**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q**

** **

**(Mark one)**

**ý****Quarterly report pursuant toSection 13 or 15(d) of the Securities Exchange Act of 1934**

 

##### **For the quarterly period ended March 31, 2006**

##### ** **

**OR**

 

**o****Transition report pursuant toSection 13 or 15(d) of the Securities Exchange Act of 1934**

 

**CommissionFile Number:  0-31151**

 

 

**RADVIEWSOFTWARE LTD.**

(Exact name ofregistrant as specified in its charter)

 

| **Israel**                       | ** ** | **Not  applicable**  |
|----------------------------------|------------|----------------------|
| (State or other  jurisdiction of |       | (I.R.S. Employer     |
| incorporation or  organization)  |       | Identification  No.) |

 

**7 NewEngland Executive Park**

**Burlington,MA 01803**

(Address ofprincipal executive offices)

 

##### **Telephone Number (781) 238-1111**

(Registrant’stelephone number, including area code)

 

**None**

(Former name,former address and former fiscal year, if changed since last report)

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports):  Yes ý   Noo, and (2) has been subject to such filingrequirements for the past 90 days:  Yes ý              No o.

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer or anon-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of theExchange Act (Check one):   Larger Accelerated Filer o            Accelerated Filer o   Non-Accelerated Filer ý

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act):  Yes o    No ý

 

As of April 30, 2006,there were 20,525,682 shares of the Registrant’s Ordinary Shares outstanding,excluding 134,000 Ordinary Shares held by the registrant as treasury sharesthat are “dormant” shares for purposes of Israeli law.

 

 

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**RADVIEW SOFTWARE LTD. AND SUBSIDIARIES**

Form 10-Q INDEX

 
| ** **                        | ** **                                                                                          | **Page No.** |
|-----------------------------------|-----------------------------------------------------------------------------------------------------|--------------|
|                              |                                                                                                |         |
| **PART I. FINANCIAL INFORMATION** | ** **                                                                                          |
|                              |                                                                                                |         |
| Item 1.                           | Condensed Consolidated  Financial Statements (Unaudited):                                           |         |
|                              |                                                                                                |         |
|                              | Condensed Consolidated  Balance Sheets as of March 31, 2006 and December 31, 2005                   | 3            |
|                              |                                                                                                |         |
|                              | Condensed Consolidated  Statements of Operations for the three months ended March 31, 2006 and 2005 | 4            |
|                              |                                                                                                |         |
|                              | Condensed Consolidated  Statements of Cash Flows for the three months ended March 31, 2006 and 2005 | 5            |
|                              |                                                                                                |         |
|                              | Notes to Condensed  Consolidated Financial Statements                                               | 6            |
|                              |                                                                                                |         |
| Item 2.                           | Management’s Discussion and  Analysis of Financial Condition and Results of Operations         | 13           |
|                              |                                                                                                |         |
| Item 3.                           | Qualitative and Quantitative  Disclosures About Market Risk                                         | 19           |
|                              |                                                                                                |         |
| Item 4.                           | Controls and Procedures                                                                             | 19           |
|                              |                                                                                                |         |
| **PART II. OTHER INFORMATION**    | ** **                                                                                          |
|                              |                                                                                                |         |
| Item 6.                           | Exhibits                                                                                            | 20           |
|                              |                                                                                                |         |
|                              | Signatures                                                                                          | 21           |
|                              |                                                                                                |         |
|                              | Certifications                                                                                      |         |

 

2

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**PART I -FINANCIAL INFORMATION**

 

**RADVIEW SOFTWARE LTD.AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(Inthousands, except share data)**

**(Unaudited)**

 
| ** **                                                                                                                                                                                                                                | ** ** | **March 31,****2006** | ** ** | **December 31,  2005** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|------------------------|------------|
| **ASSETS**                                                                                                                                                                                                                                | ** ** | ** **            | ** ** | ** **             | ** ** |
| Current Assets:                                                                                                                                                                                                                           |       |                  |       |                   |       |
| Cash and cash equivalents                                                                                                                                                                                                                 |       | $                     | 130        |                   | $          | 166 |   |
| Restricted cash                                                                                                                                                                                                                           |       | 40                    |       | 40                     |       |
| Accounts receivable, net of reserves of $56 at March 31, 2006 and  December 31, 2005                                                                                                                                                      |       | 713                   |       | 679                    |       |
| Prepaid expenses and other current assets                                                                                                                                                                                                 |       | 105                   |       | 179                    |       |
| Total Current Assets                                                                                                                                                                                                                      |       | 988                   |       | 1,064                  |       |
|                                                                                                                                                                                                                                      |       |                  |       |                   |       |
| Property and Equipment, net                                                                                                                                                                                                               |       | 124                   |       | 144                    |       |
| Other Assets                                                                                                                                                                                                                              |       | 343                   |       | 383                    |       |
|                                                                                                                                                                                                                                      |       |                  |       |                   |       |
| Total Assets                                                                                                                                                                                                                              |       | $                     | 1,455      |                   | $          | 1,591 |   |
|                                                                                                                                                                                                                                      |       |                  |       |                   |       |
| **LIABILITIES AND SHAREHOLDERS’ DEFICIT**                                                                                                                                                                                            | ** ** | ** **            | ** ** | ** **             | ** ** |
| Current Liabilities:                                                                                                                                                                                                                      |       |                  |       |                   |       |
| Revolving line of credit                                                                                                                                                                                                                  |       | $                     | —     |                   | $          | 70 |   |
| Bridge loan                                                                                                                                                                                                                               |       | 200                   |       | —                 |       |
| Accounts payable                                                                                                                                                                                                                          |       | 384                   |       | 570                    |       |
| Accrued expenses                                                                                                                                                                                                                          |       | 1,228                 |       | 1,134                  |       |
| Deferred revenue                                                                                                                                                                                                                          |       | 1,382                 |       | 1,659                  |       |
| Total Current Liabilities                                                                                                                                                                                                                 |       | 3,194                 |       | 3,433                  |       |
|                                                                                                                                                                                                                                      |       |                  |       |                   |       |
| Long-term Liabilities:                                                                                                                                                                                                                    |       |                  |       |                   |       |
| Accrued severance pay                                                                                                                                                                                                                     |       | 447                   |       | 539                    |       |
|                                                                                                                                                                                                                                      |       |                  |       |                   |       |
| Total Liabilities                                                                                                                                                                                                                         |       | 3,641                 |       | 3,972                  |       |
|                                                                                                                                                                                                                                      |       |                  |       |                   |       |
| Shareholders’ Deficit:                                                                                                                                                                                                               |       |                  |       |                   |       |
| Ordinary shares, NIS 0.01 par value – Authorized – 40,000,000 shares;   Issued – 20,659,682 shares at March 31, 2006 and December 31, 2005;   Outstanding – 20,525,682 shares at March 31, 2006 and December 31, 2005 |       | 51                    |       | 51                     |       |
| Treasury shares, at cost – 134,000 shares                                                                                                                                                                                            |       | (100                  | )          | (100                   | )          |
| Additional paid-in capital                                                                                                                                                                                                                |       | 57,005                |       | 56,981                 |       |
| Accumulated deficit                                                                                                                                                                                                                       |       | (59,142               | )          | (59,313                | )          |
| Total Shareholders’ Deficit                                                                                                                                                                                                          |       | (2,186                | )          | (2,381                 | )          |
|                                                                                                                                                                                                                                      |       |                  |       |                   |       |
| Total Liabilities and Shareholders’ Deficit                                                                                                                                                                                          |       | $                     | 1,455      |                   | $          | 1,591 |   |

 

The accompanying notes are an integral part of these condensedconsolidated financial statements.

 

3

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**RADVIEWSOFTWARE LTD. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

**(Inthousands, except per share data)**

**(Unaudited)**

 
| ** **                                                                                          | ** ** | **Three Months Ended  March 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                                          | ** ** | **2006**                          | ** ** | **2005** | ** ** |
| Revenues:                                                                                           |       |                              |       |   |   |
| Software  licenses                                                                                  |       | $                                 | 807        |   | $ | 940 |   |
| Services                                                                                            |       | 883                               |       | 567 |   |
| Total Revenues                                                                                      |       | 1,690                             |       | 1,507 |   |
|                                                                                                |       |                              |       |   |   |
| Cost of  Revenues:                                                                                  |       |                              |       |   |   |
| Software  licenses                                                                                  |       | 50                                |       | 36 |   |
| Services                                                                                            |       | 77                                |       | 57 |   |
| Total Cost of  Revenues                                                                             |       | 127                               |       | 93 |   |
|                                                                                                |       |                              |       |   |   |
| Gross Profit                                                                                        |       | 1,563                             |       | 1,414 |   |
|                                                                                                |       |                              |       |   |   |
| Operating  Expenses:                                                                                |       |                              |       |   |   |
| Sales and  marketing                                                                                |       | 668                               |       | 961 |   |
| Research and  development                                                                           |       | 346                               |       | 710 |   |
| General and  administrative                                                                         |       | 364                               |       | 476 |   |
| Total Operating  Expenses                                                                           |       | 1,378                             |       | 2,147 |   |
|                                                                                                |       |                              |       |   |   |
| Income (loss)  from operations                                                                      |       | 185                               |       | (733 | ) |
|                                                                                                |       |                              |       |   |   |
| Interest  expense, net                                                                              |       | (17                               | )          | (2 | ) |
| Other income  (expense), net                                                                        |       | 3                                 |       | (8 | ) |
|                                                                                                |       |                              |       |   |   |
| Net income  (loss)                                                                                  |       | $                                 | 171        |   | $ | (743 | ) |
|                                                                                                |       |                              |       |   |   |
| Basic and  diluted net income (loss) per share                                                      |       | $                                 | 0.01       |   | $ | (0.04 | ) |
|                                                                                                |       |                              |       |   |   |
| Weighted average  number of shares used in computing basic and diluted net income (loss) per  share |       | 20,526                            |       | 20,526 |   |

 

The accompanyingnotes are an integral part of these condensed consolidated financialstatements.

 

4

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**RADVIEW SOFTWARE LTD. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTSOF CASH FLOWS**

**(In thousands)**

**(Unaudited)**

 
| ** **                                                                                 | ** ** | **Three Months Ended****March 31,** | ** ** |
|--------------------------------------------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                                 | ** ** | **2006**                            | ** ** | **2005** | ** ** |
| Cash Flows from Operating Activities:                                                      |       |                                |       |   |   |
| Net income (loss)                                                                          |       | $                                   | 171        |   | $ | (743 | ) |
| Adjustments to reconcile net income (loss) to net cash used in  operating activities— |       |                                |       |   |   |
| Depreciation                                                                               |       | 20                                  |       | 16 |   |
| Stock-based compensation                                                                   |       | 24                                  |       | 30 |   |
| Accrued severance                                                                          |       | (92                                 | )          | (156 | ) |
| Changes in operating assets and liabilities—                                          |       |                                |       |   |   |
| Accounts receivable, net                                                                   |       | (34                                 | )          | (148 | ) |
| Prepaid expenses and other current assets                                                  |       | 74                                  |       | 58 |   |
| Accounts payable                                                                           |       | (186                                | )          | 11 |   |
| Accrued expenses                                                                           |       | 94                                  |       | 78 |   |
| Deferred revenue                                                                           |       | (277                                | )          | (301 | ) |
| Net cash used in operating activities                                                      |       | (206                                | )          | (1,155 | ) |
|                                                                                       |       |                                |       |   |   |
| Cash Flows from Investing Activities:                                                      |       |                                |       |   |   |
| Purchases of property and equipment                                                        |       | —                              |       | (29 | ) |
| Decrease in other assets                                                                   |       | 55                                  |       | 132 |   |
| Net cash provided by investing activities                                                  |       | 55                                  |       | 103 |   |
|                                                                                       |       |                                |       |   |   |
| Cash Flows from Financing Activities:                                                      |       |                                |       |   |   |
| Repayment under revolving line of credit facility                                          |       | (70                                 | )          | — |   |
| Borrowings under bridge loan, net of financing costs of $15                                |       | 185                                 |       | — |   |
| Net cash provided by financing activities                                                  |       | 115                                 |       | — |   |
|                                                                                       |       |                                |       |   |   |
| Decrease in cash and cash equivalents                                                      |       | (36                                 | )          | (1,052 | ) |
|                                                                                       |       |                                |       |   |   |
| Cash and cash equivalents, beginning of period                                             |       | 166                                 |       | 2,163 |   |
| Cash and cash equivalents, end of period                                                   |       | $                                   | 130        |   | $ | 1,111 |   |
|                                                                                       |       |                                |       |   |   |
| Cash paid during period for interest                                                       |       | $                                   | 17         |   | $ | 9 |   |

 

The accompanyingnotes are an integral part of these condensed consolidated financialstatements.

 

5

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**RADVIEWSOFTWARE LTD. AND SUBSIDIARIES**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

**(Unaudited)**

 

**1.****             ****Operations**

 

RadView Software Ltd.(the “Company”) is an Israeli corporation. The Company develops, markets andsupports software that enables organizations to verify the scalability,efficiency and reliability of web applications, and facilitates their rapiddevelopment.

 

The Company has a historyof incurring net losses and had an accumulated deficit of $59.1 million atMarch 31, 2006. The Company has funded these losses principally from proceedsfrom equity financings, including the private placement of its ordinary sharescompleted in March 2004, a short-term bridge loan (see Note 5), as well asproceeds from technology license arrangements (see Note 6).

 

Revenues in the firstquarter of 2006 derived from licenses and services in connection with atechnology license transaction entered into in December 2005 were a majorcontributing factor to the Company’s increase in revenues for the three monthsended March 31, 2006. In March 2006, the Company implemented a series of measuresto reduce operating expenses, including staff reductions, renegotiation ofcertain vendor contracts, and reduced spending on professional fees. As aresult, the Company reported net income of $171,000 for the quarter ended March31, 2006. However, the Company expects it will not be able to sustainprofitable operations in the immediate future due to an expected decline inrevenues resulting from the substantial completion of recognition of revenuesduring the first quarter of 2006 arising from previously signed technologytransactions.

 

On April 4, 2006,subsequent to the balance sheet date, the Company signed definitive agreementsfor a financing lead by Fortissimo Capital Funds, (“Fortissimo”), along withseveral co-investors including one of the Company’s directors and an existingsignificant shareholder, to provide for a minimum initial investment of $1.5million and up to $2.25 million of additional investments, at the election ofthe investors, over 18 months. The completion of the proposed financing issubject to approval by a majority of the Company’s shareholders. Severalsignificant shareholders, representing 39.3% of the Company’s outstandingordinary shares, have represented to the Company their intention to vote infavor of the investment.

 

Prior to signing thedefinitive agreements for the financing, in January 2006, the Company executeda bridge loan agreement with Fortissimo to provide the Company with interimfunding for up to $500,000, subject to compliance by the Company with an approvedbudget. As of April 30, 2006, the Company has borrowed $330,000 under thisbridge loan and has $170,000 available for future borrowings on an as-neededbasis until the closing, subject to approval of Fortissimo and compliance bythe Company with an approved budget (See Note 5). Borrowings under the bridgeloan will become part of the minimum investment at the closing of the financingdescribed above. If the financing is not closed due to failure to secureshareholder approval or termination by either party, the Bridge Loan willbecome due and payable within 60 days of notice by either party of an intentionto terminate negotiations with respect to the financing.

 

Management believes thatexisting cash and cash equivalents, along with borrowings currently availablefrom the bridge loan and the proceeds that would be available at the closing ofthe investment transaction, will be adequate to fund operations through atleast March 31, 2007.

 

**2.****             ****Significant Accounting Policies**

 

The Company’s condensedconsolidated financial statements are prepared in accordance with U.S.generally accepted accounting principles for interim financial information. Thesignificant policies followed in the preparation of the condensed consolidatedfinancial statements, applied on a consistent basis, are as follows.

 

6

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**(a)**          Use of Estimates

** **

The preparation of thefinancial statements in conformity with U.S. generally accepted accountingprinciples requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and disclosure of contingentassets and liabilities as of the date of the financial statements and thereported amounts of revenues and expenses during the reporting periods. Actualresults could differ from these estimates.

 

**(b)**          Financial Statements inU.S. Dollars

** **

Substantially all of theCompany’s revenues are in U.S. dollars. In addition, most expenses are incurredin U.S. dollars. The Company’s management believes that the U.S. dollar is theprimary currency of the economic environment in which the Company operates. Thus,the functional and reporting currency of the Company is the U.S. dollar.

 

Accordingly, monetaryaccounts maintained in currencies other than the dollar are remeasured intodollars in accordance withStatement of Financial Accounting Standard (“SFAS”) No. 52, *Foreign Currency Translation*. Changes incurrency exchange rates between the Company’s functional currency and thecurrency in which a transaction is denominated are included in the Company’sresults of operations as other income (expense) in the period in which thecurrency exchange rates change.

 

Allexchange gains and losses from the above-mentioned remeasurement are reflectedin the statements of operations and were not material for all periods presented.The representative rate of exchange was U.S. $1.00 to 4.665 New Israeli Shekel(“NIS”) at March 31, 2006, U.S. $1.00 to NIS 4.603 at December 31, 2005, andU.S. $1.00 to NIS 4.361 at March 31, 2005.

 

**(c)**          Interim FinancialStatements

** **

The accompanying condensed consolidated balancesheet as of March 31, 2006, the condensed consolidated statements of operationsfor the three months ended March 31, 2006 and 2005, and the condensedconsolidated statements of cash flows for the three months ended March 31, 2006and 2005, are unaudited but, in the opinion of management, include alladjustments necessary for a fair presentation of results for these interimperiods. Certain information and footnote disclosures normally included infinancial statements prepared in accordance with U.S. generally accepted accountingprinciples have been omitted, although the Company believes that thedisclosures included are adequate to make the information presented notmisleading. The results of operations for the three months ended March 31, 2006are not necessarily indicative of the results to be expected for the entirefiscal year. These financial statements should be read in conjunction with theannual consolidated financial statements for 2005 and related notes included inthe Company’s Annual Report on Form 10-K for the year ended December 31, 2005.

 

**(d)**          Research and DevelopmentCosts

** **

The Company has evaluatedthe establishment of technological feasibility of its products in accordancewith SFAS No. 86, *Accounting for the Costsof Computer Software to Be Sold, Leased or Otherwise Marketed*. TheCompany sells products in a market that is subject to rapid technologicalchange, new product development and changing customer needs. Accordingly, theCompany has concluded that technological feasibility is not established untilthe development stage of the product is nearly complete. The Company definestechnological feasibility as the completion of a working model. The time periodduring which costs could be capitalized from the point of reachingtechnological feasibility until the time of general product release is veryshort. Consequently, the amounts that could be capitalized are not material tothe Company’s financial position or results of operations. Therefore, theCompany has charged all such costs to research and development expense in theperiod incurred.

 

**(e)**          Revenue Recognition

** **

The Company generatesrevenues mainly from licensing the rights to use its software products. TheCompany also generates revenues from support and maintenance services and, to alesser extent, training and consulting 

 

7

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services. The Company sells its products primarily through its directsales force and, to a lesser extent, through resellers and distributorsconsidered as end-users.

 

The Company recognizesrevenue in accordance with Statement of Position (“SOP”) 97-2, *Software Revenue Recognition,* and SOP98-9, *Modificationof SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions*.****Under SOP 97-2, r****evenuesfrom software product licenses are recognized upon delivery of the softwareprovided there is persuasive evidence of an agreement, the fee is fixed ordeterminable and collection of the related receivable is probable and nofurther obligations exist. Revenues under multiple-element arrangements, whichmay include software licenses, support and maintenance, and training andconsulting services, are allocated to each element based on their respectivefair values based on vendor-specific objective evidence. This objectiveevidence represents the price of products and services when sold separately. ****W****henvendor-specific objective evidence of fair value exists for undeliveredelements but does not exist for delivered elements of a software arrangement,the Company uses the residual method for recognition of revenues, when allother revenue recognition criteria are met. Under the residual method, theCompany defers revenues related to the undelivered elements based on theirvendor specific objective evidence of fair value and recognizes the remainingarrangement fee for the delivered elements. When vendor-specific objectiveevidence of fair value for undelivered elements does not exist, revenues fromthe entire arrangement are recognized over the term of the agreement.

 

Revenues from support andmaintenance agreements are recognized ratably over the term of the maintenanceperiod, which is typically one year. Revenues from training arrangements arerecognized as the services are performed.

 

Revenue is recognized forsoftware licenses sold to resellers or distributors at the time of shipment,provided that all revenue recognition criteria set forth in SOP 97-2 arefulfilled.

 

The Company generally doesnot grant a right of return to its customers. When a right of return exists,revenue is deferred until the right of return expires, at which time revenue isrecognized provided that all other revenue recognition criteria are met.

 

Amounts collected orbilled prior to satisfying the above revenue recognition criteria are reflectedas deferred revenue. Deferred revenue represents deferred maintenance revenue,and to a lesser extent, deferred software license revenues.

 

**(f)**            Stock-BasedCompensation

** **

In December 2004, theFASB issued SFAS No. 123R (Revised 2004) (“SFAS 123(R)”), *Share-Based Payment*, which replaced SFASNo. 123, *Accounting for Stock-BasedCompensation*, and superseded APB Opinion No. 25, *Accounting for Stock Issued to Employees*. SFAS123(R), as amended, requires all share-based payments to employees, includinggrants of employee stock options, to be recognized in the financial statementsbased on their fair values beginning with the first annual reporting periodbeginning after January 1, 2006. Early adoption was permitted. SFAS 123(R)permits public companies to adopt its requirements using one of two methods:

 

•                  A “modifiedprospective” method in which compensation cost is recognized beginning with theeffective date (a) based on the requirements of SFAS 123(R) for all share-basedpayments granted after the effective date and (b) based on the requirements ofSFAS 123 for all awards granted to employees prior to the effective date ofSFAS 123(R) that remain unvested on the effective date.

•                  A “modifiedretrospective” method which includes the requirements of the modifiedprospective method described above, but also permits entities to restate basedon the amounts previously recognized under SFAS 123 for purposes of pro formadisclosures either (a) all prior periods presented or (b) prior interim periodsof the year of adoption.

 

The Company has electedto early adopt the provisions of SFAS 123(R) effective January 1, 2005following the modified prospective method of adoption described above.

 

8

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The Company hasdetermined the fair value of share based-payments issued after January 1, 2005and unvested options granted in prior periods using the Black-Scholes optionvaluation model, using the following weighted-average assumptions:

 
| ** **               | ** ** | **Three Months Ended  March 31,** | ** ** |
|--------------------------|------------|-----------------------------------|------------|
| ** **               | ** ** | **2006**                          | ** ** | **2005** | ** ** |
|                     |       |                              |       |   |   |
| Expected life of  option |       | 4 years                           |       | 4 years |   |
| Dividend yield           |       | —                            |       | — |   |
| Expected  volatility     |       | 123                               | %          | 110 | % |
| Risk-free  interest rate |       | 3.9                               | %          | 3.4 | % |

 

Expected volatilities arebased on historical volatility of the Company’s ordinary shares. The Companyuses historical data to estimate option exercises and employee terminationswithin the valuation model. The expected term of options granted is based onthe Company’s estimate and represents the period of time that options grantedare expected to be outstanding. The risk-free rate is based on the U.S.Treasury yield curve.

 

The Company applies SFASNo. 123 and Emerging Issues Task Force No. 96-18, *Accounting for Equity Instruments That Are Issued to Other ThanEmployees for Acquiring, or in Conjunction with Selling, Goods or Services*(“EITF 96-18”), with respect to options and warrants issued to non-employees. SFASNo. 123 and EITF 96-18 require the use of option valuation models to measurethe fair value of the options and warrants at the measurement date.

 

**3.****             ****Net Income (Loss) Per Share**

 

Basic and diluted net income (loss) per share ispresented in conformity with SFAS No. 128, *EarningsPer Share*, for all periods presented. Basic and diluted net income(loss) per ordinary share was determined by dividing net income (loss) by theweighted average ordinary shares outstanding during the period. Diluted net income(loss) per ordinary share is the same as basic net income (loss) per ordinaryshare for all periods presented, as the effects of the Company’s potential additionalordinary shares were antidilutive.

 

The calculation of diluted net loss per shareexcludes outstanding stock options, warrants and additional investment rightsheld by certain investors because their inclusion would be antidilutive, as setforth in the following table.

 
| ** **                                              | ** ** | **March 31,**       | ** ** |
|---------------------------------------------------------|------------|---------------------|------------|
| ** **                                              | ** ** | **2006**            | ** ** | **2005** | ** ** |
| ** **                                              | ** ** | **(In  thousands)** | ** ** |
|                                                    |       |                |       |   |   |
| Stock options                                           |       | 2,749               |       | 3,490 |   |
| Warrants held by certain investors                      |       | 2,334               |       | 2,334 |   |
| Additional investment rights held by certain  investors |       | —              |       | 3,333 |   |
| Warrants held by Comerica Bank (See Note 4)             |       | 353                 |       | — |   |

 

**4.****             ****Revolving Line of Credit Facility**

 

On May 27, 2005, theCompany, through RadView Software Inc., the Company’s U.S. subsidiary (the “U.S.Subsidiary”), obtained a one-year revolving line of credit facility withComerica Bank for borrowings of up to $2.0 million.  In December 2005, anevent of default was incurred under the credit facility when the borrowingsunder the credit facility exceeded the collateral base and the Company wasunable to repay the amount of the overadvance. The Company and the bank agreedupon a plan of repayment for all outstanding borrowings. As of December 31,2005, 

 

9

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outstanding borrowings under the revolving line of credit totaled$70,000. This amount was fully repaid in January 2006 and the revolving line ofcredit facility was terminated.

 

In connection with thefacility, the Company issued to the bank a warrant to purchase 352,941 of theCompany’s ordinary shares at an exercise price of $0.17 per share. The warrantwas exercisable immediately and has a term of seven years. The warrant alsoprovides for piggyback registration rights. These warrants are not affected bythe early termination of the revolving line of credit facility. Pursuant to anevaluation of the terms of the warrant under the provisions of EITF 00-19, theCompany classified the warrant issued in connection with the line of credit asequity.

 

The total considerationof $1.3 million under the credit facility was allocated based on the relativefair values of the revolving line of credit and the warrants in accordance withAPB No. 14, *Accounting for Convertible Debtand Debt Issued with Stock Purchase Warrants.*At the grant date, thefair value of the warrants was determined to be $52,000 using the Black-Scholesoption-pricing model assuming a risk free interest of 3.9%, a volatility factorof 120%, dividend yield of 0% and contractual life of seven years. The Companyalso incurred financing costs totaling $70,000 consisting of bank fees andlegal costs, which were accounted for as deferred financing costs. The warrantcosts and deferred financing costs have been fully amortized as interestexpense over the term of the revolving credit facility.

 

**5.**              Bridge Loan

** **

On January 26, 2006, theCompany entered into a bridge loan agreement (the “Bridge Loan”) withFortissimo Capital Fund GP LP (“Fortissimo”). Under the Bridge Loan, Fortissimohas agreed to provide the Company with up to $500,000 of loans, subject to theterms of the loans. As of March 31, 2006, the Company had borrowed $200,000under the Bridge Loan. As of April 30, 2006, the Company has borrowed anaggregate amount of $330,000 under the Bridge Loan and $170,000 remainsavailable for future borrowing on an as-needed basis until the closing, subjectto approval of Fortissimo and compliance by the Company with an approved budget.The Bridge Loan bears interest at 8.0% per annum and is secured by a fixedcharge on the Company’s accounts receivables and intellectual property and afloating charge on all of its assets. The Bridge Loan would become part of theconvertible loan portion of the financing if the financing closes. If thefinancing is not closed due to failure to secure shareholder approval ortermination by either party, the Bridge Loan will become due and payable within60 days of notice by either party of an intention to terminate negotiationswith respect to the financing.

 

**6.****             ****Technology License Transactions**

 

*(a)**       Ixia*

 

On July 7, 2004, theCompany received $1,000,000 in cash from a technology license transaction forits WebLOAD product with Ixia, an original equipment manufacturer, pursuant tothe exercise of an option by Ixia under the terms of a development, publishingand distribution agreement. As a result of the option exercise, the technologylicense provides Ixia with expanded license rights including the right toaccess and use source code for the WebLOAD product and the right to createderivative products. Under the terms of the original agreement, Ixia wasrequired to continue to pay to the Company royalties on its sale of WebLOAD ata reduced rate through July 7, 2005. Ixia was also granted a right to make asingle lump-sum payment of $250,000 to the Company in lieu of its reducedroyalty obligations. In November 2004, Ixia exercised this right and madepayment to the Company of $250,000. Accordingly, Ixia has no further licensefee or royalty payment obligations to the Company pursuant to this arrangement.

 

The Company was obligatedto provide product updates and technical and engineering support to Ixia untilJuly 2005. The Company recognized the $1,000,000 technology license fee asrevenue over the 12-month period commencing July 7, 2004, which represented theterm over which the Company was obligated to provide support services to Ixia. TheCompany recognized as revenue the $250,000 payment in lieu of royalties on astraight-line basis over the remaining term from November 2004 until June 2005.

 

10

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The Company recognizedrevenue under this technology license transaction of $362,000 for the threemonths ended March 31, 2005 that has been classified as software licensesrevenues in the condensed consolidated statements of operations.

 

*(b)**       OPNET Technologies*

 

On December 7, 2005, theCompany and OPNET Technologies, Inc. (“OPNET”) entered into a license anddistribution agreement (the “License Agreement”), which granted to OPNET anon-exclusive, non-royalty-bearing, perpetual source code license for theCompany’s WebLOAD and WebFT products. In addition, the Company agreed toprovide limited engineering support services for a period of eight weeks forthe purpose of assisting OPNET with the use of the source code and up to tendays of training services for OPNET’s support personnel. OPNET was also wasgranted a right to extend the service period for up to an additional eightweeks for an additional fee. The total consideration under the LicenseAgreement of approximately $572,000 was payable in cash as follows: $360,000paid upon execution of the Agreement; $200,000 paid in bi-weekly installmentsin varying amounts through January 16, 2006; and $12,000 paid at varying datesas training services are performed.

 

The Company determined that the right to extend theservice period under the License Agreement contained a more-than-insignificantdiscount, and therefore accounted for the future discount in accordance withAICPA Technical Practice Aid 5100.51, *Accountingfor Significant Incremental Discounts in Software Revenue Recognition*(“TPA 5100.51”). According to TPA 5100.51, if the maximum amount of theincremental discount on the future purchases is quantifiable, that quantifiableamount should be allocated to the elements of the arrangement and the futurepurchases assuming that the customer will purchase the minimum amount necessaryto utilize the maximum discount. The portion of the fee that is deferred as aresult of the significant incremental discount should be recognized as revenueproportionately as the future purchases are delivered, assuming all otherrevenue recognition criteria are met, such that a consistent discount rate isapplied to all purchases under the arrangement. The Company applied theprovisions of TPA 5100.51 and determined that the incremental discount value ofthe future services under the extension right was $53,000. The Company deferredthe value of the future services discount at the outset of the arrangement, andthe deferred discount was recognized as revenue as the future services wereperformed in the first quarter of 2006, as described below.

 

Additionally, in accordance with SOP 97-2, ifsufficient vendor-specific objective evidence of the fair value of the elementsdoes not exist to permit the allocation of revenue to the services and the onlyundelivered element is services, the entire arrangement fee should berecognized as the services are performed or on a straight-line basis over theservice period if no other pattern of performance is discernible. Accordingly,the Company recognized the arrangement fee, less the value of the deferredfuture discount described above, on a ratable basis over the initial eight-weekengineering service period from December 2005 to January 2006.

 

In January 2006, OPNETexercised its right to extend the engineering services through March 2006 foran additional fee of $101,000. The revenues from these additional services werealso recognized in the first quarter of 2006.

 

Total revenues recognized in connection with theLicense Agreement, including the extension of engineering services and $31,000of incremental revenues from reimbursable costs, totaled $203,000 in the fourthquarter of 2005 and $501,000 in the first quarter of 2006.

 

11

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**7.****              Disclosures About Segments of anEnterprise**

 

The Company has adoptedSFAS No. 131, *Disclosures About Segments of an Enterpriseand Related Information*. The Company operates in one reportablesegment (see Note 1 for a brief description of the Company’s business). Thetotal revenues are attributed to geographic areas based on the location of theend-user customer as follows:

 
| ** **     | ** ** | **Three months ended  March 31,** | ** ** |
|----------------|------------|-----------------------------------|------------|
| ** **     | ** ** | **2006**                          | ** ** | **2005** | ** ** |
| ** **     | ** ** | **(in thousands)**                | ** ** |
|           |       |                              |       |   |   |
| United States  |       | $                                 | 1,309      |   | $ | 1,046 |   |
| Europe         |       | 292                               |       | 131 |   |
| Israel         |       | 12                                |       | 257 |   |
| Other          |       | 77                                |       | 73 |   |
| Total revenues |       | $                                 | 1,690      |   | $ | 1,507 |   |

 

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**MANAGEMENT’S DISCUSSIONAND ANALYSIS OF**

**FINANCIALCONDITION AND RESULTS OF OPERATIONS**

 

*Statementsin this Quarterly Report on Form 10-Q concerning RadView’s business outlook orfuture performance; anticipated revenues, expenses or other financial items;product introductions and plans and objectives related thereto; and statementsconcerning assumptions made or expectations as to any future events,conditions, performance or other matters, are “forward-looking statements” asthat term is defined under U. S. federal securities laws. Forward-lookingstatements are subject to various risks, uncertainties and other factors thatcould cause actual results to differ materially from those stated in suchstatements. These risks, uncertainties and factors include, but are not limitedto: our history of losses; need for additional financing; market acceptance ofour products; our ability to develop new products and enhance existingproducts; impact of significant competition; and other factors detailed inRadView’s filings with the Securities and Exchange Commission, including thisQuarterly Report on Form 10-Q.*

 

# **Overview**

# ** **

We develop, market andsupport software that enables companies to assure the scalability, performance,efficiency and reliability of web applications.

 

We derive the majority ofour software license revenues from perpetual licenses of our load testingproducts and, to a lesser extent, our functional testing and root-causeanalysis products. We derive the majority of our services revenues from supportand maintenance arrangements and, to a lesser extent, from training and consultingservices. Substantially all of our revenues are denominated in U.S. dollars.

 

A portion of our revenueswas derived from royalty fees, license fees and engineering service fees fromtechnology license transactions. Revenues recognized under such arrangementstotaled $362,000 in the three months ending March 31, 2005 and $501,000 for thesame period in 2006. We expect that the impact of future technology licensetransactions, if any, will not represent a material portion of our totalrevenues. In March 2006, we implemented a series of measures to reduceoperating expenses, including staff reductions, renegotiation of certain vendorcontracts, and reduced spending on professional fees. As a result of increasedrevenues and lower operating expenses, we reported net income of $171,000 forthe quarter ended March 31, 2006. However, we expect that we will not be ableto sustain profitable operations in the immediate future due to an expecteddecline in revenues resulting from the substantial completion of recognition ofrevenues during the first quarter of 2006 arising from previously signedtechnology transactions.

 

On April 4, 2006, wesigned definitive agreements for a financing led by Fortissimo Capital Funds,or Fortissimo, along with several co-investors including one of our directorsand two existing shareholders, to provide for a minimum initial investment of$1.5 million and up to $2.25 million of additional investments, at the electionof the investors, over 18 months. The completion of the proposed financing issubject to approval by a majority of our shareholders. Prior to signing thedefinitive agreements for the financing, in January 2006, we executed a bridgeloan agreement with Fortissimo to provide us with interim funding for up to$500,000, subject to approval by Fortissimo and compliance by us with anapproved budget, of which we have borrowed $330,000 as of April 30, 2006. Borrowingsunder the bridge loan will become part of the minimum initial investment atclosing.

 

Our cash balance was $130,000as of March 31, 2006 compared to $166,000 as of December 31, 2005.

 

We believe that ourexisting cash and cash equivalents, along with the proceeds available under thebridge loan and the expected proceeds from the initial investment from thefinancing, assuming the approval by a majority our shareholders and completionof the financing, will be sufficient to meet our anticipated needs for workingcapital and capital expenditures for at least the next 12 months.

 

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# **Application of CriticalAccounting Policies and Estimates**

# ** **

## ***General***

## *** ***

We prepare ourconsolidated financial statements in conformity with U.S. generally acceptedaccounting principles. As such, we are required to make certain estimates,judgments and assumptions that we believe are reasonable based upon theinformation available. These estimates and assumptions affect the reportedamounts of assets and liabilities at the date of the financial statements andthe reported amounts of revenues and expenses during the periods presented. Tofully understand and evaluate our reported financial results, we believe it isimportant to understand the significant estimates and judgments applied as theyrelate to our policies for revenue recognition, software development costs,restructuring costs and accounting for stock options. More detaileddescriptions of these policies are provided in Note 2 to the consolidatedfinancial statements.

 

## ***RevenueRecognition***

## *** ***

Our revenue recognitionapproach requires that four basic criteria must be met before revenue can berecognized: (1) persuasive evidence of an arrangement exists; (2) delivery hasoccurred or services rendered; (3) the fee is fixed and determinable; and (4)collectibility is reasonably assured. Determination of criteria (3) and (4) isbased on management’s judgments regarding the fixed nature of the fee chargedfor services rendered and products delivered, and the collectibility of thosefees. Should changes in conditions cause management to determine these criteriaare not met for certain future transactions, revenue recognized for anyreporting period could be adversely affected.

 

## ***SoftwareDevelopment Costs***

## *** ***

Software developmentcosts incurred from the point of reaching technological feasibility until thetime of general product release should be capitalized. We define technologicalfeasibility as the completion of a working model. The determination oftechnological feasibility requires the exercise of judgment by our management.Because we sell our products in a market that is subject to rapid technologicalchange, new product development and changing customer needs, we have concludedthat technological feasibility is not established until the development stageof the product is nearly complete. For us, the period in which we cancapitalize software development costs is very short, so the amounts that couldbe capitalized are not material to our financial statements. Therefore, we havecharged all such costs to research and development expense in the periodincurred.

 

## ***Accountingfor Stock Options***

## *** ***

Effective January 1,2005, we have accounted for stock options issued to employees in accordancewith SFAS No. 123R (Revised 2004) (“SFAS 123(R)”), *Share-Based Payment*. Under this approach all share basedpayments to employees, including grants of employee stock options, are requiredto be recognized in the financial statements based on their fair values,instead of providing the information in a pro forma disclosure in the notes tothe financial statements. We have elected to use the modified prospectivemethod of adoption as permitted under SFAS 123 (R), which requires thatcompensation expense be recorded for all unvested stock options and restrictedstock at the beginning of the first quarter of adoption of SFAS 123(R). We havedetermined the fair value of share based-payments issued after January 1, 2005using the Black-Scholes option valuation model.

 

For reporting periodsbefore January 1, 2005, we accounted for stock options using the intrinsicmethod in accordance with Accounting Principles Board, or APB, Opinion No. 25, *Accounting for Stock Issued to Employees*.Under this approach we did not record any expense at the time the options weregranted unless the exercise price of a granted option is below the fair marketprice of our ordinary shares on the date of grant. For reporting periods beforeJanuary 1, 2005, we have provided disclosures of impact to our reported netloss and net loss per share if we had applied the fair value method.

 

The determination of fairvalue of stock options, whether for actual expense reporting under SFAS 123(R)or for pro forma disclosures, requires the application of estimates, such asestimated expected life of the options and 

 

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estimated market volatility for our ordinary shares. These estimatesare based on management’s review of historical option lives and computations ofmarket volatility for our ordinary shares.

 

**Results of Operations**

 

The following table setsforth, as a percentage of total revenues, consolidated statement of operationsdata for the periods indicated:

 
| ** **                    | ** ** | **Three Months Ended  March 31,** | ** ** |
|-------------------------------|------------|-----------------------------------|------------|
| ** **                    | ** ** | **2006**                          | ** ** | **2005** | ** ** |
| Revenues:                     |       |                              |       |   |   |
| Software  licenses            |       | 47.8                              | %          | 62.4 | % |
| Services                      |       | 52.2                              | %          | 37.6 | % |
| Total revenues                |       | 100.0                             | %          | 100.0 | % |
|                          |       |                              |       |   |   |
| Cost of revenues:             |       |                              |       |   |   |
| Software  licenses            |       | 3.0                               | %          | 2.4 | % |
| Services                      |       | 4.6                               | %          | 3.8 | % |
| Total cost of  revenues       |       | 7.6                               | %          | 6.2 | % |
|                          |       |                              |       |   |   |
| Gross profit                  |       | 92.4                              | %          | 93.8 | % |
|                          |       |                              |       |   |   |
| Operating expenses:           |       |                              |       |   |   |
| Sales and  marketing          |       | 39.5                              | %          | 63.8 | % |
| Research and development      |       | 20.5                              | %          | 47.1 | % |
| General and  administrative   |       | 21.5                              | %          | 31.6 | % |
| Total operating  expenses     |       | 81.5                              | %          | 142.5 | % |
|                          |       |                              |       |   |   |
| Income (loss) from operations |       | 10.9                              | %          | (48.7 | )% |
|                          |       |                              |       |   |   |
| Other income:                 |       |                              |       |   |   |
| Interest  expense, net        |       | (1.0                              | )%         | (0.1 | )% |
| Other income (expense),  net  |       | 0.2                               | %          | (0.5 | )% |
|                          |       |                              |       |   |   |
| Net income (loss)             |       | 10.1                              | %          | (49.3 | )% |

 

**Three Months Ended March 31, 2006 and 2005**

 

***Revenues***

 

*Total Revenues*. Total revenues were $1.7 million for the three months ended March 31, 2006 and $1.5 million for the sameperiod in 2005. This increase was due to an increase in services revenuespartially offset by a decrease in software license revenues.

 

*Software Licenses*. Software license revenues consistprimarily of revenues from the sale of licenses to our end-user customers andrevenues from the sale of technology licenses. Software license revenues were $807,000 for the three months ended March31, 2006 and $940,000 for the sameperiod in 2005, which represents a decrease of $133,000, or 14.1%. The decreasein software license revenues resulted from a $162,000 decrease in licenserevenues from technology license transactions, partially offset by a $29,000increase in license revenues from end-users. The decrease attributable totechnology licenses resulted from the recognition of $362,000 of revenues fromIxia in the first quarter of 2005 compared to $200,000 from OPNET in the firstquarter of 2006. As a result of the completion of the OPNET technologytransaction during the first quarter of 2006, we expect that software licensesrevenues will be lower in the second quarter of 2006 than in the first quarterof 2006.

 

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*Services*. Services revenues consist primarily of revenue from annual support andmaintenance contracts and, to a lesser extent, training and consultingservices. Services revenues were $883,000 for the three months ended March 31, 2006 compared to $567,000 for the sameperiod in 2005, which represents an increase of $316,000, or 55.7%. Theincrease resulted primarily from $301,000 of services revenues attributable toservices provided to OPNET in the first quarter of 2006. No similar revenueswere recognized in the same period in 2005. There was also $15,000 ofincremental revenues from maintenance services and other training services inthe first quarter of 2006. As a result of the completion of the OPNETtechnology transaction during the first quarter of 2006, we expect thatservices revenues will be lower in the second quarter of 2006 than in the firstquarter of 2006.

 

***Cost ofRevenues***

 

*Cost of Software Licenses*. Cost of software licenses consistsprincipally of direct product costs, such as product media and packaging, aswell as royalties due to third parties. Cost of software licenses was $50,000,or 6.2% of software license revenues, for the three months ended March 31, 2006 compared to $36,000, or 3.8% ofsoftware license revenues, for the same period in 2005. The cost of revenuesincreased due to higher third-party royalties in respect of increased revenues fromour WebLOAD Analyzer product, which bear such third-party royalties.

 

*Cost of Services*. Cost of services consists ofpersonnel-related costs associated with customer support and training inadditions to costs associated with providing engineering services to OPNET.Cost of services was $77,000, or 8.7% of service revenues, for the three monthsended March 31, 2006 compared to$57,000, or 10.1% of services revenues, for the same period in 2005. Theincrease in absolute dollars was due to $38,000 of incremental labor and travelcosts incurred in relation to the engineering services to OPNET, partiallyoffset by an $18,000 decrease in customer support labor costs due to costreductions made in July 2005. As a result of the completion of the OPNETengineering services in the first quarter of 2006, we expect that cost ofservices will decline in the second quarter of 2006.

 

***OperatingExpenses***

 

*Sales and Marketing*. Sales and marketing expenses consistprincipally of salaries and commissions earned by sales personnel, travel andmarketing program costs such as lead generation, trade shows, advertising andproduct promotion. Sales and marketing expenses were $668,000, or 39.5% oftotal revenues, for the three months ended March 31, 2006, compared to $961,000, or 63.8% of total revenues, for the sameperiod in 2005. The decrease resulted primarily as a result of cost reductionsin July 2005 achieved through reductions in personnel and salary-related costsand reduced marketing program spending. We expect sales and marketing expensesfor the remainder of 2006 to remain at relatively the same level as the firstquarter of 2006.

 

*Research and Development*. Research and development expenses consistprincipally of salaries and related expenses required to develop and enhanceour products. Research and development expenses were $346,000, or 20.5% oftotal revenues, for the three months ended March 31, 2006, compared to $710,000, or 47.1% of total revenues, for the sameperiod in 2005. These decreases resulted primarily as a result of costreductions in July 2005 and March 2006 achieved through reductions in personneland salary-related costs. We expect research and development expenses for theremainder of 2006 to remain at relatively the same level as the first quarterof 2006.

 

*General and Administrative*. General and administrative expenses consistprincipally of finance, executive and administrative salaries and relatedexpenses, professional fees and other costs associated with being a publiccompany. General and administrative expenses were $364,000, or 21.5% of totalrevenues, for the three months ended March 31, 2006, compared to $476,000, or 31.6% of total revenues, for the sameperiod in 2005. The decrease resulted from a decrease in professional fees andreduced salary related costs due to staffing reductions in the latter half of2005. As a result of cost reduction measures taken in March 2006, including thefuture impact of renegotiation of certain vendor contracts, some of which mayhave delayed effect, we expect that our general and administrative expenses inthe second quarter of 2006 will remain consistent with the first quarter of2006, but are expected to decline in the second half of 2006.

 

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*Interest Expense, Net*. Interest expense, net consists principallyof interest expenses and amortization of warrant discount and deferredfinancing costs arising fromoutstanding borrowings under the revolving line of credit facility and underthe bridge loan, offset by interest earned on cash investments. Interestexpense, net was $17,000 for the three months ended March 31, 2006, compared to$2,000 for the same period in 2005. The change in interest expense, net,resulted from increased interest expenses arising from borrowings under ourrevolving line of credit facility and amortization of warrant discount anddeferred financing costs. We expect that interest expense in will increase uponcompletion of the proposed financing transaction in respect to the portionattributable to bridge loan and convertible debt.

 

*Other Income (Expense), Net*. Other expense, net consists principally ofcurrency translation gains and losses. Other income, net was $3,000 for thethree months ended March 31,2006, compared to Other expense, net of $8,000 for the same period in 2005. Thechange in other expense, net was due to exchange rate fluctuations.

 

*Income Taxes.*We haveestimated net operating loss carryforwards for Israeli tax purposes totalingapproximately $16.4 million through March 31, 2006, that would reduce futureIsraeli income taxes, if any. These net operating losses may be carried forwardindefinitely and offset against future taxable business income. We expect thatduring the period these losses are utilized, our income would be substantiallytax exempt. Accordingly, there will be no tax benefit available from theselosses and no deferred income taxes have been included in our consolidatedfinancial statements.

 

Our U.S. subsidiary has estimated net operatingloss carryforwards for U.S. federal and state tax purposes totalingapproximately $35.2 million through March 31, 2006. These losses are availableto offset any future U.S. taxable income of the U.S. subsidiary and will expirebetween 2012 and 2026. The Company has recorded a full valuation allowanceagainst its deferred tax asset due to the uncertainty surrounding the abilityand the timing of the realization of these tax benefits.

 

# **Liquidity and Capital Resources**

# ** **

Cashand cash equivalents totaled $130,000 as of March 31, 2006 and $166,000 as of December 31, 2005.

 

Cash used in operatingactivities was $206,000 for the three months ended March 31, 2006 and $1.2million for the same period in 2005.Cash used in operating activities for the three months ended March 31, 2006 wasdue primarily to decreases of $277,000 in deferred revenues, $186,000 inaccounts payable, and $92,000 in accrued severance, and an increase of $34,000in accounts receivable, partially offset by net income of $171,000, a decreaseof $74,000 in prepaid expenses and an increase of $94,000 in accrued expenses.Deferred revenues decreased as a result of the completion in March 2006 ofrecognition of previously deferred revenues from a technology licensetransaction, partially offset by increased deferred maintenance servicecontracts from new customers and renewal orders. Accounts payable decreased asa result of settlement of delayed vendor payments. Accrued severance decreasedas a result of payments in accordance with Israel employment practices toterminated Israeli employees in 2006. Accounts receivable increased as a resultof longer collection cycles on several international accounts. Prepaid expenses decreased primarily as aresult of decrease in insurance, taxes and VAT prepayments. Accrued expensesincreased primarily as a result of an increase in accrued salary.

 

Cashprovided by investing activities was $55,000 for the three months ended March 31, 2006 and $103,000 for the same period in2005. Cash provided by investing activities in 2006 resulted from a decrease of$55,000 in other assets as a result of the release of severance fund depositsto certain terminated employees in accordance with Israel employment practices.

 

Cash provided byfinancing activities was $115,000 for the three months ended March 31, 2006.There was no cash provided by financing activities for the same period in 2005.The cash provided by financing activities in 2006 consisted of $185,000 ofborrowings under a bridge loan, net, partially offset by the final repayment of$70,000 under our prior revolving line of credit facility.

 

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*Comerica Line of Credit*

 

In May 2005, we obtaineda one-year revolving line of credit facility with Comerica Bank for borrowingsof up to $2.0 million. Advances under the facility were limited to the lesserof $2.0 million or the sum of 75% of eligible accounts receivables plus $1.0million. In December 2005, our borrowings under the credit facility exceededthe collateral base and, as a result, we triggered an event of default. Weagreed upon a repayment plan with Comerica Bank to repay the outstandingborrowings under the facility in installments through January 2006. In January2006, all outstanding borrowings under the credit facility were fully repaid andthe revolving line of credit facility was terminated.

 

*Fortissimo Financing*

 

On April 4, 2006, wesigned definitive agreements for a financing with Fortissimo Capital Fund GP LPon behalf of several limited partnerships in which it serves as general partnerand other potential co-investors including one of our directors and twoexisting shareholders, or the Investors. The initial investment of thefinancing would be for a minimum of $1.5 million consisting of $750,000 topurchase 25,000,000 of convertible preferred shares, or Preferred Shares, at aprice of $0.03 per share and $750,000 as a convertible loan. The closing of theinitial investment is required to occur within 14 days of approval by amajority of our shareholders. The financing also provides for an additionalinvestment, at the option of the Investors, to purchase up to an additional$2.25 million of Preferred Shares at a price of $0.03 per share for a period of18 months after the closing of the initial investment. Each Preferred Sharewould be convertible into one of our ordinary shares, subject to adjustment foranti-dilution events. Each Preferred Share would receive the same voting rightsas ordinary shares, except Preferred Shares would be entitled to elect themajority of our board of directors and have approval rights over specifiedactions. Each Preferred Share would be entitled to a preference in liquidationover our ordinary shares. The Investors would also receive warrants to purchase18,750,000 Preferred Shares with respect to the initial investment and up to56,250,000 Preferred Shares with respect to the additional investment, each atan exercise price of $0.04 per share for a period of five years from date ofissuance.

 

The financing alsoprovides for the issuance of a convertible loan payable at the closing of theinitial investment in the principal amount of $250,000 plus the balance of anyborrowings still available under the Bridge Loan at the time of closing. Theprincipal balance of bridge loans previously borrowed also will become part ofthe convertible loan at the closing of the Investment. The convertible loanwill bear interest at 8.0% per annum. The convertible loan plus, at theelection of the Investors, any accrued interest thereon, would be convertibleinto Preferred Shares at a conversion price of $0.03 per share. The convertibleloan would mature three years from the closing date and, if not converted bysuch date, would become due and payable 30 days thereafter.

 

Prior to the signing ofdefinitive agreements, on January 26, 2006, we entered into a bridge loanagreement, or the Bridge Loan, with the Investors. Under the Bridge Loan, theInvestors agreed to provide us with up to $500,000 of loans, subject to theterms of the loan. As of April 30, 2006, we have borrowed $330,000 and theremaining $170,000 remains available for future borrowing on an as-needed basisuntil the closing, subject to approval of the Investors and compliance by uswith an approved budget. The Bridge Loan bears interest at 8.0% per annum and issecured by a fixed charge on our accounts receivables and intellectual propertyand a floating charge on all of our assets. The Bridge Loan would be subject tothe terms and conditions of the convertible loan portion of the financing whenthe financing closes. If the financing is not closed due to failure to secureshareholder approval or termination by either party, the Bridge Loan willbecome due and payable within 60 days of notice by either party of an intentionto terminate negotiations with respect to the financing.

 

The financing remainssubject to, among other things, filing of amended articles of associationestablishing the rights and preferences of the Preferred Shares and approval bya majority of our shareholders. Several of our significant shareholders,representing 39.3% of our outstanding ordinary shares, have represented to usthat they intend to vote in favor of the financing. If a majority of ourshareholders does not approve the financing, the Investors will be entitled toreceive a termination fee of $250,000.

 

The financing alsoprovides for an us to enter into an management services agreement withFortissimo, under which Fortissimo will provide management and board servicesin consideration a minimum fee of $50,000 per year 

 

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payable quarterly plus an additional amount of up to $70,000 payable atthe end of each year that we are profitable, provided that such additionalamount may not to exceed the available profits.

 

*Working Capital Needs*

 

Weexpect that operating expenses will constitute a material use of our cashresources. We believe that our existing cash and cash equivalents, along withamounts available under the existing bridge loan agreement and potentialinvestment by the Investors, assuming the execution of definitive agreementsrelated to the proposed investment and approval by a majority of ourshareholders, will be sufficient to meet our anticipated needs for workingcapital for at least the next 12 months. In the event that we are unable tocomplete the proposed investment with the Investors, our ability to conduct ourbusiness will be materially adversely affected.

 

**ContractualObligations**

 

We lease all of ouroffice facilities under noncancellable operating leases that expire overvarying terms through 2009. As of March 31, 2006, our contractual obligationswere as follows:

 
| ** **                  | ** ** | **Payments due by Period** | ** ** |
|-----------------------------|------------|----------------------------|------------|
| **Contractual Obligations** | ** ** | **Total**                  | ** ** | **Less than   1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **More than   5 years** | ** ** |
| ** **                  | ** ** | **(In Thousands)**         | ** ** |
|                        |       |                       |       |   |   |   |   |   |   |   |   |
| Operating leases            |       | $                          | 335        |   | $ | 130 |   | $ | 205 |   | $ | — |   | $ | — |   |
| Severance pay (1)           |       | 447                        |       | 66 |   | — |   | — |   | 381 |   |
| Total                       |       | $                          | 782        |   | $ | 196 |   | $ | 205 |   | $ | — |   | $ | 381 |   |

 

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(1)          Severance pay relates toaccrued severance obligations to our Israeli employees as required underIsraeli labor laws. These obligations are payable only upon the termination ofthe respective employee and may be reduced if the employee’s termination isvoluntary.

 

**ITEM 3.QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK**

 

We do not use derivativefinancial instruments in our investing portfolio. We place our investments ininstruments that meet high credit quality standards such as money market funds,government securities, and commercial paper. We limit the amount of creditexposure to any one issuer. We do not expect any material loss with respect toour investment portfolio.

 

We conduct business invarious foreign currencies, primarily in Europe and Israel. As a result, we areexposed to the effects of foreign currency exchange rate fluctuations on theU.S. dollar value of foreign currency-denominated revenues and expenses. We donot use foreign exchange forward contracts to hedge our foreign currencydenominated receivables. Looking forward, there can be no assurance thatchanges in foreign currency rates, relative to the U.S. dollar, will notmaterially adversely affect our consolidated results.

 

**ITEM 4.CONTROLS AND PROCEDURES**

 

**Evaluationof Controls and Procedures**

 

We carried out anevaluation, under the supervision and with the participation of the ourmanagement, including our Chief Executive Officer, or CEO, and Chief FinancialOfficer, or CFO, of the effectiveness of the design and operation of theCompany’s disclosure controls and procedures as of the end of the periodcovered by this Quarterly Report on Form 10-Q. Based on this evaluation, theCEO and CFO have concluded that our disclosure controls and procedures areeffective to ensure that material information is recorded, processed,summarized and reported by our management on a timely basis in order to complywith our disclosure obligations under the Securities Exchange Act of 1934 andthe SEC rules thereunder.

 

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**Changesin Internal Controls**

 

There were no significantchanges in the Company’s internal controls or in other factors during the firstquarter of 2006 that have materially affected, or are reasonably likely tomaterially affect, the Company’s internal controls.

 

**PART II -OTHER INFORMATION**

 

**Item 6.Exhibits**

 

**Exhibit Index**

** **
| 31.1   | Certification by Chief  Executive Officer pursuant to 15 U.S.C. Section 7241, as adopted pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                 |
| 31.2   | Certification by Chief  Financial Officer pursuant to 15 U.S.C. Section 7241, as adopted pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002. |
|   |                                                                                                                                                 |
| 32     | Certification pursuant  to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                             |

 

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**SIGNATURES**

 

Pursuant to therequirements of the Securities and Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 
|               | RADVIEW SOFTWARE LTD.   |
|--------------------|-------------------------|
|               |                    |
|               |                    |
| Date: May 18, 2006 | /s/ CHRISTOPHER DINEEN  |   |
|               | Christopher Dineen      |
|               | Chief Financial Officer |

 

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