{"url_path":"/sec/rdcm/10-k/2026/item-5","section_key":"item-5","section_title":"Item 5 OPERATING AND FINANCIAL REVIEW AND PROSPECTS**","topic":"sec","document":{"doc_type":"20-F","doc_date":"2026-03-31","source_url":"https://www.sec.gov/Archives/edgar/data/1016838/0001213900-26-036862-index.html","accession_number":"0001213900-26-036862","cik":"0001016838","ticker":"RDCM","issuer_name":"RADCOM LTD","edgar_url":"https://www.sec.gov/Archives/edgar/data/1016838/0001213900-26-036862-index.html","primary_entity_key":"0001016838","primary_entity_name":"RADCOM LTD"},"word_count":5820,"has_tables":true,"body_markdown":"**ITEM\n5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS**\n\n \n\nThe\nfollowing discussion of our financial condition and results of operations should be read in conjunction with the consolidated financial\nstatements and the related notes included elsewhere in this Annual Report.\n\n \n\n**Overview**\n\n \n\nWe\nprovide cloud-native and 5G-ready network intelligence solutions for CSPs. Our world leading, innovative solutions are well-positioned\nto fulfill the CSPs’ ongoing needs to monitor their networks (fixed and mobile) and assure the delivery of a quality service to\ntheir subscribers.\n\n \n\n**General**\n\n \n\nOur\ndiscussion and analysis of our financial condition and results of operation are based upon our consolidated financial statements, which\nhave been prepared in accordance with U.S. GAAP. Our operating and financial review and prospects should be read in conjunction with\nour financial statements, accompanying notes thereto and other financial information appearing elsewhere in this Annual Report.\n\n \n\nWe\ncommenced operations in 1991. Since then, we have focused on developing and enhancing our products, building our worldwide direct and\nindirect distribution network and establishing and expanding our sales, marketing, and customer support infrastructures.\n\n \n\nMost\nof our revenues are generated in U.S. dollars and the financing activities are made in U.S. dollars. Accordingly, we consider the U.S.\ndollar to be our functional currency, and our consolidated financial statements are prepared in dollars.\n\n \n\nWe\nbelieve that continued 5G deployments by leading CSPs, as well as the expansion of our existing customer base and new customer engagements,\nare expected to support our future growth.\n\n \n\nWe\nfollowed the below sales strategy in 2025 in order to expand our sales pipeline and revenues;\n\n \n\n \n●\nWe focused on leveraging\nour implementations with AT&T, Rakuten and other customers to expand our value proposition to additional carriers;\n\n \n\n \n●\nWe expanded our business\nwith our key existing customers;\n\n \n\n \n●\nWe increased our investment\nin our sales and marketing resources and have expanded our reach through the engagement of local representatives;\n\n \n\n \n●\nWe invested in marketing\ncampaigns globally to enhance our market positioning and open new opportunities;\n\n \n\n \n●\nWe continued to invest\nin research and development to maintain our recognized technological leadership in cloud-based, 5G solutions, to meet the requirements\nof our customers, and to develop new product offerings and capabilities;\n\n \n\n \n●\nWe invested in sales and\nmarketing to create more sales engagements that can lead to additional multi-year contracts and increased market share;\n\n \n\n \n●\nWe invested in our professional\nservices team and resources to meet our customers’ deployment, customization and support requirements and to allow us to successfully\ndeliver multiple proof of concept demonstrations to potential new customers; and\n\n \n\n \n●\nWe pursued strategic partnerships.\n\n \n\n*Revenues*.\nIn general, our revenues derive from sales of our products or solutions, fixed-price projects, and sales of services which primarily\ninclude extended warranty, support services and managed services. Revenues consist of gross sales, less discounts and refunds, when applicable.\n\n \n\n33\n\n \n\n \n\n*Cost of revenues*. Cost\nof revenues, consisting of salaries and related expenses derive primarily from employees engaged in managed services and ongoing customer\nsupport, solution deployment and software development customization activities. Cost of revenues also consists of the use of hardware,\ninventory write-offs, importation taxes, shipping and handling costs, license fees for software components of third parties, hardware\nwarranty expenses, allocation of overhead expenses, subcontractors, royalties to the IIA, change in deferred inventory, amortization of\npurchased technology and share-based compensation. As part of our plan to reduce product cost and improve flexibility, we shifted during\nthe last few years to a model whereby we install our software-based solutions on standard, non-proprietary third-party hardware that functions\ntogether with our software to deliver the product’s essential functionality.\n\n \n\nOur\ngross profit is affected by several factors, including the introduction of new products, price erosion due to increasing competition,\nthe bargaining power of larger clients, the number of employees that we have in operations, deployment, software development customization,\nmanaged services and customer support, integration of third-party software components into our own, product mix, and exchange rate fluctuations.\n\n \n\n*Research\nand Development expenses, Net*. Research and development expenses, net consist primarily of salaries and related expenses, including\nshare-based compensation, payments for subcontractors and overhead expenses. Overhead expenses consist of a variety of costs, including\nrent, office and associated expenses. The R&D expenses have been partially offset by royalty-bearing grants from the IIA.\n\n \n\n*Sales and Marketing expenses*.\nSales and marketing expenses consist primarily of salaries and related expenses, including share-based compensation, commissions and fees\nto third party representatives, advertising, trade shows, promotional expenses, domestic and international travels, web site maintenance,\namortization of purchased customer relationship, and overhead expenses.\n\n \n\n*General\nand Administrative Expenses*. General and administrative expenses consist primarily of salaries and related expenses including share-based\ncompensation, professional fees (which include legal, audit and other consulting fees), bad debt expenses, other general corporate expenses\nand overhead expenses.\n\n \n\n*Financial\nIncome, Net*. Financial income, net, consists primarily of interest earned on bank deposits, bank charges, and gains or losses\nfrom the exchange rate differences of monetary balance sheet items denominated in non-U.S. dollar currencies.\n\n \n\n**Summary\nof Our Financial Performance for the Fiscal Year Ended 2025 Compared to the Fiscal Year Ended 2024**\n\n \n\nFor\nthe year ended December 31, 2025, our revenues were approximately $71.5 million, compared to approximately $61.0 million in 2024, reflecting\nan increase of approximately 17.2%. Our operating activities generated approximately $14.6 million in cash during 2025, compared to approximately\n$11.4 million generated in 2024, reflecting an increase of approximately 28.1%. Our net income for the year ended December 31, 2025,\nwas approximately $12.0 million, compared to a net income of approximately $7.0 million in 2024, reflecting an increase of approximately\n71.4%.\n\n \n\nAs\nof December 31, 2025, our cash and cash equivalents and bank deposits totaled approximately $109.9 million, compared with cash and cash\nequivalents and bank deposits of approximately $94.7 million as of December 31, 2024.\n\n \n\nOur\n2025 and 2024 income includes non-cash expenses due to share-based compensation of approximately $6.1 million in each of 2025 and 2024.\n\n  \n\n**Reportable\nSegments**\n\n* *\n\nManagement,\nincluding the Chief Operating Decision Maker (CODM), reviews financial information on a consolidated basis for purposes of evaluating\nperformance and allocating resources. While revenue information is reviewed by customer and geographical region, operating expenses and\noperating income are not allocated to product groups or geographical regions. As such, we have determined that we operate in a single\nreportable segment.\n\n \n\n34\n\n \n\n \n\n \n**A.**\n**OPERATING RESULTS**\n\n \n\n**Results\nfor the Year Ended December 31, 2025, compared to Year Ended December 31, 2024**\n\n \n\nThe\nfollowing table sets forth, for the periods indicated, certain financial data expressed as a percentage of revenues:\n\n \n\n  \nYear\nended December 31, \n\n  \n2025  \n2024 \n\nRevenues \n 100% \n 100%\n\nCost of revenues \n 24.0  \n 25.8 \n\nGross profit \n 76.0  \n 74.2 \n\nOperating expenses: \n    \n   \n\nResearch and development \n 28.3  \n 30.6 \n\nLess royalty-bearing participation \n 0.5  \n 1.1 \n\nResearch and development, net \n 27.8  \n 29.5 \n\nSales and marketing \n 27.5  \n 29.2 \n\nGeneral and administrative \n 9.0  \n 10.5 \n\nTotal operating expenses \n 64.3  \n 69.1 \n\nOperating income \n 11.7  \n 5.1 \n\nFinancial income, net \n 6.0  \n 6.7 \n\nIncome before taxes\non income \n 17.7  \n 11.8 \n\nTaxes on income \n (0.8) \n (0.4)\n\nNet Income \n 16.9  \n 11.4 \n\n \n\n*Revenues*\n\n \n\n  \nYear\nEnded December 31,\n(in millions of U.S. dollars) \n\n  \n2025  \n2024 \n\nProducts \n 36.9  \n 28.2 \n\nServices \n 34.6  \n 32.8 \n\nTotal\nRevenues \n 71.5  \n 61.0 \n\n \n\n*Revenues*. In 2025,\nour revenues increased by approximately $10.5 million, or approximately 17.2%, compared to 2024, primarily driven by an increase of approximately\n$8.7 million in product revenues, and an increase of approximately $1.8 million in services revenues. The increase in product revenues\nwas mainly driven by higher activity in EMEA and North America, primarily from existing customers. The increase in services revenues mainly\nrelates to an increase of revenues from existing customers in North America.\n\n \n\n35\n\n \n\n \n\n*Revenues\nper geographic region, based on the location of the end-customer*\n\n \n\n  \nYear\nEnded December 31,\n(in millions of U.S. dollars)  \nYear\nEnded December 31,\n(as percentages) \n\n  \n2025  \n2024  \n2025  \n2024 \n\nNorth America \n 38.9  \n 36.1  \n 54.3  \n 59.1 \n\nAsia \n 9.9  \n 12.7  \n 13.9  \n 20.9 \n\nLatin America \n 0.2  \n 0.3  \n 0.3  \n 0.5 \n\nEMEA (including Israel) \n 22.5  \n 11.9  \n 31.5  \n 19.5 \n\nTotal revenues \n 71.5  \n 61.0  \n 100% \n 100%\n\n \n\nIn 2025, our three largest\ncustomers amounted to approximately 86% of our total consolidated revenues. In 2024, our three largest customers amounted to approximately\n88% our total consolidated revenues.\n\n \n\n*Cost\nof Revenues and Gross Profit*\n\n \n\n  \nYear\nEnded December 31,\n\n(in millions of U.S. dollars) \n\n  \n2025  \n2024 \n\nProducts \n 10.2  \n 7.1 \n\nServices \n 7.0  \n 8.6 \n\nTotal cost of revenues \n 17.2  \n 15.7 \n\nGross profit \n 54.3  \n 45.3 \n\n \n\n*Cost\nof Revenues*. During 2025, our gross profit as a percentage of revenues was approximately 76.0% compared to approximately 74.2% in\n2024.\n\n \n\nTotal\ncost of revenues increased by approximately $1.5 million in 2025 compared to 2024, primarily due to higher product-related costs, partially\noffset by a decrease in services-related costs.\n\n \n\nOur cost of revenues for both\n2025 and 2024 includes an expense of approximately $0.4 million for share-based compensation in each of the fiscal years.\n\n \n\nThe\nfollowing table provides our operating costs and expenses for 2025 and 2024 as well as the percentage change of such expenses in 2025\nas compared to 2024.\n\n \n\n  \nYear\nended December 31,\n(in millions of U.S. dollars)  \n%\nChange\n2025 vs. \n\n  \n2025  \n2024  \n2024 \n\nResearch\nand development \n 20.2  \n 18.7  \n 8.0 \n\nLess royalty-bearing\nparticipation \n 0.3  \n 0.7  \n (57.1)\n\nResearch and development, net \n 19.9  \n 18.0  \n 10.6 \n\nSales and marketing \n 19.7  \n 17.8  \n 10.7 \n\nGeneral and administrative \n 6.4  \n 6.4  \n 0.0 \n\nTotal operating expenses \n 46.0  \n 42.2  \n 9.0 \n\n \n\n*Research\nand Development Expenses, gross*. Research and development expenses, gross increased from approximately $18.7 million in 2024 to approximately\n$20.2 million in 2025. As a percentage of total revenues, research and development expenses, gross, decreased from approximately 30.6%\nin 2024 to approximately 28.3% in 2025. The increase in our gross research and development expenses was primarily attributable to an\nincrease in salary and related expenses and driven by an increase in headcount, as well as the impact of foreign exchange rate fluctuations\non expenses denominated in non-U.S. dollar currencies. As of December 31, 2025, and December 31, 2024, our total research and development\nheadcount, including contractors, was 152 and 134, respectively. Our research and development costs included an expense of approximately\n$1.8 million for share-based compensation in 2025, as compared to approximately $2.0 million in 2024. Our research and development efforts\nare focused on strengthening collaborations, fostering innovation, and expanding our product portfolio. We plan to continue strategic\ninvestments in research and development to deliver advanced intelligent solutions, including agent-to-agent and multi-model workflows,\nwhile supporting our strategic partnerships and productization efforts.\n\n \n\n36\n\n \n\n \n\nWe\nbelieve that our research and development efforts are a key element of our strategy and are essential to our success. An increase or\na decrease in our total revenues would not necessarily result in a proportional increase or decrease in the levels of our research and\ndevelopment expenditures, which could affect our operating margin.\n\n \n\n*Sales\nand Marketing Expenses.* Sales and marketing expenses increased from approximately $17.8 million in 2024 to approximately $19.7 million\nin 2025, primarily attributable to higher salary and related expenses, as well as an increase in share-based compensation expenses, and\nother operating expenses. As a percentage of total revenues, sales and marketing expenses decreased from 29.2% in 2024 to 27.5% in 2025,\nprimarily due to revenue growth outpacing the increase in expenses. Our sales and marketing expenses included approximately $2.3 million\nof share-based compensation in 2025, compared to approximately $2.0 million in 2024.\n\n \n\n*General\nand Administrative Expenses*. General and administrative expenses remained relatively stable at approximately $6.4 million in both\n2025 and 2024. The overall stability reflects modest increases in share-based compensation, salary and related expenses and professional\nfees, partially offset by a decrease in director fees and related expenses compared to 2024. As a percentage of total revenues, general\nand administrative expenses decreased from 10.5% in 2024 to 9.0% in 2025, primarily due to revenue growth outpacing the increase in expenses.\nOur general and administrative expenses included approximately $1.7 million of share-based compensation in 2025, compared to approximately\n$1.6 million in 2024.\n\n \n\n*Financial\nIncome, Net*. Financial income, net, increased from approximately $4.1 million in 2024 to approximately $4.3 million in 2025,\nprimarily attributable to an increase in interest income.\n\n \n\n*Taxes\non Income*. Taxes on income increased by approximately $0.4 million, from approximately $0.2 million in 2024 to approximately\n$0.6 million in 2025, primarily attributable to expenses related to uncertain tax positions of RADCOM Ltd, as well as federal and sales\ntaxes of RADCOM US.\n\n \n\n**Comparison\nof Financial Data for Year Ended December 31, 2024, compared with Year Ended December 31, 2023**\n\n \n\nFor a discussion of the financial\ndata for the year ended December 31, 2024, compared with the year ended December 31, 2023, see “Item 5.A.—Operating and Financial\nReview and Prospects—Operating Results—Results for the Year Ended December 31, 2024, compared to the Year Ended December 31,\n2023” included in our Annual Report on Form 20-F for the fiscal year ended December 31, 2024, filed with the SEC on March 26, 2025.\n\n \n\n**Impact\nof Inflation and Foreign Currency Fluctuations**\n\n \n\nMost\nof our revenues are generated in U.S. dollars and our financing activities are conducted in U.S. dollars. We also generate revenues in\nBrazilian reals, or BRLs, euros and other currencies; however, we consider the U.S. dollar to be our functional currency. In the future\nadditional revenues may be denominated in currencies other than U.S. dollars.\n\n \n\nSince\na significant portion of our expenses is in NIS, as we pay our Israeli employees’ salaries in NIS, the dollar cost of our operations\nis influenced by the exchange rates between the NIS and the U.S. dollar. Fluctuations in exchange rates between the U.S. dollar,\nthe BRL, euro, and other currencies in which we generate revenue, and the U.S. dollar, may also influence our results of operations.\nWith respect to our Brazilian subsidiary, the functional currency has been determined to be its local currency. Assets and liabilities\nare translated at year-end exchange rates and statements of income items are translated at average exchange rates prevailing during the\nyear. Such translation adjustments are recorded as a separate component of accumulated other comprehensive losses in shareholders’\nequity.\n\n \n\nBecause\nexchange rates between the NIS and the U.S. dollar fluctuate continuously, exchange rate fluctuations will have an impact on our profitability\nand period-to-period comparisons of our results. The effects of foreign currency re-measurements of financial assets and liabilities\nare reported in our financial statements as financial income or expense. Based on our budget for 2026, we expect that a change of NIS\n0.10 to the exchange rate of the NIS to U.S. dollar will change our expenses expressed in dollar terms by approximately $0.8 million\nper fiscal year and vice versa.\n\n \n\n37\n\n \n\n \n\n**Effective\nCorporate Tax Rate**\n\n \n\nAs of January 1, 2018, Israeli\nresident companies were generally subject to corporate tax at the rate of 23%. Israeli resident companies are generally subject to capital\ngains tax at the corporate tax rate. We have not generated taxable income in Israel, as we have historically incurred operating losses\nresulting in carry forward losses for tax purposes totaling approximately $27.6 million and an additional $1.7 million of capital loss\nas of December 31, 2025. We believe that we will be able to carry forward these tax losses to future tax years. We do not expect to be\nsubject to material taxes in Israel on income from operations until we utilize our carry forward tax losses. We may be required to pay\ntaxes on our passive income, if any. For more information on taxation, see “Item 10.E - Taxation.”\n\n \n\nOur\neffective corporate tax rate may exceed the Israeli tax rate. Our non-Israeli subsidiaries will generally be subject to applicable\nfederal, state and local taxation, and we may also be subject to taxation in the other foreign jurisdictions in which we own assets,\nhave employees or conduct business activities.\n\n \n\nWe\nrecorded a valuation allowance of approximately $11.4 million as of December 31, 2025, for all of our deferred tax assets. Based\non the weight of available evidence, we believe it is more likely than not that all of our deferred tax assets will not be realized.\n\n \n\n**B.****LIQUIDITY\nAND CAPITAL RESOURCES**\n\n \n\nWe\nhave financed our operations through cash generated from operations, proceeds from the exercise of options, royalty-bearing participation\nfrom the IIA, up until 2017 from proceeds from our private and public equity offerings we conducted and others. Cash and cash equivalents,\nand bank deposits on December 31, 2025, and 2024, were approximately $109.9 and $94.7 million, respectively.\n\n \n\nWe\nbelieve that our existing capital resources and cash flows from operations will be adequate to satisfy our expected liquidity requirements\nthrough the next twelve months. Without derogating from the foregoing estimate regarding our existing capital resources and cash flows\nfrom operations, we may decide to raise additional funds in the future. We believe that, if required, we will be able to raise additional\ncapital or reduce discretionary spending to provide the required liquidity within the next twelve months.\n\n \n\n*Net\nCash Provided by Operating Activities*. Net cash provided by operating activities was approximately $14.6 million in 2025 compared\nto net cash provided by operating activities of approximately $11.4 million in 2024.\n\n \n\nThe\npositive net cash flow in 2025 was primarily due to net income of approximately $12.0 million, share-based compensation expenses of approximately\n$6.1 million, a decrease of approximately $1.3 million in inventory, depreciation and amortization of approximately $0.7 million, an\nincrease of approximately $0.5 million in other liabilities and accrued expenses, an increase of approximately $0.5 million in severance\npay, net, a decrease of approximately $0.4 million in operating lease right-of-use assets and liabilities, net, and an overall increase\nof approximately $0.2 million in trade payables. This was partially offset by a decrease in deferred revenue and advances from customers\nof approximately $5.7 million, an increase of approximately $1.2 million in trade receivables, net, and an increase of approximately\n$0.4 million in accrued interest on bank deposits.\n\n \n\nThe\npositive net cash flow in 2024 was primarily due to net income of approximately $7.0 million, share-based and restricted share compensation\nexpenses of approximately $6.1 million, an increase in deferred revenue and advances from customers of approximately $5.4 million, an\nincrease of approximately $1.8 million in employees and payroll accruals, an increase of approximately $1.5 million in other liabilities\nand accrued expenses and depreciation and amortization of $0.7 million. This was partially offset by an increase of approximately $5.6\nmillion in trade receivables, net, an increase of approximately $2.2 million in other account receivables and prepaid expenses, a decrease\nof $1.8 million in accrued interest on bank deposits and an increase of approximately $1.4 million in inventory.\n\n \n\n38\n\n \n\n \n\nThe\ntrade receivables and days of sales outstanding are primarily impacted by payment terms, variations in the levels of shipment in the\nquarter, and collections performance. Trade receivables for 2025 increased to approximately $20.2 million from approximately $19.0 million\nin 2024.\n\n \n\nThe\ndecrease in inventories in 2025 was mainly due to an increase in inventory delivered to customers for which revenue criteria have been\nmet and recognized.\n\n \n\n*Net\nCash Used in Investing Activities.*Our investing activities generally consist of investment in bank deposits and purchase of equipment.\nNet cash used in investing activities in 2025 was approximately $4.0 million, compared to net cash used in investing activities in 2024\nof $2.7 million. In 2025, we invested approximately $95.0 million in bank deposits, received approximately $91.4 million from the maturity\nof a short-term bank deposit and invested approximately $0.4 million for the purchase of equipment.\n\n \n\nIn\n2024, we invested approximately $75.5 million in bank deposits, received approximately $73.2 million from the maturity of a short-term\nbank deposit and invested approximately $0.4 million for the purchase of equipment.\n\n \n\n*Net\nCash provided by (Used in) Financing Activities.* In 2025, net cash provided by financing activities was approximately $0.3 million from\nthe exercise of options. In 2024, there was no net cash provided by or used in financing activities.\n\n \n\nAs\nof December 31, 2025, our material cash requirements from contractual obligations consist primarily of operating lease liabilities for\nour offices and facilities, as well as purchase commitments entered in the ordinary course of business. Our lease obligations are presented\nin our consolidated financial statements and represent fixed payments over the non-cancellable lease terms. We do not have material long-term\ndebt obligations or other significant contractual commitments outside the ordinary course of business, except as otherwise disclosed\nin our consolidated financial statements.\n\n \n\n** Investments**\n\n \n\nWe\nmay, in the future, undertake hedging or similar transactions, or invest in instruments that are sensitive to market risks, if management\ndetermines that such actions are necessary to mitigate risks, including foreign currency and interest rate fluctuations.\n\n \n\n**Impact\nof Related Party Transactions**\n\n \n\n For\nmore information, about our related party transactions, none of which currently has a material impact on us, see “Item 7.B—Major\nShareholders and Related Party Transactions—Related Party Transactions” below.\n\n \n\n**Government\nGrants and Related Royalties**\n\n \n\nThe\nGovernment of Israel, through the IIA, encourages research and development projects pursuant to the Innovation Law and the regulations\npromulgated thereunder. We may receive grants from the IIA at rates that range from 20% to 60% (and with respect to Magnet Programs\nup to 66%) of the research and development expenses, as prescribed by the research committee of the IIA in accordance with the Innovation\nLaw. We recorded such grants from the IIA in the total amount of approximately $0.4 million in 2025, $0.7 million in 2024, and $0.7\nmillion 2023. Pursuant to the specific terms of these grants, we are obligated to pay royalties of 3% of the revenues generated by sales\nof products (and certain related services) funded with these grants (excluding grants received in the Magnet project). In the event\nthat a project funded by the IIA does not result in a development which generates revenues, we would not be obligated to repay the grants\nwe received for such development. Royalty expenses relating to the IIA grants included in the cost of revenues for years ended December\n31, 2025 and 2024 were approximately $2.1 million and $1.8 million, respectively. The total royalty-bearing grants regarding projects\nthat we have received from the IIA as of December 31, 2025 were approximately $50.2 million. For projects authorized as a research\nand development program under the Innovation Law since January 1, 1999, the repayment interest rate was LIBOR, as further detailed and\nqualified below. As of December 31, 2025, the accumulated interest was approximately $30.4 million, the accumulated royalties paid to\nthe IIA were approximately $24.6 million and our total amount of contingent liability to the IIA in respect of grants received was, according\nto our records, approximately $56.0 million. In September 2021, the Bank of Israel, which determines annual interest rates, published\na directive which stated that annual interest at a variable rate linked to the LIBOR rate for loans in U.S. dollars will be replaced\nby the SOFR, in June 2023. Grants received from the IIA on applications that had been approved before June 30, 2017, bear an annual interest\nrate that applied at the time of the approval of the applicable IIA file, and that interest rate will apply to all of the funding received\nunder that IIA approval, and grants received from the IIA on applications that had been approved after June 30, 2017, bear an annual\ninterest rate based on the 12-month LIBOR, until December 31, 2023, and as of January 1, 2024, bear an annual interest rate based on\nthe 12-month SOFR, or at an alternative rate published by the Bank of Israel, with the addition of 0.72%. Grants approved after January\n1, 2024 will bear the higher of (i) the 12 months SOFR, plus 1%, or (ii) a fixed annual interest rate of 4%.\n\n \n\n39\n\n \n\n \n\nWe\nare also obligated to pay royalties to the BIRD Foundation, with respect to sales of products based on technology resulting from research\nand development funded by the BIRD Foundation. Royalties to the BIRD Foundation are generally payable at the rate of 5% of the sales\nof such products, up to 150% of the grant received, linked to the United States Consumer Price Index. As of December 31, 2025,\nwe had a contingent obligation to pay the BIRD Foundation aggregate royalties in an amount of approximately $478,035.\n\n \n\n \n**C.**\n**RESEARCH AND DEVELOPMENT,\nPATENTS AND LICENSES, ETC.**\n\n \n\nSee\n“Item 4.B—Information on the Company—Business Overview—Research and Development,” “Item 4.B—Information\non the Company—Business Overview—Proprietary Rights”, and “Item 5—Operating and Financial Review and Prospects—Research\nand Development expenses, Net” and “Item 5.A—Operating and Financial Review and Prospects—Operating Results”.\n\n \n\n \n**D.**\n**TREND INFORMATION**\n\n \n\nAccording\nto industry research, as of January 2026, 89 operators in 48 countries, launched 5G standalone networks and we expect that the number\nof 5G SA deployments will grow in the coming years, although the pace of such growth is still unknown. CSPs are continuing to invest\nin 5G networks and more devices have become commercially available despite the economic disruption.\n\n \n\n5G\nnetworks and services are becoming much more complex and dynamic. They use cloud-native technologies such as containers and Kubernetes\nto enable automation and simplification and to reduce operating costs. These and the evolution to 5G advanced and GenAI embedded network\ntechnologies may result in potential increased interest by CSPs in our solutions.\n\n \n\nWe\nconsider customer experience as another driver for CSPs to invest in solutions that enable them to better monitor, understand customer\naffecting issues, and proactively offer resolution and upgrade of quality of service.\n\n \n\nAs\nservices become more technologically complex and their volumes increase, service quality becomes an issue that must be addressed to allow\nfor end-to-end visibility across the different network areas. Our automated assurance solutions address this need by providing end-to-end\nnetwork visibility from RAN to core, enabling CSPs to monitor their networks end-to-end as they progress with 5G deployments.\n\n \n\n**E.****CRITICAL\nACCOUNTING ESTIMATES**\n\n \n\n**Critical\nAccounting Policies and Estimates**\n\n \n\nThe\npreparation of Consolidated Financial Statements and related disclosures in conformity with U.S. GAAP requires us to make judgments,\nassumptions, and estimates that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. Note 2 of\nthe Notes to the Consolidated Financial Statements describes the significant accounting policies and methods used in the preparation\nof the Consolidated Financial Statements. The accounting policies described below are significantly affected by critical accounting estimates.\nSuch accounting policies require significant judgments, assumptions, and estimations used in the preparation of the Consolidated Financial\nStatements, and actual results could differ materially from the amounts reported based on these policies.\n\n \n\n40\n\n \n\n \n\n*Revenue\nrecognition*.\n\n \n\nWe\nrecognize revenues in accordance with ASC No. 606, “Revenue from Contracts with Customers”. As such, we identify a contract\nwith a customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price\nto each performance obligation in the contract and recognize revenues when (or as) performance obligations are satisfied as follows:\n\n \n\n \na)\nIdentify the contract with\na customer:\n\n \n\nWe\ngenerally consider either agreements or purchase orders, which in some cases are governed by master agreements, to be contracts with\ncustomers. In evaluating the contract with a customer, we analyze the customer’s intent and ability to pay the amount of promised\nconsideration (credit risk) and consider the probability of collecting substantially all of the consideration.\n\n \n\n \nb)\nIdentify the performance\nobligations in the contract:\n\n \n\nAt\na contract’s inception, we assess the goods or services promised in a contract with a customer and identify the performance obligations.\n\n \n\nThe\nmain performance obligations would generally include:\n\n \n\nLicense\nfor our software solutions, professional services, managed services, service type warranty and post-contract customer support, each of\nwhich are generally distinct as these promises are capable of being distinct and are separately identifiable.\n\n \n\n \nc)\nDetermine the transaction\nprice:\n\n \n\nThe\ntransaction price is the amount of consideration to which we are entitled in exchange for transferring promised goods or services to\na customer, excluding amounts collected on behalf of third parties.\n\n \n\nWe\ndon’t usually grant our customers with a right to return the products sold. However, in some cases, the arrangements may include\nrefunds, liquidated damages, penalties or other damages if we fail to deliver future goods or services or if the goods or services fail\nto meet certain specifications to acceptance criteria. All of the above are accounted for as variable considerations, which may be considered\nas adjustments to the transaction price.\n\n \n\nWe\ninclude estimated amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized\nwill not occur when the uncertainty associated with the variable consideration is resolved. Our estimates of variable consideration and\ndetermination of whether to include estimated amounts in the transaction price are based largely on an assessment of our anticipated\nperformance and all information (historical, current and forecasted) that is reasonably available.\n\n \n\nThe\nCompany uses the practical expedient and does not assess the existence of a significant financing component when the difference between\npayment and revenue recognition is a year or less. As our standard payment terms are less than one year, the contracts have no significant\nfinancing component. In instances of contracts where revenue recognition differs from the timing of invoicing, we have determined that\nthose contracts generally do not include a significant financing component. The primary purpose of the invoicing terms is to provide\ncustomers with simplified and predictable ways of purchasing our products and services, not to receive or provide financing.\n\n \n\n \nd)\nAllocate the transaction\nprice to the performance obligations in the contract:\n\n \n\nTo\ndetermine SSP, the Company maximizes the use of observable standalone sales and observable data, where available. In instances where\nperformance obligations do not have observable standalone sales, the Company utilizes available observable inputs or uses the expected\ncost-plus margin approach to estimate the price the Company would charge if the products and services were sold separately. For software\nlicenses where the standalone selling prices, cannot be determined based on observable prices, given the same products are sold for a\nbroad range of amounts and the selling price is highly variable, the standalone selling prices included in a contract with multiple performance\nobligations are determined by applying a residual approach. Standalone selling prices of services are typically estimated based on observable\ntransactions when these services are sold on a standalone basis or on a cost-plus basis. The transaction price is allocated to the separate\nperformance obligations on a relative standalone selling price basis.\n\n \n\n \ne)\nRecognize revenue when\na performance obligation is satisfied:\n\n \n\nRevenue\nis recognized when or as performance obligations are satisfied by transferring control of a promised good or service to a customer. Control\nis either transferred over time or at a point in time, which affects the revenue recognition schedule.\n\n \n\n41\n\n \n\n* *\n\n*Products*.\nRevenues from sales of software solutions which include customer acceptance or software licenses only are recognized at a point in time\nof the acceptance of the solution or the point in time the software license is delivered.\n\n \n\n*Services*.\nRevenues related to managed services, service type warranty and post-contract customer support are recognized over time.\n\n \n\nDeferred\nrevenues represent unrecognized fees collected as well as other advances and payments received from customers, for which revenue has\nnot yet been recognized. Deferred revenues are classified as short-term and long-term deferred revenues based on the period in which\nrevenues are expected to be recognized.\n\n \n\nWe\nrecord unbilled receivables from contracts when the revenue recognized exceeds the amount billed to the customer.\n\n \n\nWe\ncapitalize an asset for the incremental costs of obtaining a contract whenever such expenses are expected to be recovered. Capitalized\ncosts derive primarily from sales commissions or incentives granted to employees and partners. Our contracts with customers include performance\nobligations related to products and services, some of which are satisfied at a point in time and others over time. Commission costs related\nto performance obligations satisfied at a point in time are expensed at the time of sale, which is when revenue is recognized. Commission\ncosts related to long-term service contracts and performance obligations satisfied over time are deferred and recognized on a systematic\nbasis that is consistent with the transfer of the products or services to which the asset relates. Amortization expense is included in\nsales and marketing expenses in the accompanying consolidated statements of income (loss).\n\n \n\n*Share-based\ncompensation*. Our accounts for share-based compensation are in accordance with ASC No. 718 “Compensation – Stock-based\nCompensation”, or ASC No. 718, which requires us to estimate the fair value of share-based payment awards on the grant date using\nan option-pricing model.\n\n \n\nWe\nrecognize compensation expenses for the value of its awards over the requisite service period of each of the awards. For graded vesting\nawards subject to service conditions only, we use the straight-line attribution method. We estimate expected forfeitures.\n\n \n\nWe\nselected the Black-Scholes option-pricing model as the most appropriate fair value method for its share-options awards. The option-pricing\nmodel requires a number of assumptions, of which the most significant are the expected share price volatility and the expected option\nterm. Expected volatility was calculated based upon actual historical share price movements over the most recent periods ending on the\ngrant date, equal to the expected option term. The expected term was generated pursuant to historical option exercise information. The\nrisk-free interest rate is based on the yield from U.S. Treasury zero-coupon bonds with an equivalent term to the expected term of the\noptions. Historically the Company has not paid dividends and in addition has no foreseeable plans to pay dividends, and therefore uses\nan expected dividend yield of zero in the option-pricing model.\n\n \n\nOur\ndetermination of the fair value of restricted share units or RSUs is based on the closing market value of the underlying shares at the\ndate of grant.\n\n \n\n*Income\nTaxes.*We account for income taxes using the asset and liability method whereby deferred tax assets and liability account balances\nare determined based on the differences between financial reporting and the tax basis for assets and liabilities and are measured using\nthe enacted tax rates and laws that will be in effect when the differences are expected to reverse. We provide a valuation allowance,\nif necessary, to reduce deferred tax assets to the amounts that are more likely-than-not to be realized.\n\n \n\nWe\naccount for unrecognized tax positions under a two-step approach. The first step is to evaluate the tax position taken or expected to\nbe taken in a tax return by determining if the weight of available evidence indicates that it is more likely than not that, on an evaluation\nof the technical merits, the tax position will be sustained on audit, including resolution of any related appeals or litigation processes.\nThe second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement.\nAssumptions, judgment, and the use of estimates are required in determining if the more-likely-than-not standard has been met and in\ndetermining the expected benefit when developing the provision for income taxes. Our evaluations are based upon a number of factors,\nincluding changes in facts or circumstances, changes in tax law or guidance, correspondence with tax authorities during the course of\naudits, and effective settlement of audit issues. Changes in these or other factors could result in material increases or decreases in\nour provision for income taxes in the period in which we make the change.\n\n \n\n42"}