 5G Agreement. We believe that the Rakuten 5G Agreement is the first 5G assurance contract in our industry and is a testimony to the significant investment in product development we have been making over the last few years as well as a market validation to our ability to monitor the entire end-to-end network, providing superior insights.

In May 2021, we announced an additional order from a Top-Tier Latin America operator, selected for our 4G and 5G capabilities. This order expands our deployment at this top-tier operator to its mobile network and covers assurance for this top-tier operator’s 4G network, such as the operator’s cloud-based VoLTE offering, and we expect them to expand our solutions to their 5G network in the future.

In April 2022, we announced the extension of our contract with AT&T, providing automated service assurance for AT&T’s cloud network to ensure the network performance and service quality. In addition, we announced our entrance into a multi-year agreement to provide RADCOM ACE to enhance the end-to-end customer experience for a 5G mobile CSP in Europe.

In May 2022, we announced our selection by Dish to provide RADCOM ACE solution to monitor customers’ experience across Dish’s 5G Smart Network™ — the first cloud-native, OpenRAN-based 5G network in the United States. RADCOM ACE at Dish runs on AWS.

In July 2022, we announced that we are building on our existing relationship with Rakuten Mobile to bring RADCOM ACE, deployed on Rakuten Mobile in Japan, to telecom operators globally through the Rakuten Symphony Symworld™ marketplace.

In September 2022, we announced that we renewed our contract with Rakuten Mobile in Japan, to continue and monitor service quality across Rakuten’s nationwide deployment and enable Rakuten to gain real-time service and network analytics.

In January 2023, we announced our entrance into an agreement with a new customer in North America to provide our RADCOM ACE solution to deliver real-time insights into the network performance 24/7 as the operator maintains its 4G network while expanding 5G coverage nationwide.

In February 2023, we announced the entry into definitive agreements to acquire the technology, intellectual property, and customer agreements of Continual Ltd, a leading mobility experience analytics company that uses AI and ML to deliver advanced insights to help telecom operators improve their subscribers’ mobility experience, for an amount of up to $2,500,000. The closing of the acquisition is expected to occur within three months after the signing of the definitive agreements, pending the satisfaction of customary and transaction specific closing conditions and regulatory approvals.

During 2022,2023, We expect to continue our investment in research and development and to increase our sales and marketing efforts. We intend to leverage our success with industry leading customers as we seek to engage with other CSPs that are looking to manage existing networks while evaluating their transition to the cloud-native architectures and 5G network. We are targeting Tier 1, Greenfield Operators and CSPs who are deploying 5G virtualized networks as well as CSPs who are evaluating or migrating their 4G, 3G and 2G networks to fully virtualized cloud-native networks and are searching for a cutting-edge network intelligence solution that can cover their entire network needs.

Industry Background

Our Customers and the Market for Our Solutions

We operate in a large market that is undergoing significant transformation with significant potential for growth, which is evidenced by the evolution of the networks and transition to 5G networks all over the world. Such transition contains new technological challenges, which require a new approach in order to be solved. The customers in our market consist primarily of mobile and fixed CSPs who are responsible for providing mobile and fixed telecommunications services. Our solutions are used by multiple divisions within a CSP’s organization, including engineering, operations, marketing, management and customer care departments.

CSPs face many challenges in managing their network, from the rapid growth in mobile data traffic to complexities in managing services that are delivered across multiple vendor technologies. These challenges are intensified by the increased traffic growth and the emergence of new technologies and services, such as machine to machine, IoT and 5G. Deploying a cloud-native, virtualized network intelligence and network intelligence solution is an essential part of a CSP’s network, derived by the need to manage huge amounts of various network elements and services from multiple vendors and technologies. In addition, CSPs are facing strong competition both from other CSPs and from over-the-top (OTT) players who are offering more and more similar services. In order to fight for their customers’ satisfaction, CSPs will need to gain deeper insight into customer behavior, enabling them to tailor processes based on customer preferences.

In the early stages, 5G is expected to deliver enhanced mobile broadband with higher data speeds (up to twenty times faster than 4G) as well as better coverage for use cases such as Fixed Wireless Access. Over time, SA 5G is expected to enable new use cases such as autonomous cars, remote control of critical infrastructure/machinery, smart-grid control, industrial automation, robotics, drone control, and remote telehealth services which will be empowered by an ultra-reliable, low latency network (up to ten times that of 4G).

While CPSs are adopting 5G in some countries and preparing for the adoption of 5G technologies in other countries, they continue to operate their 4G, 3G and 2G networks and search for superior solutions that will enable them full end-to-end network visibility. Our solution offering is built on years of industry experience, is 5G ready and supportsupports the CSPs entire network offerings. Our solution is built to ensure that both CPSs who are deploying 5G virtualized networks and CSPs who are evaluating or migrating their 4G, 3G and 2G networks to fully virtualized cloud-native networks, will benefit from our cutting-edge network intelligence solution that covers their entire network visibility and service assurance needs.

With the new 5G network being fully virtualized and cloud-native, network functions will run as stateless, container-based, virtual network functions. Being fully virtualized will make CSPs more agile and faster to innovate and deliver new services. Containerization means that individual services will be updated with minimal impact on other services. This fully virtualized cloud-native design will enable CSPs to reduce costs, accelerate the introduction of new services, and deliver faster iterations to their network and services. As a result of this fully virtualized cloud-native infrastructure, CSPs are redesigning their network and core network architectures, using web-based standards to create a dynamic, open, scalable, and modular platform to deliver their 5G services while utilizing cutting edge cloud-native network intelligence technology to cover their 4G, 3G and 2G legacy networks.

The ability to assure the diverse 5G service types on a cloud-native, fully virtualized containerized platform is fundamental to the success of CSPs. 5G introduces many new interfaces, protocols, and technologies into the cloud core. As result, a dynamic, cloud-native service assurance such as ours is supporting automated, closed-loop service optimization that enables CSPs to meet service level assurance across multiple service types as well as deliver end-to-end services that meet a unified network policy.

Our Strategy

Our objective is to be the worldwide market leader for 5G network intelligenceautomated assurance solutions while maintaining our leadership by providing end-to-end network visibility. We believe our leadership and innovation around cloud-native fully virtualized network intelligence5G assurance solutions is one of our core competencies and will be advantageous to us as these types of solutions are expected to play a key role in the deployment of 5G networks. We plan to increase our sales by leveraging our unparalleled experienced gained from implementing some of largest, most advanced virtualized network deployments to date, where we are providing complete end-to-end network visibility from the RAN to the network core.core in multiple deployment models including public cloud.

We offer our solutions and expertise to existing tier 1 and innovative CSPs worldwide, which are evaluating or migratingbuilding their 4G, 3G and 2G networks to fully virtualized cloud-native5G networks. We plan to maintain our technical advantage over competitors by further investing in enhancing the analytics and automation capabilities (including advanced AI\ML capabilities) of our cloud-native fully virtualized solutions to meet the evolving needs of 5G networks.

Key elements of our strategy include:

Products and Solutions

RADCOM’s 5G solution includesThe RADCOM Portfolio is comprised of RADCOM ACE – our portfolio of Automated assurance solutions, and RADCOM NWDAF – Network Visibility working together to provide an end-to-end view of the network. Data Analytics Function for closed loop automation.

RADCOM ACE

RADCOM ACE

Our automated assurance portfolio of solutions helps CSPs monitor data in real-time and proactively resolve customer experience issues before they impact your business for 5G and 4G. RADCOM ACE our 5G network intelligence solution, is an automated, containerized 5G assurance platform for end-to-end network visibility, built based on our cloud-native expertise and designed to allow CSPs to manage their networks in a more dynamic and agile way, which can run on private and public clouds such as AWS, RCP and Azure. RADCOM ACE is built to ensure that 5G services continuously run at optimal quality, while at the same time improving the operators’ operational efficiency through automation and rapidly enhancing time to market for new services and innovations. RADCOM ACE is the culmination of our significant product investment over the last few years and reinforced by customer feedback to enable a new way of monitoring 5G services that ensures a high-quality customer experience as operators transition to 5G.

RADCOM ACE embeds RADCOM Service Assuranceincludes automated assurance, advanced network insights, automated insights via AI/ML, and RADCOM Insights as detailed below.cloud-native network visibility.

RADCOM Service Assurance

RADCOM Service Assurance is a full assurance solution that smartly and passively collects and analyzes multiple data types (network packets, events, PM/FM counters, and more) across various domains (fixed and mobile) and generations of technologies (5G, 4G, 3G) from access to the core to provide real-time subscriber analytics. RADCOM Service Assurance is a cloud-native, 5G-ready, fully containerized service assurance solution that runs on private and public cloud (such as AWS, RCP and Azure), which allows CSPs to gain end-to-end network visibility and customer experience insights across all networks. RADCOM Service Assurance delivers a real-time, high performance, and automated solution that is critical in providing operators customer insights in today’s top-tier, high-capacity networks.

Our patented technology enables RADCOM Service Assurance to efficiently collect data from multiple sources (network events, event detail records and packets) and smartly correlates them into RADCOM Network Insights, driven by AI. This is the key to 5G monitoring.  RADCOM’s solution is designed to provide network intelligence from the RAN to the core. Built using a dynamic, modular, and stream-based microservices architecture, RADCOM Service Assurance can process large volumes of streaming data at lightning speed with very low latency.

RADCOM Service Assurance offers the service provider full end-to-end visibility of the network across technologies. RADCOM Service Assurance monitors multiple types of services such as voice, video and data, employing numerous tools and network performance and measurement methodologies to continuously analyze service performance and provide customer experience quality metrics. RADCOM Service Assurance offers users a full array of analysis and troubleshooting tools, delivering a comprehensive, integrated network service view that facilitates performance monitoring, fault detection and network and service troubleshooting from tapping point to network insights. RADCOM Service Assurance displays performance and quality measurements from both the signaling and the user planes, based on a broad range of passive software-based probes, which are installed on standard, non-proprietary third-party hardware that function together with RADCOM Service Assurance to deliver essential functionality. 

RADCOM Service Assurance consists of a powerful and user-friendly central management module and a broad range of passive software-based probes used to gather transmission quality data from various types of networks and services, including 5G, VoIP, UMTS, LTE, IMS data and others.

RADCOM Service Assurance provides an advanced set of service assurance monitoring applications: network troubleshooting, network quality monitoring, service quality monitoring, customer quality of service monitoring, and customer service level agreements monitoring.

RADCOM Service Assurance is designed to enable CSPs to succeed in their efforts to address significant technology challenges, including:

CSPs use RADCOM Service Assurance for a wide array of use cases, such as:

Customer and Service Assurance

Roaming and Interconnect Analysis

RADCOM Service Assurance is used by CSPs to monitor their roaming and interconnect traffic. By identifying problematic links, CSPs avoid revenue loss, detect problems with specific roaming partners, and manage interconnection KPIs.

Fixed-Wireless Access

Using RADCOM ACE for Fixed Wireless Access monitoring enables CSPs the transition to customer-focused network operations, focus on committed SLAs vs. mobility and plan the full lifecycle of the subscriber while monitoring devices at home, applications used, usage patterns, and bottleneck.  

RADCOM Network Insights

As part of RADCOM ACE, RADCOM Network Insights takes the data which has been collected and analyzed by RADCOM Service Assurance and applies cutting edge AI and ML techniques to provide automated anomaly detection and root cause analysis to rapidly resolve customer-impacting issues proactively. RADCOM Network Insights covers a wide range of use cases that provide the operator with an end-to-end understanding of the service quality and customer experience. Also, RADCOM Network Insights offers next-generation tools for network optimization and root-cause analysis, such as call tracing and in-depth packet analysis.

RADCOM Network Insights provides CSPs with real-time actionable business and marketing insights, which are customer centric while still maximizing revenue streams across the organization. These rich, actionable network insights, allows operators to fully visualize their networks and improve the service and customer experience, provide customer impact analysis, and proactively handle issues to fully understand the customer experience and offer an improved Quality of Experience, or QoE, and a reduced customer churn, which is of particular importance in transitioning to cloud-native, software-based, virtualized network environments and 5G networks.

 RADCOM’s Network Insights solution takes a proactive approach to handling network issues. By using both internal probe-based data and certain external data feeds, RADCOM has the network intelligence to know which data to extract in order to provide the actionable insights required. Key network monitoring metrics can be fed into RADCOM’s key quality indicators and converted to Quality of Service. Combined with customer resource management feeds and legacy third-party probe data, the solution enables operators to assess the QoE for the subscriber and make proactive decisions.

RADCOM Network Insights’ sophisticated tools are delivered via a powerful data virtualization suite. This enables the CSP to pinpoint necessary data for actionable insights which are required to improve the CSP’s customers QoE and therefore to improve the CSP’s capital efficiency.efficiency, providing automated, AI/ML-based analytics that can be integrated with RADCOM ACE or form the foundation for zero-touch automation with RADCOM NWDAF. The solution works across multiple domains (mobile and fixed) and generations of technologies (5G, 4G, 3G). The use cases provided are automated anomaly detection for hundreds of time-based data series like KPI and key quality indicators, or KQIs, root cause analysis, and predictive analytics. Once our AI/ML capabilities are deployed on the network, they learn baseline behavior and automatically create thresholds without operators needing to configure them.

RADCOM Network VisibilityVIA

RADCOM Network VisibilityVIA provides complete visibility into the CSP’s network with network tapping, advanced filtering, and packet brokers that can be delivered togetherdeployed stand-alone or with RADCOM ACE or asACE. It solves the critical challenges telecom operators face today when trying to gain visibility into the new container-based network functions in 5G. The solution offers host-based and pod-based tapping and filtering, thus enabling to mirror traffic to our system in a standalone solution forcontainerized-based network. This was a challenge at this type of architecture and we believe that we have an integrated cloud-native solution.

RADCOM Network Visibility virtualizes the traditional networkinnovative approach to solve it. In addition, our advanced packet broker. Utilizing its advanced smart load balancing capabilities, RADCOM Network Visibility cost effectively provides operators with end-to-end network visibility for cloud-native, software-based, virtualized network environments and 5G networks. Working in unison with RADCOM Service Assurance, RADCOM Network Visibility is fully automated under the under European Telecommunications Standards Institute compliant virtualized network environments orchestration for onboarding and configuration and provides operators with on-demand capabilities, auto-scaling, and auto-healing as well as seamless upgrades.

RADCOM Network Visibility offers operators an integrated cloud-native visibility solution that ensuresbrokers enable intelligent traffic distribution, filtering, and load balancing across multiple clouds and full end-to-end visibility across virtual networks, and provides advanced packet broker capabilities, like packet de-duplication, secure socket layer decryption and packet slicing. As a cloud-native solution, RADCOM Network Visibility has no dedicated hardware limitations and can be dynamically deployed and scaled efficiently with a cloud-native distributed approach to high scale packet brokering.domains.

RADCOM Network VisibilityVIA enables CSPs to virtually, intelligently and efficiently:

 
RADCOM NWDAF

The RADCOM Network Visibility playsNWDAF is a critical rolenetwork function in managing networkthe 5G core which intends to collect data, analyze it in multiple use-cases and cause changes in the core to improve the overall performance and aggregating live data fromquality of experience. The solution is fully integrated with the Network Repository Function enabling communications with other network performing session-aware load balancingfunctions in the core with analytics provided through APIs. The solution offers automated, AI/ML-based analytics as a 3GPP standards-based NWDAF function enabling closed-loop, zero-touch network operations and filtering before carefully optimizing the traffic flow to virtual probes. Under a unified management solution, RADCOM Network Visibility is deployed and configured with a simple drop and drag graphic user interface that provides operators with direct interfaces to a suite of troubleshooting tools and with a single point of access to multiple resources. This approach can deliver significant cost savings as operators can analyze traffic before it reaches the service assurance tools. Furthermore, with powerful filtering capabilities, this solution’s visibility layer can identify and manage specific data, thus significantly saving on the use of network resources by filtering the amount of data delivered to RADCOM Service Assurance. an improved customer experience.

Sales and Marketing Organization

We mainly sell directly to customers throughout the world through our executives and sales representatives in North America, Europe, Latin America, Asia Pacific and Israel, which are supported by local representatives and subcontractors in the local markets. During 2021,2022, these direct sales were made mainly in North America, South America and Asia. In North America, we operate mainly through RADCOM US, which sells our solutions to end-users directly and provides support to customers in the North American market.  Our solutions are sold to end-users in North America either by RADCOM US, RADCOM Canada or by us. In Brazil, we operate through RADCOM Brazil, which primarily sells our solutions to end-users in the Brazilian market directly. In India, we operate through RADCOM India, which primarily provides customer support and development services worldwide.  Elsewhere, our solutions are primarily sold through our sales representatives in Europe, Latin America, the Commonwealth of Independent States, Asia Pacific and Israel, and supported by local representatives and subcontractors in the local market.

In territories in which we do not have direct presence, we expanded our outreach by entering into agreements with local distributors and value-added resellers. In 2021,2022, we signed agreements with new distributors to penetrate new geographical markets and engage with new customers, and to better serve our target markets. We continue to search for more of these channels to expand our outreach further. In certain territories, our distributors and resellers serve as part of our sales, marketing and support teams as our local representatives, helping to sell, deploy and service our solutions, offer technical support in the end-user’s native language, and attend to customer needs during local business hours.

Geographic Markets:

The table below indicates the approximate breakdown of our revenue by territory, based on the location of the end-customer:

Competition

The market for our solutions is competitive, and we expect that competition will continue in the future, both with respect to solutions that we are currently offering and solutions that we are developing. Our principal competitors include NetScout System Inc., Infovista S.A. (acquired Empirix Inc.), Elisa Oyj (acquired Polystar), Anritsu Corporation, Viavi Solutions Inc. and EXFO Inc. In addition to these competitors, we expect competition from established and emerging communications, network management and test equipment companies, as well as traditional players in the network intelligence space such as Huawei, Ericsson and Nokia. Many of our competitors have substantially greater resources than we have, including financial, technological, engineering, manufacturing, marketing and distribution capabilities, and some of them may enjoy greater market recognition than we do. Furthermore, the transition to cloud-virtualized network solutions could possibly open the market to new competitors or bring in competitors from adjacent markets, including network core providers. For more information, see “Item 3.D—Risk Factors— Risks Related to Our Business and Our Industry.”

We believe that we are differentiated from our competitors due to:

Our solutions are deployed with leading and innovative CSPs such as AT&T, Dish and Rakuten. We believe that we are positioned to be one of the most advanced leaders in cloud-native 5G network intelligence solutions for CSPs deploying 5G networks on private and public cloud (such as RCP, AWS and Azure). In addition, we believe that our solutions are also the most advanced for CSPs that are evaluating or migrating their 4G, 3G and 2G networks to fully virtualized cloud-native networks (such as RCP, AWS and Azure).

Customer Service and Support

We believe that providing a high level of customer service and support to end-users is essential to our success, and it is our goal to establish RADCOM as an industry leader in customer satisfaction. Investments that we are making to achieve this goal include:

Seasonality of Our Business

Orders of our products are affected by numerous reasons, including general market and economic conditions, the impact of inflation and rise of interest rates, overall industry consolidation, the pace of adoption of new technologies the effects of the COVID-19 pandemic and CSPs budgets and multi-year roadmap. Although this results in fluctuations in our revenues from quarter to quarter, such fluctuations are not subject to any clear seasonality or consistent seasonal patterns.

Headquarters and Development Facilities

Our corporate office and main development facilities areis located in Tel Aviv, Israel. and consistconsists primarily of our corporate units such as legal, finance, human resources and operation as well as software development, testing, quality control and installation units.operation.

Research and Development

The industry in which we compete is subject to rapid technological developments, evolving industry standards, changes in customer requirements, and new product introductions and enhancements. As a result, our success depends in part upon our ability to continue to enhance our existing solutions and to develop and introduce new solutions that improve performance and reduce total costs on a cost-effective and timely basis.

During 2021 and 2020,the last several years, we invested significant amounts in research and development in order to create and maintain our technological leadership and to meet the current and future needs of the world’s most advanced CSPs. We believe that the widescale rollout of 5G will bring with it a larger wave of network virtualizationcloud native deployments by CSPs. Through our research and development efforts, we believe that we are well positioned to offer state of the art technologies and capabilities to CSPs. Accordingly, we increased our investments in the development of enhanced automation containerized deployment capabilities as well as in advanced ML based techniques to better identify network anomalies and analyze the increased network traffic that is expected following the roll-out of 5G networks. In addition to that, we are constantly focusing on automation as a key goal to reduce costs and optimize the operations of CSPs.

In parallel, we continued to enhance and develop both our cloud native virtualized network and 5G solutions to offer greater value and benefit to our current and potential customers.

We expect to continue this significant investment in 20222023, as we develop new features and new solution offerings to meet the requirements of transition to 5G networks.networks, as well as establishing a modular approach for the enabling of targeted packages for the service assurance market. This modular approach will enable us to offer not just the full solution, but also specific modules for smaller deployment of CSPs.

Israel Innovation Authority

We have received royalty-bearing grants from the IIA for certain research and development activities pursuant to an incentive program, in an aggregate amount of $48.4 million, calculated from our inception through December 31, 2021,2022, which are subject to provisions of the R&D Law and the regulations promulgated thereunder.

In addition, we have filed numerous applications, and in the future may continue to file additional applications, for grants from the IIA pursuant to the R&D Law. Grants received under such programs are repaid through mandatory royalty payments based on revenues generated from products developed pursuant to such programs or deriving therefrom. The receipt of such grants is contingent upon our ability to comply with certain applicable requirements and conditions specified in the R&D Law and under the applicable program. As of December 31, 2021,2022, royalties at a rate of 3% are due on revenues from sales of products and related services that incorporate know-how developed, in whole or in part, within the framework of projects funded by the IIA.

In 2022, and in previous years, we participated in a Magnet consortium program sponsored by IIA. Under the terms of this program, we cooperate with additional companies, universities and research institutes in Israel, organized in a consortium for the development of new technologies. The rules of the consortium include several references to the distribution of knowledge between the consortium members, and require us to provide the other members in the consortium with a non-sub-licensable license to use the “new information” developed by such member, without consideration. These programs do not require payments of royalties to the IIA, but all other restrictions under the R&D Law, such as local manufacturing obligations and know-how transfer limitations, as further detailed in this annual report on Form 20-F, are applicable to the know how developed by us with the funding received in such programs.

Below is a description of our obligations in connection with the grants received from the IIA under the R&D Law:

Local Manufacturing Obligations

The terms of the grants under the R&D Law require that we manufacture the products developed with these grants in Israel (but do not restrict the sale of products that incorporate the know-how). Under the regulations promulgated under the R&D Law, the products may be manufactured outside Israel by us or by another entity only if prior approval is received from the IIA (such approval is not required for the transfer of up to 10% of the manufacturing capacity in the aggregate, in which case a notice must be provided to the IIA and not objected to by the IIA within 30 days of such notice).

Know-How and Know-How Transfer Limitation

Change In Control

The R&D Law generally imposes reporting requirements with respect to certain changes in the ownership of a grant recipient. The R&D Law requires the grant recipient and its controlling shareholders or the foreign interested party of such grant recipient to notify the IIA of any change in control of the recipient or a change in the holdings of the means of control of the grant recipient that results in a non-Israeli citizen or non-Israeli resident or corporation incorporated in Israel becoming an interested party directly in the grant recipient, and requires the new interested party to undertake to the IIA to comply with the R&D Law. In addition, the IIA may require additional information or representations in respect of such events. For R&D Law purposes, “control” is defined as the ability to direct the activities of a corporation except the ability that stems from serving as an officer or director of the company. A person is presumed to have control if such person holds 50% or more of the means of control of a company. “Means of control” generally refers to voting rights in a company’s shareholders meeting or the right to appoint directors or the chief executive officer. An “interested party” of a company includes a holder of 5% or more of its outstanding share capital or voting rights, its chief executive officer and directors, someone who has the right to appoint its chief executive officer or at least one director, and a company with respect to which any of the foregoing interested parties owns 25% or more of the outstanding share capital or voting rights or has the right to appoint 25% or more of the directors. Accordingly, any non-Israeli who acquires 5% or more of our ordinary shares will be required to notify the IIA that it has become an interested party and to sign an undertaking to comply with the R&D Law.

Amendment No. 7 to the R&D Law became effective on January 1, 2016 and established the formation of the IIA in place of the Office of the Chief Scientist. Accordingly, pursuant to Amendment No. 7, it is expected that the IIA may establish new guidelines and/or amend the existing guidelines regarding the R&D Law and/or regulations thereunder. Consequently, Amendment No. 7 creates uncertainty with respect to the terms of our existing and/or future IIA programs and incentives as we do not know what guidelines will be adopted by the IIA or will be amended by it.

Since we commenced operations, we have received royalty-bearing grants from the IIA. As of December 31, 2021,2022, our total contingent liability to the IIA in respect of grants received including accumulated interest and net of accumulated royalties paid was approximately $53.3$54.2 million.

In May 2010, we received a notice from the IIA regarding alleged miscalculations in the amount of royalties paid by us to the IIA for the years 1992 through 2009. See “Item 3.D. —Risk Factors—Risks related to our Business and Our Industry”.

Proprietary Rights

To protect our rights to our intellectual property, we rely upon a combination of trademarks, contractual rights, trade secret law, copyrights, non-disclosure agreements and technical measures to establish and protect our proprietary rights in our solutions and technologies. We own registered trademarks for the name RADCOM and for the name Omni-Q^®. We currently have oneseven registered patentpatents and fiveseveral pending patent applications in the United States.  In addition, we usually enter into non-disclosure and confidentiality agreements with our employees, distributors, sales representatives and with suppliers and sub-contractors who have access to sensitive information.

Employees

Our total headcount as of December 31, 2021,2022, was 278284 including employees and contractors. See “Item 6.D—Directors, Senior Management and Employees—Employees.”

We consider our relations with our employees to be good and we have never experienced a strike or work stoppage. Except for employees located in Brazil, none of our employees are represented by labor unions.

Although we are not a party to a collective bargaining agreement in Israel, we are subject to certain provisions of collective bargaining agreements among the General Federation of Labor in Israel, or the Histadrut, and the Coordinating Bureau of Economic Organizations (including the Industrialists’ Association), or the CBEO, that are applicable to our Israeli employees by virtue of expansion orders of the MOE, including transportation allowance, annual recreation allowance, the lengths of the workday and workweek and mandatory general insurance pension. In addition, we may be subject to the provisions of the extension order applicable to the Metal, Electricity, Electronics and Software Industry. Israeli labor laws are applicable to all our employees in Israel.  These provisions and laws principally concern the length of the workday, minimum wages for workers, procedures for dismissing employees, determination of severance pay, leaves of absence (such as annual vacation or maternity leave), sick pay and other conditions of employment.

In Israel, we follow a general practice, which is the contribution of funds on behalf of most of our employees to an individual insurance policy known as “Managers Insurance” or a pension fund.  The contribution rates towards such Managers’ Insurance are above and beyond the legal requirement. This policy provides a combination of savings plan, disability insurance and severance pay benefits to the insured employee.  It provides for payments to the employee upon retirement or death and accumulates funds on account of severance pay, if any, to which the employee may be legally entitled upon termination of employment. Each participating employee contributes an amount equal to up to 7% of such employee’s base salary, and we contribute between 15.3% and 19.1% of the employee’s base salary. Pursuant to changes to Israeli law as well as collective bargaining agreements entered into by the Histadrut and the CBEO, the amounts that we are required to contribute may increase from time to time.

Our employment agreements with new employees in Israel are in accordance with Section 14 of the Israeli Severance Pay Law – 1963, or the Israeli Severance Pay Law, which provides that our contributions to severance pay fund shall cover our entire severance obligation. Upon termination, the release of the contributed amounts from the fund to the employee shall relieve us from any further severance obligation and no additional payments shall be made by us to the employee. As a result, the related obligation and amounts deposited on behalf of such obligation are not stated on the balance sheet, as we are legally released from severance obligation to employees once the amounts have been deposited, and we have no further legal ownership on the amounts deposited.

We also provide employees of RADCOM with an Education Fund, to which each participating employee contributes an amount equal to 2.5% of such employee’s base salary and we contribute an amount equal to 7.5% of the employee’s base salary (generally up to a certain ceiling provided in the Israeli Income Tax Regulations).  Israeli employees and employers also are required to pay pre-determined sums which include a contribution to national health insurance to the Israel National Insurance Institute, which provides a range of social security benefits.

In the United States, we provide benefits in the form of health, dental, vision and disability coverage and matching 401(k) plan contributions, in an average amount equal to approximately 19.1% of the employee’s base salary. 

In Brazil, we provide benefits in the form of health coverage, including health, vision and dental coverage, in an amount that varies from 3% - 13% of the employee’s base salary.

In India, we provide benefits in form of health coverage, education fund, house rent allowance and health insurance fund, in an amount equal to 28% of the employee’s salary. 

Our subsidiaries are: (1) RADCOM US, which conducts the sales, marketing, and customer support of our products mainly in North America;the United States; (2) RADCOM Investments (96) Ltd, for the purpose of making various investments, including the purchase of securities; (3) RADCOM Brazil, which conducts the sales, marketing and customer support of our products mainly in Brazil; and (4) RADCOM India, which primarily provides, customer support and development services worldwide.worldwide; and (5) RADCOM Canada, which conducts the sales and marketing of our products in Canada. The following is a list of our subsidiaries, each of which is wholly owned:

We currently lease an aggregate of approximately 22,830 square feet of office space in Tel Aviv, Israel, from affiliates of our principal shareholders. This space includes our development facilities, which consist primarily of programming, documenting, quality control, testing and bug fixing, as well as from time to time, installation of software components on third party hardware.

In 2021,2022, we paid to affiliates of our principal shareholders aggregate annual lease and maintenance payments in the sum of approximately $707,000$647,000 for our Tel Aviv offices. We may, in the future, lease additional space from affiliated parties. 

We also lease an aggregate of approximately 5,946 square feet of office space in Paramus, New Jersey, from an affiliate of our principal shareholder. In 2021,2022, our aggregate annual lease payments for such premises were approximately $123,000.$116,000.

We also lease an aggregate of approximately 48440 square feet of office space in Brazil and 5,809 square feet in India. The aggregate annual lease and maintenance payments for those premises in 20212022 were approximately $5,000$6,000 and $95,000.$91,000, 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.

ITEM 4A. UNRESOLVED STAFF COMMENTS

Not applicable.

ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

The following discussion of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and the related notes included elsewhere in this Annual Report.

Overview

We provide cloud-native, virtualized network and 5G-ready network intelligence solutions for CSPs. Our world leading, innovative solutions are well-positioned to fulfill the CSPs’ ongoing needs to monitor their networks (fixed and mobile) and assure the delivery of a quality service to their subscribers; both on cloud-native virtualized network and non-virtual networks. 

General

Our discussion and analysis of our financial condition and results of operation are based upon our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. Our operating and financial review and prospects should be read in conjunction with our financial statements, accompanying notes thereto and other financial information appearing elsewhere in this Annual Report.

We commenced operations in 1991. Since then, we have focused on developing and enhancing our products, building our worldwide direct and indirect distribution network and establishing and expanding our sales, marketing, and customer support infrastructures.

Most of our revenues are generated in U.S. dollars and the financing activities are made in U.S. dollars. Accordingly, we consider the U.S. dollar to be our functional currency and our consolidated financial statements are prepared in dollars.

As we evaluate our growth prospects and manage our operations for the future, we believe that the deployments of 5G by leading CSPs will drive our growth.

We followed the below sales strategy in 20212022 in order to expand our sales pipeline and revenues:

Revenues. In general, our revenues derive from sales of our products or solutions, fixed-price projects, and sales of services which primarily include extended warranty, support services and managed services. Revenues consist of gross sales, less discounts and refunds, when applicable.

Cost of revenues.  Cost of revenues, consisting of salaries and related expenses derive primarily from employees engaged in managed services and ongoing customer support, solution deployment and software development customization activities. Cost of revenues also consists of the use of hardware, inventory write-offs, importation taxes, shipping and handling costs, license fees for software components of third parties, hardware warranty expenses, allocation of overhead expenses, subcontractors’, royalties to the IIA and share-based compensation. As part of our plan to reduce product cost and improve flexibility, we shifted during the last few years to a model whereby we install our software-based solutions on standard, non-proprietary third-party hardware that functions together with our software to deliver the product’s essential functionality.

Our gross profit is affected by several factors, including the introduction of new products, price erosion due to increasing competition, the bargaining power of larger clients, the number of employees that we have in operations, deployment, software development customization, managed services and customer support, integration of third-party software components into our own, product mix, and exchange rate fluctuations.  

Research and Development expenses, Net. Research and development expenses, net consist primarily of salaries and related expenses, including share-based compensation, payments for subcontractors and overhead expenses. Overhead expenses consist of a variety of costs, including rent, office and associated expenses. The R&D expenses have been partially offset by royalty-bearing grants from the IIA.

Sales and Marketing expenses, Net.  Sales and marketing expenses, net consist primarily of salaries and related expenses, including share-based compensation, commissions and fees to third party representatives, advertising, trade shows, promotional expenses, domestic and international travels, web site maintenance, and overhead expenses, net of grants received from the MOE.expenses.

General and Administrative Expenses. General and administrative expenses consist primarily of salaries and related expenses including share-based compensation, professional fees (which include legal, audit and other consulting fees), bad debt expenses, other general corporate expenses and overhead expenses.

Financial Income, Net. Financial income, net, consists primarily of interest earned on bank deposits, bank charges, and gains or losses from the exchange rate differences of monetary balance sheet items denominated in non-U.S. dollar currencies.

Summary of Our Financial Performance for the Fiscal Year Ended 20212022 Compared to the Fiscal Year Ended 20202021

For the year ended December 31, 2021,2022, our revenues were approximately $40.3$46.1 million, compared to approximately $37.6$40.3 million in 2020,2021, reflecting an increase of approximately 7.2%14.4%. We were provided with approximately $2$6.0 million in cash from operating activities during 2021,2022, compared to approximately $0.05$2.0 million usedprovided in 2020.2021. Our net loss for the year ended December 31, 2021,2022, was approximately $5.3$2.3 million, compared to a net loss of approximately $4$5.3 million in 2020.2021.

As of December 31, 2021,2022, our cash and cash equivalents and short-term bank deposits totaled approximately $70.6$77.7 million, compared with cash and cash equivalents of approximately $69$70.6 million as of December 31, 2020.2021.

Our 2021 net losses include2022 loss includes non-cash expenses due to share-based compensation of approximately $3.4$5.2 million, compared to $2.2$3.4 million in 2020.2021.

Reportable Segments

Management receives sales information by customers and by geographical regions. Research and development, sales and marketing, and general and administrative expenses are reported on a combined basis only (i.e., they are not allocated to product groups or geographical regions). Because a measure of operating profit or loss by product groups or geographical regions is not presented to management due to shared resources, we have concluded that we operate in one reportable segment.  

Results for the Year Ended December 31, 2021,2022, compared to Year Ended December 31, 20202021

The following table sets forth, for the periods indicated, certain financial data expressed as a percentage of revenues:

Revenues

Revenues. In 2021,2022, our revenues increased by approximately $2.7$5.8 million, or approximately 7.2%14.4%, compared to 20202021 due to an increase of approximately $5.2$2.1 million in services revenues, offset by a decreaseand an increase of approximately $2.5$3.7 million in product revenues. The increase in services revenues relates mainly to an increase in revenues in North America and Asia. The decreaseincrease in product revenues relates to Asia.North America and EMEA.

Revenues per geographic region, based on the location of the end-customer

In 2022, our two largest customers amounted to approximately 77% of our total consolidated revenues. In 2021 our three largest customers amounted to approximately 88% of our total consolidated revenues. In 2020 our three largest customers amounted to approximately 93% our total consolidated revenues.

Cost of Revenues and Gross Profit

Cost of Revenues.  During 2021,2022, our gross profit as a percentage of revenues, calculated to include variable costs such as salaries and related expenses was approximately 71.6%72.4% compared to approximately 71.4%71.6% in 2020.2021.

Our cost of revenues for 20212022 includes an expense of approximately $0.2$0.4 million for share-based compensation, as compared to approximately $106,000$0.2 million for share-based compensation in 2020.2021.

The following table provides the operating costs and expenses of the Company in 20212022 and 20202021 as well as the percentage change of such expenses in 20212022 as compared to 2020.2021.

Research and Development Expenses. Research and development expenses, gross, increased from approximately $19.2 million in 2020 to approximately $20.3 million in 2021.2021 to approximately $21.5 million in 2022. As a percentage of total revenues, research and development expenses, gross, decreased from approximately 51.1%50.5% in 20202021 to approximately 50.5%46.7% in 2021.2022. The increase in our gross research and development expenses is attributable mostly to the strengthening of the New Israeli Shekel during 2021an increase in salaries and benefit expenses and to an increase in share-based compensation expenses in 20212022 compared to 2020.2021. As of December 31, 2021,2022, our total research and development headcount, including contractors, was 142,137, compared to 144142 employees and contractors as of December 31, 2020.2021. Our research and development costs included an expense of approximately $1,368,000$2.5 million for share-based compensation in 2021,2022, as compared to approximately $879,000$1.4 million for share-based compensation in 2020.2021.

We believe that our research and development efforts are a key element of our strategy and are essential to our success. An increase or a decrease in our total revenues would not necessarily result in a proportional increase or decrease in the levels of our research and development expenditures, which could affect our operating margin.

Sales and Marketing Expenses.  Sales and marketing expenses increased from approximately $9.7 million in 2020 to approximately $10.4 million in 2021.2021 to approximately $12.3 million in 2022. The increase in our sales and marketing expenses is mainly related to an increase in the global sales headcount.third party commissions and to an increase in share-based compensation expenses in 2022 compared to 2021. As a percentage of total revenues, sales and marketing expenses were 25.7%26.6% in 2021,2022, with no significant change from 25.8%25.7% in 2020.2021. Our sales and marketing expenses included an expense of approximately $865,000$1.4 million for share based compensation in 2022, as compared to approximately $0.9 million for share-based compensation in 2021, as compared to approximately $536,000 for share-based compensation in 2020.2021.

General and Administrative Expenses.  General and administrative expenses increased from approximately $3.8 million in 2020 to approximately $4.2 million in 2021.2021 to approximately $4.5 million in 2022. The increase in our general and administrative expenses is mainly attributed to an increase in share-based compensationsalaries and benefits and to an increase in professional services expenses in 20212022 compared to 2020.2021. As a percentage of total revenues, general and administrative expenses were 10.4%9.7% in 2021,2022, with no significant change from 10.2%10.4% in 2020.2021. Our general and administrative expenses included approximately $916,000$0.9 million for share-based compensation in 2021,2022, as compared to approximately $648,000$0.9 million for share-based compensation in 2020.2021. 

Financial Income, Net. In 2021,2022, the financial income, net, was approximately $0.4$2.0 million, as compared to financial income, net, of approximately $0.8$0.4 million in 2020.2021. The decreaseincrease in our financial income, net is related to a negativepositive impact of currency exchange rates and a decreasean increase in interest income from short-term bank deposits. 

Taxes on Income. In 2021,2022, we recorded tax expenses of approximately $124,000$159,000 as compared to tax expenses of approximately $220,000$124,000 in 2020.2021. Tax expenses are comprised from tax expenses of RADCOM India and RADCOM US, as well as withholding taxes that were deducted by our customers.

Comparison of Financial Data for Year Ended December 31, 2020,2021, compared with Year Ended December 31, 20192020

For a discussion of the financial data for the year ended December 31, 2020,2021, compared with the year ended December 31, 2019,2020, see “Item 5.A. —Operating and Financial Review and Prospects—Operating Results—Summary of Our Financial Performance for the Fiscal Year Ended 20202021 Compared to the Fiscal Year Ended 2019”2020” included in our Annual Report on Form 20-F for the fiscal year ended December 31, 2020,2021, filed with the SEC on March 25, 2021.29, 2022.

Impact of Inflation and Foreign Currency Fluctuations

Most of our revenues are generated in U.S. dollars and the financing activities are made in U.S. dollars. We also generate revenues in BRLs, euros and other currencies; however, we consider the U.S. dollar to be our functional currency. In the future additional revenues may be denominated in currencies other than U.S. dollars.

Since a significant portion of our expenses is in NIS, as we pay our Israeli employees’ salaries in NIS, the dollar cost of our operations is influenced by the exchange rates between the NIS and the U.S. dollar. Fluctuations in exchange rates between the U.S. dollar, the BRL, euro, and other currencies in which we generate revenue, and the U.S. dollar, may also have an effect on our results of operations. With respect to our Brazilian subsidiary, the functional currency has been determined to be their local currency. Assets and liabilities are translated at year-end exchange rates and statements of income items are translated at average exchange rates prevailing during the year. Such translation adjustments are recorded as a separate component of accumulated other comprehensive loss in shareholders’ equity.

Because exchange rates between the NIS and the U.S. dollar fluctuate continuously, exchange rate fluctuations will have an impact on our profitability and period-to-period comparisons of our results.  The effects of foreign currency re-measurements of financial assets and liabilities are reported in our financial statements as financial income or expense. Based on our budget for 2022,2023, we expect that an increase of NIS 0.10 to the exchange rate of the NIS to U.S. dollar will decrease our expenses expressed in dollar terms by approximately $650,000$610,000 per fiscal year and vice versa.

Effective Corporate Tax Rate

As of January 1, 2018, Israeli resident companies were generally subject to corporate tax at the rate of 23%. Israeli resident companies are generally subject to capital gains tax at the corporate tax rate. We do not generate taxable income in Israel, as we have historically incurred operating losses resulting in carry forward losses for tax purposes totaling approximately $38.4 million and an additional $1.3$1.5 million of capital loss as of December 31, 2021.2022. We believe that we will be able to carry forward these tax losses to future tax years. We do not expect to pay taxes in Israel, on our incomes from operations, until we utilize our carry forward tax losses. We may be required to pay taxes on our passive income, if any. For more information on taxation, see “Item 10.E — Taxation.”

Our effective corporate tax rate may exceed the Israeli tax rate. Our U.S. and Brazilian subsidiaries will generally be subject to applicable federal, state, local and foreign taxation, and we may also be subject to taxation in the other foreign jurisdictions in which we own assets, have employees or conduct business activities.

We recorded a valuation allowance of approximately $14.3$14.9 million on December 31, 2021,2022, 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. 

We have financed our operations through cash generated from operations, the proceeds from our private and public offerings, proceeds from the exercise of options and warrants and royalty-bearing participation from the IIA and others. Cash and cash equivalents, and short-term bank deposits on December 31, 2021,2022, and 2020,2021, were approximately $70.6$77.7 and $69$70.6 million, respectively.

We believe that our existing capital resources and cash flows from operations will be adequate to satisfy our expected liquidity requirements through the next twelve months. Without derogating from the foregoing estimate regarding our existing capital resources and cash flows from operations, we may decide to raise additional funds in 2022.the future. We believe that, if required, we will be able to raise additional capital or reduce discretionary spending to provide the required liquidity beyond the next twelve months.

Net Cash Provided by (Used in) Operating Activities. Net cash provided by operating activities was approximately $2$6.0 million in 20212022 compared to net cash used inprovided by operating activities of approximately $0.05$2.0 million in 2020.2021. 

The positive net cash flow in 2022 was primarily due to share-based and restricted share compensation expenses of approximately $5.2 million, an increase in deferred revenue and advances from customers of approximately $4.3 million, an increase in other liabilities and accrued expenses of approximately $0.9 million, an increase of approximately $0.8 million in employees and payroll accruals and depreciation of $0.5 million. This was partially offset by net loss of approximately $2.3 million, an increase in accrued interest on short-term bank deposits and long-term bank deposits of approximately $1.2 million, an increase of approximately $1.1 million in other account receivables and prepaid expenses and an increase of approximately $1.0 million in trade receivables, net.

The positive net cash flow in 2021 was primarily due to share-based and restricted share compensation expenses of approximately $3.4 million, a decrease in trade receivables of approximately $2.4 million, an increase in trade payable of approximately $1.0 million, an increase in other liabilities and accrued expenses of approximately $0.7 million, and depreciation of $0.5 million. This was partially offset by net loss of approximately $5.3 million, an increase in inventories of approximately $0.4 million and an increase in deferred revenue and advances from customers of approximately $0.4 million.

The negative net cash flow in 2020 was primarily due to net loss of approximately $4 million, an increase in trade receivables of approximately $1.7 million, a decrease in trade payables of approximately $0.8 million, a decrease in accrued interest on short-term bank deposits of approximately $0.4 million and a decrease in operating lease right-of-use assets and liabilities, net and effect of exchange rate differences of approximately $0.3 million. This was partially offset by an increase in deferred revenue and advances from customers of approximately $2.3 million, share-based and restricted share compensation expenses of approximately $2.2 million, a decrease in inventories of approximately $0.8 million, depreciation of approximately $0.7 million, an increase in other liabilities and accrued expenses of approximately $0.5 million and an increase in employees and payroll accruals of approximately $0.3 million.

The trade receivables and days of sales outstanding are primarily impacted by payment terms, variations in the levels of shipment in the quarter, and collections performance.  Trade receivables for 2021 decreased2022 increased to approximately $11 million from approximately $10 million from approximately $12.4 million in 2020.2021.

The increasedecrease in inventories in 20212022 was mainly due to an increasea decrease in inventory delivered to customers for which revenue criteria have not been met and recognized.

Net Cash Provided by (Used in) Investing Activities.  Our investing activities generally consist of the purchase of equipment and investment in short-term bank deposits. Net cash used in investing activities in 20212022 was approximately $3.5$8.4 million, compared to net cash provided byused in investing activities in 20202021 of $7.6$3.5 million. In 2021,2022, we invested approximately $66.9 million in bank deposits, received approximately $58.6 million infrom the maturity of a short-term bank deposit and invested approximately $0.2 million for the purchase of equipment. In 2021, we received approximately $55.5 million from the maturity of a short-term bank deposit, and invested approximately $0.4 million for the purchase of equipment. In 2020, we received approximately $63.1 million from the maturity of a short-term bank deposit, invested approximately $55.1$58.6 million in a short-term bank deposits and invested approximately $0.4 million for the purchase of equipment.

Net Cash provided by (Used in) Financing Activities. In 20212022 and in 2020,2021, there was no net cash provided by or used in financing activities.

On February 19, 2023, we entered into definitive agreements to acquire the technology, intellectual property, and customer agreements of Continual Ltd for an amount of up to $2.5 million in cash. The closing of the acquisition is expected to occur within three months after the signing of the definitive agreements, pending the satisfaction of customary and transaction specific closing conditions and regulatory approvals. While we expect to continue to grow organically, we expect to continue to evaluate additional potential transactions to purchase other companies or technologies in the field in which we operate.

Investments

We may in the future undertake hedging or other similar transactions or invest in market risk-sensitive instruments, if our management determines that it is necessary to offset risks such as foreign currency and interest rate fluctuations.

Impact of Related Party Transactions

We have entered into a number of lease agreements with the RAD-BYNET Group (as described under “Item 7.B-Major Shareholders and Related Party Transactions-Related Party Transactions”).  The pricing of the transactions with respect to such leases was determined based on negotiations between the parties. Members of our audit committee of the Board of Directors, or the Audit Committee, Board of Directors and management reviewed the pricing of the leases and confirmed that these leases were not different from terms that could have been obtained from unaffiliated third parties. We believe, however, that due to the affiliation between us and the RAD-BYNET Group, we have greater flexibility on certain issues than what may be available from unaffiliated third parties.

We have also entered into a number of limited term engagements with Matrix IT Ltd. or its affiliated companies (as described under “Item 7.B-Major Shareholders and Related Party Transactions-Related Party Transactions”), or Matrix, for certain software and/or services used in connection with the development of our solutions. Members of our Board of Directors and management reviewed the pricing of such agreements and confirmed that these agreements were not different from terms that could have been obtained from unaffiliated third parties. As of January 1, 2022, Matrix is no longer considered as a related party.

For more information, see “Item 7.B—Major Shareholders and Related Party Transactions—Related Party Transactions” below.

Government Grants and Related Royalties

The Government of Israel, through the IIA, encourages research and development projects pursuant to the R&D Law and the regulations promulgated thereunder. We may receive grants from the IIA at the rates that range from 20% to 50%60% of the research and development expenses, as prescribed by the research committee of the IIA in accordance with the R&D Law. We recorded such grants from the IIA in the total amount of approximately $0.8 million in 2022 and $0.5 million in 2021 and $1.3 million in 2020.2021. Pursuant to the specific terms of these grants, we are obligated to pay royalties of 3% of the revenues generated by sales of products (and certain related services) funded with these grants. In the event that a project funded by the IIA does not result in the development of a product which generates revenues, we would not be obligated to repay the grants we received for the product’s development.  Royalty expenses relating to the IIA grants included in the cost of revenues for years ended December 31, 20212022 and 20202021 were approximately $1.2$1.4 million and $1.1$1.2 million, respectively. The total grants regarding projects that we have received from the IIA as of December 31, 20212022 were approximately $48.4 million. For projects authorized as a research and development program under the R&D Law since January 1, 1999, the repayment interest rate is LIBOR.was LIBOR, as further detailed below. As of December 31, 2021,2022, the accumulated interest was approximately $23.5$25.0 million, the accumulated royalties paid to the IIA were approximately $18.6$19.3 million and our total amount of contingent liability to the IIA in respect of grants received was, according to our records, approximately $53.3$54.2 million.  The United Kingdom’s Financial Conduct Authority, which regulates the LIBOR, announced in July 2017 that it will no longer persuade or require banks to submit rates for LIBOR after 2021. In September 2021, the Bank of Israel, which determines annual interest rates, published a directive which stated that annual interest at a variable rate linked to the LIBOR rate for loans in U.S. dollars will be replaced by the SOFR, in June 2023. As of the date of this Annual Report, the IIA has not yet published the alternative interest that will be applied on the grants that the Company received from the IIA. While the effect that the replacement of the LIBOR interest will have on the Company remains uncertain as of the date of this Annual Report, the Company assesses that such change will not have a material effect on its operations and financial condition in light of the common interests in the market. For additional information, see “Item 4.B—Information on the Company—Business Overview—Israel Innovation Authority.”

We are obligated to pay to the MOE, royalties of 3% on the increased sales in the target market, with respect to the year during which the grant was approved (2012 for India, and 2014 for China), over a period of five years but not more than the total linked amount of the grant received. During 2018, the Company paid an aggregate amount of $9,000 of royalties to the MOE. No royalties were required to be paid during 2021. For additional information, see “Item 4.B—Information on the Company—Business Overview—Israel Innovation Authority.”

We are also obligated to pay royalties to the BIRD Foundation, with respect to sales of products based on technology resulting from research and development funded by the BIRD Foundation. Royalties to the BIRD Foundation are generally payable at the rate of 5% of the sales of such products, up to 150% of the grant received, linked to the United States Consumer Price Index. As of December 31, 2021,2022, we had a contingent obligation to pay the BIRD Foundation aggregate royalties in the amount of approximately $423,000.$450,000. For additional information, see “Item 4.B—Information on the Company—Business Overview—Binational Industrial Research and Development Foundation.”