RDWR 20-F DEF-14A Report Dec. 31, 2017 | Alphaminr
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RDWR 20-F Report ended Dec. 31, 2017

Balance Sheet
Cash Flow
Income Statement
20-F 1 zk1821405.htm 20-F

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
☐ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended
December 31, 2017

OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
OR
☐ SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of event requiring this shell company report _________
Commission file number : 000-30324

RADWARE LTD.
(Exact name of registrant as specified in its charter)
Israel
(Jurisdiction of incorporation or organization)
22 Raoul Wallenberg Street, Tel Aviv 6971917 , Israel
(Address of principal executive offices)
Gadi Meroz, Adv.
General Counsel
Tel. +972-3-7668666, Fax: +972-3-7668982
22 Raoul Wallenberg Street, Tel Aviv 6971917 , Israel
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:

Title of each class Name of each exchange on which registered
Ordinary Shares,
NIS 0.05 par value per share
The Nasdaq Stock Market LLC

Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None
(Title of Class)
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report (December 31, 2017):
44,133,954 Ordinary Shares, NIS 0.05 par value per share
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
☐ Yes ☒ No
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
☐ Yes ☒ No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
☒ Yes          ☐ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
☒ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer ☐ Accelerated Filer ☒
Non-Accelerated Filer o Emerging growth company ☐
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If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act. ☐
† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
☒
U.S. GAAP

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

☐
Other
If “Other” has been checked in response to the previous question indicate by check mark which financial statement item the registrant has elected to follow:
☐ Item 17 ☐ Item 18
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
☐ Yes ☒ No
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INTRODUCTION
Unless the context otherwise requires, all references in this annual report to:
·
“we,” “us,” “our,” the “Company,” and “Radware” are to Radware Ltd. and its subsidiaries;
·
“ordinary shares” are to our Ordinary Shares, par value NIS 0.05 per share;
·
“Companies Law” or the “Israeli Companies Law” are to the Israeli Companies Law, 5759-1999, as amended;
·
the “SEC” are to the U.S. Securities and Exchange Commission;
·
the "U.S." are to the United States;
·
“U.S. GAAP” are to generally accepted accounting principles in the United States;
·
“Nasdaq” are to the Nasdaq Global Market (formerly, the Nasdaq National Market);
·
“dollars”,  “$” or “US$”  are to U.S. dollars; and
·
“NIS” or “shekels” are to New Israeli Shekels.
We have registered trademarks for, among others, Radware®; Radware Logo: ®; OnDemand Switch®; Alteon®; APSolute®; LinkProof®; DefensePro®; CID®; SIPDirector®; AppDirector®; AppXcel®; AppXML®; AppWall®; APSolute Insite®; Triangulation®; SmartNat®; StringMatch Engine®; Web Server Director®; Fireproof®; SecureFlow®; APSolute Vision®; VAdapter®; vDirect®; Alteon VA®; AppShape®; FastView®; DefenseFlow®; TeraVIP®; Virtual Director®;  DefensePipe®;“ADC Fabric®”; CyberStack® and “Virtual DefensePro® and we have trademark applications pending for, among others, “ADC-VX”™; VADI™ (Virtual Application Delivery Infrastructure)  and “Inflight”™.  Unless the context otherwise indicates, all other trademarks and trade names appearing in this annual report are owned by their respective holders.
Our consolidated financial statements appearing in this annual report are prepared in dollars and in accordance with U.S. GAAP, and are audited in accordance with the standards of the Public Company Accounting Oversight Board in the United States.
On March 25, 2018, the exchange rate between the NIS and the dollar, as quoted by the Bank of Israel, was NIS 3.491 to $1.00. Unless the context otherwise indicates, statements in this annual report that provide the dollar equivalent of NIS amounts or provide the NIS equivalent of dollar amounts are based on such exchange rate.
On April 12, 2013, we effected a two-for-one forward split of our ordinary shares, and accordingly the par value of our ordinary shares has changed from NIS 0.1 to NIS 0.05 per share. Unless indicated otherwise by the context, all ordinary shares, options and per share amounts as well as stock prices in this annual report have been adjusted to give retroactive effect to the stock split for all periods presented.
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Statements made in this annual report concerning the contents of any contract, agreement or other document are summaries of such contracts, agreements or documents and are not complete descriptions of all of their terms. If we filed any of these documents as an exhibit to this annual report or to any registration statement or annual report that we previously filed, you may read the document itself for a complete description of its terms, and the summary included herein is qualified by reference to the full text of the document which is incorporated by reference into this annual report.
Unless otherwise indicated, information contained in this annual report concerning our industry and the markets in which we operate, including our competitive position and market opportunity, is based on information from our own management estimates and research, as well as from industry and general publications and research, surveys and studies conducted by third parties. Management estimates are derived from publicly available information, our knowledge of our industry and assumptions based on such information and knowledge, which we believe to be reasonable. Our management estimates have not been verified by any independent source, and we have not independently verified any third-party information. In addition, assumptions and estimates of our and our industry’s future performance are necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in Item 3.D “Risk Factors” below.

CAUTIONARY STATEMENT REGARDING
FORWARD-LOOKING STATEMENTS
Except for the historical information contained herein, the statements contained in this annual report are forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995 and other federal securities laws with respect to our business, financial condition and results of operations.  Actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including all the risks discussed in “Risk Factors” and elsewhere in this annual report.
We urge you to consider that statements which use the terms “believe,” “do not believe,” “expect,” “plan,” “intend,” “estimate,” “anticipate,” and similar expressions are intended to identify forward-looking statements.  Such forward-looking statements appear in Item 3.D “Risk Factors”, Item 4 “Information on the Company”, and Item 5 “Operating and Financial Review and Prospects” as well as elsewhere in this annual report. These statements reflect our current views with respect to future events and are based on assumptions and are subject to risks and uncertainties, including those discussed under Item 3.D “Risk Factors” and in our other filings with the SEC.  Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof.
Except as required by applicable law, including the securities laws of the United States, we do not intend to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
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Table of Contents
8
8
8
9
A.    Selected Financial Data
9
B.     Capitalization and Indebtedness
10
C.     Reasons for the Offer and Use of Proceeds
11
D.     Risk Factors
11
35
A.    History and Development of the Company
35
B.     Business Overview
36
C.     Organizational Structure
55
D.     Property, Plants and Equipment
57
57
57
A.    Operating Results
57
B.     Liquidity and Capital Resources
75
C.     Research and Development, Patents and Licenses, etc.
78
D.     Trend Information
79
E.     Off-Balance Sheet Arrangements
80
F.     Tabular Disclosure of Contractual Obligations
80
81
A.    Directors and Senior Management
81
B.     Compensation
86
C.     Board Practices
89
D.     Employees
98
E.     Share Ownership
99
102
A.    Major Shareholders
102
B.     Related Party Transactions
104
C.     Interests of Experts and Counsel
106
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107
A.    Consolidated Statements and other Financial Information
108
B.     Significant Changes
108
109
A.    Offer and Listing Details
109
B.     Plan of Distribution
110
C.     Markets
110
D.     Selling Shareholders
110
E.     Dilution
110
F.     Expenses of the Issue
110
111
A.     Share Capital
111
B.     Memorandum and Articles of Association
111
C.     Material Contracts
117
D.     Exchange Controls
117
E.     Taxation
118
F.     Dividends and Paying Agents
132
G.     Statement by Experts
132
H.     Documents on Display
132
I.     Subsidiary Information
133
134
135
136
136
136
136
138
138
138
139
140
141
141
141
142
142
142
142
142
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PART I
ITEM 1.
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not applicable.
ITEM 2.
OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
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ITEM 3.
KEY INFORMATION
A. Selected Financial Data
The following tables present selected information from our consolidated statements of income and balance sheet data for the periods and as of the dates indicated.  We derived the selected consolidated statements of income for the years ended December 31, 2015, 2016 and 2017 and the selected balance sheet data as of December 31, 2016 and 2017 from our audited consolidated financial statements included elsewhere in this annual report on Form 20-F, which have been prepared in accordance with U.S. GAAP and audited by Kost, Forer, Gabbay & Kasierer, an independent registered public accounting firm and a member firm of Ernst & Young Global.  The selected consolidated statements of income data for the years ended December 31, 2013 and 2014 and the selected balance sheet data as of December 31, 2013, 2014 and 2015 are derived from our audited consolidated financial statements not included in this annual report, which have been prepared in accordance with U.S. GAAP.
You should read the following selected financial data together with the section of this annual report entitled “Operating and Financial Review and Prospects” and our consolidated financial statements together with the notes thereto included elsewhere in this annual report
Year ended December 31,
2017
2016
2015
2014
2013
(U.S. dollars and share amounts in thousands, except per share data)
Consolidated Statements of Income Data:
Revenues:
Products
$
117,968
$
110,186
$
136,793
**
$
143,466
**
$
118,727
Services
93,401
86,399
79,773
**
78,426
**
74,270
211,369
196,585
216,566
221,892
192,997
Cost of revenues:
Products
30,862
27,320
29,159
29,448
27,066
Services
8,754
8,375
9,041
10,284
9,669
39,616
35,695
38,200
39,732
36,735
Gross profit
171,753
160,890
178,366
182,160
156,262
Operating expenses, net:
Research and development, net
59,003
51,732
49,987
44,081
40,983
Sales and marketing
108,744
103,774
93,347
93,203
82,815
General and administrative
17,577
18,133
17,033
19,797
14,895
Other income
(6,900
)
-
-
-
-
Total operating expenses
178,424
173,639
160,367
157,081
138,693
Operating income (loss)
(6,671
)
(12,749
)
17,999
25,079
17,569
Financial income, net
4,830
5,741
5,867
5,802
4,494
Income (loss) before taxes on income
(1,841
)
(7,008
)
23,866
30,881
22,063
Taxes on income
(5,652
)
(1,651
)
(5,297
)
(5,931
)
(4,008
)
Net income (loss)
$
(7,493
)
$
(8,659
)
$
18,569
$
24,950
$
18,055
Basic net earnings (loss) per share*
$
(0.17
)
$
(0.20
)
$
0.40
$
0.55
$
0.40
Diluted net earnings (loss) per share*
$
(0.17
)
$
(0.20
)
$
0.40
$
0.53
$
0.39
* See notes 2(y) and 11 to our consolidated financial statements included elsewhere in this annual report for an explanation regarding the computation of basic and diluted net earnings (loss) per ordinary share.

** The breakdown between product and service revenues for 2015 and 2014 was reclassified to include most subscription revenues in product revenues rather than allocating some to product and some to service revenues, which has resulted in a change to previously published figures for the periods ended December 31, 2015 and December 31, 2014, respectively.
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Year ended December 31,
2017
2016
2015
2014
2013
(in thousands)
Weighted average number of ordinary shares used in computing basic net earnings  (loss) per share
43,476
43,868
45,895
45,309
44,760
Weighted average number of ordinary shares used in computing diluted net earnings (loss) per share
43,476
43,868
46,739
46,895
46,717
As of December 31,
2017
2016
2015
2014
2013
(U.S. dollars in thousands)
Consolidated Balance Sheet Data:
Cash and cash equivalents, short-term bank deposits and marketable securities
$
200,961
$
226,086
$
130,669
$
104,416
$
134,826
Long-term bank deposits and marketable securities
143,338
94,059
184,457
226,273
150,874
Working capital
140,765
181,502
101,029
76,010
113,546
Total assets
469,088
430,336
430,887
442,573
388,734
Shareholders’ equity
315,356
299,763
319,123
333,697
294,120
Capital Stock
349,923
326,001
313,445
294,738
263,420
B. Capitalization and Indebtedness
Not applicable.
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C. Reasons for the Offer and Use of Proceeds
Not applicable.
D. Risk Factors
You should carefully consider the following risks before deciding to purchase, hold or sell our ordinary shares. Our business, operating results and financial condition could be seriously harmed due to any of the following risks. The following risks are not the only risk factors facing our Company. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also affect our business. The trading price of our ordinary shares could decline due to any of these risks. You should also refer to the other information contained or incorporated by reference in this annual report, before making any investment decision regarding our Company.
Risks Related to Our Business and Our Industry
We have incurred net losses in the past, and may incur losses in the future.
Although we were profitable in the past several years, including 2015, we incurred net losses during 2016 and 2017, mainly as a result of an increase in our operating expenses compared to a lower rate of increase in our revenues in 2017 and a decrease in revenues in 2016. Our ability to achieve or increase profitability in the future depends in part on the following factors: the economic health of the global economy; the rate of growth of, and changes in technology trends in our market and other industries in which we currently or may in the future operate; our ability to develop and manufacture new products and technologies in a timely manner; the competitive position of our products; the continued acceptance of our products and services by our customers and in the industries that we serve; and our ability to manage expenses. In the future, it may be necessary to undertake cost reduction initiatives to become profitable, which could lead to a deterioration of our competitive position. Any difficulties that we encounter as we reduce our costs could negatively impact our results of operations and cash flows. We cannot assure you that we will return to profitability. Our revenues also may not grow, may grow at a lower rate than experienced in 2017 or may decline as they did in 2016, which would negatively impact our results of operations and cash flows. Over the past few years, we changed our sales model to increased product subscription sales, leading to deferral of revenue recognition, while our operating expenses are based on current sales levels regardless of revenue recognition.
During 2017, our operating expenses grew mainly due to investments in sales, the Seculert acquisition, marketing initiatives and the appreciation of the NIS against the dollar, which raised the dollar cost of our Israeli operations. We may continue to increase our operating expenses in future periods. Our decision to increase operating expenses and the scope of such increases depends upon several factors, including the market situation and the effectiveness of our past expenditures. We may continue to make additional expenditures in anticipation of generating higher revenues, which we may not realize, if at all, until sometime in the future.  This could cause reductions in our profitability or lead to losses, as it did in 2016 and 2017. Additionally, a failure of any acquisition or product development initiative to produce increased revenues could have a material adverse effect on our operations and profitability.
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If our revenues do not increase as anticipated or decline, or if our expenses increase more than anticipated, we may incur losses.
We must manage our anticipated growth effectively in order to be profitable.
We have actively expanded our operations in the past and may continue to expand them in the future in order to gain market share in the evolving market for cyber security and application delivery solutions. This expansion has required, and may continue to require, managerial, operational and financial resources.
In some cases, we may choose to increase our cost of operations at the expense of our short term profitability in order to support future expansion and growth. We cannot assure you that we will continue to expand our operations successfully. If we are unable to manage our expanding operations effectively, our revenues may not increase or may decline, our cost of operations may rise and we may not be profitable.
Global rollout of new information systems could disrupt our operations and cause unanticipated increases in our costs.

In the past few years, we have invested significant capital and human resources in a project for a company-wide enterprise resource planning, or ERP, system, including modules such as a new customer relationship management, or CRM, system for our sales operations and new customer service system for our customer support. We intend to continue to invest significant capital and human resources to further improve and implement our ERP and other information systems. Any major disruptions or deficiencies in the design and implementation of the new information systems, particularly those that impact our operations, could adversely affect our ability to process customer orders, ship products, provide services and support to our customers, bill and track our customers, timely report our financial results and otherwise run our business.
Changing or severe global economic conditions and volatility of the market for our products, including slow-down in expenditures and other trends in our industry, could have a material adverse effect on our results of operations.
Our business is affected by global economic conditions and their impact on current and anticipated market demand for our products. While the global economy has improved in recent years, uncertainties surrounding the strength of the recovery in many regions remain. As our operations are on a global level, we may be affected by such events and other economic and political uncertainties. Uncertainty about current global economic conditions continues to pose a risk as customers may postpone or reduce spending in response to such uncertainties. For example, Brexit and the withdrawal of the United Kingdom from the European Union, as well as other member countries’ public discussions about the possibility of withdrawing from the European Union, may also create global economic uncertainty, which may impact, among other things, the demand for our products and services. Furthermore, should companies in our target markets reduce capital or operational expenditures, we may experience a reduction in sales, longer sales cycles, and slower adoption of new technologies as well as downward pressure on the price of our products. In addition, if the market for our products and services is flat and our customers experience low visibility, we may not be able to increase our sales (whether direct sales or indirect sales through our distributors). Each of the above scenarios could have a material adverse effect on our business, operating results and financial condition.
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Competition in the market for cyber security and application delivery solutions and our industry in general is intense. As a result, we may lose market share and we may be unable to maintain profitability.
The information technology, or IT, marketplace is competitive and has very few barriers to entry. In particular, the cyber security and application delivery market in which we focus is highly competitive. We expect competition to intensify in the future, and we may lose market share if we are unable to compete effectively.
Most of our competitors have greater financial, personnel and other resources than us, which may limit our ability to effectively compete with them. Our principal competitors in the cyber security and application delivery market include: F5 Networks, Inc., Arbor Networks, Inc., Akamai Technologies, Inc., or Akamai, Citrix Systems, Inc., A10 Networks, Inc., Imperva, Inc., or Imperva, Amazon.Com, Inc. (through Amazon Web Services’ ELB service), Microsoft Corporation (through Microsoft Azure) and Brocade Communications Systems, Inc. (through Broadcom Limited), HP Inc. and Intel Corporation (through McAfee, Inc.). We expect to continue to face additional competition as new participants enter the market or extend their portfolios into related technologies. Larger companies with substantial resources, brand recognition and sales channels may form alliances with or acquire competing cyber security and application delivery solutions and emerge as significant competitors.
Competition may result in lower prices or reduced demand for our products and a corresponding reduction in our ability to recover our costs, which may impair our ability to achieve, maintain and increase profitability. Furthermore, the dynamic market environment poses a challenge in predicting market trends and expected growth. We cannot assure you that we will be able to implement our business strategy in a manner that will allow us to be competitive. If any of our competitors offer products or services that are more competitive than ours, we could lose market share and our business, financial condition and results of operations could be materially and adversely affected as a result.
Our international sales may expose us to additional risks
We currently offer our products in over 40 countries, including the U.S. For the years ended December 31, 2017 and 2016, our sales outside the Americas (which include the U.S., Canada as well as Central America and Latin America, or CALA) represented approximately 54% and 57%, respectively, of our total sales. Our international business activity involves varying degrees of risk and uncertainty inherent in doing business in so many different jurisdictions. Such risks include, among others, difficulties and costs of staffing and managing foreign operations; the possibility of unfavorable circumstances and additional compliance costs arising from host country laws or regulations, including unexpected changes of interpretations thereof and reduced protection for intellectual property rights in some countries; partial or total expropriation, export duties and quotas; local tax exposure; political instability, insurrection or war; differences in business practices; and recessionary environments in multiple foreign markets, such as those that occurred in some European countries in the past several years. We cannot be certain that the foregoing factors will not have a material adverse effect on our future revenues and, as a result, on our business, operating results and financial condition.
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We may experience significant fluctuations in our quarterly financial performance.
Our quarterly operating results have varied significantly in the past and may vary significantly in the future as a result of various factors, many of which are outside of our control .  A delay in our recognition of revenue may have a negative impact on our results of operations for a given quarter.  In addition, over the past few years, we changed our sales model, to increased product subscription sales, leading to a deferral of revenue recognition. While hardware products are recognized almost immediately upon their shipment and invoicing, product services and support services are recognized throughout the term of their respective contract length. At the same time, we base our decisions regarding our operating expenses on anticipated sales trends and our expense levels are relatively fixed. In addition, due to the change in our sales model, leading to deferral of revenue recognition, while operating expenses are based on current sales levels, we witnessed an increase in our total current operating expenses, leading to the operating loss we incurred in 2017. As such, because only a small portion of our expenses are dependent on our revenues, if our revenues fall below our expectations, our earnings and profitability for that period will be materially and adversely affected. Our future operating results will depend on many additional factors, including, but not limited to, the following:
·
demand for our products;
·
sales cycles (see “Risk Factors— Our products generally have long sales cycles, which increase our costs in obtaining orders and reduce the predictability of our earnings”);
·
seasonal trends, as more fully described below;
·
new product announcements by us and our competitors;
·
budgeting cycles of our customers;
·
changes in our strategy;
·
currency exchange rate fluctuations and economic conditions in the geographic areas where we operate; and
·
those other factors discussed in this annual report.
In addition, our quarterly operating results have been, and are likely to continue to be, influenced by seasonal fluctuations in the sales of our products and services. Because our sales have mostly grown year-over-year since our inception, these fluctuations may not be apparent from our historical financial statements. However, we believe that our sales and sales growth have been, and will continue to be, affected by the seasonal purchasing patterns of some of our customers, primarily in the first quarter ended March 31 when our sales may be reduced due to our customers’ annual purchasing budget planning process and in the third quarter ended September 30 due to a slowdown in business activities during the summer months in Europe. Conversely, our sales during the fourth quarter ended December 31 have typically increased because some of our customers tend to make greater capital expenditures towards the end of their fiscal years.
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Due to the foregoing factors, our sales and operating results in any quarter are difficult to forecast, and period-to-period comparisons of our operating results may not necessarily be meaningful. In addition, in some future quarter our operating results may be below the expectations of public market analysts and investors.  In such event the price of our ordinary shares may be materially adversely affected.
If the market for cyber security and application delivery solutions does not continue to develop and grow, we will not be able to sell enough of our products to maintain profitability.
The cyber security and application delivery market in which we operate is rapidly evolving and we cannot assure you that it will continue to develop and grow. In addition, we cannot assure you that our products and technology will keep pace with the changes to this market. Market acceptance of cyber security and application delivery solutions may be inhibited by, among other factors, a lack of anticipated congestion and strain on existing network infrastructures and the availability of alternative solutions. If demand for cyber security and application delivery solutions does not continue to grow, or grows in a slower pace than expected, we may not be able to sell enough of our products to maintain and increase our profitability.
If the market for our cloud based solutions does not continue to develop and grow, we will sustain capital and operation loses.
As our business continues to shift to the cloud and we continue to offer more cloud based solutions, our investments, both capital and operational, in our cloud business increases.  We cannot assure you that our cloud bases sales will continue to develop and grow. In addition, we cannot assure you that our services and technology will keep pace with the changes to this market. Specifically, the emergence of alternative solutions, such as Amazon AWS and Microsoft Azure public cloud may negatively affect sales of our products and services.
We must develop new products and services as well as enhancements and new features to existing products to remain competitive.  If we fail to develop new products and services of fail to develop product enhancements on a timely basis, we may lose market share.
The market for cyber security and application delivery solutions is characterized by rapid technological changes, frequent new product introductions, changes in customer requirements and evolving industry standards. Our products typically constitute a critical portion of our customers’ data centers. In recent years, the capacity of transactions in such data centers has been steadily increasing.  Due to such increases in capacity and in order to remain competitive in our industry, we must address the increased needs of our customers by developing more powerful platforms for our products. Additionally, we must address increased demands by our customers for advancements in our applications in order to support our customers’ growing needs and evolutions in their data centers. In order to meet this challenge and remain competitive in the market, we have introduced and must continue to introduce new enhancements to our existing product lines. Furthermore, t he cyber-security market is characterized by rapid changing customer requirements driven by legal, regulatory and self-regulatory compliance mandates, frequent new product introductions and enhancements and evolving industry standards in computer hardware and software technology. Customers and industry analysts expect speedy introduction of software and new functionality to respond to new cyber threats, requirements and risks and we may be unable to meet these expectations.
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Accordingly, our future success will depend to a substantial extent on our ability to: invest significantly in research and development; develop, introduce and support new products and services and enhancements on a timely basis; and gain market acceptance of our products.
We have developed and are currently developing new products and enhancements to our existing products and services offerings. Our development of new products and enhancement of our offerings is undertaken in an effort to remain competitive in our market, and our failure to do so could result in a decrease in our revenues. In addition, we have invested and must continue to invest in research and development in order to remain competitive in our industry. However, there can be no assurances that continued investment and higher costs of research and development, including associated capital expenditures, will ultimately result in us maintaining or increasing our market share, which would result in a decline to our operating results.  If our research and development expenses increase without a corresponding increase in our revenues, it could have a material adverse effect on our operating results. Also, we may not be able to successfully complete the development and market introduction of new products or product enhancements in a timely manner. If we fail to develop and deploy new products and product enhancements on a timely basis, or if we fail to gain market acceptance of our new products, our revenues will decline and we may lose market share to our competitors.
During 2017, we invested in, and plan to continue to invest in 2018, in developing or when appropriate, acquiring, capabilities to advance our product offering and market vision. One of the primary trends in the past few years in our industry is the shift to providing services through the cloud. We have also invested and intend to continue to invest substantial resources in developing and enhancing our cloud offerings.  There is no assurance that we will be successful in marketing and selling our next generation cyber security and application delivery solutions, or that we will be able to grow revenues to justify our investments.
Moreover, we identified an industry trend in the past few years that drives a shift from customers’ maintaining on-premise physical appliances or having internal specialized knowledge to support and maintain complex IT infrastructure to relying on third party provided managed IT services. In response to such market trend, we have increased our support offerings to include, among others, such managed services.
Our failure to develop and market new products, product enhancements or services on a timely basis or our failure to gain market acceptance of our new products and services could result in our loss of market share and our business and could materially and adversely affect our financial condition and results of operations.
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Even if we are able to anticipate, develop and commercially introduce enhancements and new products and services, there can be no assurance that we will be successful in developing sufficient market awareness of them or that such enhancements or new products and services will achieve widespread market acceptance. For example, while the majority of our current revenues are derived from the sales of our DefensePro and Alteon appliances, we also offer our security products as cloud-based services. The market for cloud-based security solutions is relatively new and it is uncertain whether our security cloud-based services will continue to gain rapid market acceptance. In addition, diversifying our product offerings will require significant investment and planning, will bring us more directly into competition with software and cloud-based providers that may be better established or have greater resources than we do, will require additional investments of time and resources in the development and training of our channel and strategic partners and will entail a significant risk of failure.
Government regulation affecting our business is evolving, and unfavorable changes could harm our business.
Laws and regulations that apply to cloud-based solutions are becoming more prevalent and constantly evolving, particularly in the area of privacy. We may be impacted by changes in privacy-related regulations governing the collection, use, retention, sharing and security of data that we receive from our customers and/or visitors to their websites and others. Complying with a diverse range of privacy requirements could cause us to incur substantial costs or require us to change our business practices in a manner adverse to our business. Any failure, or perceived failure, by us to comply with any privacy-related laws, government regulations or directives, or industry self-regulatory principles could result in damage to our reputation or proceedings or actions against us by governmental entities or others, which could potentially have an adverse effect on our business. For example, the European General Data Protection Regulation (Regulation (EU) 2016/679), or GDPR, that will come into effect on May 25, 2018, includes operational requirements for companies that receive or process personal data of residents of the European Union and non-compliance will result in significant penalties. Our compliance with GDPR carried and will continue to carry capital expenditure investments.
Furthermore, laws, regulations and industry standards are subject to drastic changes that, particularly in the case of industry standards, may arrive with little or no notice, and these could either help or hurt the demand for our products. If we are unable to adapt our products and services to changing regulatory standards in a timely manner, or if our products fail to assist our customers with their compliance initiatives, our customers may lose confidence in our products and could switch to competing solutions. In addition, if regulations and standards related to cyber-security are changed in a manner that makes them less onerous, our customers may view government and industry regulatory compliance as less critical to their businesses, and our customers may purchase fewer of our products and services, or none at all. In either case, our sales and financial results would suffer.
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Outages, interruptions or delays in hosting services could impair the delivery of our cloud-based security services and harm our business.
We operate infrastructure that supports our distributed denial of service (DDoS) and web application firewall (WAF) Cloud-based services and scrubbing centers’ services. Despite precautions taken within our own internal network and at these third party facilities, the occurrence of a natural disaster or an act of terrorism or other unanticipated problems could result in lengthy interruptions in our services.
The DDoS and WAF cloud-based security services that we provide are operated from a network of third party facilities that host the software and systems that operate these security services. Any damage to, or failure of, our internal systems or systems at third party hosting facilities could result in outages or interruptions in our DDoS and WAF cloud-based services. Outages or interruptions in our DDoS and WAF cloud-based security services may cause our customers and potential customers to believe our DDoS and WAF cloud-based security services are unreliable, cause us to issue credits or pay penalties, cause customers to terminate their subscriptions and adversely affect our reputation and renewal rates and our ability to attract new customers, ultimately harming our business and revenue.
Some of our products contain “open source” software, and any failure to comply with the terms of one or more of these open source licenses could negatively affect our business.
Some of our products utilize open source technologies. Some open source software licenses require users who distribute or make available as a service open source software as part of their own software product to publicly disclose all or part of the source code of the users’ software product or to make available any derivative works of the open source code on unfavorable terms or at no cost. We have established processes to help alleviate these risks, including a review process for screening requests from our development organization for the use of open source software, but we cannot be sure that all open source software is submitted for approval prior to use in our products. In addition, open source license terms may be ambiguous and many of the risks associated with use of open source software cannot be eliminated, and could, if not properly addressed, negatively affect our business.  We may face ownership claims of third parties over, or seeking to enforce the license terms applicable to, such open source software, including by demanding the release of the open source software, derivative works or our proprietary source code. Any such requirement to disclose our source code or other confidential information related to our products could materially and adversely affect our competitive position and may adversely impact our business, results of operations and financial condition. In addition, if the license terms for the open source code change, we may be forced to re-engineer our software or incur additional costs.
We may pursue mergers or make acquisitions or other investments that could disrupt our business and harm our financial condition.
As part of our business strategy, we may invest in or acquire complimentary businesses, technologies or assets or enter into joint ventures or other strategic relationships with third parties. For example, in January 2017, we acquired Seculert, a company engaged in cyber-attack detection and HTTP analytics solutions and developing user and entity behavioral analysis “UEBA” solutions. In connection with the acquisition of Seculert and with any future acquisitions, we have and may in the future assume liabilities, incur acquisition related costs, incur amortization expenses or realize write-offs on assets no longer being used or phased out. In addition, the future valuation of these acquisitions may decrease from the market price paid by us which could result in the impairment of our goodwill and other intangible assets associated with the relevant acquired assets.  Moreover, our operation of any acquired or merged businesses, technologies or assets could involve numerous risks, including:
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post-merger integration problems resulting from the combination of any acquired operations with our own operations or from the combination of two or more operations into a new merged entity;
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diversion of management’s attention from our core business;
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substantial expenditures, which could divert funds from other corporate uses;
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entering markets in which we have little or no experience;
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loss of key employees of the acquired operations; and
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known or unknown contingent liabilities, including, but not limited to, tax and litigation costs.
We cannot be certain that the Seculert acquisition or that any future acquisitions or mergers will be successful. If the operation of the business of any future acquisitions or mergers disrupts our operations, our results of operations may be adversely affected, and even if we successfully integrate the acquired business with our own, we may not receive the intended benefits of the acquisition. In addition , our pursuit of potential acquisitions may divert our management’s attention from our core business and require considerable cash outlays at the expense of our existing operations, whether or not such transactions are consummated. For example, in January 2017, we acquired Seculert Ltd., or Seculert, a company engaged in cyber-attack detection and hypertext transfer protocol (HTTP) analytics solutions, including the development user and user entity behavioral analysis (UEBA) solutions. This acquisition resulted in additional operating costs. A failure of any acquisitions or product developments to produce increased revenues could have a material adverse effect on our operations and profitability.
An increasing amount of intangible assets and goodwill on our books may in the future lead to significant impairment charges.
The amount of goodwill and intangible assets on our consolidated balance sheet is significant. We regularly review our intangible and tangible assets, including goodwill, for impairment. Goodwill and acquired research and development not yet ready for use are subject to impairment review at least annually. Other intangible assets are reviewed for impairment when there is an indication that impairment may have occurred. Impairment testing has led to and may in the future lead to significant additional impairment charges.
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We depend upon independent distributors to sell our products to customers.  If our distributors do not succeed in selling our products, we may not be able to operate profitably.
We sell our products primarily to independent distributors, including value added resellers (VARs), original equipment manufacturers (OEMs) and system integrators, and are highly dependent upon these distributors’ active marketing and sales efforts. We currently have active independent distributors and resellers that sell our products to the end-user customer. Our distribution agreements with our distributors generally are non-exclusive, ranging from one-year agreements to multiple-year duration with no obligation on the part of our distributors to renew the agreements.  Our distribution agreements also typically do not prevent our distributors from selling products of our competitors and do not contain minimum sales or marketing performance requirements. As a result, our distributors may give higher priority to products of our competitors or their own products, thereby reducing their efforts to sell our products. In addition, we may not be able to maintain our existing distribution relationships, and we may not be successful in replacing them on a timely basis or at all. We may also need to develop new distribution channels for new products, and we may not succeed in doing so. Any changes in our distribution channels, including a termination or other disruption of our commercial relationship with our distributors, or our inability to establish distribution channels for new products could impair our ability to sell our products and result in a material adverse effect on our business, financial condition and results of operations.
Our products generally have long sales cycles, which increase our costs in obtaining orders and reduce the predictability of our earnings.
Our products are technologically complex and are typically intended for use in applications that may be critical to the business of our customers. As a result, our pre-sales process is often subject to delays associated with budgetary constraints, lengthy approval and procurement processes that typically accompany the design and testing of new equipment. The sales cycles of our products to new customers can last as long as twelve months (and in some cases, for example with carrier customers, even longer) from initial presentation to sale. This long sales cycle results in a delay to our recognition of revenue and results in our need to make significant investments in marketing and sales. Long sales cycles also subject us to risks not usually encountered in a short sales cycle, including our customers’ budgetary constraints and internal acceptance reviews and processes prior to purchase.  In addition, orders expected in one quarter could shift to another because of the timing of our customers’ procurement decisions. Furthermore, customers may defer orders in anticipation of new products or product enhancements introduced by us or by our competitors. Such long sales cycles and order deferrals may cause us to keep levels of inventory that are higher than what we will be eventually able to use, which, over time, may lead to write-offs of such unused inventory. These factors complicate our planning processes and reduce the predictability of our earnings.
Currency exchange rates and fluctuations of exchange rates could have a material adverse effect on our results of operations.
We are impacted by exchange rates and fluctuations thereof in a number of ways, including:
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A large portion of our expenses in Israel, principally salaries and related personnel expenses, are paid in NIS, whereas most of our revenues are generated in U.S. dollars. When the dollar is weak, our foreign currency denominated expenses will be higher, whereas if the dollar is strong, our foreign currency denominated expenses will be lower. If the NIS strengthens against the U.S. dollar (as happened in 2017), the dollar value of our Israeli expenses will increase and may have a material adverse effect on our business, operating results and financial condition;
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A portion of our international sales are denominated in currencies other than U.S. dollars, such as Euro, Chinese Yuan and Australian Dollar, thereby exposing us to currency fluctuations in such international sales transactions;
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We incur expenses in several other currencies in connection with our operations in Europe and Asia. Devaluation of the U.S. dollar relative to such local currencies causes our operational expenses to increase; and
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The majority of our international sales are denominated in U.S. dollars. Accordingly, devaluation in the local currencies of our customers relative to the U.S. dollar could cause our customers to decrease orders or default on payment.
We generally do not engage in hedging or other transactions intended to manage risks relating to foreign currency exchange rate fluctuations. Consequently, we are exposed to risks related to changes in currency exchange rates and fluctuations of exchange rates, any of which could result in a material adverse effect on our business, financial condition and results of operations. Even if we enter into hedging transactions in the future, they may not effectively protect us from currency exchange rate risks. For a further discussion of the impact on currency exchange rates on our business, see “Item 11. Quantitative and Qualitative Disclosures About Market Risk.”
Undetected defects and errors may increase our costs and impair the market acceptance of our products.
Our products have occasionally contained, and may in the future contain, undetected defects or errors, especially when first introduced or when new versions are released, due to defects or errors that we fail to detect, including in components supplied to us by third parties. These defects or errors may be found after the commencement of commercial shipments. In addition, because our customers integrate our products into their networks with products from other vendors, it may be difficult to identify the product that has caused the problem in the network. Regardless of the source of these defects or errors, we will then need to divert the attention of our engineering personnel from our product development efforts to address the detection and correction of these errors and defects. In the past, we have not incurred significant warranty or repair costs, nor have we been subject to liability claims for material damages related to product errors or defects, nor have we experienced any material lags or delays as a result thereof. However, we cannot assure you that we will not incur these costs or liabilities or experience these lags or delays in the future.  Any insurance coverage that we maintain may not provide sufficient protection should a claim be asserted. Moreover, the occurrence of errors and defects, whether caused by our products or the components supplied by another vendor, may result in significant customer relations problems and injure our reputation, thereby impairing the market acceptance of our products.
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A shortage of components or manufacturing capacity could cause a delay in our ability to fulfill orders or increase our manufacturing costs.
Our ability to meet customer demands depends in part on our ability to obtain timely deliveries of parts from our suppliers and contract manufacturers. We cannot assure you that we will not encounter supply and fulfillment issues in the future. Although in many cases we use standard parts and components for our products, certain components are presently available to us only from limited sources (see the risk factor below and the discussion under "Business Overview - Manufacturing and Suppliers"). We may not be able to diversify sources in a timely manner, which could harm our ability to deliver products to customers and seriously impact present and future sales.
We may experience a shortage of certain component parts as a result of our own manufacturing issues, manufacturing issues at our suppliers or contract manufacturers, capacity problems experienced by our suppliers or contract manufacturers, or strong demand in the industry for those parts, especially if there is growth in the overall economy. If there is growth in the economy, such growth is likely to create greater pressures on us and our suppliers to accurately project overall component demand and component demands within specific product categories and to establish optimal component levels. If shortages or delays persist, the price of these components may increase, or the components may not be available at all.
We may also encounter shortages if we do not accurately anticipate our needs. We may not be able to secure enough components at reasonable prices or of acceptable quality to build new products in a timely manner in the quantities or configurations needed. Accordingly, our revenues and gross margins could be materially and adversely affected until other sources can be developed.
In addition, our operating results could be materially and adversely affected if we anticipate greater demand than actually develops and we commit to the purchase more components than we actually require. We see this specifically with respect to dated components, which we need to order in large quantities due to manufacturing stoppage. Due to technology advancement, we are required from time-to-time to make “last buy” type of stock purchase of such dated components for our legacy products.
Any disruption in our supply chain could result in a material adverse effect on our business, financial condition and results of operations.
We rely on few vendors to provide our hardware platforms and components for our main accessories. If such vendors are not able to provide us with adequate supplies of these components and platforms on a timely basis and on acceptable terms, our business, financial condition and results of operations could be harmed .
We primarily rely on a few original design manufacturers, or ODMs, for the manufacture and supply of our hardware platforms, with approximately 80% of our direct product costs are from these vendors. In addition, we purchase components for our main accessories from such vendors, whereby we purchase approximately 13% of such accessories from these vendors. If we are unable to continue to acquire from these ODMs and/or components vendors on acceptable terms, or should any of these ODMs and/or components vendors cease to supply us with such platforms or components for any reason, we may not be able to identify and integrate an alternative source of supply in a timely fashion or at the same costs. Any transition to one or more alternate manufacturers would likely result in delays, operational problems and increased costs, and may limit our ability to deliver our products to our customers on time for such transition period, any of which could result in a material adverse effect on our business, financial condition and results of operations.
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Our business and operating results could suffer if third parties infringe upon our proprietary technology.
Our success depends, in part, upon the protection of our proprietary software installed in our products, our trade secrets and our trademarks.  We seek to protect our intellectual property rights through a combination of trademark and patent law, trade secret protection, confidentiality agreements and other contractual arrangements with our employees, affiliates, distributors and others. In the United States and several other countries, we have registered or acquired trademarks. In addition, we have registered patents in the U.S. and have pending patent applications and provisional patents in connection with several of our products’ features.
The protective steps we have taken may be inadequate to deter infringement upon our intellectual property rights or misappropriation of our proprietary information. We may be unable to detect the unauthorized use of our proprietary technology or take appropriate steps to enforce our intellectual property rights. Effective trademark, patent and trade secret protection may not be available in every country in which we offer, or intend to offer, our products.  Failure to adequately protect our intellectual property rights could devalue our proprietary content, impair our ability to compete effectively and eventually harm our operating results. Furthermore, defending our intellectual property rights, either by way of initiating intellectual property litigation or defending such, could result in the expenditure of significant financial and managerial resources. For example, in 2015, 2016 and 2017, intellectual property litigation costs amounted to $3.4 million, $4.3 million and $2.1 million, respectively, and continues in 2018 (see “Item 8. Financial Information – Legal Proceedings”). Moreover, the outcome of such proceedings, if such outcome is negative, could result in devaluation of our proprietary technology and cause an additional significant financial impact which may harm our operating results.
Our products may infringe on the intellectual property rights of others.
Third parties may assert claims that we have violated a patent, trademark, copyright or other proprietary intellectual property right belonging to them. As is characteristic of our industry, there can be no assurance that our products do not or will not infringe the proprietary rights of third parties, that third parties will not claim infringement by us with respect to patents or other proprietary rights or that we would prevail in any such proceedings. We have received in the past, and may receive in the future, communications asserting that the technology used in some of our products requires third-party licenses. Any infringement claims, whether or not meritorious, could result in significant costly litigation or arbitration and divert the attention of technical and management personnel. For example, see the discussion in “Item 8. Financial Information – Legal Proceedings”. Any adverse outcome in litigation alleging infringement could require us to develop non-infringing technology or enter into royalty or licensing agreements. If, in such situations, we are unable to obtain licenses on acceptable terms, we may be prevented from manufacturing or selling products that infringe such intellectual property of a third party. An unfavorable outcome or settlement regarding one or more of these matters could have a material adverse effect on our business and operating results.
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If our products fail to protect against malicious attacks and our end-users experience security breaches, our reputation and business could be harmed, and our operating results could be adversely impacted.
Defects may cause our products to be vulnerable to security attacks or cause them to fail to help secure networks. Data thieves are increasingly sophisticated, often affiliated with organized crime and operate large-scale and complex automated attacks. In addition, the techniques they use to access or sabotage networks change frequently and generally are not recognized until launched against a target. As a result, our products may be unable to anticipate these techniques and provide a solution in time to protect our end- users’ networks. If we fail to identify and respond to new and increasingly complex methods of attack and to update our products to detect or prevent such threats in time to protect our end- users’ critical business data, the integrity of our products and reputation as well as our business and operating results could suffer.
In addition, an actual or perceived security breach or theft of sensitive data of one of our end- users , regardless of whether the breach is attributable to the failure of our products or services, could adversely affect the market’s perception of our security products. There is no guarantee that our products will be free of flaws or vulnerabilities. Our end- users may also misuse our products, which could result in a breach or theft of business data.
As a security provider, if our internal network system is subject to intentional disruption by cyber attackers or other data thieves, it could, among other things, harm the integrity of our products and the public perception of our products and services and consequently adversely impact our future sales.
We will not succeed with our application and network security solutions unless the marketplace is confident that we provide effective IT security protection. We provide security products, and as a result we could be an attractive target of cyber-attacks (including, among others, malware, viruses and attachments to e-mails, and other disruptive activities of individuals or groups) designed to impede the performance of our solutions, penetrate our network security or the security of our cloud platform or our internal systems, misappropriate proprietary information and/or cause other interruptions to our services. Although we have not identified any act of sabotage or unauthorized access by a third party of our network systems, if we experience an actual or perceived breach of security in our internal systems, it could adversely affect the integrity and market perception of our products and services. Furthermore, the costs to eliminate or address security threats and  vulnerabilities before or after a cyber-security incident could be significant. Our remediation efforts may not be successful and could result in interruptions, delays, or cessation of service and loss of existing or potential customers. In addition, any such  security breach could impair our ability to operate our business, including our ability to provide maintenance and support services to our customers. If this happens, our revenues could decline and our reputation and business could suffer.
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We rely on information systems to conduct our businesses, and failure to protect these systems against security breaches and otherwise to implement, integrate, upgrade and maintain such systems in working order could have a material adverse effect on our results of operations, cash flows or financial condition.
The  efficient  operation  of  our  businesses  depends  on  our  computer  hardware  and software systems. For instance, we rely on information systems to process customer orders, manage accounts receivable collections, manage accounts payable processes, track costs and operations, maintain client relationships and accumulate financial results.  Despite our implementation of industry-accepted security measures and technology, our information systems are vulnerable to and have been in the past subject to computer viruses, attempts to insert malicious codes, unauthorized access, phishing efforts, denial-of-service attacks and other cyber attacks and we expect to be subject to similar attacks in the future as such attacks become more sophisticated and frequent. A breach of our information systems could result in decreased performance, operational difficulties and increased costs, any of which could have a material adverse effect on our business and operating results.
Our non-competition agreements with our employees may not be enforceable.  If any of these employees leave us and join a competitor, our competitor could benefit from the expertise our former employees gained while working for us.
We currently have non-competition agreements with most of our employees. These agreements prohibit our employees, in the event they cease working for us, from directly competing with us or working for some of our competitors for a limited period after termination of employment.  The laws of the United States, Israel and most other countries in which we have employees may limit or prohibit our ability to enforce these non-competition agreements or may allow us to enforce them only to a limited extent. In the event that we are unable to enforce any of these agreements, competitors that employ our former employees could benefit from the expertise our former employees gained while working for us.
We may be required to pay additional taxes due to tax positions that we undertook. Additional tax liabilities could materially adversely affect our results of operations and financial condition.
We operate our business in various countries, and we attempt to utilize an efficient operating model to optimize our tax payments based on the laws in the countries in which we operate. This can cause disputes between us and various tax authorities in the countries in which we operate, whether due to tax positions that we have taken in various tax returns we have filed or due to determinations we have made not to file tax returns in certain jurisdictions. In particular, not all of our tax returns are final and may be subject to further audit and assessment by applicable tax authorities. There can be no assurance that the applicable tax authorities will accept our tax positions, and if they do not, we may be required to pay additional taxes, as a result of which, our future results may be adversely affected. In the past few years, certain tax authorities which have audited our tax returns have rejected our tax positions and, while we intend to vigorously maintain our positions, we cannot be sure that our positions will be accepted and we may end up paying additional taxes, whether as a result of litigation, if ensued, or settlement negotiations.
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In recent years, we have seen changes in tax laws resulting in an increase in applicable tax rates, especially increased liabilities of corporations and limitations on the ability to benefit from strategic tax planning, with these laws particularly focused on international corporations. Such legislative changes in one or more jurisdictions in which we operate may have implications on our tax liability and have a material adverse effect on our results of operations and financial condition. For example, the Organization for Economic Cooperation and Development, or the OECD, an intergovernmental organization with 35 member countries that aims to promote the economic and social well-being of people around the world, has recently introduced the base erosion and profit shifting (“BEPS”) project. The BEPS project contemplates changes to numerous international tax principles, as well as national tax incentives, and these changes, if adopted by individual countries, could adversely affect our provision for income taxes. Countries have only recently begun to translate the BEPS recommendations into specific national tax laws, and it remains difficult to predict with accuracy the magnitude of any impact that such new rules may have on our financial results. The U.S. and Israel, among other countries in which we have operations, are members of the OECD.
The adoption of the recent tax reform and the enactment of additional legislation changing the United States taxation of international business activities could materially impact our financial position and results of operations.
On December 22, 2017, President Trump signed into law what is known as the “Tax Cuts and Jobs Act” (the “TCJA”) that significantly reforms the Internal Revenue Code of 1986, as amended (the “Code”). The TCJA, among other things, includes changes to U.S. federal corporate and individual income tax rates. The TCJA makes significant changes to the U.S. tax law which may affect our operations and the impact of these provisions on our operations and our investors is still uncertain and may not become evident for some period of time. The application and implementation of the new provisions may require us to apply the provisions without clear guidance from the U.S. Treasury Department or the Internal Revenue Service (“IRS”). The U.S. Treasury Department and the IRS could interpret or issue guidance on how provisions of the TCJA will be applied or otherwise administered that is different from our interpretation. As part of our compliance with the changes pursuant to the TCJA, we may make adjustments to our current provision for income taxes and other items impacted by the TCJA.
In addition, due to the expansion of our international business activities, any changes in the U.S. taxation of such activities may increase our worldwide effective tax rate and adversely affect our financial position and results of operations. Further, other foreign governments may enact tax laws in response to the TCJA that could result in further changes to global taxation and materially affect our financial position and results of operations. The impact of the TCJA on holders of our securities is uncertain. We therefore recommend our stockholders to consult with their legal and tax advisors with respect to such legislation and the potential tax consequences.
Our bank deposits and investments in Israel are not insured, and our bank deposits in the United States are in excess of insured limits.
The majority of our cash and cash equivalents, and short-term and long-term bank deposits are invested in banks in Israel and, to a smaller extent, in banks in the United States. The Israeli bank deposits are not insured, while the deposits made in the United States are in excess of insured limits and are not otherwise insured.  If one or more of these financial institutions were to become insolvent, the loss of these investments would have a material adverse effect on our financial condition.
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If we are unable to realize our investment objectives, our financial condition and results of operations may be adversely affected.
We maintain substantial balances of cash and liquid investments, for purposes of acquisitions and general corporate purposes. Our cash, cash equivalents, short-term and long-term bank deposits and marketable securities totaled $344.3 million as of December 31, 2017. The performance of the capital markets affects the values of funds that are held in marketable securities. These assets are subject to market fluctuations and various developments, including, without limitation, rating agency downgrades that may impair their value. We expect that market conditions will continue to fluctuate and that the fair value of our investments may be affected accordingly.
Financial income is a component of our net income (loss). As of December 31, 2017, our investment portfolio, including cash and cash equivalents, deposits and marketable securities, had a carrying value of $344.3 million, compared with $320.1 million as of December 31, 2016. For the years ended December 31, 2017, 2016 and 2015, we had $4.8 million, $5.7 million and $ 5.9 million, respectively, of financial income.
The outlook for our financial income is dependent, in part, on the future direction of interest rates, exchange rates, the amount of any share repurchases or acquisitions that we make and the amount of cash flows from operations that are available for investment. The performance of the capital markets affects the values of our funds that are held in marketable securities. These assets are subject to market fluctuations and will yield uncertain returns. Due to certain market developments, including investments’ rating downgrades, the fair value of these investments may decline. If market conditions continue to fluctuate, the fair value of our investments may be impacted accordingly. Although our investment guidelines stress diversification and capital preservation, our investments are subject to a variety of risks, including risks related to general economic conditions, interest rate fluctuations and market volatility.
In particular, our investment portfolios include a significant amount of interest rate-sensitive instruments, such as bonds, which, in addition to the inherent risk associated with the debt, may be adversely affected by changes in interest rates. Changes in interest rates and credit quality may also result in fluctuations in the income derived from, or the valuation of, our fixed income securities. Interest rates are highly sensitive to many factors, including governmental monetary policies, domestic and international economic and political conditions and other factors beyond our control. For example, benchmark interest rates, such as the U.S. Federal Funds Rate, are currently relatively low, which is likely to significantly impact our investment income.  Increases in interest rates will decrease the value of our investments in fixed-income securities. If increases in interest rates occur during periods when we sell investments to satisfy liquidity needs, we may experience investment losses. Conversely, if interest rates decline, reinvested funds will earn less than expected.
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In terms of credit risk, our investment portfolio policy is "buy and hold", while minimizing credit risk by setting maximum concentration limit per issuer and credit rating. Our investments consist primarily of government and corporate debentures and bank deposits. Although we believe that we generally adhere to conservative investment guidelines, if turmoil in the financial markets reoccurs in the future, it may result in impairments of the carrying value of our investment assets since we classify our investments in marketable securities as available-for-sale. Changes in the fair value of investments classified as available-for-sale are not recognized as income during the period, but rather are recognized as a separate component of equity until realized. Realized losses in our investments portfolio may adversely affect our financial position and results. For example, if we had reported all the changes in the fair values of our investments into income, our reported net loss would have increased by $0.4 million and $ 1.3 million during the years ended December 31, 2017 and 2016, respectively, and our reported net income would have increased by $1.0 million during the year ended December 31, 2015. Any significant decline in our financial income or the value of our investments as a result of continued low interest rates, deterioration in the credit worthiness of the securities in which we have invested, general market conditions or other factors, could have an adverse effect on our results of operations and financial condition.
Our success depends on our ability to attract, train and retain highly qualified research and development, sales, technical, customer support, operations and information technology personnel.
We may need to increase our research and development, sales and marketing, technical, support, operations and information technology staff. Our products require a sophisticated technology, marketing and sales effort targeted at several levels within a prospective customer’s organization. Accordingly, we need highly-trained research and development, sales, marketing, technical, customer support, operations and information technology personnel. Competition for such qualified personnel is intense. Consequently, we may not be able to hire or retain sufficient personnel to support our business operations, which could result in a material adverse effect on our business, financial condition and results of operations.
Risks Related to the Market for Our Ordinary Shares
Yehuda Zisapel, our chairman of the board, Nava Zisapel, and Roy Zisapel, our President, Chief Executive Officer and director, may exert significant influence in the election of our directors and over the outcome of other matters requiring shareholder approval.
As of March 25, 2018, Yehuda Zisapel, the Chairman of our Board of Directors, beneficially owned approximately 5.4% of our outstanding ordinary shares; Nava Zisapel, beneficially owned approximately 6.4% of our outstanding ordinary shares; and their son, Roy Zisapel, our President, Chief Executive Officer and director, beneficially owned approximately 5.5% of our outstanding ordinary shares (see “Item 6E – Directors, Senior Management and Employees - Share Ownership”).  As a result, if these shareholders act together, they could exert significant influence on the election of our directors and on decisions by our shareholders on matters submitted to shareholder vote, including mergers, consolidations and the sale of all or substantially all of our assets. This concentration of ownership of our ordinary shares could delay or prevent proxy contests, mergers, tender offers, or other purchases of our ordinary shares that might otherwise give our shareholders the opportunity to realize a premium over the then-prevailing market price for our ordinary shares.  This concentration of ownership may also adversely affect our share price.
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If we are characterized as a passive foreign investment company, our U.S. shareholders may suffer adverse tax consequences.
Generally, if for any taxable year, after applying certain "look through" tax rules, (i) 75% or more of our gross income is passive income, or (ii) at least 50% of the fair market value of our assets, averaged quarterly over our taxable year, are held for the production of, or produce, passive income, we would be characterized as a passive foreign investment company, or PFIC, for U.S. federal income tax purposes. If we are classified as a PFIC, our U.S. shareholders could suffer adverse U.S. tax consequences, including having gain realized on the sale of our ordinary shares treated as ordinary income, as opposed to capital gain income, and having potentially punitive interest charges apply to such gain. Similar rules apply to certain “excess distributions” made with respect to our ordinary shares.
For our 2017 taxable year, we do not believe that we should be classified as a PFIC. There can be no assurance, however, that the IRS will not challenge this treatment, and it is possible that the IRS could attempt to treat us as a PFIC for 2017 and prior taxable years. The tests for determining PFIC status are applied annually, and it is difficult to make accurate predictions of our future income, assets and market capitalization, including the future price of our ordinary shares, all of which are relevant to the PFIC determination. Accordingly, there can be no assurance that we will not become a PFIC in future taxable years. U.S. shareholders should consult with their own U.S. tax advisors with respect to the U.S. tax consequences of investing in our ordinary shares. For a more detailed discussion of the rules relating to PFICs and related tax consequences, please see the section of this annual report entitled “Item 10 – Additional Information – Taxation — United States Federal Income Tax Considerations.”
Provisions of our Articles of Association and Israeli law as well as the terms of our equity incentive plan could delay, prevent or make a change of control of us more difficult or costly, which could depress the price of our ordinary shares.
The provisions in our Articles of Association that provide that our directors, other than our external directors, are elected in three staggered classes by a majority vote of our shareholders may have the effect of delaying or making an unsolicited acquisition of our Company more difficult. Israeli corporate and tax laws, including the ability of our Board of Directors to adopt a shareholder rights plan without further shareholder approval, may also have the effect of delaying, preventing or making an acquisition of us more difficult. For example, under the Companies Law, upon the request of a creditor of either party to a proposed merger, an Israeli court may delay or prevent the merger if it concludes that there is a reasonable concern that, as a result of the merger, the surviving company will be unable to satisfy the obligations of any of the parties to the merger. In addition, our Key Employee Share Incentive Plan (1997), as amended, or the Share Incentive Plan , provides that in the event of a “Hostile Takeover” (which is defined to include, among others, an unsolicited acquisition of more than 20% of our outstanding shares), the vesting of all or a portion of our outstanding equity awards, including stock options, will accelerate, unless otherwise determined by our Board of Directors (or a committee thereof). As a result, an acquisition of our Company that triggers the said acceleration will be more costly to a potential acquirer. These provisions could cause our ordinary shares to trade at prices below the price for which third parties might be willing to pay to gain control over us. Third parties who are otherwise willing to pay a premium over prevailing market prices to gain control of us may be unwilling to do so because of these provisions. For additional information on this topic, see “Item 6C – Board Practices – Staggered Board,” “Item 6E – Directors Senior Management and Employees – Share Ownership - Key Employee Share Incentive Plan” and “Item 10B – Additional Information – Memorandum and Articles of Association – Mergers and Acquisitions under Israeli Law.”
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Compliance with the disclosure rules regarding the use of conflict minerals may affect our relationships with suppliers and customers.
Pursuant to Section 1502 of the Dodd-Frank Act, United States publicly-traded companies, such as Radware, are required to disclose use or potential use of “conflict minerals” that are mined from the Democratic Republic of Congo or adjoining countries (collectively, “Covered Countries”).  Conflict minerals are defined by the SEC as columbite-tantalite (coltan), cassiterite, gold, wolframite, or their derivatives, which are limited to tantalum, tin, and tungsten (“conflict minerals” or “3TG”).  These requirements necessitate due diligence efforts to assess whether such minerals are used in our products in order to make the relevant required annual disclosures.  These requirements, which were recently implemented, could adversely affect the sourcing, supply and pricing of materials used in our products.
We have conducted an analysis of our products and found that small quantities of 3TG could potentially be found in our products.  The products that we manufacture are highly complex, typically containing thousands of parts from many direct suppliers. In general, we primarily rely on third-party assembly and manufacturing vendors to provide our finished products and, in this respect, these vendors typically receive components and subassemblies included in our products from other suppliers and subcontractors. We have relationships with a vast network of suppliers throughout the world and there are generally multiple tiers between the 3TG mines and our direct suppliers. Therefore, we must rely on our direct suppliers to cooperate with us and work with their own upstream suppliers or sub-contractors in order that they may provide us with accurate information about the origin of 3TG in the components we purchase from them. In particular, many of our supplier contracts have fixed durations and we cannot unilaterally impose new contract terms or flow-down requirements that would otherwise compel these suppliers to support our due diligence efforts with respect to 3TG content.  Currently, we do not have sufficient information from our suppliers to determine the country of origin of the conflict minerals used in our products or the facilities used to process those conflict minerals. Therefore, we cannot exclude the possibility that some of these conflict minerals may have originated in Covered Countries and are not from recycled or scrap sources.
We may face reputational challenges that could impact future sales (1) based on the fact that we are unable to verify with sufficient accuracy the origins of all conflict minerals used in our products, or (2) if we later determine that certain of our products contain minerals not determined to be conflict free.
Additionally, there are, and will be, ongoing costs associated with complying with these disclosure requirements pursuant to Section 1502 of the Dodd-Frank Act, including due diligence to determine the sources of those minerals that may be used or necessary to the production of our products in order to make the relevant required annual disclosures.
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Our share price has decreased significantly in the past and could continue to fluctuate and further decrease in the future.
The market price for our ordinary shares, as well as the prices of shares of other technology companies, has been volatile. For example, during 2017 the lowest closing price of our share was $14.38, compared to the highest closing price of our share of $20.48 during the same year (see also “Item 9A. Offer and Listing Details”). Numerous factors, many of which are beyond our control, may cause the market price of our ordinary shares to fluctuate significantly and further decrease, including:
•
fluctuations in our quarterly revenues and earnings and those of our publicly-traded competitors;
•
shortfalls in our operating results from levels forecast by securities analysts;
•
announcements concerning us or our competitors;
•
the introduction of new products and new industry standards;
•
changes in pricing policies by us or our competitors;
•
general market conditions and changes in market conditions in our industry;
•
the general state of the securities market (particularly the technology sector); and
•
political, economic and other developments in the State of Israel, the U.S. and worldwide.
Risks Related to Operations in Israel
Security and political and economic instability in the Middle East may harm our business.
We are incorporated under Israeli law and our principal offices and manufacturing and research and development facilities are located in Israel. Accordingly, our operations and financial results could be adversely affected if political, economic and military events curtailed or interrupted trade between Israel and its present trading partners or if major hostilities involving Israel should occur in the Middle East.
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Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its Arab neighbors. A state of hostility, varying in degree and intensity, has led to security and economic problems for Israel.  Since late 2000, there has also been a high level of violence between Israel and the Palestinians including during the summer of 2014, when Israel was engaged in armed conflicts with Hamas, a militia group and political party operating in the Gaza Strip. This violence has strained Israel’s relationship with its Arab citizens, Arab countries and, to some extent, with other countries around the world. Since the end of 2010 several countries in the region have been experiencing increased political instability, which led to changes in government in some of these countries and the war in Syria, the effects of which are currently difficult to assess. In addition, Israel faces threats from more distant neighbors, such as Iran (which is believed to be an ally of Hamas in Gaza and Hezbollah in Lebanon) and the militant group known as the Islamic State of Iraq and Syria. This situation may potentially escalate in the future. In addition, this instability in the region may affect the global economy and marketplace. We do not believe that the political and security situation has had a material impact on our business to date; however, there can be no assurance that this will be the case for future operations. We could be adversely affected by any major hostilities, including acts of terrorism as well as cyber-attacks or any other hostilities involving or threatening Israel, the interruption or curtailment of trade between Israel and its trading partners, a significant downturn in the economic or financial condition of Israel or a significant increase in the rate of inflation. Furthermore, some neighboring countries, as well as certain companies, organizations and movements, continue to participate in a boycott of Israeli firms and others doing business with Israel or with Israeli companies as the result of the aforementioned hostilities. No predictions can be made as to whether or when a final resolution of the area’s problems will be achieved or the nature thereof and to what extent the situation will impact Israel’s economic development or our operations.
Some of our directors and officers as well as many of our Israeli employees are obligated to perform annual military reserve duty in Israel. We cannot assess the potential impact of these obligations on our business.
Some of our directors, officers and employees are, unless exempt, obligated to perform annual military reserve duty, depending upon their age and prior position in the army.  They may also be subject to being called to active duty at any time under emergency circumstances. Our operations could be disrupted by the absence, for a significant period, of one of more of these officers or other key employees due to military service, and any disruption in our operations could harm our business. The full impact on our workforce or business if some of our officers and employees will be called upon to perform military service, especially in times of national emergency, is difficult to predict.
The exchange rate between the New Israeli Shekel against the U.S. dollar is volatile, and may negatively impact our profitability.
Most of our revenues worldwide are denominated in U.S. dollars or are dollar-linked, whereas a portion of our revenues is denominated in other currencies, including NIS. At the same time, a substantial portion of our expenses is incurred in U.S. dollars, but we incur a portion of our expenses, principally salaries and related personnel expenses, in other currencies, mainly in Israel - in NIS, in Europe - in Euros and in Asia-Pacific - in several local currencies. If the NIS increases in value relative to the dollar, as was the case in 2017, the dollar cost of our operations in Israel will increase and our dollar-measured results of operations will be adversely affected. We cannot provide assurances that we will not be materially adversely affected by exchange rate fluctuations in the future. See also “ Currency exchange rates and fluctuations of exchange rates could have a material adverse effect on our results of operations ” above in this section.
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The tax benefits we may receive in connection with our approved enterprise, privileged or preferred enterprise programs require us to satisfy prescribed conditions and may be terminated or reduced in the future.  This would increase taxes and decrease our net profit.
We have in the past benefited, and currently benefit from certain government programs and tax benefits in Israel. To remain eligible to obtain such tax benefits, we must continue to meet certain conditions. If we fail to comply with these conditions in the future, the benefits we receive could be canceled and we may have to pay certain taxes. We cannot guarantee that these programs and tax benefits will be continued in the future, at their current levels or at all.  If these programs and tax benefits are ended, our tax expenses and the resulting effective tax rate reflected in our financial statements may increase and as such our business, financial condition and results of operations could be materially and adversely affected.
In the event of distribution of dividends from tax-exempt income or in conducting certain transactions that may be viewed by the Israeli tax authorities as a deemed dividend event, the amount distributed will be subject to corporate tax at the rate ordinarily applicable to the approved/privileged enterprise's income. Tax-exempt income generated under the approved/privileged enterprise program will be subject to taxes upon dividend distribution (which includes the repurchase of the Company's shares) or liquidation.
It may be difficult to enforce a U.S. judgment against us or our officers and directors and to assert U.S. securities laws claims in Israel.
We are incorporated under the laws of the State of Israel. Service of process upon us, our Israeli subsidiary, our directors and officers and the Israeli experts, if any, named in this annual report , substantially all of whom reside outside the United States, may be difficult to obtain within the United States. Furthermore, because the majority of our assets and investments, and substantially all of our directors, officers and such Israeli experts are located outside the United States, any judgment obtained in the United States against us or any of them may be difficult to collect within the United States.
We have been informed by our legal counsel in Israel that it may also be difficult to assert U.S. securities law claims in original actions instituted in Israel.  Israeli courts may refuse to hear a claim based on an alleged violation of U.S. securities laws reasoning that Israel is not the most appropriate forum to bring such a claim. In addition, even if an Israeli court agrees to hear a claim, it may determine that Israeli law and not U.S. law is applicable to the claim. There is little binding case law in Israel addressing these matters. If U.S. law is found to be applicable, the content of applicable U.S. law must be proved as a fact, which can be a time-consuming and costly process.  Certain matters of procedure will also be governed by Israeli law.
Subject to specified time limitations and legal procedures, under the rules of private international law currently prevailing in Israel, Israeli courts may enforce a U.S. judgment in a civil matter, including a judgment based upon the civil liability provisions of the U.S. securities laws as well as a monetary or compensatory judgment in a non-civil matter, provided that the following key conditions are met :
·
subject to limited exceptions, the judgment is final and non-appealable;
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·
the judgment was given by a court competent under the laws of the state of the court and is otherwise enforceable in such state;
·
the judgment was rendered by a court competent under the rules of private international law applicable in Israel;
·
the laws of the state in which the judgment was given provide for the enforcement of judgments of Israeli courts;
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adequate service of process has been effected and the defendant has had a reasonable opportunity to present his arguments and evidence;
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the judgment and its enforcement are not contrary to the law, public policy, security or sovereignty of the State of Israel;
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the judgment was not obtained by fraud and does not conflict with any other valid judgment in the same matter between the same parties; and
·
an action between the same parties in the same matter was not pending in any Israeli court at the time the lawsuit was instituted in the U.S. court.
We have obtained benefits from the Israeli Innovation Authority, which subjects us to ongoing restrictions.  In addition, these benefits may not continue or in the future may be limited or restricted.
In 2016 and 2017, we received grants from the Israeli Innovation Authority (formerly known as the Office of the Chief Scientist of the Israeli Ministry of Economy), or the IIA. We have also received such grants in the past few years and may in the future apply for,  non-royalty-bearing grants for research and development programs that meet specified criteria pursuant to the Law for the Encouragement of Research, Development and Technological Innovation, 1984, and the regulations promulgated thereunder, or the R&D Law. The terms of the IIA grants limit our ability to manufacture products or transfer technologies outside of Israel if such products or technologies were developed using know-how developed with or based upon IIA grants. In addition, any non-Israeli who, among other things, becomes an "interested party" in Radware (e.g., becomes a holder of 5% or more of our share capital or voting rights), is generally required to undertake to observe the law governing the grant programs of the IIA, some of the principal restrictions and penalties of which are the transferability limits described above and elsewhere in this annual report.
Further, the IIA grants may be terminated in the future or the available benefits may be reduced or impacted, including, among other possible circumstances, should we transfer certain research and development and/or manufacturing activities outside the State of Israel. The termination or curtailment of these programs or the loss or reduction of such benefits could have a material adverse effect on our business, financial condition and results of operations. In addition, the IIA may establish new guidelines regarding the R&D Law, which may affect our existing and/or future IIA programs and incentives for which we may be eligible. We cannot predict what changes, if any, the IIA may make.
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ITEM 4.
INFORMATION ON THE COMPANY
A. History and Development of the Company
Radware Ltd. was organized in May 1996 as a corporation under the laws of the State of Israel and commenced operations in 1997. Our principal executive offices are located at 22 Raoul Wallenberg Street, Tel-Aviv 6971917, Israel and our telephone number is 972-3-766-8666. Our website address is www.radware.com (information contained on our website is not incorporated herein by reference and shall not constitute part of this annual report) .
As of September 1, 1998, we established Radware, Inc., a wholly-owned subsidiary in the United States, which conducts the sales and marketing of our products in the Americas and is our authorized representative and agent in the United States. The principal offices of Radware Inc. are located at 575 Corporate Dr., Lobby 2, Mahwah, NJ 07430 and its telephone number is 201-512-9771. We also have several wholly-owned subsidiaries world-wide handling local support and promotion activities.
In September 1999, we conducted the initial public offering of our ordinary shares and our ordinary shares commenced trading on the Nasdaq .
In December 2005, we acquired the business of V-Secure Technologies, a U.S.-based provider of behavior-based network intrusion prevention solutions. In April 2007, we acquired Covelight, a U.S.-based provider of web channel intelligence technology. In March 2009, we acquired from Nortel certain assets and liabilities related to Nortel’s Layer 4-7 Application Delivery Business (Alteon). In May 2011, we established Radyoos Media Ltd., or Radyoos, our majority owned subsidiary, which was engaged in developing and operating a web-based e-commerce platform. In February 2013, we acquired Strangeloop, a Canadian-based provider of web performance acceleration solutions. In January 2017, we acquired Seculert, a company engaged in cyber-attack detection and HTTP analytics solutions and developing user and entity behavioral analysis “UEBA” solutions.
Recent Major Business Developments
Below is a summary of the major business developments in Radware since January 1, 2017:
·
On September 19, 2017, we announced that we introduced a comprehensive solution for protection from network layer attacks, including increased threats stemming from Internet-of-Things (IoT) botnets.
·
On June 7, 2017, we announced the new Alteon D-line of appliances and software, which was designed to address evolving market challenges around the increase in encrypted traffic.
·
On January 31, 2017, we announced the acquisition of Seculert, a company engaged in cyber-attack detection and HTTP analytics solutions and developing user and entity behavioral analysis “UEBA” solutions.
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For a discussion of our capital expenditures and divestitures, see “Item 5B—Operating and Financial Review and Prospects – Liquidity and Capital Resources.”
B. Business Overview
(a) Overview
We are a provider of cyber security and application delivery solutions that help our customers to secure the digital experience for users of business-critical applications in virtual, cloud and software defined data centers. Our solutions are deployed by, among others, enterprises, carriers and cloud service providers.

We offer a set of solutions that are designed to ensure application service levels are guaranteed at all times, in any operational scenario, and to optimize business operations, minimize service delivery degradation and prevent downtime.

Our solutions are offered in three main categories including products, product subscriptions and services.

(b) The Market Opportunity

General Market Overview - Cyber Security and Application Delivery
According to Frost & Sullivan, a market research firm, in their “DDoS Mitigation Global Market Analysis, Forecast to 2021” report, the total DDoS Mitigation market is estimated at nearly $1 billion in 2017 and expected to grow to  $1.8 billion by 2021, representing a compound annual growth rate of 17.1%. According to Frost & Sullivan, in their “Global Web Application Firewall (WAF) Market Analysis, Forecast to 2021”,  the total WAF market is estimated at approximately $700 million in 2017 and expected to grow to $1.15 billion by 2021, representing a compound annual growth rate of 13.1%.

At the same time, enterprises are moving their applications to the cloud in order to achieve flexibility, reduce capital expenses and service simplicity. This trend is reflected in the growth of both cloud applications markets and cloud security markets. Frost & Sullivan, in their aforementioned reports, estimates the cloud DDoS Protection and Cloud WAF markets to be at approximately $840 million in 2017 and expected to grow to $1.2 billion by 2021, representing a compound annual growth rate of 22.8%.

The application delivery controllers market is estimated by Gartner, in its “Forecast: Enterprise Network Equipment by Market Segment, Worldwide, 2014-2021, 3Q17 Update” report, at $2.5 billion in 2017 and expected to decrease to $2.3 billion by 2021, representing a compound annual decline rate of (2.2%). While this overall market shows mild negative slow down, according to the aforesaid Gartner report, the virtual ADC segment is expected to show a compound annual growth at a rate of 8.1% and the virtual ADC leases for MSPs is expected to show a compound annual growth rate of 12.7%.

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The following sections provide more detailed information about the trends in the key markets Radware is selling to.

Market Overview –
DDoS Protection
General
We believe that in today's environment, organizations are challenged by an evolving threat of cyber-attacks that, if materialized, could reduce revenues, increase expenses and damage reputation of organizations and other users. In particular, today’s cyber-attackers use sophisticated methods, often equipped with multiple attack-vectors in the same attack campaign, aimed at shutting down or otherwise impairing the operation of datacenters and organizations’ web presence. At the same time, we believe that the simplicity of launching such cyber-attacks and variety of attack tools available are the primary reasons that more organizations are suffering from increased attacks, such as DDoS.
The DDoS protection market has significantly evolved in the past years with multiple solutions designed to defend against the DDoS threat, starting from hardware and software on-premises solutions, in-the-cloud scrubbing centers, DDoS protection managed providers and Internet service providers, or ISPs, who offer value-add DDoS protection services.
Industry Trends
As DDoS attack characteristics become more complex, organizations are increasingly adopting "hybrid" DDoS mitigation strategies consisting of on-premises appliances for manageable attacks and a cloud-based service as a fail-over option for massive volume attacks), driving new alliances and consolidation among complementary DDoS mitigation solution providers. For example, in 2015, Akamai became a competitor in the security market by acquiring Prolexic, and in 2016, F5 acquired defense.net, a DDoS mitigation scrubbing service provider, to offer a hybrid DDoS protection solution (defense.net service was later renamed F5 Silverline). The key trends we identified in this market include the following:
·
While large enterprises and service providers are focused on the technology advantage of the DDoS solutions, medium-sized organizations often balance such criteria with other considerations, like cost and ease of deployment and procurement.
·
Increased adoption of cloud computing, by customers as well as attackers, is creating new opportunities and expectations for DDoS mitigation solution providers.
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Need for DDoS protection solutions provided as-a-service is increasing.
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The growing frequency and intensity of DDoS attacks in recent years have directly translated to a jump in demand for DDoS mitigation solution during such period.
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WAF Solutions
General
In its 2017 Magic Quadrant report for Web Application Firewalls (WAF), Gartner summarized that the WAF market is growing, driven by the adoption of cloud-based WAF service. WAF deployments are also driven by compliance requirements such as the payment cards industry (PCI) and the GDPR that will come into effect in May 2018.
Industry trends
The key trends we identified in this market include the following:
·
In recent years, WAF solutions delivered as a cloud-based service directly by the vendor (cloud-based WAF service), which initially targeted midmarket or relatively smaller organizations, has gained more attention from initialtarget of midmarket organizations.
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Cloud-based WAF service grows steadily. Gartner estimates that it now represents more than 30% of the total market in 2017 and that Cloud-native solutions increasingly compete with the more mature vendors, which Internet as a Service providers are not yet as visible in inquiries, but they also offer a WAF.
ADC Solutions
General
In its 2016 Magic Quadrant report Application Delivery Controllers (ADC), Gartner summarized that ADCs are a key component within enterprise and cloud data centers to improve application availability, performance and security.
Industry Trends
The ADC market continues to be innovative as new application-centric customers are emerging and drive changes in the market, including changes in deployment, pricing and the overall vendor landscape for application delivery. The key trends we identified in this market include the following:
·
Although this market emerged from load balancing in the mid-1990s, most organizations now use advanced functionality, including WAF, global load balancing and acceleration.
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·
As the market evolves, ADCs are becoming less hardware-centric and the demand for software-based ADCs increases. However, we believe that, at this stage, hardware-based ADCs still provide the highest level of performance and scale.
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More organizations are relying on private or hybrid cloud-based ADC solutions, especially with cloud-based applications that require cloud-based ADC solutions.
·
IT and data center managers are increasingly minded to the challenges posed by network and application attacks coupled with the need to maintain the availability and integrity of services by improved resistance to cyber-attacks.
·
With the increase of encrypted web communication usage (such as the use of HTTPS, a protocol for secure communication over a computer network which is widely used on the Internet) on the Internet, cyber attackers have found a new channel through which they can gain access into an enterprise network and the sensitive information it contains without being spotted. Enterprises are expecting ADC solutions to offload Secure Sockets Layer (SSL) traffic and provide visibility into SSL-encrypted traffic to various network security tools.
(c) Our Competitive Strengths and Strategies
Our Core Assets
Our solutions incorporate proprietary and innovative cyber security and application delivery technologies that help our customers to secure the digital experience for users of business-critical applications. We believe our competitive strengths are based on the following key elements:
·
Innovation, proprietary technologies and thought leadership . Being one of the first companies to offer hybrid attack mitigation solutions, we have developed and commercially deployed several generations of our products and solutions. We believe this has given us significant expertise, know-how and leadership in the market for cyber-attack mitigation solutions and we take part in many technology communities, standard organizations and open source projects. At the same time, we continue to invest in research and development of cyber security and application delivery technologies in order to introduce new and innovative solutions, which are supported and protected by multiple patents and proprietary rights.
·
Global presence . We have more than 12,500 customers worldwide and have global sales, support and marketing capabilities. For example, we offer global cloud and service infrastructure based on multiple service centers dispersed globally through service data centers in Europe, Asia, North America, South America, Africa and Australia. We currently have local presence in 19 countries around the world. As such, our Technical Assistance Centers (TAC) are located to provide 24/7 support service to our customers.
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·
Strategic relationships . We have global technology partner alliances with leading vendors such as Cisco Systems, Inc., Check Point Software Technologies Ltd., Hewlett Packard Enterprise HPE, Nokia Corp, IBM (International Business Machines Corporation), VMware, Inc., and Symantec Corporation. We believe these relationships enable us to increase our market reach as well as offer prospects with higher solutions value.
·
Customers . Our customers include top-tier banks, stock exchanges, carriers, cloud service providers, internet service providers, retailers and higher-education institutions. We believe this portfolio of high profile customers demonstrates the advantage and recognition of our solution offerings.
Our Growth Strategy
Our growth strategy is based on several key elements:
·
Focus on data center solutions . Focus on developing and selling holistic cyber security and application delivery solutions for data centers and cloud applications.
·
Continue investing in cloud and security. We aim to offer superior and innovative security solutions and cloud-based solutions and expand our portfolio in these two dimensions. We also intent to invest in go-to-market efforts related to cloud and security.
·
Increase our market footprint . We believe that a significant market opportunity exists to sell our solutions with the complementary products and services provided by other organizations with whom we wish to collaborate. To that end, we have already established strategic relationships with various third parties, including leading global-class partners, such as Check Point, Cisco and Nokia. We intend to further increase our market footprint through OEMs,  global system integrations and collaboration with leading cloud and CDN providers.
·
Pursue acquisitions and investments . In order to achieve our business objectives, we may evaluate and pursue the acquisition of, or significant investments in, other complementary companies, technologies, products and/or businesses that enable us to enhance and increase our technological capabilities and expand our products and service offerings.
(d) Our Solutions
General
We are a provider of cyber security and application delivery solutions cyber security and application delivery technologies that help our customers to secure the digital experience for users of business-critical applications in virtual, cloud and software defined data centers. Our solutions are deployed, among others, by enterprises, carriers and cloud service providers.

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Our solutions are offered in three main categories:

·
Products – We offer a range of physical appliances and virtual appliances (software-based products) for enterprise and carrier data centers, which typically deploy on-premises solutions as part of their IT and application infrastructure.
·
Product subscriptions – We offer subscriptions for value-add features and capabilities on top of our products offering. The subscriptions are typically offered as yearly activation licenses.
·
Services – We offer cloud services and managed services to our customers. Our services are typically offered as a recurring monthly fee.
Our Products
Our product offering currently consists of the following key products:

o
DefensePro Attack Mitigation Device. DefensePro® is a real-time network attack prevention device that protects the user’s application infrastructure against network and application downtime, application vulnerability exploitation, malware spread, network anomalies, information theft and other emerging network attacks.
o
AppWall Web Application Firewall. AppWall® is a WAF appliance that secures web applications. It enables PCI compliance by mitigating web application security threats and vulnerabilities to prevent data theft and manipulation of sensitive corporate and customer information. AppWall incorporates Web application security filtering technologies to effectively detect threats, block attacks and report events.
o
DefenseFlow Cyber Command and Control application. DefenseFlow® is a network-wide cyber command and control application that helps service providers to automate network security incidents response. DefenseFlow acts as a cyber-defense control-plane that collects and analyzes multiple sources of security telemetries and, based on this information, applies designated intelligent security actions. DefenseFlow enables service providers to handle large amounts of customers efficiently and with minimal errors.
o
Alteon® D Line Application Delivery Controller/Load Balancer . Alteon D Line is our next generation ADC. It provides advanced, end-to-end local and global load balancing capabilities for Web, cloud and mobile based applications. Alteon D Line is built from the ground up to allow application SLA. Alteon D Line innovatively leverages several next-generation services, bundling FastView Web Performance Optimization (WPO), HTTP/2.0 Gateway, Application Performance Monitoring (APM), AppWall Web Application Firewall (WAF), Authentication Gateway, Advanced Denial of Service (ADoS), bandwidth management, as well as SSL off-loading and SSL inspection security gateway – a feature that enables organizations to oversee outgoing encrypted traffic and filter using content security gateways. All Alteon D Line platforms are designed with comprehensive fault isolation of each ADC instance (vADC). Our vADC per application approach, along with the ability to scale up or scale out, is offered on all our Alteon D Line platforms and form factors including ADC-VX, Alteon Virtual Appliance (VA), Alteon VA for NFV and Alteon VA for cloud environment.
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LinkProof NG Multi-homing . LinkProof® NG is a next-generation multi-homing and enterprise gateway solution that allows service level availability and continuous connectivity of enterprise and cloud-based applications. It is an application-aware multi-homing and link load balancing module that delivers 24/7 continuous connectivity and service level assurance, improved performance and cost-effective scalability of bandwidth for corporate and cloud-based applications.
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FastView - Web Performance Optimization and Acceleration . FastView® is a web performance optimization (WPO) module that enables faster websites and web-based applications. It combines the power of its Web performance optimization (WPO) module and technology, together with an embedded HTTP/2 gateway. Each one of those modules provides a different set of capabilities that accelerate the delivery of web applications to all types of end-user devices and browsers (e.g. desktops/mobile, etc.). FastView transforms front-end optimization (FEO) from a lengthy and complex process to an automated function. This FEO is performed in real time, accelerating web application response time out-of-the-box. FastView is also available in other modes, including for SAP applications (primarily designed to accelerate SAP applications for the customer’s global workforce, partners and customers) and as a cloud-based service.
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APSolute Vision - APSolute Vision is the network management tool and network monitoring tool for the Radware family of cyber security and application delivery solutions. It provides Radware’s customers immediate visibility to health, real-time status, performance and security of Radware products from one central, unified console (even if you have multiple data centers).
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Application Performance Monitoring (APM) - APM allows our customers to detect application performance issues – before their end users customer do. APM ensures Web application performance meets the und user's expectations and consistently delivers business SLA. It provides complete visibility into our customers’ applications' performance with a breakdown by application, location or specific transaction.
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vDirect - vDirect is our service orchestration and automation engine, designed for software-defined data centers and clouds. With vDirect, customers can automate their data centers across all of Radware devices. In addition, vDirect integrates the Radware devices with leading network virtualization and orchestration solutions such as VMware vCloud Director, VMware vCenter Orchestrator, VMware vFabric Application Director Cloud Management, VMware NSX, Cisco ACI, OpenStack and others.
Our Product Subscriptions
Our product subscription offering currently consists of the following key subscription-based products:

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Alteon Perform Subscription . The perform subscription is available on top of the Alteon D-line base product offering, adding features such as Operator Tool Box (for automated solution management), Application Performance Monitoring (APM), FastView (for web applications acceleration), Advanced Routing and LinkProof (for link load balancing).
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Alteon Secure Subscription . The Secure subscription is available on top of the Alteon D-line Perform Subscription, adding features such as AppWall web application firewall, Application Authentication Gateway (AAG) and SSL Inspection (for inspection of encrypted internet traffic).
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Security Updates Subscription (SUS) . Our SUS service consists of periodic updates, emergency updates, and custom filters, which are supported by our own security operations center for vulnerability and exploit detection; security risk assessment; and threat mitigation support services. The service provides immediate and ongoing security updates to protect customers against the latest threats. The service is available for DefensePro and AppWall products.
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Fraud Feed Subscription . This subscription-based service provides protection from fraud and phishing attacks. This includes protecting network users from financial fraud, information theft, and zero-minute malware spread. By subscribing to this service, customers receive updates about malicious fraud and phishing sites that are downloaded automatically to DefensePro every defined period, and block access to malicious sites from within the organization.
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Cloud DDoS Protection Service . Our Cloud DDoS Protection Services provide a full range of enterprise-grade DDoS protection services in the cloud. Based on our DDoS protection technology, it aims to offer organizations wide security coverage, accurate detection and short time to protect from today’s dynamic and evolving DDoS attacks. We offer a multi-vector DDoS attack detection and mitigation service, handling attacks at the network layer, server-based attacks, and application-layer DDoS attacks. The solution includes protection against volumetric and non-volumetric attacks, SYN flood attacks, "low & slow" attacks, HTTP floods, SSL-based attacks and more.
Our Cloud DDoS Service is offered in multiple deployment options to meet an organization’s specific needs:
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Hybrid Cloud DDoS service –integrates with our on-premises DDoS protection device in its data center. Recommended for organizations that can deploy an on-premises device in its data center.
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Always-On Cloud DDoS Service (provides always-on protection where traffic is always routed through Radware's cloud security POPs (Points of Presence) with no on-premises device required for detection and mitigation. Recommended for organizations that have applications hosted in the cloud or those that are not able to deploy an on-premises attack mitigation device in their data center.
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On-Demand Cloud DDoS Service - protects against Internet pipe saturation and is activated when the attack threatens to saturate the organization’s Internet pipe. Recommended for organizations that are looking for the lowest cost solution and are less sensitive to real-time detection of DDoS attacks.
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Cloud WAF Service - Our Cloud WAF Service provides enterprise-grade, continuously adaptive web security protection and is based on our ICSA Labs certified web application firewall. Cloud WAF includes full coverage of OWASP Top-10 threats, advanced attacks and zero-day attack protection. It automatically adapts the protections to evolving threats and protected assets.
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Cloud Malware Protection Service – Our Cloud Malware Protection service defends organizations against zero-day malware by analyzing data collected from a global community of 2 million users using patented machine learning algorithms to detect previously unknown malware based on their unique behavior patterns.
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Content Delivery Network (CDN) Service – Our CDN service provides content to end-users from the nearest location to optimize user experience, shorten website response times, and offload customer compute capacity. The CDN service uses a globally distributed network of high capacity, high-speed cache servers leveraging advanced caching techniques. Our CDN Service is based on a strategic cooperation with Verizon Digital Media Services’ CDN.
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Cloud Web Acceleration Service. Our Cloud Web Acceleration Service speeds up web applications by up to 40% is designed to eliminate the need to continuously invest development resources in code optimization per browser or device type. Based on our FastView technology, Cloud Web Acceleration Service continuously monitors the web application and automatically optimizes its content for faster delivery to the end user, according to device type and web browser.
Our Services
Our service offering currently consists of the following key services:

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Emergency Response Team (ERT) Service. Our ERT team provides 24x7 security and product expert support for hands-on attack mitigation assistance from a single point of contact. The ERT provides expertise needed by the customer during prolonged, multi-vector attacks. This includes working closely with customers to decide on the diversion of traffic during volumetric attacks, assisting with capturing files, analyzing the situation and ensuring the best mitigation options are implemented.
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Emergency Response Team (ERT) Premium Service. The ERT Premium service is an extended set of security and operational support services that allow customers to fully outsource the monitoring and management of their organization’s security to a team of security experts. ERT Premium is a managed service designed to proactively prevent emergencies, neutralize security risks, and safeguard operations from irreparable damages, thus assuring SLA and business continuity.
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Customer Support and Maintenance Services. The technical support and maintenance services consists of initial installation, set-up and ongoing support of our products, trains distributors and customers to use our products and provides software updates and product upgrades for our products.  In addition, our technical team trains and certifies our distributors to provide limited technical support in each of the geographical areas in which our products are sold, and is directly responsible for remote support.
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Recent Product Activities
During 2017, our key activities regarding our products and services offering consisted of the following:
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We have added Cloud Malware Protection, a cloud-based service that defends organizations against zero-day malware by analyzing data collected from a global community of millions of users using patented machine learning algorithms to detect previously unknown malware based on their unique behavior patterns. The Cloud Malware protection service is based on the acquisition of Seculert, a SaaS cloud-based provider of protection against enterprise network breach and data exfiltration.
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We have further expanded our global cloud security network by adding new scrubbing centers in South Africa, Japan, South Korea, Australia and England. Our cloud security nodes achieve now over 3.5Tbps of global mitigation capacity, enabling to segregate clean and attack traffic with dedicated scrubbing centers, and block attack traffic near origin. These nodes serve our cloud WAF offering, our DDOS cloud offering, or both.
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We have launched DDoS Protection for applications hosted on Amazon Web Services and Microsoft Azure public clouds. Radware’s new Cloud DDoS Service provides organizations that host their applications on a mix of on-premises and public cloud environments with unified DDoS protection that offers consistent security policies and a single pane-of-glass. This includes a single emergency response team and focal point, a unified web security portal, single reporting tool and single DDoS protection technology across premise- and cloud-based protections.
We have launched a new line of DefensePro products to offer a full range of next generation protection platforms that includes:
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DefensePro VA – a virtual appliance with mitigation capacity of up to 20Gbps. Best for organizations operating in a virtualized environment and Software Defined Data Centers (SDDC) as well as for cloud hosting providers looking to scale protection to their customers.
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DefensePro 20 – Supporting 2Gbps through 12Gbps of legitimate traffic with up to 20Gbps mitigation capacity. Best fit for small and medium size enterprises.
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DefensePro 60 - Supporting 10Gbps through 40Gbps of legitimate traffic with up to 60Gbps mitigation capacity. Designed for large data center protection deployed by large enterprises, eCommerce and service providers.
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DefensePro 200 & 400 – Radware’s largest devices offering up to 200Gbps and 400Gbps mitigation capacity respectively. Best fit for carriers, scrubbing centers and service providers looking for a single platform to handle very high volume attacks.
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We have launched a new set of DNS service protections, protecting against large scale attacks originating from IoT botnets that target the availability of web based services through paralyzing the DNS service.
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We have launched the new Alteon D-line of appliances and software, which was designed to address evolving market challenges around the increase in encrypted traffic, the increase in encrypted attacks and malware, and the growing needs for data center automation. We have introduced new SSL process capacity across the complete suite of Alteon D line of hardware and virtual appliances with SSL connection speeds up to 98,000 CPS (2K RSA) and 48,000 CPS (256-bit ECC) and up to 40G of SSL throughput.
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We have launched Alteon VA for Microsoft Azure public cloud. Alteon VA for Azure targets enterprises that need to incorporate an application delivery solution in their cloud deployment. It comes with integrated migration tools that make cloud migration simple and easy to execute.
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Technology partnerships and integrations.
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We have continued our investment in the OEM agreement with Cisco for DDoS Mitigation, providing our virtual DefensePro appliance for Cisco’s next generation Firewalls (Firepower 4100 series and Firepower 9000 series).
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We have continued our investment in integrating Radware solutions with Cisco next generation and software defined data center (SDDC) technologies through vDirect, our software-based management orchestration plug-in for Cisco SDDC solutions.
(e) Sales and Marketing
Sales. We market and sell our products primarily through indirect sales channels that consist of distributors and resellers located in the Americas (including the U.S., Canada and Central and Latin America), Europe, Africa, Asia and Australia. In addition, we generate direct sales to select customers mainly in the United States. Our direct sales channels are supported by our sales and marketing managers who are also responsible for recruiting potential distributors and resellers and for initiating and managing marketing projects in their assigned regions. The sales managers are supported by our internal sales support staff that help generate and qualify leads for the sales managers. As of December 31, 2017, we had a total of 186 sales and marketing personnel, of which 70 persons were employed in the Americas with locations in various countries, mainly in the United States. We have subsidiaries and representative offices and branches in several countries (see Item 4.C. – Organizational Structure), which promote and market our products and provide customer support in their respective regions.
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Marketing. Our marketing strategy is to enhance brand recognition and maintain our reputation as a provider of technologically advanced, quality cyber security and application delivery solutions to help drive demand for our products.  We seek to build upon our marketing and branding efforts globally to achieve greater worldwide sales. Our sales force and marketing efforts are principally directed at developing brand awareness, generating demand and providing support to our distributors/resellers to promote sales. We participate in major trade shows, regionally-based events/seminars and offer support to our distributors and resellers who participate in these events. We also invest in online and search engine advertising campaigns, global public relations and regionalized field marketing campaigns. In addition to our independent marketing efforts, we invest in joint marketing efforts with our distributors, VARs and other companies that have formed strategic alliances with us.
We have entered into co-marketing and reseller arrangements with companies in other complementary sectors in order to broaden our customer base by selling joint solutions comprised of such complementary products. As an example, application vendors may sell our Alteon ® to their customers in conjunction with their application in order to load-balance and optimize the application availability and performance. We established such co-marketing and reseller arrangements with, among others: Xura (previously Comverse); Hewlett Packard Enterprise; IBM; Microsoft Corporation; Oracle Corporation; SAP AG.; Juniper Networks, Inc.; VMWare, Inc.; Red Hat Limited; NEC Corporation; Verint Americas, Inc.; Cisco Systems Inc.; Nokia Networks and Ericsson Inc. However, there is no assurance that the above co-marketing and strategic alliance agreements would result in a substantial increase in our revenues.
Strategic Alliances and OEM Agreements. We have entered into strategic alliances and OEM agreements with other software and hardware vendors, as well as mutual channel information sharing arrangements, where products can either be branded with our name or the vendor’s name. We believe that these companies have significant customer relationships and offer products which complement our products.
For example, we entered into an agreement with Check Point Software Technologies Ltd., whereby certain of Check Point’s appliances will be based on our attack mitigation solutions; in 2015, we entered into an OEM agreement with Cisco for DDoS Mitigation, providing our virtual DefensePro appliance for Cisco Firepower 9300 series and Firepower 4100 series; and in early 2017, our strategic relationship with Nokia was expanded to include the reselling of our security solutions as part of Nokia’s offerings to carriers.
We plan to further invest in the development of strategic alliances in order to provide greater access to our target markets and enhance our brand name. We have also entered into OEM agreements with several software vendors, in which we incorporate such vendors’ software into our products to create additional value to our customers.
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(f) Customers and End-Users
With the exception of our limited direct sales to selected customers, we sell our products through distributors or resellers who then sell our products to end users.
We have a globally diversified end-user base, consisting of corporate enterprises, including banks, insurance companies, manufacturing and retail companies, government agencies and media companies, and service providers, such as telecommunication carriers, internet service providers, cloud service providers and application service providers. Customers in these different vertical markets deploy Radware products for availability, performance and security of their applications from headquarters to branch offices.
In 2017, approximately 46% of our sales were in the Americas (principally in the United States), 27% were in Europe, Middle East and Africa (“EMEA”) and 27% in Asia-Pacific, compared to 43%, 27% and 30%, respectively, in 2016, and 41%, 29% and 30%, respectively, in 2015. Other than the United States, which accounted for 37% of our total revenues in 2017, no other single country accounted for more than 10% of our sales for 2017.
In 2017, approximately 56% of our sales derived from product sales and 44% derived from service sales, same as in 2016 and 63% and 37%, respectively, in 2015. We believe that this reflects our strong product installed base that drives a demand for our support and managed services and maintenance, as well as a decline in our product sales.
In 2017, approximately 66% of our sales derived from the enterprise market and 34% derived from the carrier market, compared to approximately 69% and 31%, respectively, in 2016 and 71% and 29%, respectively, in 2015.
As of December 31, 2017, 2016 and 2015, no single customer accounted for more than 10% of our sales or more than 10% of our trade receivables balance.
For additional details regarding the breakdown of our revenues by geographical distribution and by activity, see “Item 5A – Operating and Financial Review and Prospects – Operating Results”.
(g) Seasonality
Our quarterly operating results have been, and are likely to continue to be, influenced by seasonal fluctuations in our sales and by seasonal purchasing patterns of some of our customers. Some of our customers plan their annual purchasing budget at the beginning of each year which causes operating results in our first quarter of the year to be typically lower than other quarters. In addition, our operating results in the fourth quarter tend to be higher than other quarters as some of our customers tend to make greater capital and operational expenditures as well as expenditures relating to service renewals towards the end of their own fiscal years, thereby increasing orders for our products, support and subscription services in the fourth quarter.
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(h) Customer Support Services
Our technical team, which consisted of 244 employees worldwide as of December 31, 2017, supports our sales force during the sales process, assists our customers and distributors with the initial installation, set-up and ongoing support of our products, trains distributors and customers to use our products and provides software updates and product upgrades for our products.  In addition, our technical team trains and certifies our distributors to provide limited technical support in each of the geographical areas in which our products are sold, and is directly responsible for remote support. Our Certainty Support Program provides offerings which allow customers to automatically obtain new software versions of their products and obtain optimized performance by purchasing any of the following optional offerings: extended warranty, software updates, 24x7 help-desk (directly to our customers and through our distributors), on-site support and unit replacement. Some of our on-site services are provided by third party contractors.
(i) Research and Development
We place considerable emphasis on research and development to expand the capabilities of our existing products, develop new products and improve our existing technologies and capabilities. We believe that our future success will depend upon our ability to maintain our technological expertise, enhance our existing products and introduce, on a timely basis, new commercially viable products that will continue to address the needs of our customers. Accordingly, we intend to continue devoting a significant portion of our personnel and financial resources to research and development. In order to identify market needs and to define appropriate product specifications, as part of the product development process we seek to maintain close relationships with current and potential distributors, customers and vendors in related industry sectors.
As of December 31, 2017, our research and development staff consisted of 320 employees and 61 subcontractors. Research and development activities take place mainly at our facilities in Israel, Vancouver, Canada; and North Carolina, United States and our sub-contractor in Bangalore, India. We employ established procedures for the required management, development and quality assurance of our new product developments. Our research and development organization is divided into Security, Application Delivery, Cloud Malware and Management groups. Within those groups the organization is divided according to our existing product solutions.  Each product group is headed by a group leader and includes team leaders and engineers. Each group has a dedicated quality assurance team.  In addition, we have an infrastructure department responsible for the development of our platforms which are the basis for all products, serving all product groups, which consist of a senior group leader, group leaders, team leaders, and engineers. The heads of all research and development divisions report to either the Chief Operating Officer or the Chief Technology Officer.
See also below under "Government Regulations – Israeli Innovation Authority.”
(j) Manufacturing and Suppliers
Our quality assurance testing, final integration, packaging and shipping operations as well as part of our final assembly activities are primarily performed at our facility in Jerusalem, Israel. All of our products are Underwriters Laboratories (UL) and ISO 9001:2008 compliant and some of them have also achieved significant industry certifications, such as DefensePro (for the Common Criteria Evaluation & Validation Scheme (CCEVS) EAL4+ through the National Security Agency (NSA) program) and AppWall (ICSA certification for Web Application Firewall).
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We rely on third-party manufacturing vendors to provide our finished products. In this respect, these vendors primarily provide us with manufacturing assembly services in order to deliver the finished goods while we perform the final integration of the products. All components and subassemblies included in our products are supplied to the manufacturing vendors by several suppliers and subcontractors. Each of the manufacturing vendors monitors each stage of the components production process, including the selection of components and subassembly suppliers. Thereafter, each of the manufacturing vendors makes the final assembly in their own facility. Our primary manufacturing vendors are ISO 9001 certified, indicating that each of their manufacturing processes adhere to established quality standards.
In 2017, we primarily relied on two ODMs to manufacture and to supply our hardware platforms, whereby approximately 47% of our direct product costs were from one of these vendors and 34% were from the other vendor. There are also two additional vendors from whom we buy components for main accessories – in 2017, we purchased 8% of such accessories from one of these vendors and 4% from the other.
We conduct a business continuity plan (BCP) with all our vendors to ensure an immediate recovery in case of crisis that might jeopardize the supply of our products. However, if we are unable to continue to acquire those platforms or components from these platform manufacturers and vendors on acceptable terms, or should any of these suppliers cease to supply us with such platforms or components for any reason, we may not be able to identify and integrate an alternative source of supply in a timely fashion or at the same costs. Any transition to one or more alternate suppliers would likely result in delays, operational problems and increased costs, and may limit our ability to deliver our products to our customers on time for such transition period, although we believe we have levels of inventory that will assist us to transition to alternate suppliers smoothly.
(k) Proprietary Rights
We rely on patent, trademark and trade secret laws, as well as confidentiality agreements and other contractual arrangements with our employees, distributors and others to protect our technology.  We have a policy that requires our employees to execute employment agreements, including confidentiality and non-competition provisions.
We have registered trademarks for, among others, Radware®; Radware Logo: ®; OnDemand Switch®; Alteon®; APSolute®; LinkProof®; DefensePro®; CID®; SIPDirector®; AppDirector®; AppXcel®; AppXML®; AppWall®; APSolute Insite®; Triangulation®; SmartNat®; StringMatch Engine®; Web Server Director®; Fireproof®; SecureFlow®; APSolute Vision®; VAdapter®; vDirect®; Alteon VA®; AppShape®; FastView®; DefenseFlow®; TeraVIP®; Virtual Director®;  DefensePipe®;“ADC Fabric®”; CyberStack® and “Virtual DefensePro® and we have trademark applications pending for, among others,   “ADC-VX”™; VADI™ (Virtual Application Delivery Infrastructure)   and “Inflight”™, “.  We own registered U.S. copyrights in all of our primary software product lines.
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We have registered patents in the United States and Canada for, among others, our triangle redirection method used for the global load balancing in our AppDirector product; our mechanism for efficient management and optimization of multiple links used in our LinkProof product; our method for load balancing by global proximity used in our AppDirector product; our method for controlling traffic on links between autonomous Border Gateway Protocol (BGP) systems; the stateful distribution of copied SSL traffic; the transparent inspection of encrypted client traffic; our passive monitoring and event detection mechanisms used for business event monitoring in our Inflight product; the activation of multiple virtual services on a switching platform; the behavioral analysis and detection of zero-day and DoS network attack patterns in our DefensePro product; our hypertext transfer protocol (HTTP) DoS attack mitigation behavioral mechanisms in our DefensePro; a geographically based traffic distribution; a generic proximity based site selection for global load balancing; an internal hardware connectivity plane architecture; a specific proximity based site selection for global load balancing of HTTP transactions implemented in our Alteon products; and additional patents in the SDN field, around a new concept of cyber control and automation for our DefenseFlow Product.
We have pending patent applications and provisional patents in connection with several methods and features used in our products or that we plan to implement in the future, such as advanced algorithms for cyber detection defending against new kinds of attacks (Burst and IoT related attacks, detection of attacks within AWS etc.), patent applications around the cyber control and automation (DefenseFlow) and around ADC for SDDC adapted for containerized environments. In 2017, we continued to add new capabilities covered by such patent applications to our lines of security, namely new algorithms to fight against new attack surfaces resulting from IoT, and added new capabilities to defeat application floods against workloads that are hosted in public clouds such as AWS and Azure. Our new patent applications allowed us extended the surface of the DefenseFlow to control, manage and automate attack mitigation across all domains: scrubbing centers, enterprise data-centers and cloud data-centers. The notion of DefenseFlow client was extended to DetectPro which has been develop as a software based programmable detector with flexible form factors and deployment modes, to extend our detection footprints across new domains such as: micro-perimeters and edge-compute. Another domain that we have added new capabilities covered by patent applications is integration of our Alteon load-balancer with micro-services. We have integrated Alteon as a front-end service to automatically learn the Kubernetes eco-system and auto-configure itself based on the ever-changing containerized application environment. These applications may not result in any patent being issued, and, if issued, the patents may not provide adequate protection against competitive technology and may not be held valid and enforceable if challenged.  In addition, other parties may assert rights as inventors of the underlying technologies, which could limit our ability to fully exploit the rights conferred by any patent that we receive. See “Item 8. Financial Information – Legal Proceedings” for a discussion of intellectual property litigation. Our competitors may be able to design around a patent we receive and other parties may obtain patents that we would need to license or circumvent in order to exploit our patents.
The protective steps we have taken may be inadequate to deter misappropriation of our technology and information. We may be unable to detect the unauthorized use of, or take appropriate steps to enforce, our intellectual property rights.  Some of the countries in which we sell our products do not protect intellectual property to the same extent as the United States and Israel. In addition, our competitors may independently develop technologies that are substantially equivalent or superior to our technology. Any licenses for intellectual property that might be required for our services or products may not be available on reasonable terms.
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(l) Competition
The cyber security and application delivery market is highly competitive and we expect competition to intensify in the future.  We may lose market share if we are unable to compete effectively with our competitors, which include equipment manufacturers and service providers.
Our principal competitors are:
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Equipment manufacturers (DDoS Protection): Netscout Systems Corp. (through Arbor Networks); and A10 Networks, Inc.
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Equipment manufacturers (ADC): F5 Networks, Inc., or F5; Citrix Systems, Inc.; and A10 Networks, Inc.
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Equipment manufacturers (WAF): Imperva; F5; Akamai.
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Cloud service providers (DDoS protection and Cloud WAF): Akamai (Prolexic); Imperva (through Incapsula, Inc.); Neustar and Verisign;
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Cloud service providers (ADC): Amazon Web Services; Microsoft Azure.
We expect to continue to face additional competition as new participants enter the market or extend their portfolios into related technologies. Larger companies with substantial resources, brand recognition and sales channels may also form alliances with or acquire competing providers of application delivery or application and network security solutions and emerge as significant competitors.
Competition may result in lower prices or reduced demand for our products and a corresponding reduction in our ability to recover our costs as well as increased costs associated with sales and marketing expenses to maintain or increase market share which may impair our ability to increase profitability. Furthermore, the dynamic market environment, which is demonstrated by the above acquisitions, poses a challenge in predicting market trends and expected growth. We believe that our success will depend primarily on our ability to provide more technologically advanced and cost-effective application delivery and application and network security solutions, and more responsive customer service and support, than our competitors.  However, we cannot assure you that the products we offer will compete successfully with those of our competitors. Furthermore, should competition intensify, we may have to reduce the prices of our products which will negatively impact our business and financial condition. See also above under “Business Overview – Our Competitive Strengths and Strategies”.
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(m) Government Regulations
Environmental Regulations
Our activities in Europe require that we comply with European Union Directives with respect to product quality assurance standards and environmental standards. The “RoHs” and RoHs II Directives require products sold in Europe to meet certain design specifications, which exclude the use of hazardous substances . Directive 2002/96/EC on Waste Electrical and Electronic Equipment (known as the “WEEE” Directive) requires producers of electrical and electronic equipment to register in different European countries and to provide collection and recycling facilities for used products. We are currently in compliance with the RoHs and WEEE regulations and ISO 14001 standards (re Environmental Management Systems).
Israeli Innovation Authority
From time to time, eligible participants may receive grants under programs of the IIA. Grants received are generally repaid through a mandatory royalty based on revenues from the sale of products (and ancillary services) incorporating know-how developed, in whole or in part, with the grants. This governmental support is conditioned upon the participant’s ability to comply with certain applicable requirements and conditions specified in the IIA’s programs and  the R&D Law.
Under the R&D Law, research and development programs that meet specified criteria and are approved by the Research Committee of the IIA are eligible for grants usually of up to 66% of certain approved expenditures of such programs, as determined by said committee. In exchange, the recipient of such grants is required to pay the IIA royalties from the revenues derived from products incorporating know-how developed within the framework of each such program or derived therefrom (including ancillary services in connection therewith), up to an aggregate of 100% of the dollar-linked value of the total grants received in respect of such program, plus interest.
The R&D Law also provides that know-how developed under an approved research and development program or rights associated with such know-how (1) may not be transferred to third parties in Israel without the approval of the IIA (such approval is not required for the sale or export of any products resulting from such research or development) and (2) may not be transferred to any third parties outside Israel, except in certain special circumstances and subject to the IIA’s prior approval, which approval, if any, may  generally be obtained, in the following cases: (a) the grant recipient pays to the IIA a portion of the sale price paid in consideration for such IIA-funded know-how (according to certain formulas, which may result in repayment of up to 600% of the grant amounts plus interest), or (b) the grant recipient receives know-how from a third party in exchange for its IIA-funded know-how. Such approval is not required for the export of any products resulting from such research or development.
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The R&D Law imposes reporting requirements with respect to certain changes in the ownership of a grant recipient. The law requires the grant recipient and its controlling shareholders and foreign interested parties to notify the IIA of any change in control of the recipient or a change in the holdings of the means of control of the recipient and requires a non-Israel interested party to undertake to the IIA to comply with the R&D Law.  In addition, the rules of the IIA may require additional information or representations in respect of certain of such events. For this purpose, “control” is defined as the ability to direct the activities of a company other than any ability arising solely from serving as an officer or director of the company.  A person is presumed to have control if such person holds 50% or more of the means of control of a company. “Means of control” refers to voting rights or the right to appoint directors or the chief executive officer. An “interested party” of a company includes a holder of 5% or more of its outstanding share capital or voting rights, its chief executive officer and directors, someone who has the right to appoint its chief executive officer or at least one director, and a company with respect to which any of the foregoing interested parties owns 25% or more of the outstanding share capital or voting rights or has the right to appoint 25% or more of the directors. Accordingly, any non-Israeli who acquires 5% or more of our ordinary shares will be required to notify us that it has become an interested party and to sign an undertaking to comply with the R&D Law.
The Israeli authorities have indicated in the past that the government may further reduce or abolish the IIA grants in the future.  Even if these grants are maintained, we cannot presently predict what would be the amounts of future grants, if any, that we might receive. In addition, an amendment to the R&D Law that became effective on January 1, 2016, provides the IIA with authority to establish new guidelines regarding the R&D Law, which may affect our existing and/or future IIA programs and incentives for which we may be eligible. We cannot predict what changes, if any, the IIA may make.
During 2012-2014 we received grants from the IIA to fund certain other research and development projects as part of our participation in the MAGNET Consortium Program, which is a program that sponsors innovative generic industry-oriented technologies to strengthen the country’s technological expertise and enhance competitiveness. These grants do not bear any royalty repayment obligations. In 2012, 2013 and 2014 we received $0.3 million, $0.4 million, and $0.3 million respectively, in IIA grants under such MAGNET programs.
In 2017 and 2016, we were qualified to participate in three projects funded by the IIA to develop generic technology relevant to the development of our products. We were eligible to receive grants constituting between 30% and 50% of certain research and development expenses relating to these projects. The grants under these projects are not required to be repaid by way of royalties. Grants for the years ended December 31, 2016 and 2017 were $ 0.9 million and $ 0.6 million, respectively.
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C. Organizational Structure
We have a wholly-owned subsidiary in the United States, Radware Inc., which conducts the sales and marketing of our products in the United States.  We also have subsidiaries in Australia, France, Germany, the United Kingdom, Italy, Japan, Singapore, Korea, Canada, India, Israel, China and Hong Kong, most of which typically conduct the sales and marketing of our products in their respective locations. We have also established representative offices in Taiwan and Spain. Our subsidiaries include:
Name of Subsidiary
Country of Incorporation
Radware Inc.
New Jersey, United States of America
Radware UK Limited
United Kingdom
Radware France
France
Radware Srl
Italy
Radware GmbH
Germany
Nihon Radware KK
Japan
Radware Australia Pty. Ltd.
Australia
Radware Singapore Pte. Ltd.
Singapore
Radware Korea Ltd.
Korea
Radware Canada Inc.
Canada
Radware India Pvt. Ltd.
India
Radware China Ltd. 睿伟网络科技（上海）有限公司
China
Radware (Hong Kong) Limited
Hong Kong
Radyoos Media Ltd.*
Israel
Seculert Ltd.**
Israel
Radware Canada Holdings Inc.
Canada
Radware Iberia, S.L.U.
Spain
* We own 91% of this subsidiary. All other listed subsidiaries are wholly owned.
** Seculert Ltd. was merged into Radware on December 31, 2017.
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Yehuda Zisapel, one of our co-founders and shareholders, is the Chairman of our Board of Directors and the father of Roy Zisapel, our President, Chief Executive Officer and director.  Individually or together with his brother, Zohar Zisapel, and with Nava Zisapel, Yehuda Zisapel is also a founder, director and/or principal shareholder of several other companies which, together with our Company and our subsidiaries listed above are known as the RAD-Bynet Group. These companies include, among others:
AB-NET Communications Ltd.
Ace – Assured Customer Experience Ltd.
Binat Business Ltd.
BYNET Data
Communications Ltd.
BYNET Electronics Ltd.
BYNET SEMECH (outsourcing) Ltd.
Bynet Software Systems Ltd.
Bynet System Applications Ltd.
Ceragon Networks Ltd.
Internet Binat Ltd.
Nuance Hearing Ltd.
Packetlight Networks Ltd.
RAD-Bynet Properties and Services (1981) Ltd.
Radbit Computers, Inc.
RADCOM Ltd.
RAD Data Communications Ltd.
Radiflow Ltd.
RADWIN Ltd.
SecurityDam Ltd.
Silicom Ltd.
The RAD-Bynet Group also includes several other holdings, real estate companies, biotech and pharmaceutical companies and the above list does not constitute a complete list of the holdings of Messrs. Yehuda and Zohar Zisapel.
In addition to engaging in other businesses, members of the RAD-Bynet Group are actively engaged in designing, manufacturing, marketing and supporting data communications products, none of which currently compete with our products. Some of the products of members of the RAD-Bynet Group are complementary to, and may be used in connection with, our products. See also “Item 7B – Major Shareholders and Related Party Transactions - Related Party Transactions”.
D. Property, Plants and Equipment
General . We operate from leased premises mainly in Tel Aviv and Jerusalem in Israel and New Jersey in the United States. We also lease premises in several locations in Europe and Asia-Pacific for the activities of our subsidiaries, representative offices and branches. Our aggregate annual rent expenses under these leases were approximately $6.2 million in 2017 compared to $5.4 in 2016.
We believe that the following offices and facilities are suitable and adequate for our operations as currently conducted and as currently foreseen. In the event that additional or substitute offices and facilities are required, we believe that we could obtain such offices and facilities at commercially reasonable rates.
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Israel. Our headquarters and principal administrative, finance, research and development and marketing operations are located in approximately 100,000 square feet of leased office space in Tel Aviv, Israel, in two buildings: one, consisting of approximately 40,000 square feet, with a lease expiring in June 2020; and the second consisting of approximately 60,000 square feet, with a lease expiring in June 2020. These facilities are leased from companies owned by Yehuda, Nava and Zohar Zisapel. For more information see – “Item 7 - Major Shareholders and Related Parties Transactions.”
In addition, we lease approximately 3,600 square feet of space in Jerusalem for development facilities from a company owned by Yehuda, Nava and Zohar Zisapel. The lease expires in August 2020. We also sublease approximately 15,000 square feet for warehousing in Jerusalem from a company owned by Yehuda, Nava and Zohar Zisapel. The lease expires in August 2019. For more information, see “Item 7 - Major Shareholders and Related Parties Transactions.”
Other locations. In the United States, we lease approximately 16,900 square feet of property, consisting of approximately 12,700 square feet of office space and 4,200 square feet of warehouse space, in Mahwah, New Jersey from a company owned by Yehuda, Nava and Zohar Zisapel.  The lease expires in December 2018. For more information, see – “Item 7 - Major Shareholders and Related Party Transactions.”
We lease approximately 3,800 square feet of property for our research and development facilities in North Carolina, the lease for which will expire in September 2018. In addition, we lease approximately 5,700 square feet of property in Sunnyvale, California, the lease for which will expire in December 2021.
We lease facilities for the operation of our subsidiaries and representative offices in several locations in Europe and Asia-Pacific, all from unrelated third parties.
ITEM 4A. UNRESOLVED STAFF COMMENTS
None.
ITEM 5.
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
Our discussion and analysis of our financial condition and results of operation are based upon our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States.  Our operating and financial review and prospects should be read in conjunction with our financial statements, accompanying notes thereto and other financial information appearing elsewhere in this annual report.
A. Operating Results
Overview
We are a provider of cyber security and application delivery solutions designed to secure the user digital experience for business-critical applications in virtual, cloud and software defined data centers. Our solutions are deployed by enterprises, carriers and cloud service providers. We began selling our products in 1997, and currently have local offices, subsidiaries or branches in 19 countries in Asia-Pacific, Europe and the Americas.
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We sell through sales channels such as resellers and distributors whereas most of our direct sales are to strategic customers.
Most of our revenues are generated in dollars or are dollar-linked and the majority of our expenses are incurred in dollars and, as such, the dollar is our functional currency. Our consolidated financial statements are prepared in dollars and in accordance with U.S. GAAP.
Our revenues are derived from sales of our products and services:
·
We recognize product revenue when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, no further obligation exists and collectability is probable. We recognize revenues from product subscriptions, ratably over the subscription period.
·
Revenues from post-contract customer support and service subscriptions, which represents mainly software update subscriptions, help-desk support and unit repairs or replacements, are recognized ratably over the contract or subscription period.
We operate in one reportable market segment and our revenues are attributed to geographic areas based on the location of the end-users.
In the years ended December 31, 2017, 2016 and 2015, revenues derived from sales of the Company’s products constituted approximately 56%, 56% and 63%, respectively, of our total revenues, with the remaining revenues being derived from services. A significant portion of our revenues is derived from repeat product sales to existing customers, and we expect that repeat product sales will continue to account for a significant portion of such revenues in the future. As our installed base of products grows, service revenues are also generally expected to increase.
On January 30, 2017 we acquired Seculert. The consideration to acquire Seculert was $10 million in cash and additional contingent consideration of up to $10 million, based on certain milestones to be achieved. The derived goodwill from this acquisition is attributable to additional capabilities of the Company to expand its products portfolio. Goodwill generated from this business combination is primarily attributable to synergies between the Company's and Seculert's respective products and services.
We recorded IPR&D, technology and goodwill in amount of $7.1 million, $2.2 million and $2.1 million, respectively. The estimated useful life of the IPR&D and technology is approximately 9 years.
For our recording of our IPR&D, technology and goodwill and estimated payments of the contingency milestones see also Note 1(c) and Note 4 to our consolidated financial statements included elsewhere in this annual report.
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Critical Accounting Policies
In many cases, the accounting treatment of a particular transaction is specifically dictated in U.S. GAAP and does not require management’s judgment in its application. There are also areas in which management’s judgment in selecting among available alternatives would produce a materially different result.  Our management has reviewed these critical accounting policies and related disclosures with our Audit Committee. See note 2 to our consolidated financial statements included elsewhere in this annual report, which contains additional information regarding our accounting policies and other disclosures required by U.S. GAAP.
Our management believes that the significant accounting policies which affect its more significant judgments and estimates used in the preparation of its consolidated financial statements and which are the most critical to aid in fully understanding and evaluating our reported financial results include the following:
· Revenue recognition;
· Investment in marketable securities;
· Goodwill;
· Impairment of long lived assets and intangible assets subject to amortization;
· Stock-based compensation; and
· Income taxes.
Revenue Recognition .  We derive revenues mainly from sales of products and services:
·
We recognize product revenue in accordance with Accounting Standards Codification, or ASC, No. 605, "Revenue Recognition", when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, no further obligation exists and collectability is probable. We recognize revenues from product subscriptions, ratably over the subscription period.
·
Revenues from PCS and service subscriptions, which represents mainly software update subscriptions, help-desk support and unit repairs or replacements, are recognized ratably over the term of the agreement, which is typically between one year and three years.
Our products are sold partially through distributors and resellers, all of which are considered end-users.
Our products and services generally qualify as separate units of accounting. As such, revenues from multiple element arrangements that include products, PCS and subscriptions are separated into their various elements using the relative selling price method. The estimated selling price for each deliverable is based on its vendor specific objective evidence (“VSOE”), if available, third party evidence (“TPE”) if VSOE is not available, or estimated selling price (“ESP”) if neither VSOE nor TPE is available.
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We determine the best estimated selling price ("ESP") in multiple-element arrangements as follows: VSOE for post-contract customer support is determined based on the price charged when such element is sold separately (renewals). The price may vary in the territories and vertical markets in which we conduct business. Price is determined by using a consistent percentage of our product price lists, in the same territories and markets.
For the product and subscriptions, we determine the ESP based on management estimated selling price by considering several external and internal factors including, but not limited to, pricing practices including discounting, margin objectives, and competition. The determination of ESP is made through consultation with and approval of management, taking into consideration the pricing model and go-to-market strategy.
We record a provision for estimated sale returns and stock rotation granted to customers on products in the same period the related revenues are recorded in accordance with ASC No. 605. These estimates are based on historical sales returns, stock rotations and other known factors. Such provisions amounted to $ 1.7 million and $1.0 million as of December 31, 2017 and 2016, respectively.
Deferred revenues include unearned amounts received under post-contract customer support and subscription agreements, and are classified in short and long-term based on their contractual term. Deferred revenues amounts which represent uncollected amounts are offset against account receivables.
Investment in Marketable Securities. We account for investments in marketable securities in accordance with ASC No. 320, "Investments- Debt and equity Securities". Management determines the appropriate classification of our investments at the time of purchase and reevaluates such determinations at each balance sheet date.
We classified all of our debt and equity securities as available-for-sale securities. Available-for-sale securities are carried at fair value, with the unrealized gains and losses reported in "accumulated other comprehensive income (loss)" in shareholders' equity. Realized gains and losses on sales of investments are included in financial income, net and are derived using the specific identification method for determining the cost of securities.
The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization together with interest and dividends on securities are included in financial income, net.
We recognize an impairment charge when a decline in the fair value of our investments below the cost basis is judged to be other-than-temporary. The factors considered in making such a determination include the duration and severity of the impairment, the reason for the decline in value, the potential recovery period and our intent to sell, including whether it is more likely than not that we will be required to sell the investment before recovery of cost basis. For securities that are deemed other-than-temporarily impaired, the amount of impairment recognized in the statement of income is limited to the amount related to credit losses, while impairment related to other factors is recognized in other comprehensive income. During the years 2017, 2016 and 2015, we did not record any other-than-temporary impairment loss with respect to our marketable securities.
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Goodwill .  Goodwill represents the excess of the purchase price in a business combination over the fair value of the net tangible and intangible assets acquired. Under ASC 350 "Intangibles – Goodwill and Other" ("ASC 350"), goodwill is not amortized, but rather is subject to an annual impairment test. ASC 350 requires goodwill to be tested for impairment at least annually or between annual tests in certain circumstances, and written down when impaired. Goodwill is tested for impairment by comparing the fair value of the reporting unit with its carrying value.
ASC 350 allows an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. If the qualitative assessment does not result in a more likely than not indication of impairment, no further impairment testing is required. If it does result in a more likely than not indication of impairment, the two-step impairment test is performed. Alternatively, ASC 350 permits an entity to bypass the qualitative assessment for any reporting unit and proceed directly to performing the first step of the goodwill impairment test.
We operate in one operating segment, and this segment comprises our single reporting unit. We perform assessment of qualitative factors during the fourth quarter of each fiscal year, or more frequently if impairment indicators are present. This analysis determined that no indicators of impairment existed for 2017, 2016 and 2015.
Impairment of long lived assets and intangible assets subject to amortization. Property and equipment and intangible assets subject to amortization are reviewed for impairment in accordance with ASC No. 360, "Accounting for the Impairment or Disposal of Long-Lived Assets," whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted cash flows expected to be generated by the assets. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets.
Intangible assets acquired in a business combination are recorded at fair value at the date of acquisition. Following initial recognition, intangible assets are carried at cost less any accumulated amortization and any accumulated impairment losses. The useful lives of intangible assets are assessed to be either finite or indefinite. Intangible assets that are not considered to have an indefinite useful life are amortized over their estimated useful lives, which range from five to nine years. Some of the acquired customer arrangements are amortized over their estimated useful lives in proportion to the economic benefits realized. This accounting policy results in accelerated amortization of such customer arrangements as compared to the straight-line method. All other intangible assets are amortized over their estimated useful lives on a straight-line basis.
During 2017, 2016 and 2015, no impairment losses were recorded.
Stock-based compensation. We account for stock-based compensation in accordance with ASC No. 718, "Compensation-Stock Compensation". ASC No. 718 requires companies to estimate the fair value of equity-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as an expense over the requisite service periods in our consolidated statement of income.
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We recognize compensation expenses for the value of our awards based on the accelerated attribution method over the requisite service period of each of the awards, net of estimated forfeitures. ASC No. 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Estimated forfeitures are based on actual historical pre-vesting forfeitures.
ASC No. 718 requires the cash flows resulting from the tax deductions in excess of the compensation costs recognized for those stock options to be classified as financing cash flows.
We selected the Black-Scholes-Merton option pricing model to account for the fair value of our stock-options awards with only service conditions and whereas the fair value of the restricted stocks awards is based on the market value of the underlying shares at the date of grant. The option-pricing model requires a number of assumptions, of which the most significant are the expected stock price volatility and the expected option term. Expected volatility was calculated based upon actual historical stock price movements over an historical period equivalent to the option's expected term. The expected option term represents the period of time that options are expected to be outstanding. Expected term of options is based on historical experience. The risk-free interest rate is based on the yield from U.S. treasury bonds with an equivalent term. We have historically not paid dividends and have no foreseeable plans to pay dividends.
During 2016, we approved the repricing of 667,750 stock options for several employees and senior management, previously granted under the Stock Option Plans. As a result, the exercise price of the options was lowered to a price per share lower than the original grant exercise price, but a higher price than the known share’s closing price on Nasdaq on the modification date. There was no change in the number of shares subject to each option, vesting or other terms of the options. The incremental expense for the repricing of the options is approximately $1.2 million. For the year ended December 31, 2016, we recorded expenses totaling $0.4 million associated with the repricing.
Income Taxes. We account for income taxes in accordance with ASC No. 740, "Income Taxes". This statement prescribes the use of the liability method whereby deferred tax assets and liability account balances are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. We provide a valuation allowance, if necessary, to reduce deferred tax assets to their estimated realizable value if it is more likely than not that a portion or all of the deferred tax assets will not be realized. Deferred tax liabilities and assets are classified as non-current in accordance with Accounting Standard Update, or ASU, No. 2015-17 (see also Note 2(ab) to our consolidated financial statements included elsewhere in this annual report). ASC No. 740 contains a two-step approach to recognizing and measuring a liability for uncertain tax positions. The first step is to evaluate the tax position taken or expected to be 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 of the technical merits, the tax position will be sustained on audit, including resolution of any related appeals or litigation processes. The second step is only addressed if the first step has been satisfied (i.e. the position is more likely than not to be sustained) otherwise a full liability in respect of a tax position not meeting the more likely than not criteria is recognized. The second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. We accrue interest and penalty, if any related to unrecognized tax benefits in its taxes on income. Although we believe we have adequately reserved for our uncertain tax positions, no assurance can be given that the final tax outcome of these matters will not be different. We adjust these reserves in light of changing facts and circumstances, such as the closing of a tax audit, the refinement of an estimate or changes in tax laws. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will impact the provision for income taxes in the period in which such determination is made. The provision for income taxes includes the impact of reserve provisions and changes to reserves that are considered appropriate, as well as the related interest and penalties.
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Accounting for tax positions requires judgments, including estimating reserves for potential uncertainties. We also assess our ability to utilize tax attributes, including those in the form of carry forwards for which the benefits have already been reflected in the financial statements. We do not record valuation allowances for deferred tax assets that we believe are more likely than not to be realized in future periods. While we believe the resulting tax balances as of December 31, 2017 and 2016 are appropriately accounted for, the ultimate outcome of such matters could result in favorable or unfavorable adjustments to our consolidated financial statements and such adjustments could be material. See Note 12 to our consolidated financial statements included elsewhere in this annual report for further information regarding income taxes. We have filed or are in the process of filing local and foreign tax returns that are subject to audit by the respective tax authorities. The amount of income tax we pay is subject to ongoing audits by the tax authorities, which often result in proposed assessments. See “Results of Operations – Taxes” below.
While we believe that we have adequately provided for any reasonably foreseeable outcomes related to tax audits and settlement, our future results may include favorable or unfavorable adjustments to our estimated tax liabilities in the period the assessments are made or resolved, audits are closed or when statutes of limitation on potential assessments expire.
New Accounting Pronouncements Not Yet Effective
In May 2014, the Financial Accounting Standards Board, or the FASB, issued ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)", or ASU No. 2014-09, a new standard related to revenue recognition and, thereafter, issued related subsequent updates or, collectively, the New Revenue Standard. Under the New Revenue Standard, revenue is recognized when a customer obtains control of promised goods or services and is recognized in an amount that reflects the consideration, which the entity expects to receive in exchange for those goods or services. In addition, the New Revenue Recognition Standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flow arising from contracts with customers. The New Revenue Standard permits two methods of modification: retrospectively to each prior reporting period presented (the so-called "full retrospective method"), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the so-called "modified retrospective method"). We have adopted the New Revenue Standard, effective January 1, 2018, using the modified retrospective method applied to those contracts, which were not substantially completed as of January 1, 2018. The cumulative adjustment will decrease our retained earnings by $0.1 million to the opening accumulated balance.
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We expect that the most significant impact of the New Revenue Standard on us will relates to the way we account for sales commission expenses. We have also considered the impact of the guidance in ASC No. 340-40, "Other Assets and Deferred Costs", in light of the New Revenue Standard. Under ASC No. 340-40, we may be required to capitalize and amortize certain incremental costs of obtaining a contract, such as the maintenance portion of sales commission costs. The cumulative impact to our retained earnings as of January 1, 2018 will increase our opening accumulated balance by approximately $10.2 million.
Adoption of the New Revenue Standard had no impact to cash from or used in operating, investing or financing activities on our consolidated statement of cash flows.
Recently Issued Accounting Pronouncements
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which changes the current lease accounting standard by requiring the recognition of lease assets and lease liabilities for all leases, including those currently classified as operating leases. This new standard is to be applied under a modified retrospective application to the earliest reporting period presented for reporting periods beginning after December 15, 2018. Early adoption is permitted. We are currently evaluating the potential impact of this new standard on our financial statements.
In June 2016, the FASB issued ASU No. 2016-13, "Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments". This new standard requires financial assets measured at amortized cost be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. This standard will be effective for the Company beginning January 1, 2020, with early application permitted. We are evaluating the impact of adopting this new accounting standard on our consolidated financial statements.
In January 2017, FASB issued ASU No. 2017-01, "Business Combinations (Topic 805) Clarifying the Definition of Business". ASU No. 2017-01 clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The update to the standard is effective for interim and annual periods beginning after December 15, 2017, and applied prospectively. We do not expect the adoption of this standard will have a material impact on the consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-04, "Simplifying the Test for Goodwill Impairment (Topic 350)". This standard eliminates the second step from the goodwill impairment test, and instead requiring an entity to recognize a goodwill impairment charge for the amount by which the goodwill carrying amount exceeds the reporting unit's fair value. This standard is effective for interim and annual goodwill impairment tests in fiscal years beginning after December 15, 2019 with early adoption permitted. This standard must be applied on a prospective basis. We are currently evaluating the potential effect of the standard on our consolidated financial statements.
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In May 2017, the FASB issued ASU 2017-09, changing the terms or conditions of a share-based payment award must be accounted for as modifications. Entities will apply the modification accounting guidance if the value, vesting conditions or classifications of the award changes. The standard also clarifies that a modification to an award could be significant and therefore require disclosure, even if modification accounting is not required. Therefore, an entity will have to make all of the disclosures about modifications that are required today, in addition to disclosing that the compensation expense has not change. This standard is effective for interim and fiscal years beginning after December 15, 2017 with early adoption permitted. This standard must be applied on a prospective basis. We do not expect the adoption of this standard will have a material impact on our consolidated financial statements.
For information with respect to ASU No. 2014-09 and other recent accounting pronouncements, see Note 2(aa) and Note 2(ab) to our consolidated financial statements included in this annual report.

Results of Operations
The following discussion of our results of operations for the years ended December 31, 2017, 2016 and 2015, including the following tables, which present selected financial information data in dollars and as a percentage of total revenues, are based upon our statements of operations contained in our financial statements for those periods, and the related notes, included in this annual report.
The following table sets forth, for the periods indicated, certain financial data concerning our operating results:
2017
2016
2015
(U.S. $ in thousands)
Revenues:
Products
$
117,968
$
110,186
$
136,793
*
Services
93,401
86,399
79,773
*
211,369
196,585
216,566
Cost of revenues:
Products
30,862
27,320
29,159
Services
8,754
8,375
9,041
39,616
35,695
38,200
Gross profit
171,753
160,890
178,366
Operating expenses, net:
Research and development, net
59,003
51,732
49,987
Sales and marketing
108,744
103,774
93,347
General and administrative
17,577
18,133
17,033
Other income
(6,900
)
-
-
Total operating expenses
178,424
173,639
160,367
Operating income (loss)
(6,671
)
(12,749
)
17,999
Financial income, net
4,830
5,741
5,867
Income (loss) before taxes on income
(1,841
)
(7,008
)
23,866
Taxes on income
(5,652
)
(1,651
)
(5,297
)
Net income (loss)
(7,493
)
(8,659
)
18,569
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The breakdown between product and service revenues for 2015 was reclassified to include most subscription revenues in product revenues rather than allocating some to product and some to service revenues, which has resulted in a change to previously published figures for the period ended December 31, 2015.
The following table sets forth, for the periods indicated, certain financial data expressed as a percentage of our total revenues:
2017
2016
2015
Revenues:
Products
56
%
56
%
63
%
Services
44
44
37
100
100
100
Cost of Revenues:
Products
15
14
13
Services
4
4
4
19
18
18
Gross profit
81
82
82
Operating expenses, net:
Research and development, net
28
26
23
Sales and marketing
51
53
43
General and administrative
8
9
8
Other income
(3
)
-
-
Total operating expenses
84
88
74
Operating income (loss)
(3
)
(6
)
8
Financial income, net
2
3
3
Income  (loss) before taxes on income
(1
)
(3
)
11
Taxes on income
(3
)
(1
)
(2
)
Net income (loss)
(4
)%
(4
)%
9
%
Comparison of Years Ended December 31, 2017, 2016 and 2015
Revenues.
Our revenues are derived from sales of our products and services. We recognize product revenue when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, no further obligation exists and collectability is probable.  Subscriptions revenues and post-contract customer support, which represents mainly software update subscriptions, help-desk support and unit repairs or replacements, are recognized ratably over the contract or subscription period.
We operate in one reportable market segment and our revenues are attributed to geographic areas based on the location of the end-users.
Sales in 2017 were $211.4 million compared with sales of $196.6 million in 2016, an increase of 7.5%.
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Sales in 2016 were $196.6 million compared with sales of $216.6 million in 2015, a decrease of 9%.
The following table provides a breakdown of our revenues (dollars in thousands) by type of revenues both in dollars and as a percentage of total revenues for the past three fiscal years, as well as the percentage change between such periods:
2017
2016
2015
% Change
2017 vs. 2016
% Change
2016 vs. 2015
Products
117,968
56
%
110,186
56
%
136,793
*
63
%
7
%
(19
)%
Services
93,401
44
%
86,399
44
%
79,773
*
37
%
8
%
8
%
Total
211,369
100
%
196,585
100
%
216,566
100
%
8
%
(9
)%
*The breakdown between product and service revenues for 2015 was reclassified to include most subscription revenues in product revenues rather than allocating some to product and some to service revenues, which has resulted in a change to previously published figures for the period ended December 31, 2015.
The following table shows a breakdown of our total revenues (dollars in thousands) by geographical distribution both in dollars and as a percentage of total revenues for the past three fiscal years, as well as the percentage change between such periods:
2017
2016
2015
% Change
2017 vs. 2016
% Change
2016 vs. 2015
North, Central and South America (principally the United States)(*)
97,901
46
%
84,733
43
%
88,685
41
%
16
%
(4
)%
EMEA (Europe, the Middle East and Africa)
56,589
27
%
53,724
27
%
62,689
29
%
5
%
(14
)%
Asia-Pacific
56,879
27
%
58,128
30
%
65,192
30
%
(2
)%
(11
)%
Total
211,369
100
%
196,585
100
%
216,566
100
%
8
%
(9
)%
(*) For the years ended December 31, 2017, 2016 and 2015, our revenues from the United States were $78.5 million, $68.0 million and $69.1 million, respectively, representing 37%, 35% and 32% of total revenues for these years, respectively.
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Other than the United States, no other single country accounted for more than 10% of our sales for the years ended December 31, 2017, 2016 and 2015.
In 2017, our product revenues increased by 7%, to $118.0 million, compared to $110.2 million in 2016. The increase in our product revenues is mainly attributed to an increase in our product sales and greater contribution from our previous years’ subscription deferred revenues which matured into revenues in 2017.
In 2017, our service sales increased by 8% to $93.4 million, compared to $86.4 million in 2016. This increase in service sales is mainly attributed to renewals of existing support contracts and sales of new support contracts.
During 2017, our revenues from the enterprise market represented approximately 66%, whereas revenues from the carrier market represented approximately 34% of our revenues, compared to 69% and 31%, respectively, in 2016.
Our revenues in the Americas increased in 2017 by $13.0 million compared to 2016, or 16% year-over-year, mainly due to greater demand for cloud based security solutions. Revenues from the EMEA region increased by 5% compared to 2016. Revenues in Asia-Pacific region decreased by 2% due to change in our sales model which is reflected by the shift to subscription sales which resulted lower revenue recognition.
In 2016, our product sales decreased by 19%, to $110.2 million, compared to $136.8 million in 2015. The decrease in our product sales is attributed to a gradual change in our sales model which is reflected by the shift to subscription sales format as well as challenging conditions in our international business.
In 2016, our service sales increased by 8% to $86.4 million, compared to $79.8 million in 2015. This increase in service sales is attributed primarily to (1) the continued growth of our installed base and (2) an increase in our service offerings.
During 2016, our revenues (excluding revenues derived from the Radyoos web-based e-commerce platform) from the enterprise market represented approximately 69%, whereas revenues from the carrier market represented approximately 31% of our revenues, compared to 71% and 29%, respectively, in 2015.
Our revenues in the Americas in 2016 decreased by $4.0 million compared to 2015, or 4% year-over-year, mainly as a result of the shift to subscription sales format which resulted in a longer period for revenue recognition. The EMEA region experienced a decline of 14% compared to 2015. The decrease was primarily due to lower products revenue resulting from the shift to subscription sales as well as a result of overall soft market conditions. Revenues from the Asia-Pacific region decreased by $7.1 million, or 11% year- over-year, mainly due to challenging conditions in some of the major countries, mainly in China, Japan and Australia.
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Cost of Revenues.
Cost of revenues refers to both products and service revenues and consists primarily of the cost of circuit boards and other components required for the assembly of our products, salaries and related personnel expenses for those engaged in the final assembly and in providing support and maintenance service of our products, amortization of acquired technology and other overhead costs.
The following table sets forth a breakdown of our cost of revenues between products and services for the periods indicated, in absolute figures (dollars in thousands) and as a percentage of the relative product and services revenues:
2017
2016
2015
Cost of Products
30,862
26.2
%
27,320
24.8
%
$
29,159
21.3
%
Cost of Services
8,754
9.4
%
8,375
9.7
%
9,041
11.3
%
Total
39,616
18.7
%
35,695
18.2
%
$
38,200
17.6
%
Cost of products sales as a percentage of products sales increased from 24.8% in 2016 to 26.2% in 2017. Cost of products sales in 2017 and 2016 included amortization of intangible assets in the amount of $1.1 and $1.0 million, respectively. Our cost of products sales as a percentage of products sales, excluding amortization of intangible assets, represented approximately 25.2% of products sales in 2017, compared to 23.9% in 2016. The increase in cost of products sales as a percentage of products sales is mainly due to different sales mix of our products, cost of operating our cloud infrastructure and expanding our global logistic footprint to support our global maintenance and support commitments.
Cost of sales related to services as a percentage of service revenues in 2017 was 9.4% compared to 9.7% in 2016.
Cost of products sales as a percentage of products sales increased year-over-year from 21.3% in 2015 to 24.8% in 2016. Cost of products sales in 2016 and 2015 included amortization of intangible assets in the amount of $1.0 and $1.1 million, respectively. Our cost of products sales as a percentage of products sales, excluding amortization of intangible assets, represented approximately 23.9% of products sales in 2016, compared to 20.5% in 2015. The increase in cost of products sales as a percentage of products sales is mainly due to different sales mix of our products coupled with stronger competition in some of the regions.
Cost of sales related to services as a percentage of service revenues in 2016 was 9.7% compared to 11.3% in 2015. The reason for the decrease is mainly due to the fact that a major portion of the cost of services is fixed (mainly salaries of technical personnel) while the increase in sales did not correlate into the same rate of increase in costs.
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Operating Expenses.
The following table sets forth a breakdown of our operating expenses (dollars in thousands) for the periods indicated as well as the percentage change between such periods:
2017
2016
2015
% Change
2017 vs. 2016
% Change
2016 vs. 2015
Research and development, net
$
59,003
$
51,732
$
49,987
14
%
3
%
Selling and marketing
108,744
103,774
93,347
5
%
11
%
General and administrative
17,577
18,133
17,033
(3
)%
6
%
Other income
(6,900
)
-
-
-
Total
$
178,424
$
173,639
$
160,367
3
%
8
%
Our operating expenses increased by 3% in 2017 to $178.4 million from $173.6 million in 2016. The increase is primarily attributed to (1) an increase of $3.6 million in operating expenses that are related to salaries and salaries related mainly due to  salary increases awarded during 2017 in all regions and higher sales commissions;  (2) an increase of $4.3 million related to the impact of the weakening of the dollar, mainly against the NIS; (3) an increase of $3.6 million associated with the Seculert acquisition; and (4) an increase of $1.5 million in stock based compensation expenses. Such increase was partially offset by (1) $6.9 million other income related to the award we received in connection with an intellectual property dispute and (2) a decrease in our general and administrative expenses in an amount of $2.2 million related mainly to litigation costs of the intellectual property matter, namely the patent litigation against F5 Networks, Inc.
The increase in our operating expenses is also due to an increase in other expenses as more fully described below.
Research and Development Expenses.
Research and development, or R&D, expenses consist primarily of salaries and related personnel expenses, costs of subcontractors and prototype expenses related to the design, development, quality assurance and enhancement of our products, and depreciation of equipment purchased for the development and testing processes. All R&D costs are expensed as incurred. We believe that continued investment in R&D is critical to attaining our strategic product objectives.
R&D expenses were $59.0 million in 2017, an increase of $7.3 million, or 14% compared with R&D expenses of $51.7 million in 2016. This increase is primarily a result of the following: (1) an increase of $2.9 million attributed to the acquisition of Seculert in January 2017; (2) an increase of $2.6 million related to the impact of the weakening of the dollar, mainly against the NIS; (3) an increase of $2.1 million due to salary raises awarded in mid-2017 and other salaries related expenses; (4) an increase of $ 0.5 million attributed to higher stock-based compensation expenses ( see also “Stock based compensation expenses” below ) and (5) an increase of $0.3 million attributed to lower grants received from the IIA. Such increase was partially offset due to: (1) the cease of the Radyoos activity during 2017 in an amount of $ 0.7 million and (2) $0.4 million related to the adjustment of the fair value of the Seculert acquisition contingent consideration.
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R&D expenses were $51.7 million in 2016, an increase of $1.7 million, or 3% compared with R&D expenses of $50.0 million in 2015. This increase is primarily a result of the following: (1) an increase of $1.0 million due to a higher average number of R&D employees  as well as salary raises awarded in mid-2016, (2) an increase of $0.7 million in depreciation expenses, (3) an increase of $ 0.9 million attributed to higher stock-based compensation expenses ( see also “Stock based compensation expenses” below ), and (4) an increase of $0.4 million related to the impact of the weakening of the dollar mainly against the NIS. Such increase was partially offset by the following: (1) grants received from the IIA in the amount of $0.9 million, and (2) a decrease in travel expenses in the amount of $0.4 million due to cost saving efficiency.
Sales and Marketing Expenses.
Sales and marketing expenses consist primarily of salaries, commissions and related personnel expenses for those engaged in the sales and marketing of our products, operational costs of our offices which are located outside Israel and are engaged in the promotion, marketing and support of our products, in addition to the related trade shows, advertising, promotions, web site maintenance and public relations expenses, and amortization of intangible assets.
Sales and marketing expenses were $108.7 million in 2017, an increase of $4.9 million, or 5%, compared with sales and marketing expenses of $103.8 million in 2016.  This increase is primarily a result of the following: (1) an increase of  $2.7 million  primarily due to increases in personnel costs and commissions due to the growth in sales during 2017, (2) an increase of $1.0 million related to the impact of the weakening of the dollar, mainly against the NIS and the EUR (3) an amount of $0.2 million that is related to the acquisition of Seculert in 2017, (4) an increase of $1.2 million is attributed to higher stock - based compensation expenses (see also “ Stock based compensation expenses” below), and (5) an increase of  $0.5 million is related to increased travel expenses. Such increase was partially offset due to the cease of the Radyoos activity during 2017 in an amount of $0.8 million,
Sales and marketing expenses were $103.8 million in 2016, an increase of $10.5 million, or 11%, compared with sales and marketing expenses of $93.3 million in 2015.  This increase is primarily a result of the following: (1) a $6.5 million increase in sales and marketing expenses is attributable to increased salary costs as a result of increase in the average number of sales, technical support and marketing employees  and salary raises awarded in the beginning of 2016 to some of our employees, (2) an increase of $2.4 million associated with higher sales commissions (3) an increase of $0.4 million is attributed to marketing promotions and initiatives, and (4) an increase of $1.6 million is attributed to higher stock - based compensation expenses (see also “ Stock based compensation expenses” below). Such increase was partially offset due to a decrease of $0.4 million related to the strengthening of the dollar against other currencies.
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General and Administrative Expenses.
General and administrative expenses consist primarily of salaries and related personnel expenses for executive, accounting and administrative personnel, professional fees (which include legal, audit and additional consulting fees), bad debt expenses, acquisition related costs and other general corporate expenses.
General and administrative expenses were $17.6 million in 2017, a decrease of $0.5 million, compared with general and administrative expenses of $18.1 million in 2016. The decrease in general and administrative expenses in 2017 was primarily due to (1) a decrease in litigation costs related mainly to the intellectual property litigation matter by an amount of $2.2 million  and (2) a decrease of $0.3 million related to stock based compensation expenses. This decrease was offset by (1) an increase of $1.0 million related to increase in personnel costs; (2) an increase of $0.3 million related to depreciation expenses and (3) an increase of $0.7 million related to the weakening of the dollar against the NIS. For a discussion of the impact of foreign currency fluctuations our business, see “Item 11. Quantitative and Qualitative Disclosures about Market Risk”.
General and administrative expenses were $18.1 million in 2016, an increase of $1.1 million, compared with general and administrative expenses of $17.0 million in 2015. General and administrative expenses in 2016 included stock-based compensation expenses of $2.3 million, compared to stock-based compensation expenses of $2.6 million in 2015. Excluding stock based compensation expenses, general and administrative expenses increased in 2016 by $1.4 million, mainly due to an increase in litigation costs in connection with an intellectual property litigation matter and depreciation expenses of $0.1 million.
Stock based compensation expenses.
Our expenses also include recognition of stock-based compensation, which is allocated among cost of sales, research and development expenses, marketing and selling expenses and general and administrative expenses, based on the division in which the recipient of the option grant is employed. The stock-based compensation is amortized to operating expenses over the requisite service period of the individual options.
Stock-based compensation expenses in 2017 totaled to $ 13.0 million, an increase of $1.5 million compared with expenses of $11.5 million in 2016. During 2017, we granted stock options to purchase approximately 1.7 million shares at a weighted average grant-date fair value of $4.3 per option and 0.4 million restricted stock units, or RSUs, at a weighted average grant-date fair value of $16.2 per RSU, compared to 2.8 million options granted during 2016 at an average grant-date fair value of $3.5 per option and 0.7 million RSUs at a weighted average grant-date fair value of $12.8 per RSU. Since these values are recognized as an expense based on the accelerated attribution method over the requisite service period of each award, a large portion of these values is being recognized as an expense in the first year since grant date of each award, which resulted in higher stock-based compensation expenses in 2017 compared to 2016, despite the decrease in number of options granted in 2017 compared to the number of options granted in 2016.  In addition, the higher average grant-date fair value of the options and RSUs granted in 2017 compared with such equity grants in 2016 also impacted this expense item in 2017.

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Our total amount of stock based compensation expenses in 2016 totaled to $11.5 million, an increase of $2.2 million compared with expenses of $9.3 million in 2015. During 2016, we granted stock options to purchase approximately 2.8 million shares at a weighted average grant-date fair value of $3.5 per option and 0.7 million RSUs, at a weighted average grant-date fair value of $12.8 per RSU, compared to 1.6 million options granted during 2015 at an average grant-date fair value of $5.3 per option and $0.5 million RSUs at a weighted average grant-date fair value of $18.4 per RSU. The reasons for the increase in our stock based compensation expenses in 2016, compared to 2015, are mainly attributed to the stock option repricing made during the year and the increase in the quantity of options and RSUs granted in 2016 compared to 2015 and the impact of the recognition of stock based compensation expenses in 2016, which relates to the options and RSUs granted in the end of 2015.
Other Income
During 2017 we recorded $6.9 million of other income related to the award we collected in connection with an intellectual property dispute.
Financial Income Net.
Financial income, net consists primarily of interest earned on short-term and long-term bank deposits, amortization of premiums, accretion of discounts, interest and dividends earned on investments in marketable securities, gain from sale of marketable securities and from income and expenses from the translation of monetary balance sheet items denominated in non-dollar currencies.
Financial income, net was $4.8 million in 2017, compared with $5.7 million in 2016. The net decrease of $0.9 million is attributed to a decrease in gain from sale of marketable securities in an amount of $1.8 million, offset by an increase of $0.8 million due to an increase in interest rates in 2017 leading to higher yields on our investment portfolio and the fact that our average investment portfolio balance in 2017 was higher by $14.0 million than our portfolio balance in 2016.
Financial income, net was $5.7 million in 2016, compared with $5.9 million in 2015. The net decrease of $0.2 million is attributed to a decrease of $0.7 million in gain from sale of marketable securities, offset by changes in impact of foreign currency translation differences in an amount of $0.5 million.
Income Taxes.
Israeli companies are generally subject to corporate tax on their taxable income at the rate of 24% and 25% for the 2017 and 2016 tax years, respectively. However, we have established Preferred Enterprise program, which entitles us for the tax benefits described below under the heading “Corporate Tax Rate.” These benefits result in part of our income being taxed at lower rates. The Preferred Enterprise tax rates in the years 2017 and 2016 were 9% in areas in Israel designated as Development Zone A and 16% elsewhere in Israel.  The tax benefits depended on our meeting the requirements of the approved and privileged and preferred enterprise programs and there is no assurance that we will be able to obtain such benefits. Other subsidiaries of ours are taxed according to the laws in their countries of incorporation and tax expenses are recorded accordingly.
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We operate our business in various countries and attempt to utilize an efficient operating model to optimize our tax payments based on the laws in the countries in which we operate. This can cause disputes between us and various tax authorities in different parts of the world.
Tax expense for 2017 amounted to $5.7 million compared to $1.7 million in 2016. The increase of $4.0 million in the tax expenses is derived primarily from the recent change in the U.S. federal tax reform which led to re-measurement of our net deferred tax assets.
Tax expense for 2016 and 2015 amounted to $1.7 million and $5.3 million, respectively. The decrease in the tax expenses is derived primarily from a decrease in our taxable income in Israel as we have not generated profits in 2016 unlike 2015 which was profitable.
For additional disclosure and explanations regarding our income taxes, see note 12 to our consolidated financial statements included elsewhere in this annual report. See also “Item 10E – Taxation – Israeli Tax Considerations.”
Impact of Currency Fluctuations and Inflation
Our financial results may be negatively impacted by foreign currency fluctuations and inflation. Information required by this section is set forth in “Item 11 – Quantitative and Qualitative Disclosures about Market Risk” and in “Item – 3D – “Risk Factors” –Currency exchange rates and fluctuations of exchange rates could have a material adverse effect on our results of operations”, each of which are incorporated herein by reference.
Impact of Governmental Policies
For information on the impact of governmental policies on our operations, see “Item 4B – “Government Regulations” and “Item – 3D – “Risk Factors” – “Government regulation affecting our business is evolving, and unfavorable changes could harm our business” and “Risks Related to Operations in Israel.”
Related Parties
We have entered into a number of agreements with certain companies, of which Yehuda, Zohar Zisapel and/or Nava Zisapel are co-founders, directors and/or principal shareholders, collectively known as the RAD-Bynet Group and, in one of which, SecurityDam, Roy Zisapel, our President and Chief Executive Officer and a director, also holds a minority stake. In addition, we purchase different services and fixed assets from third parties at special rates offered to the RAD-Bynet Group, such as car leases, maintenance, insurance communication and Managed Security Service Providers (MSSP) scrubbing centers services.
We believe that the terms of the transactions in which we have entered with members of the RAD-Bynet Group are not different in any material respect from terms we could obtain from unaffiliated third parties and are beneficial to us and no less favorable to us than terms, which might be available to us from unaffiliated third parties. The pricing of the transactions was arrived at based on negotiations between the parties. Members of our management reviewed the pricing of the agreements and confirmed that they were not different in any material respect than that which could have been obtained from unaffiliated third parties.
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See also below under “Item 7B – Major Shareholders and Related Party Transactions - Related Party Transactions”.
B. Liquidity and Capital Resources
General
Since our inception, we have financed our operations through a combination of issuing debt and/or equity securities, including two public offerings, research and development and/or marketing grants from the Government of Israel and cash generated by operations.
The Company’s equity as a percentage of its total assets was 67% at December 31, 2017, compared with 70% at December 31, 2016 and 74% at December 31, 2015.
Cash and cash equivalents, short-term and long term bank deposits and short and long term marketable securities were $344.3 million at December 31, 2017, compared with $320.1 million and $315.1 million at December 31, 2016 and at December 31, 2015 respectively.
Principal Capital Expenditures and Divestitures
Capital expenditures were $7.2 million, $9.4 million and $13.8 million for the years ended December 31, 2017, 2016 and 2015, respectively. These expenditures were mainly comprised of investments in new ERP modules, leasehold improvements, machinery and equipment, computers, lab equipment, testing tools and infrastructure to support our cloud based solutions.
We expect to engage in additional capital spending to support possible growth in our operations, infrastructure and personnel. In 2018, we anticipate that the majority of our capital expenditures will be primarily for R&D testing, lab equipment, additional investments in new modules to our ERP system and additional infrastructure to support our cloud based solutions.
We did not affect any principal divestitures in the past three years.
Working Capital and Cash Flows
The following table presents the major components of net cash flows used in and provided by operating, investing and financing activities for the periods presented (dollars in thousands):
2017
2016
2015
Net cash provided by operating activities
$
31,464
$
38,480
$
39,136
Net cash provided by (used in) investing activities
(56,342
)
28,359
(6,853
)
Net cash provided by (used in) financing activities
10,478
(20,944
)
(43,518
)
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Net cash provided by operating activities for 2017, 2016 and 2015 was $31.5 million, $38.5 million and $39.1 million, respectively. Our net income (loss) in 2017, 2016 and 2015 was ($7.5) million, ($8.7) million and $18.6, respectively.
Net cash provided by operating activities in 2017 consisted of net loss adjusted for non-cash activity, including stock-based compensation expenses, depreciation, amortization of intangible asset and amortization of premiums, accretion of discounts and accrued interest on available-for-sale marketable securities, an increase in deferred revenues, accrued interest on bank deposits, decrease in trade receivables partially offset by an increase in other payables and accrued expenses and other long-term liabilities, other current assets and prepaid expenses, increase in inventories and a decrease in trade payables.
Net cash provided by operating activities in 2016 consisted of net loss adjusted for non-cash activity, including stock-based compensation expenses, depreciation, amortization of intangible asset and amortization of premiums, accretion of discounts and accrued interest on available-for-sale marketable securities, plus an increase in other payables and accrued expenses and other long-term liabilities, an increase in deferred revenues, accrued interest on bank deposits, decrease in trade receivables partially offset by gain from sales of available for sale marketable securities, other current assets and prepaid expenses, increase in inventories  and a decrease in trade payables.
Net cash provided by operating activities in 2015 consisted primarily of net income adjusted for non-cash activity, including stock-based compensation expenses, depreciation, amortization of intangible asset and amortization of premiums, accretion of discounts and accrued interest on available-for-sale marketable securities, plus an increase in other payables and accrued expenses and other long-term liabilities and deferred revenues partially offset by accrued interest on bank deposits, gain from sales of available for sale marketable securities, increase in trade receivables, other current assets and prepaid expenses and a decrease in trade payables.
Net cash provided in investing activities amounted to $56.3 for 2017 million compared to net cash used in investing activities of approximately $28.4 million for 2016 and net cash used in investing activities of approximately $6.9 million for 2015.
Net cash provided by investing activity in 2017 consisted primarily of proceeds from bank deposits and marketable securities partially offset by the Seculert acquisition as well as purchase of property and equipment.
Net cash used in investing activity in 2016 and 2015 consisted of investment in bank deposits, marketable securities and purchase of property and equipment.
Net cash provided by financing activities in 2017 was $10.5 million compared to net cash used in financing activities in 2016 and 2015 which were $20.9 million and $43.5 million, respectively.
Net cash provided by financing activities in 2017 was attributed to proceeds from issuance of shares upon exercise of stock options by our employees offset by repurchase of our ordinary shares.
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Net cash used in financing activities in 2016 was attributed primarily to the repurchase of our ordinary shares, and from adjustment of tax deficiency related to exercise of stock options, offset by proceeds from issuance of shares upon exercise of stock options by our employees.
Net cash used in financing activities in 2015 was attributed primarily to the repurchase of ordinary shares, which was offset by proceeds from issuance of shares upon exercise of stock options by our employees and from adjustment of excess tax benefit from stock based compensation.
Cash and Cash Equivalents
As of December 31, 2017, we had cash and cash equivalents, including short-term and long-term bank deposits and short-term and long-term marketable securities, of $344.3 million, compared to $320.1 million as of December 31, 2016 and $315.1 million as of December 31, 2015. As of December 31, 2017, approximately 85% of our short-term and long-term bank deposits were deposited in major Israeli banks in Israel which are rated AA+ and AAA, as determined by S&P’s Maalot, and 15% were deposited in the U.S. branch of another major Israeli bank which is rated AAA, as determined by S&P’s Maalot. As of December 31, 2017, the longest contractual duration of any of our bank deposits was 2.25 years, the weighted average duration of our deposits was 1.59 years, and the weighted average time to maturity was 0.87 year.
Our marketable securities portfolio includes investments in foreign banks and government debentures and in debt of corporations. The financial institutions that hold our marketable securities are major U.S. financial institutions, located in the United States.  As of December 31, 2017, 44% of our marketable securities portfolio was invested in debt securities of financial institutions, 2% in debt securities of governmental institutions and 54% in debt securities of corporations. From a geographic perspective, 49% of our marketable securities portfolio was invested in debt securities of U.S. issuers, 18% were invested in debt securities of European issuers and 33% was invested in debt securities of other geographic-located issuers. As of December 31, 2017, 92% of our marketable securities portfolio were rated A- or higher, 4% were rated BBB or BBB+, and 4% was rated BB-, as determined by S&P.
There are no material legal restrictions, taxes or other costs associated with transferring our funds held in U.S. financial institutions to Israeli financial institutions, and we have access to all of our cash as needed for our operations. Although we have various subsidiaries throughout the world, there are no material legal, tax or other cost impediments to our transferring cash to these subsidiaries for operations as and when needed or to such subsidiaries transferring cash to Radware to meet its own cash obligations. Further, Radware generates sufficient cash from its Israeli operations to fund its operating and capital requirements and, therefore, does not need or intend to repatriate any of the earnings of its foreign subsidiaries.
Days-Sales-Outstanding
The days-sales-outstanding (DSO) for a given period is calculated by dividing the end-of-period balance of accounts receivable by the average daily sales in the period.
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Our average quarterly DSO (computed over the four quarters of the year) was 29 days for 2017, compared with 44 days in 2016 and 43 days in 2015. When computed annually, the DSO is 28 days in 2017, down from 36 days in 2016 and 45 days in 2015.
DSO decreased in 2017 mainly as a result of a more even distribution of our invoicing throughout all financial calendar quarters in 2017 than they were in 2016. Due to the fact that most of these invoices are not collected within the month of issuance, but only in the following months, our DSO decreased in 2017 compared to 2016. In addition our 2017 DSO ratio was also affected by the transition in our business model, where we collected payments ahead of revenue recognition.
Outlook
Our capital requirements depend on numerous factors, including market acceptance of our products and the resources we allocate to our operating expenses.  Since our inception, we have experienced substantial increases in our expenditures consistent with growth in our operations and personnel, and we may increase our expenditures in the foreseeable future in order to execute our strategy.
We anticipate that operating activities as well as capital expenditures will demand the use of our cash resources. We believe that our cash balances will provide sufficient cash resources to finance our operations and the projected marketing and sales activities and research and development efforts for a period of no less than the next twelve months.
Market Risk
We are exposed to market risk, including fluctuations in interest rates and foreign currency exchange rates. Additional information about market risk is set forth in “Item 11 – Quantitative and Qualitative Disclosures about Market Risk” and incorporated herein by reference.
C. Research and Development, Patents and Licenses, etc.
In order to accommodate the rapidly changing needs of our markets, we place considerable emphasis on research and development projects designed to improve our existing product lines, develop new product lines and customize our products to meet our customers’ needs. As of December 31, 2017, we had 320 employees and 61 subcontractors engaged primarily in research and development activities, compared to 318 employees and 71 subcontractors at the end of 2016. For a further discussion of research and development, see “Item 5A – Operating and Financial Review and Prospects – Operating Results.”
For a discussion regarding the benefits provided under programs of the IIA, see “Item 4B – Information about the Company – Business Overview – Israeli Innovation Authority.”
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D. Trend Information
We have identified the following key trends that we believe will continue to influence our markets and the demand for our solutions:
·
Applications are migrating to the cloud. Organizations therefore require broader protection that encompasses both the enterprise and cloud-based applications. They also prefer to purchase security services as a subscription, to match the subscription-based consumption of hosting services.
·
Datacenter architecture is changing, to include various models such as a physical datacenter, a virtual datacenter, a software defined datacenter, and private or public cloud. Many organizations use a mixed infrastructure that includes a combination of one or more of the above. This mixed environment that often involved multiple vendors and creates challenges in IT staffing and operational costs, which increase the needs for hybrid cloud services, managed services and modern automated data center technologies.
·
Increasing complexity and intensity of security threats require expertise in identifying the attacks and recommending the right action.  Attack delivery is aided by the growing presence of connected devices (IoT) which increases the threat surface, attack tools are becoming more sophisticated as hackers use automation and Artificial Intelligence, and all of that leads to ever-morphing and scalable attack vectors. In addition, attack tools are increasingly available to all through the Darknet. Most organizations are not able to keep up with these developments with their internal cyber security resources and increasingly seek managed security services.
·
Increasing expectations for applications availability and performance, due to the increasing dependence on applications in today’s business world. Businesses are sensitive to the resilience and availability of their applications and given their customers’ expectations of a world class experience can identify a direct commercial impact from a less than optimal performance.
We believe that our business, comprised of application security and delivery products and services, is positioned to benefit from the above-mentioned industry dynamics due to the following key factors:
·
We have developed a broad portfolio of solutions to address the challenges arising from these trends.
·
We continuously focus on innovation and believe that our products and services have, in many instances a technological advantage over competing solutions.
·
We offer our solutions in a wide array of deployment models ( on-premises devices and solution, managed services, cloud based solutions, etc.), in order to support various customers’ business models. We believe this flexibility addresses the complexity and diversity of the current application and infrastructure ecosystem.
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We believe that the advantages of our offerings, coupled with the above mentioned industry dynamics and trends, place us in a good position to meet our business plans. Nevertheless, meeting our business plans may not convert into revenues growth, due to our shift  towards an increased proportion of subscription-based product sales, which are recognized throughout the subscription period.
As more fully described under Item 4.B. "Business Overview – Our Growth Strategy" above, our growth strategy is based on several key elements: further and leveraging the integration of our application security and delivery solutions; continuing to innovate industry leading solutions to maintain our technology advantages and differentiation; expand and leverage our  market footprint, through internal resources as well as relationships with resellers, service providers, and other partners, and; pursue acquisitions.
In addition, we operate in a highly competitive environment, and some of our competitors have larger internal resources, and a larger install  base. Moreover, while we believe that the shift towards a subscription-based business model is a strategic transition towards higher growth and profitability in the long term, we may not be successful in its execution and specifically, in maintaining a high subscription renewal rate. In addition, our customers purchasing decisions are related to the conditions in our industry and in the various regions and geographical markets in which we operate and are tied to the overall IT spending climate. Uncertainty about current global economic conditions continues to pose a risk as customers may postpone or reduce spending in response to such uncertainties. For other risks and uncertainties we face, see under Item 3.D. "Risk Factors".
E. Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements, as such term is defined under Item 5E of the instructions to Form 20-F, that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
F. Tabular Disclosure of Contractual Obligations
The following table summarizes our contractual obligations as of December 31, 2017 and the effect those commitments are expected to have on our liquidity and cash flow.
Payments Due By Period (US $ in thousands)
Contractual obligations
Total
Less than 1 year*
1-3 years
3-5 years
More than 5 years
Operating leases(1)
13,027
5,711
6,602
714
0
Total contractual cash obligations (2)(3)
13,027
5,711
6,602
714
0
* Become due during 2018.
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(1) Consists of outstanding operating leases for the Company’s facilities. The lease agreements expire in the years 2018 to 2022, although certain of our leases have renewal options. The data in this row details our future minimum payments under non-cancelable operating lease agreements at December 31, 2017.
(2) Payments for uncertain income tax positions of $1.5 million under ASC No. 740 are due upon settlement. Since we are unable to reasonably estimate the timing of settlement, such payments are not included in the table. See also Notes 2(s) and 12(a) of our consolidated financial statements.
(3) Severance payments of $2.4 million are payable only upon termination, retirement or death of the respective employee and there is no obligation for benefits accrued prior to 2007 if the employee voluntarily resigns. Since we are unable to reasonably estimate the timing of settlement, such payments are not included in the table. See also Note 2(u) of our consolidated financial statements.
* Following the Seculert Acquisition, which we completed in January 2017, earn-out payments of up to a total of $10 million remain to be paid, upon achievement of certain milestones. As of December 31, 2017 the fair value of these contingent payments is $1.6 million.
ITEM 6.
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. Directors and Senior Management
The following table lists our current directors and senior management:
Name
Age
Position
Yehuda Zisapel (1)
76
Chairman of the Board of Directors
Yair Tauman (2)(3)(4)(5)
69
Director, Chairman of the Compensation Committee
David Rubner (1)(3)(4)(5)
78
Director, Chairman of the Audit Committee
Yael Langer (6)
53
Director
Avraham Asheri (1) (4) (5)
80
Director
Joel Maryles (2)(4)(5)
58
Director
Roy Zisapel (2)
47
President, Chief Executive Officer and Director
Doron Abramovitch
49
Chief Financial Officer
Gabi Malka
42
Chief Operating Officer
Sharon Trachtman
51
Chief Business Operation Officer
David Aviv
62
Chief Technology Officer
Anna Convery-Pelletier
49
Chief Marketing Officer
Yoav Gazelle
48
VP Sales EMEA & CALA
Terence Ying
56
VP Sales Asia-Pacific
(1)  Term as director expires at the annual meeting of shareholders to be held in 2018.
(2)  Term as director expires at the annual meeting of shareholders to be held in 2019.
(3)  External Director, as defined in the Israeli Companies Law.
(4)  Qualified as an independent director, as determined under the Nasdaq rules.
(5)  Serves on the Audit and Compensation Committees of the Board of Directors.
(6)  Term as director expires at the annual meeting of shareholders to be held in 2020.
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Yehuda Zisapel , co-founder of our Company, has served as a member of our Board of Directors since our inception in May 1996 and served as Chairman of our Board of Directors from May 1996 until August 2006 and again since November 2009. In addition, Mr. Zisapel serves as a director of Radware Inc. and other subsidiaries. Mr. Zisapel is also a founder and a director of RAD Data Communications Ltd., a worldwide data communications company headquartered in Israel, and BYNET Data Communications Ltd., a distributor of data communications products in Israel and serves as a director of other companies in the RAD-Bynet Group. See “Item 4C – Organizational Structure.”  Mr. Zisapel has a B.Sc. and a M.Sc. degree in electrical engineering as well as an Award of Honorary Doctorate (DHC-Doctor Honoris Causa) from the Technion, Israel Institute of Technology and an M.B.A. degree from Tel Aviv University, Israel. Yehuda Zisapel is the father of Roy Zisapel, our President, Chief Executive Officer and director.
Prof. Yair Tauman has served as a member of our Board of Directors since October 2010. He is the Dean of the Adelson School of Entrepreneurship in the Interdisciplinary Center (IDC) in Herzliya, Israel and was previously the Dean of the Arison School of Business in the IDC. He is also a Leading Professor of Economics and the Director of the Center for Game Theory in Economics at Stony Brook University, New York. He was a professor in Tel-Aviv University for 25 years until 2009 and, prior thereto, served as a professor in Kellogg School of management at Northwestern University.  His areas of research include game theory and industrial organization. Prof. Tauman currently serves on the board of directors of other public and private companies from different sectors, including online auctions, education and IT. Prof. Tauman obtained his Ph.D. and M.Sc. degrees in mathematics as well as a B.Sc. in mathematics and statistics from The Hebrew University, Israel.
David Rubner has served as a member of our Board of Directors since October 2009. Mr. Rubner is the Chairman and Chief Executive Officer of Rubner Technology Ventures Ltd., and Chairman of the Board of Novelsat, Ltd. During the years 1991 to 2000, he was President and Chief Executive Officer of ECI Telecom Ltd. (“ECI”). Prior to that, Mr. Rubner held several senior positions within ECI, such as Chief Engineer, Vice President of Operations and Executive Vice President, General Manager of the Telecommunications division. Prior to joining ECI, Mr. Rubner was a senior engineer in the Westinghouse Research Laboratories in Pittsburgh, Pennsylvania. Mr. Rubner serves on the boards of Check Point Software Ltd., Eltek Ltd. and other private companies. He also serves on the boards of trustees of Shaare Zedek Hospital and Jerusalem College of Technology. Mr. Rubner holds a B.Sc. degree in engineering from Queen Mary College, University of London, England and an M.S. degree from Carnegie Mellon University.
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Yael Langer has served as a member of our Board of Directors since July 2009. Ms. Langer has served as the general counsel and secretary of RAD Data Communications Ltd. and several other companies in the RAD-BYNET group since July 1998 Since December 2000, Ms. Langer has served as a director in Ceragon Networks Ltd., a company publicly-traded on Nasdaq and the Tel-Aviv stock markets. From 1995 to 1998, Ms. Langer served as assistant general counsel to companies in the RAD-BYNET group. From 1993 until 1995, Ms. Langer was a member of the legal department of Poalim Capital Markets and Investments Ltd., the underwriting and investment banking subsidiary of Bank Hapoalim. Ms. Langer holds an L.L.B. degree from The Hebrew University, Israel.
Avraham Asheri has served as a member of our Board of Directors since July 2009. Mr. Asheri was the President and Chief Executive Officer of Israel Discount Bank (“DB”) during the years 1991 to 1998. Prior to that, from 1983 until 1991 he served as Executive Vice President of DB and a member of its Management Committee. Before that, Mr. Asheri served at the Israel Ministry of Industry and Trade and at the Israel Ministry of Finance, including in the positions of Director General of the Ministry of Industry and Trade, Managing Director of Israel Investment Center, and Trade Commissioner of Israel to the United States. Mr. Asheri acts as chairman of the Audit Committee of the Board of Governors of the Hebrew University, member of the Executive Committee of the Jerusalem Institute for Israel Studies, member of the Executive Committee of Hadassah Academic College and Chairman of its Finance Committee and serves as a member of the board of directors of Mishkenot Sha’ananim and as the Chairman of its Finance Committee. Mr. Asheri holds a BA degree in economics and political science from The Hebrew University, Israel.
Joel Maryles, has served as a member of our Board of Directors since January 2014 . Mr. Maryles is a Partner at OurCrowd. He held numerous senior positions in the financial sector over the past three decades.  From 2007 to 2012, Mr. Maryles was a portfolio manager of T-Cubed Investments LP, an equity hedge fund that he founded. From 1996 to 2006, he was a Managing Director at Citigroup Investment Banking where, in addition to his role as a senior technology banker, he founded and managed the Israeli investment banking operations for Citigroup/Salomon Smith Barney. From 1986 to 1996, Mr. Maryles held various senior positions at Furman Selz, a U.S.-based investment bank, including Managing Director focused on Israeli technology and healthcare transactions. Prior to Furman Selz, Mr. Maryles was an Investment Officer at First Chicago Investment Advisors.  Mr. Maryles holds a B.Sc. degree in engineering from the University of Illinois and an M.B.A. from the University of Chicago.
Roy Zisapel , co-founder of our Company, has served as our President and Chief Executive Officer and a director since our inception in May 1996.  Mr. Zisapel also serves as a director of Radware Inc. and other subsidiaries. From 1996 to 1997, Mr. Zisapel was a team leader of research and development projects for RND Networks Ltd. From 1994 to 1996, Mr. Zisapel was employed as a software engineer for unaffiliated companies in Israel. Mr. Zisapel has a B.Sc. degree in mathematics and computer science from Tel Aviv University, Israel. Roy Zisapel is the son of Yehuda Zisapel, who is the Chairman of the Board of Directors of the Company.
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Doron Abramovitch has served as our Chief Financial Officer since September 2015. In such role, Mr. Abramovitch oversees Radware's business performance and strategic growth initiatives. He is responsible for overall financial management of the company, its financial reporting and disclosure practices, and overall corporate operational and infrastructure functions. Prior to Radware, Mr. Abramovitch was Corporate Vice President and Chief Financial Officer of Orbotech Ltd. from May 2011 to June 2015. Prior to joining Orbotech, from 2005 to 2011, Mr. Abramovitch served as senior executive vice president and chief operating officer of Bagir Group Ltd., an Israeli TASE-listed company. Prior to joining Bagir, Mr. Abramovitch served, from 2000 to 2005, as chief financial officer and, from 2004 to 2005, as chief executive officer and chief financial officer, of Phytech Technologies (2000) Ltd., then an Israeli TASE-listed company. Mr. Abramovitch is a certified public accountant and received a B.Sc. and M.B.A. degrees in business administration from Tel Aviv University.
Gabi Malka has served as our Chief Operating Officer since March 2014. From May 2005 to February 2014, Mr. Malka served as Vice President of Research and Development at HP Software (formerly Mercury). Prior to HP, from 2000 to 2005, Mr. Malka headed the R&D of AppStream (acquired by Symantec). Prior to AppStream, from 1998 to 2000, Mr. Malka directed R&D organization at Amdocs Limited. Mr. Malka holds a B.A. from American InterContinental University and has furthered his post-graduate education at Lahav Business School, Tel Aviv University and Harvard Business School.
Sharon Trachtman has served as our Chief Business Operation Officer since December 2016. Prior to that she was our Chief Marketing Officer and before that Ms. Trachtman served as our Global Marketing Vice President since 2008. Prior to that, since 1997 she held various senior positions in Radware, such as Product Management Vice President and Marketing Vice President. From 1994 to 1997, Ms. Trachtman was a product line marketing manager for Scitex Corporation. Ms. Trachtman holds a B.A. degree in computer science and philosophy from Bar-Ilan University, Israel.
Yoav Gazelle has served as our Vice President, EMEA & CALA since June, 2013. Prior to joining Radware, between 2000 and 2013, Mr. Gazelle held a variety of sales, marketing and business development positions in ECI Telecom Ltd., including President, Head of Europe and the Americas from January 2012 to March 2013. Mr. Gazelle holds a B.Sc. degree in electrical and electronic engineering from the Technion – The Israeli Institute of Technology, Israel.
Terence Ying has served as our Vice President, APAC since April 2002. Prior to joining Radware, between 1998 to 2002, Mr. Ying held a series of senior positions with Nortel Networks’ APAC division, including as Marketing Director for the Intelligent Internet Business Unit, Managing Director of Greater China for Alteon WebSystems (acquired by Nortel in 2000) and the Enterprise Director for Nortel in Hong Kong. Mr. Ying holds a M.S. degree in IT management from the Macquarie University of Australia.
David Aviv has served as our Chief Technology Officer since 2016 and as our Vice President, Advanced Services, since 2004. Prior to joining Radware, he was the VP Engineering of Ofek, an Israel based ILEC and a senior consultant. Prior to that, until 2000, Mr. Aviv served in the Israeli Air Force as a senior technical leader. He also serves as the Technical Chairman of the Israeli Telecom Standards Body committee. Mr. Aviv holds a Ph.D. degree in Electrical Engineering (EE) from the Naval Postgraduate School in Monterey, California, a B.S. degree in Electrical Engineering from Ben-Gurion University and an M.S. degree in Electrical Engineering from Tel Aviv University, Israel.
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Anna Convery-Pelletier has served as our Chief Marketing Officer since December 2016. As a member of the executive leadership team, she leads the global marketing organization, which consists of the corporate, product, field and channel marketing teams. Ms. Convery is responsible for the marketing strategy that shapes the future of the Radware brand while directly increasing the marketing contribution to drive revenue and increase market share Prior to joining Radware, Ms. Convery held the position of Chief Marketing Officer and Executive Vice President of Strategy for OpenSpan Inc. (now Pega Systems Inc.) for five years. Ms. Convery has more than 25 years’ experience in enterprise technology, helping FORTUNE 500 companies drive operational and financial excellence, leveraging technology innovation to deliver digital transformation and world-class customer experience. At OpenSpan, Ms. Convery’s responsibilities included global go-to-market strategy and strategic enterprise growth for the company. Prior to OpenSpan, Ms. Convery held senior executive roles at NICE Systems Ltd., ClickFox, Inc., and Nexidia Inc., as well as global marketing and business development roles at IBM Corporation, Jacada Ltd. and Unibol Inc. Named a “Woman of the Year in Technology” by Women in Technology (WIT), Ms. Convery has received numerous industry awards and is a respected customer experience and enterprise transformation thought leader.
Additional Information
Under Nasdaq requirements, a majority of the members of our Board of Directors are required to be “independent” as defined under Nasdaq Marketplace Rules, or the Nasdaq rules. We currently satisfy this requirement because four of our seven directors (namely, Mr. David Rubner, Prof. Yair Tauman, Mr. Avraham Asheri and Mr. Joel Maryles) qualify as “independent directors” under the Nasdaq rules.
Yehuda Zisapel, the Chairman of the Board of Directors, co-founder of the Company, and a principal shareholder of our company, is the father of Roy Zisapel, our President, Chief Executive Officer and director. In accordance with the Companies Law, Mr. Zisapel’s service as our Chairman was approved by our shareholders in September 2017. There are no other family relationships between any of the directors or members of senior management named above.
We are not aware of any arrangements or understandings with major shareholders, customers, suppliers or others, pursuant to which (1) any person referred to above was selected as a director or member of senior management or (2) any director will receive compensation by a third party in connection with his or her candidacy or board service in the Company.
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B. Compensation
General
Our objective is to attract, motivate and retain highly skilled personnel who will assist Radware to reach its business objectives, performance and the creation of shareholder value and otherwise contribute to our long-term success. In October 2013, our shareholders approved the compensation policy for our executive officers and directors, or our Compensation Policy, and in November 2015, our shareholders approved several modifications thereto. Our Compensation Policy is designed to correlate executive compensation with Radware's objectives and goals.

The following table sets forth all compensation we paid or accrued with respect to all of our directors and officers as a group for the periods indicated. The table does not include any amounts we paid to reimburse any of our affiliates for costs incurred in providing us with services during such period.
Salaries, fees, commissions and bonuses
Pension, retirement
and other similar benefits
2016 - All directors and officers as a group, consisting of 14 persons*
$
2,645,000
$
389,500
2017 - All directors and officers as a group, consisting of 14 persons**
$
3,604,100
$
504,900
*  All directors and executive officers as a group, consisting of 15 persons for the year ended December 31, 2016. These being the 14 individuals listed in the table in ITEM 6A above and one additional executive officer whose service expired in January 2016.
** All directors and executive officers as a group, consisting of 14 persons for the year ended December 31, 2017. These being the 14 individuals listed in the table in ITEM 6A above.
During 2017, we granted to our directors and officers listed in Item 6A above, in the aggregate, 6,000 RSUs at a grant date fair value of $14.68 and options to purchase 382,500 ordinary shares at a weighted average exercise price per share of $15.79. The options expire sixty-two months after grant. The weighted average grant date fair value of these options was $4.5 per option.
For a discussion of the accounting method and assumptions used in valuation of such options, see Note 2(r) to our consolidated financial statements included elsewhere in this annual report. See also "Item 6.E. - Directors, Senior Management and Employee – Share Ownership –– Share Option Plans” below .
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For a discussion of the compensation granted to our five most highly compensated executive officers during 2017, see “Compensation of Executive Officers” below, and for a discussion of the compensation paid to our non-employee directors, see “Compensation of Directors” below.
Compensation of Executive Officers
The table and summary below outline the compensation granted to our five most highly compensated executive officers during or with respect to the year ended December 31, 2017. We refer to the five individuals for whom disclosure is provided herein as our “Covered Executives.”

For purposes of the table and the summary below, “compensation” includes base salary, bonuses, equity-based compensation, retirement or termination payments, benefits and perquisites such as car, phone and social benefits and any undertaking to provide such compensation. All amounts reported in the table are in terms of cost to the Company, as recognized in our financial statements for the year ended December 31, 2017.
Name and Principal Position (1)
Year
Salary
Bonus (including Sales Commissions) (2)
Equity-Based
Compensation (3)
All Other
Compensation (4)
Total
(US$ in thousands)
Anna Convery-Pelletier, Chief Marketing Officer
2017
265
112
498
33
908
Roy Zisapel, Chief Executive Officer, President and Director*
2017
425
(5)
272
(6)
0
113
810
Gabi Malka, Chief Operating Officer*
2017
268
81
291
66
706
Doron Abramovitch, Chief Financial Officer*
2017
297
120
137
93
647
Terence Ying, Vice President Asia-Pacific
2017
263
206
109
21
599
(1)
Unless otherwise indicated herein, all Covered Executives are (i) employed on a full-time (100%) basis; and (ii) subject to customary confidentiality, intellectual property assignment and non-solicitation provisions as well as an undertaking not to compete with us or in our field of business for at least 12 months following termination of employment.
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(2)
Amounts reported in this column represent annual bonuses, including sales commissions. Consistent with our Compensation Policy, such bonuses are based upon (i) for non-sales executive officers - achievement of milestones and targets and the measurable results of the Company, as compared to our budget and/or work plan for the relevant year, with a portion of the bonus (up to 10% in the case of Roy Zisapel) being based on the achievement and performance of pre-determined individual key performance indicators (KPIs), and, in any event, not to exceed the amount of one (100%) annual base salary of such executive; and (ii) for sales executive officers - achievement of targets of revenues generated by the individual and/or his/her team or division and/or the Company, and in any event, not to exceed the amount of four annual base salaries of such executive.
(3)
Amounts reported in this column represent the grant date fair value in accordance with accounting guidance for stock-based compensation. For a discussion of the assumptions used in reaching this valuation, see Note 2(r) to our consolidated financial statements included elsewhere in this annual report.
(4)
Amounts reported in this column include benefits and perquisites, including those mandated by applicable law. Such benefits and perquisites may include, to the extent applicable to the Covered Executive, payments, contributions and/or allocations for savings funds (e.g., Managers Life Insurance Policy), education funds ('keren hishtalmut'), pension, severance, vacation, car or car allowance, medical insurances and benefits, risk insurances (e.g., life, or work disability insurance), phone, convalescence or recreation pay, relocation, payments for social security, tax gross-up payments and other benefits and perquisites consistent with Radware's guidelines. Unless otherwise indicated herein, all Covered Executives (i) are entitled to a notice period of at least 1 month prior to termination (other than termination for cause), during which they are generally entitled to all compensation and rights under their employment agreements; and (ii) are not entitled to any special bonuses or benefits upon a change of control of our Company, other than a potential acceleration of the vesting of their stock options pursuant to our equity incentive plan, as more fully described in Item 6E below.
(5)
Mr. Roy Zisapel is entitled to a gross base salary of $300,000 (or the equivalent in NIS) per annum. However, he is also entitled to a quarterly payment of $25,000, effective as of the January 1, 2012 as compensation for his additional duties and tasks in the United States as manager of our entire on-going North America activities. The additional amount will be payable for as long as Mr. Zisapel maintains this additional position. The additional $25,000 over the aggregated total $400,000 annual salary is attributed to the change in the exchange rate of the $ vs. NIS since the date of the Shareholders’ Annual General Meeting in 2012 approving Mr. Zisapel’s salary and the average $/NIS exchange rate in 2017.
(6)
Consistent with our Compensation Policy, and as approved by our shareholders in November 2015, Mr. Roy Zisapel is entitled to an annual bonus of up to $400,000 (or the equivalent in NIS).
* All or part of the base salary is denominated in NIS whereas our functional currency is dollars and therefore fluctuations in dollar amounts may be attributed to exchange rate fluctuations.
Compensation of Directors
An external director is entitled to consideration and reimbursement of expenses only as provided in regulations promulgated under the Israeli Companies Law and is otherwise prohibited from receiving any other compensation, directly or indirectly, in connection with his service as an external director.
Our non-employee directors, including external directors, are entitled to the following compensation: (i) annual compensation in the amount of NIS 120,800 (currently equivalent to approximately $34,600) per year of service; (ii) per meeting remuneration of NIS 3,600 (currently equivalent to approximately $1,030) for each board or committee meeting attended, provided that the director is a member of such committee; (iii) compensation for telephonic participation in board and committee meetings (where other members physically attend)  in an amount of 60% of what is received for physical participation; and (iv) compensation for board and committee meetings held via electronic means without physical participation in an amount of 50% of what is received for physical meeting.  All amounts payable under items (i), (ii), (iii) and (iv) above are subject to adjustment for changes in the Israeli consumer price index after December 2007 and changes in the amounts payable pursuant to Israeli law from time-to-time.
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In addition, our non-employee directors, including external directors, are entitled to a grant of options under our stock option plans to purchase 20,000 ordinary shares for each year in which such non-employee director holds office. The options are granted for three years in advance, and therefore every director receives an initial grant of options to purchase 60,000 ordinary shares which vest over a period of three years, with a third (20,000) to vest upon each anniversary of service, provided that the director still serves on the Company’s Board of Directors on the date of vesting. The grant is made on the date of the director’s election (or the date of commencement of office, if different), and thereafter, every three years, if reelected, an additional grant of options to purchase an additional 60,000 ordinary shares will be made on the date of each annual meeting in which such director is reelected. The exercise price of all options shall be equal to the fair market value of the ordinary shares on the date of the grant (i.e., an exercise price equal to the market price of our ordinary shares on the date of the annual meeting approving the election or reelection of a director or the date of commencement of office, if different).
C. Board Practices
Introduction
Since we are incorporated as an Israeli company, we are subject to the provisions of the Companies Law and the regulations adopted thereunder. In addition, we are subject to the rules of the Nasdaq applicable to listed companies since our ordinary shares are listed on the Nasdaq Global Select Market.
According to the Companies Law and our Articles of Association, the oversight of the management of our business is vested in our Board of Directors.  Our Board of Directors may exercise all powers and may take all actions that are not specifically granted to our shareholders. As part of its powers, our Board of Directors may cause us to borrow or secure payment of any sum or sums of money for our purposes, at times and upon terms and conditions as it determines, including the grant of security interests in all or any part of our property.
Our Articles of Association provide for a Board of Directors of not less than five and not more than nine directors.  Currently, our Board of Directors consists of seven directors, including the external directors (as described below).  In accordance with current Nasdaq requirements, nominees for election as directors are approved and recommended to the Board of Directors by a decision of a majority of our independent directors.
Under the Companies Law, our Board of Directors is required to determine the minimum number of directors having accounting and financial expertise, as defined in regulations promulgated under the Companies Law, that our Board of Directors should have.  In determining the number of directors required to have such expertise, the Board of Directors must consider, among other things, the type and size of the company and the scope and complexity of its operations. Our Board of Directors has determined that we require at least one director with the requisite financial and accounting expertise and that Mr. Avraham Asheri has such expertise.
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Staggered Board
In accordance with the terms of our Articles of Association, our Board of Directors (other than our external directors, as described below) is divided into three classes with each class of directors serving until the third annual meeting following their election as follows:
Class
Term expiring at the annual meeting for the year
Directors
Class I
2018
Yehuda Zisapel and Avraham Asheri
Class II
2019
Roy Zisapel and Joel Maryles
Class III
2020
Yael Langer
At each annual meeting of shareholders after the initial classification, the successors to directors whose terms will then expire will be elected to serve from the time of election and qualification until the third annual meeting following such election.  Directors, other than external directors, are elected by a simple majority of the votes cast by our shareholders at an annual general meeting, whereas a director’s removal from office requires the vote of at least seventy-five percent (75%) of the voting power represented at the general meeting. Any additional directorships resulting from an increase in the number of directors will be distributed among the three classes so that, to the nearest extent possible, each class will consist of one-third of the directors. This classification of our Board of Directors may have the effect of delaying or preventing changes in control or management of our company.
The above classification does not apply to Mr. David Rubner and Prof. Yair Tauman, who were appointed as external directors and whose term of appointment ends in 2018 and 2019, respectively.
For a description of how long our directors and officers have served in their current positions, please see “Item 6A - Directors, Senior Management and Employees – Directors and Senior Management”.
External Directors
Qualifications of External Directors
Under the Companies Law, companies incorporated under the laws of Israel whose shares are listed for trading on a stock exchange or have been offered to the public in or outside of Israel, such as Radware, are required to appoint at least two external directors. However, effective from April 2016, companies whose shares are traded on specified U.S. stock exchanges, including Nasdaq, and which do not have a controlling shareholder, such as Radware, may (but are not required to) elect to opt out of the requirement to maintain external directors or retain external directors but opt out of the composition requirements under the Companies Law with respect to either or both of the audit and compensation committees. After considering this matter, we have decided not to elect to opt out of any such requirements at this time.
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Under the Companies Law, external directors are required to possess professional qualifications as set out in regulations promulgated under the Companies Law. To qualify as an external director, an individual (or the individual’s relative, partner, employer or any entity under the individual’s control) may not have, and may not have had at any time during the previous two years, any “affiliation” with:
·
the company, the company’s controlling shareholder or its relative, or another entity affiliated with the company or its controlling shareholder, or
·
a company without a controlling shareholder (or a shareholder that owns more than 25% of its voting power), such as Radware, any person who, at the time of appointment, is the chairman, the chief executive officer, the chief financial officer or a 5% shareholder of the company.
The term affiliation includes:
·
an employment relationship;
·
a business or professional relationship;
·
control; and
·
service as an office holder, excluding service as a director that was appointed to serve as an external director of a company that is about to make its initial public offering.
The Companies Law defines the term “office holder” of a company to include a director, the chief executive officer, the chief financial officer, a vice president and any officer of the company that reports directly to the chief executive officer.
No person can serve as an external director if the person’s position or other business creates, or may create, a conflict of interest with the person’s responsibilities as an external director or may otherwise interfere with the person’s ability to serve as an external director.
Until the lapse of two years from termination of office as an external director, a company and its controlling shareholder may not provide compensation to an external director or his or her spouse and children or engage such persons to serve as an office holder and cannot employ or receive services from such persons, either directly or indirectly, including through a corporation controlled by that person. The same restriction applies to other family members of the external director but until the lapse of one year from termination of office as an external director.
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Election of External Directors
External directors are to be elected by a majority vote at a shareholders’ meeting, provided that either:
·
at least a majority of the shares of non-controlling shareholders voted at the meeting in favor of the election; or
·
the total number of shares voted against the election of the external director does not exceed 2% of the aggregate voting rights in the Company.
The initial term of an external director is three years and may be extended for up to two additional three-year terms . Thereafter, in a company whose shares are listed for trading on, among others, the Nasdaq Global Select Market, such as Radware, he or she may be reelected by our shareholders for additional periods of up to three years each only if the Audit Committee and Board of Directors confirm that, in light of the external director’s expertise and special contribution to the work of the Board of Directors and its committees, the reelection for such additional period is beneficial to the Company. Reelection of an external director may be effected through one of the following mechanisms: (1) the board of directors proposed the reelection of the nominee and the election was approved by the shareholders by the majority required to appoint external directors for their initial term as described above; or (2) a shareholder holding 1% or more of the voting rights proposed the reelection of the nominee or the external director himself or herself proposed their own reelection, and the reelection is approved by a majority of the votes cast by the shareholders of the company, excluding the votes of controlling shareholders and those who have a personal interest in the matter as a result of their relations with the controlling shareholders; provided that the aggregate votes cast in favor of the reelection by such non-excluded shareholders constitute more than 2% of the voting rights in the company.
External directors may be removed from office only by the vote of the same percentage of shareholders as is required for their election or by a court but, in both cases, only if they cease to meet the statutory qualifications for appointment or if they violate their duty of loyalty to the Company.
Each committee of the Company’s board of directors is required to include at least one external director, except for the Audit and Compensation Committees which are required to be comprised of all the external directors.
Currently, Mr. David Rubner and Prof. Yair Tauman qualify as external directors under the Companies Law and were elected by the general shareholders meetings held in November 2015 and October 2016, respectively, to serve as our external directors for three-year terms ending in 2018 and 2019, respectively.
Under the Companies Law and regulations promulgated thereunder, (1) an external director must have either “accounting and financial expertise” or “professional qualifications” (as such terms are defined in regulations promulgated under the Companies Law) and (2) at least one of the external directors must have “accounting and financial expertise.” However, companies whose shares are registered for trade outside of Israel, such as us, are in compliance with such requirements if all of their external directors have “professional qualifications” and one of their other independent directors has “accounting and financial expertise”. Our Board of Directors has determined that Mr. Avraham Asheri, one of our other independent directors, has “accounting and financial expertise” and that Mr. David Rubner and Prof. Yair Tauman, our external directors, have “professional qualifications”, and, therefore, we believe we satisfy these requirements.
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Our Committees
The Board of Directors appoints committees to help carry out its duties. Each committee reports the results of its meetings to the full Board of Directors. The Board of Directors established an Audit Committee and a Compensation Committee and, from time to time, establishes other “ad-hoc" committees of members of the Board of Directors for specific duties or assignments and limited duration.
Audit Committee
Nasdaq Requirements
Our ordinary shares are listed on the Nasdaq Global Select Market, and we are subject to the Nasdaq rules applicable to listed companies. Under the Nasdaq rules, we are required to have an audit committee consisting of at least three independent directors, all of whom are financially literate and one of whom has accounting or related financial management expertise.
Our Board has determined that all directors serving on our Audit Committee (namely Mr. Avraham Asheri, Mr. David Rubner, Prof. Yair Tauman and Mr. Joel Maryles) meet the independence standards required of Audit Committee members by the Securities Exchange Act of 1934 and the Nasdaq rules. In addition, the Board of Directors has determined that Mr. Avraham Asheri is considered an “audit committee financial expert” (as defined by SEC rules).
In accordance with the Nasdaq rules, our Audit Committee has adopted a charter that sets forth the Audit Committee’s purpose and responsibilities, which include, among other things, (1) assisting the Board of Directors in fulfilling its responsibility for oversight of the quality and integrity of our accounting, auditing and financial reporting practices and financial statements and the independence qualifications and performance of our independent auditors, and (2) selecting, evaluating and, where appropriate, recommending to replace the independent auditors (or to nominate the independent auditors subject to shareholder approval) and to pre-approve audit engagement fees and all permitted non-audit services and fees. Our Audit Committee must also review and approve all related party transactions specified under Item 7B of Form 20-F .
Our Audit Committee also functions as our Qualified Legal Compliance Committee, or the QLCC. In its capacity as the QLCC, our Audit Committee is responsible for investigating reports made by attorneys appearing and practicing before the SEC in representing us of perceived material violations of U.S. federal or state securities laws, breaches of fiduciary duty or similar violations by us or any of our agents.
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Israeli Companies Law Requirements
Under the Companies Law, our Audit Committee must be comprised of at least three directors, include all of the external directors, a majority of its members must satisfy the independence standards under the Companies Law, and the chairman thereof is required to be an external director.
In accordance with the Companies Law, the duties of our Audit Committee, in addition to the requirements imposed by the Nasdaq rules, include, among other things, to (1) identify irregularities in the business management of the Company, including in consultation with the internal auditor and/or the Company’s independent accountants, and to recommend remedial measures to the Board of Directors, (2) review, and, where appropriate, approve certain interested party transactions specified under the Companies Law, as more fully described below under the heading “Approval of Specified Related Party Transactions under Israeli Law”, and (3) examine and monitor the work of our internal auditor.
Compensation Committee
Pursuant to applicable Nasdaq rules, the compensation payable to a company’s chief executive officer and other executive officers must generally be approved by a compensation committee comprised solely of independent directors.
Under the Companies Law, our Board of Directors is required to appoint a compensation committee comprised of at least three directors and which shall include all of the company’s external directors. The other members of the compensation committee must satisfy certain independence standards under the Companies Law, and the chairman is required to be an external director. Under the Companies Law, the role of the compensation committee includes recommending to the Board of Directors, for ultimate shareholder approval by a special majority, a policy governing the compensation of office holders based on specified criteria; reviewing, from time to time, modifications to the compensation policy and examining its implementation; approving the actual compensation terms of office holders prior to approval thereof by the Board of Directors; and resolving whether to exempt the compensation terms of a candidate for chief executive officer from shareholder approval.
Pursuant to its charter, our Compensation Committee is authorized to make decisions regarding executive compensation and terms and conditions of employment, to follow market trends and provide recommendations to the Board of Directors in connection with the Company’s general compensation philosophy and policies, as well as to recommend that the Board of Directors issue options under our stock option plans. The Compensation Committee reviews and determines, on behalf of the Board of Directors, the amounts and types of compensation to be paid to the Company’s Chief Executive Officer and other executive officers.
Our Compensation Committee currently consists of Mr. David Rubner and Prof. Yair Tauman, who are also our external directors, Mr. Joel Maryles and Mr. Avraham Asheri, all of whom are independent directors.
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Nomination of Directors
Our independent directors consider and vote upon nominations to our Board of Directors.
Board and Committee Meetings
The table below describes the number of meetings and attendance rates of our Board of Directors, Audit Committee and Compensation Committee in 2017*:
Name of Body
No. of Meetings in 2017
Average Attendance Rate
Board of Directors
10
94
%
Audit Committee
5
90
%
Compensation Committee
4
94
%

* Excludes ad-hoc committees.
Each director attended at least 80% of all Board meetings.
Directors’ Service Contracts
Except as described in Item 6B above, we do not, as of the date of filing of this Annual Report, have service or employment contracts with our directors providing for benefits upon termination of employment.
Internal Auditor
Under the Companies Law, the board of directors of a public company must appoint an internal auditor proposed by the audit committee. The role of the internal auditor is to examine, among other things, whether the company’s conduct complies with applicable law and orderly business procedure. The internal auditor may participate in all audit committee meetings and has the right to demand that the chairman of the audit committee convene a meeting. Under the Companies Law, the internal auditor may be an employee of the company but may not be an interested party, an office holder or a relative of any of the foregoing, nor may the internal auditor be the company’s independent accountant or its representative. Ms. Dana Gottesman – Erlich, CPA, CIA, Partner in BDO Ziv Haft, CPAs is our internal auditor.
Approval of Specified Related Party Transactions under Israeli Law
Fiduciary Duties of Office Holders
The Companies Law imposes a duty of care and a duty of loyalty on all office holders of a company.
The duty of care requires an office holder to act with the level of care with which a reasonable office holder in the same position would have acted under the same circumstances.  The duty of care includes a duty to use reasonable means to obtain:
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Information regarding the advisability of a given action submitted for his or her approval or performed by him or her by virtue of his or her position; and
All other important information pertaining to these actions.
The duty of loyalty of an office holder includes a duty to:
Refrain from any conflict of interest between the performance of his/her duties in the company and the performance of his or her other duties or his or her personal affairs;
Refrain from any activity that is competitive with the company.
Refrain from exploiting any business opportunity of the company to receive a personal gain for himself/herself or others; and
Disclose to the company any information or documents relating to the company’s affairs which the office holder has received due to his/her position as an office holder.
Disclosure of Personal Interest of an Office Holder
The Companies Law requires that an office holder of a company disclose to the company any personal interest that he may have and all related material information known to him, in connection with any existing or proposed transaction by the company. The disclosure is required to be made promptly and in any event no later than the board of directors meeting in which the transaction is first discussed. If the transaction is an extraordinary transaction, the office holder’s duty to disclose also applies to a personal interest of a relative of the office holder.
Under the Companies Law, an extraordinary transaction is a transaction:
Other than in the ordinary course of business;
Not on market terms; or
That is likely to have a material impact on the company’s profitability, assets or liabilities.
Once an office holder complies with the above disclosure requirement, the board of directors may approve a transaction between the company and an office holder, or a third party in which an office holder has a personal interest unless the articles of association provide otherwise.  Nevertheless, a transaction that is adverse to the company’s interest may not be approved.
If the transaction is an extraordinary transaction, approval is required of both the audit committee and the board of directors, in that order. Under specific circumstances, shareholder approval may also be required. A director who has a personal interest in a matter which is considered at a meeting of the board of directors or the audit committee may not be present at this meeting or vote on this matter, unless a majority of the members of the board of directors or the audit committee, as the case may be, has a personal interest in the matter. If a majority of members of the board of directors have a personal interest therein, shareholder approval is generally also required.
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Approval of Office Holder Compensation
Under the Companies Law, every Israeli public company, such as Radware, must adopt a compensation policy, recommended by the compensation committee, and approved by the board of directors and the shareholders, in that order. The shareholder approval requires a majority of the votes cast by shareholders, excluding any controlling shareholder and those who have a personal interest in the matter. In general, all office holders’ terms of compensation – including fixed remuneration, bonuses, equity compensation, retirement or termination payments, indemnification, liability insurance and the grant of an exemption from liability – must comply with the company’s compensation policy. In October 2013, our shareholders approved the Compensation Policy and in November 2015 they approved several amendments thereto.
In addition, the compensation terms of directors, the chief executive officer, and any employee or service provider who is considered a controlling shareholder must be approved separately by the compensation committee, the board of directors and, subject to certain exceptions, the shareholders of the company (by the same majority noted above), in that order. The compensation terms of other officers generally require the approval of the compensation committee and the board of directors.
Disclosure of Personal Interests of a Controlling Shareholder
Under the Companies Law, the disclosure requirements which apply to an office holder also apply to a controlling shareholder of a public company. A controlling shareholder is a shareholder who has the ability to direct the activities of a company, including a shareholder that owns 25% or more of the voting power in the company, if no other shareholder owns more than 50% of the voting power in the company, but excluding a shareholder whose power derives solely from his or her position on the board of directors or any other position with the company.
Extraordinary transactions of a public company with a controlling shareholder or with a third party in which a controlling shareholder has a personal interest, and the terms of engagement of a controlling shareholder as an office holder or employee, generally require the approval of the audit committee, the board of directors and the shareholders of the company in that order. The shareholder approval must be by a majority of the shares voted on the matter, provided that either:
At least a majority of the shares of shareholders who have no personal interest in the transaction, and who are present and voting (in person, by proxy or by written ballot) vote in favor thereof; or
The shareholders who have no personal interest in the transaction who vote against the transaction do not represent more than 2% of the voting power in the company.
In addition, any such extraordinary transaction whose term is longer than three years may require further shareholder approval every three years, unless, where permissible under the Companies Law, the audit committee approves that a longer term is reasonable under the circumstances.
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General Duties of Shareholders
Under the Companies Law, each shareholder has a duty to act in good faith in exercising his rights and fulfilling his obligations toward the company and other shareholders and to refrain from abusing his power in the company, such as shareholder votes. Furthermore, specified shareholders have a duty of fairness toward the company. These shareholders include any controlling shareholder, any shareholder who knows that he/it possesses the power to determine the outcome of a shareholder vote, and any shareholder who, pursuant to the provisions of the articles of association, has the power to appoint or to prevent the appointment of an office holder or any other power toward the company.
D. Employees
At the time of commencement of employment, our employees in North America generally sign offer letters specifying basic terms and conditions of employment, whereas our employees in Israel, including our executive officers, generally sign standard written employment agreements, which include confidentiality and non-compete provisions. The employees in our other jurisdictions sign employment agreements, which differ according to customary practices in the country in which they are located.
The following table details certain data on our workforce (including temporary employees and subcontractors) as at the period indicated:
As at December 31,
2017
2016
2015
Approximate numbers of employees and subcontractors by geographic location:
Israel
450(
**)
451(
**)
465 (
**)
United States
209
209
200
Other
319(
*)
319(
*)
331 (
*)
Total workforce
978
979
996
Approximate numbers of employees and subcontractors by category of activity:
Research and development
381(
*)
389(
*)
422 (
*)
Sales, technical support, business development and marketing
474
473
455
Management, operations and administration
123
117
119
Total workforce
978(
**)
979(
**)
996 (
**)
(*) Include 61, 71 and 82 subcontractors, as of December 31, 2017, 2016 and, 2015, respectively.
(**) Include 0, 14 and 16 employees, as of December 31, 2017, 2016 and 2015, respectively, in Radyoos, our Israeli-based subsidiary which was engaged in developing and operating a web-based e-commerce platform, and not in our core business.
We are subject to Israeli labor laws and regulations with respect to our Israeli employees.  These laws principally concern matters such as paid annual vacation, paid sick days, length of the workday and work week, minimum wages, pay for overtime, insurance for work-related accidents, severance pay and other conditions of employment.
Furthermore, our Israeli employees and we are subject to provisions of the collective bargaining agreements between the “Histadrut”, the General Federation of Labor in Israel, and the Coordination Bureau of Economic Organizations, including the Industrialists Association, by governmental order. These provisions principally concern social benefits, cost of living increases, recreation pay and other conditions of employment.  We generally provide our employees with benefits and working conditions above the required minimums.
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Our employees are not represented by a labor union. The employees of our subsidiaries are subject to local labor laws, regulations and/or collective bargaining agreements that vary from country to country.
We consider our relations with our employees to be good, and we have never experienced a strike or work stoppage.
E. Share Ownership
The following table sets forth certain information regarding the beneficial ownership of our ordinary shares by our directors and officers as of March 25, 2018. The percentage of outstanding ordinary shares is based on 44,545,935 ordinary shares outstanding as of March 25, 2018.
Name
Number of ordinary shares
Percentage of outstanding ordinary shares
Yehuda Zisapel (1)
2,389,710
5.36
%
Roy Zisapel (2)
2,449,312
5.50
%
Avraham Asheri (3)
*
*
Yael Langer (3)
*
*
David Rubner (3)
*
*
Yair Tauman (3)
*
*
Joel Maryles (3)
*
*
Doron Abramovitch (3)
*
*
Gabi Malka (3)
*
*
David Aviv (3)
*
*
Sharon Trachtman (3)
*
*
Anna Convery-Pelletier (3)
*
*
Yoav Gazelle (3)
*
*
Terence Ying (3)
*
*
All directors and executive officers as a group (14 persons) (4)
5,475,397
12.29
%
(1) Of the ordinary shares beneficially owned by Mr. Yehuda Zisapel (i) 2,081,877 are held directly by Yehuda Zisapel; (ii) 267,833 are held of record by Carm-AD Ltd., an Israeli company wholly-owned in equal shares by Yehuda Zisapel and Nava Zisapel; (iii) 40,000 options to purchase ordinary shares are fully vested or will be fully vested with Yehuda Zisapel within the next 60 days, at an exercise price of $15.33 per share, expiring in January 2021. In addition, Nava Zisapel directly holds 2,592,943 ordinary shares which are not included in the total shares reported above as beneficially owned by Yehuda Zisapel.  Yehuda and Nava Zisapel have an agreement which provides for certain coordination in respect of sales of shares of Radware as well as for tag along rights with respect to off-market sales of shares of Radware.
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(2) Consists of 1,549,312 shares and 900,000 options to purchase ordinary shares which options are fully vested or will be fully vested within the next 60 days. The options consist of (i) 800,000 options at an exercise price of $13.89 which expire in December 2018, and (ii) 100,000 options at an exercise price of $15.33 which expire in January 2021.
(3) Owns less than 1% of our outstanding ordinary shares (including options held by each such party, which are vested or shall become vested within 60 days of the date of this annual report) and have therefore not been separately disclosed.
(4) Consists of 3,899,022 shares and 1,576,375 options to purchase ordinary shares which options are fully vested or which will be fully vested within the next 60 days. The options consist of  (i) 20,000 options at an exercise price of $14.38 which expire in January 2022, (ii) 40,000 options at an exercise price of $15.19 which expire in September 2018, (iii) 860,000 options at an exercise price of $13.89 which expire in December 2018,  (iv) 80,000 options at an exercise price of $14.32 which expire in December 2018, (v) 50,000 options at an exercise price of $17.98 which expire in March 2019, (vi) 131,375 options at an exercise price of $16.07 which expire in June 2019, (vii) 40,000 options at an exercise price of $17.87 which expire in November 2019, and (viii) 95,000 options at an exercise price of $14.00 which expire in April 2021, (ix) 20,000 options at an exercise price of $13.43 which expire in December 2021, (x) 20,000 options at an exercise price of $13.06 which expire in April 2021 and (xi) 220,000 options at an exercise price of $15.33 which expire in January 2021. In addition, Nava Zisapel directly holds 2,592,943 ordinary shares which are not included in the total shares reported above as beneficially owned by Yehuda Zisapel.  Yehuda and Nava Zisapel have an agreement which provides for certain coordination in respect of sales of shares of Radware as well as for tag along rights with respect to off-market sales of shares of Radware.
Key Employee Share Incentive Plan
In August 1997, we adopted our Key Employee Share Incentive Plan (1997), as amended, or the Share Incentive Plan. Under the plan, stock options as well as restricted stock units, or RSUs, may be granted to employees employed by us or by our affiliates.
The Share Incentive Plan is administered by the Compensation Committee subject to the provisions of the Companies Law. Pursuant to the plan, the Compensation Committee has the authority to determine (subject to applicable law), or advise the Board of Directors, in its discretion:
·
the persons to whom options or RSUs are granted;
·
the number of shares underlying each equity award;
·
the time or times at which the award shall be made;
·
the exercise price, vesting schedule and conditions pursuant to which the awards are exercisable; and
·
any other matter necessary or desirable for the administration of the plan.
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In addition, the Share Incentive Plan provides that, unless otherwise determined otherwise by our Board of Directors (or a committee thereof), in the event of a “Hostile Takeover”, which is defined to include, among others, an unsolicited acquisition of more than 20% of our outstanding shares (other than a purchase by Mr. Yehuda Zisapel), the vesting of all or a portion of our outstanding equity awards, will accelerate. As a result, an acquisition of our Company that triggers the said acceleration will be more costly to a potential acquirer.
Options granted pursuant to the Share Incentive Plan are typically granted for a term of sixty-two months from the date of the grant of the option. As of December 31, 2017, 30,272,967 ordinary shares have been reserved for equity grants under the plan, of which we have granted (i) options to purchase 27,334,574 ordinary shares at a weighted average exercise price of $7.5 per ordinary share and (ii) 1,810,381 RSUs have been issued under the plan.
The Share Incentive Plan allows the allocation of short term options to grantees who are not residents of Israel or the United States, with a grant price of 90% of the closing sales price for the shares on the Nasdaq on the date of grant of a respective option award. As of December 31, 2017, 1,000,000 ordinary shares have been reserved for option grants under this arrangement, of which we have granted options to purchase 236,694 ordinary shares at a weighted average exercise price of $7.09 per ordinary share. This arrangement does not affect the possibility of issuing options under the Share Incentive Plan as detailed above. However, any person who participates in the ESPP (as defined below) shall not be an eligible grantee for purposes of such arrangement.
Directors and Consultants Option Plan
In February 2000, we adopted a Directors and Consultants Option Plan, which is administered by our Compensation Committee. Options granted pursuant to our Directors and Consultants Options Plan are for a term of sixty-two months from the date of the grant of the option. The terms of the Directors and Consultants Option Plan are similar to the terms of the Share Incentive Plan.  The Directors and Consultants Option Plan relies on the 30,272,967 ordinary shares reserved for option grants shares under the Share Incentive Plan which can be rolled over between such plans. The Compensation Committee may not grant options to members of the Committee or to a shareholder of over 10% of our issued and outstanding shares.
Employee Share Purchase Plan
In February 2010, our Board of Directors adopted the 2010 Employee Share Purchase Plan (“ESPP”), which provides for the issuance of a maximum of 2,000,000 ordinary shares. Pursuant to the ESPP, eligible employees (including only Israeli and United States residents) could have up to 10% of their net income withheld, up to certain maximums, to be used to purchase our ordinary shares. The ESPP is implemented with overlapping one year offering periods, each one consisting of two purchases, once in every six-month period. The price of each ordinary share purchased under the ESPP is equal to 90% of the closing price for the shares on the respective offering date. As of December 31, 2017, a total of 255,560 shares have been purchased under the ESPP. During 2017, no shares have been purchased under the ESPP.
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ITEM 7.
MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. Major Shareholders
The following table sets forth certain information regarding the beneficial ownership of our ordinary shares as of March 25, 2018, by each person or entity known to own beneficially more than 5% of our outstanding ordinary shares based on information provided to us by the holders or disclosed in public filings with the SEC.  The voting rights of all major shareholders are the same as for all other shareholders.
Name
Number of ordinary shares
Percentage of outstanding ordinary shares
Senvest Management, LLC (1)
5,881,191
13.20
%
Cadian Capital Management, LP(2)
2,704,216
6.07
%
Nava Zisapel (3)
2,860,776
6.42
%
Yehuda Zisapel (4)
2,389,710
5.36
%
Roy Zisapel (5)
2,449,312
5.50
%
(1) Shares are beneficially owned by Senvest Management, LLC and Mr. Richard Mashaal (collectively, “Senvest”). This information is based on information provided in the Amendment No. 13 to Statement on Schedule 13G filed with the SEC by Senvest on February 12, 2018.
(2) This information is based on information provided in the Amendment No. 2 to Statement on Schedule 13G filed with the SEC by Cadian Capital Management, LP , Cadian Capital Management GP, LLC and Mr. Eric Bannasch (collectively, “Cadian”) on February 13, 2018.
(3) Of the ordinary shares beneficially owned by Ms. Nava Zisapel, (i) 2,592,943 are held directly; and (ii) 267,833 are held of record by Carm-AD Ltd., an Israeli company owned 50% by Nava Zisapel;  As noted in note 1 in “Item 6E – Share Ownership”, Yehuda and Nava Zisapel have an agreement which provides for certain coordination in respect of sales of shares of Radware as well as for tag along rights with respect to off-market sales of shares of Radware. The information regarding Mr. Yehuda Zisapel’s share holdings is based on information provided in the Amendment No. 3 to Statement on Schedule 13D filed with the SEC by Mr. Yehuda Zisapel and Ms. Nava Zisapel on February  26, 2018.
(4) Of the ordinary shares beneficially owned by Mr. Yehuda Zisapel (i) 2,081,877 are held directly by Yehuda Zisapel; (ii) 40,000 options to purchase ordinary shares are fully vested or will be fully vested with Yehuda Zisapel within the next 60 days, at an exercise price of $15.33 per share, expiring in January 2021; and (iii) 267,833 are held of record by Carm-AD Ltd., an Israeli company owned 50% by Yehuda Zisapel and 50% by Nava Zisapel ; As noted in note 1 in “Item 6E – Share Ownership”, Yehuda and Nava Zisapel have an agreement which provides for certain coordination in respect of sales of shares of Radware as well as for tag along rights with respect to off-market sales of shares of Radware. The information regarding Mr. Yehuda Zisapel’s share holdings is based on information provided in the Amendment No. 3 to Statement on Schedule 13D filed with the SEC by Mr. Yehuda Zisapel and Ms. Nava Zisapel on February  26, 2018.
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(5) Consists of 1,549,312 shares and 900,000 options to purchase ordinary shares which options are fully vested or will be fully vested within the next 60 days. The options consist of (i) 800,000 options at an exercise price of $13.89 which expire in December 2018, and (ii) 100,000 options at an exercise price of $15.33 which expire in January 2021.
To the best of our knowledge, the Company is not directly or indirectly owned or controlled by another corporation, by any foreign government or by any other natural or legal person severally or jointly.  There are no arrangements, known to the Company, the operation of which may at a subsequent date result in a change in control of the Company.
Significant Changes in the Ownership of Major Shareholders
During the past three years, the significant changes in the percentage ownership of our major shareholders were as follows:
·
Based on Amendment No.13 to Statement on Schedule 13G filed with the SEC by Senvest on February 12, 2018, Senvest beneficially owned 13.53% of our outstanding ordinary shares. Based on previous amendments to the Schedule 13G filed with the SEC by Senvest, Senvest beneficially owned (i) as of February 13, 2017,14.16% of our outstanding ordinary shares and (ii) as of February 12, 2016, 11.84% of our outstanding ordinary shares.
·
Based on Amendment No.2 to Statement on Schedule 13G filed with the SEC by Cadian on February 13, 2018, Cadian beneficially owned 6.2% of our outstanding ordinary shares. Based on previous amendments to the Schedule 13G filed with the SEC by Cadian, Cadian beneficially owned (i)  as of February 13, 2017, 9.71% of our outstanding ordinary shares and (ii) as of February12, 2016, 9.22% of our outstanding ordinary shares.
·
Pursuant to Amendment No. 3 to Statement on Schedule 13D filed with the SEC by Mr. Yehuda Zisapel and Ms. Nava Zisapel on February  26, 2018, Mr. Yehuda Zisapel reported that he has sold and aggregate amount of 100,600 share in February 2018.
·
Based on the Amendment No.1 to Statement on Schedule 13G filed with the SEC by  ETF Managers Group, LLC on August 23, 2017, ETF Managers Group, LLC no longer beneficially owns more than 5% of our outstanding ordinary shares.

·
Based on the Amendment No.1 to Statement on Schedule 13G filed with the SEC by  Morgan Stanley on February 13, 2017, Morgan Stanley no longer beneficially owns more than 5% of our outstanding ordinary shares.
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Major Shareholders Voting Rights
Our major shareholders do not have different voting rights from those of other shareholders.
Record Holders
Based on a review of the information provided to us by our transfer agent, as of March 25, 2018, there were 27 holders of record of our ordinary shares, of which 17 record holders, holding approximately 10.35% of our ordinary shares, had registered addresses in Israel , and of which 7 record holders, holding approximately 89.64% of our ordinary shares, had registered addresses in the United States. These numbers are not representative of the number of beneficial holders of our ordinary shares nor is it representative of where such beneficial holders reside, since many of these ordinary shares were held of record by brokers or other nominees (including one U.S. nominee company, CEDE & Co., which held approximately 89.64% of our outstanding ordinary shares as of said date).
B. Related Party Transactions
General
We have entered into a number of agreements with certain companies, of which Yehuda, Nava and Zohar Zisapel are co-founders, directors and/or principal stockholders, collectively known as the RAD-Bynet Group and, in one of which, SecurityDam, Roy Zisapel, our President and Chief Executive Officer and a director, also holds a minority stake of 10% . In addition, we purchase different services and fixed assets from third parties at special rates offered to the RAD-Bynet Group, such as car leases, maintenance, insurance communication and Managed Security Service Providers (MSSP) scrubbing centers services.
The RAD-Bynet Group consists of high-tech manufacturers of hardware and software solutions and data communication providers, distributors and integrators as well as service providers. The RAD-Bynet Group includes approximately 15 different companies dealing in advanced communication technology, Managed Security Service Providers (MSSP) scrubbing centers services, networks, and integration. Companies within the RAD-Bynet Group provide a variety of solutions and services to their customers, including: engineering, purchasing and sub-contracting, production and final testing, planning and control, and support for end users. The RAD-Bynet Group also includes a few companies which provide services which support the activities of the other RAD-Bynet Group members, such as real estate leasing and administrative services. Some of the products of members of the RAD-Bynet Group are complementary to, and may be used in connection with, our products. Each company in the RAD-Bynet Group is independent from the others. The ownership and Board of Directors structure of each RAD-Bynet Group member is different and certain of the RAD-Bynet Group members are publicly traded companies. See Item 4C – Organizational Structure.” for additional details about the group.
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We believe that all of these transactions and arrangements with affiliated parties, including members of the RAD-Bynet Group, are in the ordinary course of our business and are not unusual in their nature or conditions. However, in accordance with the Companies Law, they generally require the approval of our Audit Committee and our Board of Directors and may, in certain circumstances, require approval by our shareholders. In this respect, as permitted by the Companies Law, our Audit Committee established an internal policy with certain criteria and procedures designed to ensure that the terms of the transactions to which we enter into with companies within the RAD-Bynet Group are made on market terms and, at the same time, where such transactions are immaterial or negligible, both from a qualitative and quantitative perspective (and/or are otherwise believed to be routine) would not require the pre-approval of our Audit Committee and Board of Directors. Our management is required to examine whether transactions with the RAD-Bynet Group comply with such criteria and transactions which do not meet the criteria require pre-approval of our Audit Committee and such other corporate approvals prescribed by the Companies Law.
We believe that the terms of the transactions to which we have entered with members of the RAD-Bynet Group are not different in any material respect from terms we could obtain from unaffiliated third parties. The pricing of the transactions was based on negotiations between the parties and members of our management reviewed the pricing of these agreements, as well as, in some cases, used a third-party consulting firm, and confirmed that they were not different in any material respect than that which could have been obtained from unaffiliated third parties.
In the event that we cease to be a member of the RAD-Bynet Group, we may not be able to obtain the current rates for such services.  We believe, however, that due to the affiliation between us and the RAD-Bynet Group, we have greater flexibility in obtaining certain terms and conditions that may not be available from unaffiliated third parties on similar products and services.
Lease of Property
We lease the office space for our headquarters and principal R&D, administrative, finance and marketing and sales operations from private companies within the RAD-Bynet Group that are owned by Zohar Zisapel, Nava Zisapel and Yehuda Zisapel:
One lease or the “Headquarters Lease” is a five-story building in Tel Aviv, Israel, consisting of approximately 40,000 square feet, plus storage and parking space. The lease expires in June 2020. The annual rent amounts to approximately $695,000.
Another lease consists of four floors in the Or Tower in Tel Aviv, Israel with approximately 60,000 square feet, plus parking spaces. The lease expires in June 2020. The annual rent amounts to approximately $1,725,000.
We also lease approximately 3,500 square feet of space in Jerusalem, Israel, for development facilities from an affiliated company owned by Messrs. Yehuda and Zohar Zisapel. This lease expires in August 2020. The annual rent amounts to approximately $89,000.
In addition, we lease approximately 15,000 square feet of space in Jerusalem, Israel, for manufacturing facilities from an affiliated company owned by Yehuda Nava and Zohar Zisapel. This lease expires in August 2019. The annual rent amounts to approximately $276,000
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We entered into an agreement with RAD Data Communications, Inc., a company controlled by Yehuda, Nava and Zohar Zisapel, pursuant to which we lease approximately 16,900 square feet in Mahwah, New Jersey, consisting of approximately 12,700 square feet of office space and 4,200 square feet of warehouse space, in consideration for annual rent of approximately $262,000 (including taxes, electricity and management fees). The lease expires in December 2018.
Distribution Agreement
Bynet Data Communications Ltd. (“Bynet”), a member of the RAD-Bynet Group, distributes our products in Israel on a non-exclusive basis.  We have a written distributor agreement with Bynet under which we provide Bynet Data Communications with discounts on our products and services similar to the discounts provided to third-party distributors in the region in the ordinary course of business. The total sales to Bynet (and other companies in the RAD-Bynet Group) under such distributor agreement amounted to approximately $2.6 million in 2017, compared to $1.7 million in 2016.
Managed Security Service Provider (“MSSP”) Agreement
SecurityDAM Ltd., or SecurityDam, a member of the RAD-Bynet Group, provides some of our DDoS cloud protection service against high-volume network floods. SecurityDam offers these MSSP services through a global network of scrubbing centers. Total cost of services received from SecurityDam amounted to approximately $4.3 million in 2017, compared to $3.1 million in 2016.
Additional RAD-Bynet Group Services
We receive the following additional services from members of the RAD-Bynet Group: network management; IT and communication services; equipment testing and repair; electricity charges; parking and building maintenance; reception services; vehicles and human resource administration; distribution services; and marketing services.  Each of these additional services is not material, individually or in the aggregate, to Radware or the RAD-Bynet Group.
A portion of the above services, such as electricity charges, are “pass through” services for which we are charged on a “back-to-back” basis according to our actual usage (i.e., we are charged pro ratably based on the actual charge of the third party electricity company) due to the fact that we lease part of our facilities from a number of other RAD-Bynet Group members. Other services mentioned above, such as vehicles and human resource administration, are performed by one of the RAD-Bynet Group companies and are provided to all members of the RAD-Bynet Group, in order to achieve lower prices for these services based on economies of scale. In addition, since the RAD-Bynet Group is comprised of a number of companies which are engaged in our industry, the RAD-Bynet Group initiates marketing events from time to time, which we participate in, to promote the RAD-Bynet Group members’ products. The charges for these services are based on actual costs incurred and are allocated to the Company according to its relative part in such services (e.g., vehicles administration – according to the number of the Company’s vehicles out of the total vehicles of the RAD-Bynet Group; marketing events – according to the number of participants of the Company’s customers out of the total participants in the events).
All other services, such as communication and distribution services are provided to us on the same basis and terms as provided to unrelated companies outside the RAD-Bynet Group, and were compared to prices the Company could have obtained from unaffiliated third parties and were found to be equal or less expensive. All services are charged on a monthly basis and on terms which are generally typical for other third party providers of the Company.
Compensation of Chief Executive Officer
See discussion in Item 6A “Directors, Senior Management and Employees – Directors and Senior Management”.
C. Interests of Experts and Counsel
Not applicable.
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ITEM 8.
FINANCIAL INFORMATION
A. Consolidated Statements and other Financial Information
Financial Statements
See “Item 18 - Financial Statements”.
Export Sales
For the year ended December 31, 2017, the amount of our export sales (i.e., sales outside Israel) was approximately $202 million, which represents 96% of our total revenues.
Legal Proceedings
We are, or may be, from time to time named as a defendant in certain routine litigation incidental to our business. However, except for the matters described below, we are currently not, and have not been in the recent past, a party to any legal proceedings which may have or have had in the recent past significant effects on our financial position or profitability.
Intellectual Property Dispute with F5
In April 2016, F5 Networks, Inc. (“F5”) filed a lawsuit against us in the United States District Court for the Western District of Washington, alleging infringement of three U.S. patents of F5 relating to our ADC and WAF products.   In December 2016, we filed an amended counterclaim in this action for patent infringement of a recently issued Radware patent directed to outbound link load balancing.  In June 2017, the case was transferred to the United States District Court for the Northern District of California.  In November 2017, the Court for the Northern District entered a partial stay of the case pending resolution of an Inter Partes Review of Radware’s patent through the end of April 2018.  We deny that any of our products infringe any valid claims of the asserted F5 patents and we intend to continue to vigorously oppose F5’s claims.  However, since discovery and litigation is still in a preliminary stage, we cannot estimate what impact, if any, the litigation may have on our results of operations, financial condition or cash flows.
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F5 Intellectual Property Counterclaim
On August 29, 2013, F5 filed an amended answer and counterclaim in an action brought by Radware against F5 on May 1, 2013 for infringement of three Radware patents regarding link load balancing technology. Radware prevailed in its affirmative case at trial, resulting in a damages award of $6.8 million plus costs. The Court also permanently enjoined F5 from infringing Radware’s patents-in-suit.  In its counterclaim, F5 alleged infringement of four F5 patents related to cookie persistence technology. In particular, while F5 acknowledged that Radware is licensed to each of the F5 patents-in-suit, F5 contends that Radware’s AppDirector and Alteon product lines perform unlicensed modes of the patents-in-suit. F5’s counterclaim further alleged trade libel and unfair competition resulting from statements allegedly made by Radware asserting that F5 is responsible for certain internet service problems at major banks, including the Bank of America. On December 6, 2013, Radware filed an answer denying the allegations in F5’s counterclaims. On June 26, 2014, pursuant to the parties’ joint stipulation, the Court dismissed with prejudice F5’s patent infringement counterclaim with respect to Radware’s AppDirector product line. In June 2015, in response to Radware’s Summary Judgment Motion, F5 conceded that the current version of Alteon does not infringe any of the F5 patents-in-suit and that its allegations are limited to a previous version of Alteon. On January 7, 2016, pursuant to the parties’ joint stipulation, the Court dismissed with prejudice F5’s trade libel and unfair competition counterclaims.  On May 9, 2016, F5 accepted our offer for judgment of $40,000 for all of F5’s remaining claims and on September 7, 2016 the Court entered judgment in the same amount. This portion of the judgment is not appealable. After judgment, both Radware and F5 appealed other portions of the judgment to the Federal Circuit. F5 appealed the judgment for Radware, while Radware appealed orders that limited the amount of damages and the scope of the permanent injunction. F5 has posted a bond with the Court for the entire judgment amount in favor of Radware.
The Federal Circuit affirmed the entire judgment on September 18, 2017 and remanded the case to the District Court on October 25, 2017, upon expiration of the time allowed for either party to request reconsideration of the affirmance.  Upon remand, the case was re-assigned to Judge Chabria on November 21, 2017.  On November 28, 2017, Radware moved to release the bond posted by F5. On December 6, 2017, the Court granted Radware’s motion.  On January 16, 2018 Radware filed the necessary tax documents for Radware Inc. to collect the funds, which, together with interest amounted to $6.9 million and which were in turn released by the Court on January 29, 2018.
Dividend Distribution Policy
We have never paid and do not intend to pay cash dividends on our ordinary shares in the foreseeable future. While we may engage from time to time in “buy-back” programs of our shares, our policy is to retain earnings and other cash resources to continue the development and expansion of our business.  Any future dividend policy will be determined by our Board of Directors and will be based upon conditions then existing, including our results of operations, financial condition, current and anticipated cash needs, contractual restrictions and other conditions. See also Item 10B “- Dividend and Liquidation Rights.”
B. Significant Changes
Except as otherwise disclosed in this annual report, we are not aware of any significant changes that have occurred since December 31, 2017.
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ITEM 9.
THE OFFER AND LISTING
A. Offer and Listing Details
Our ordinary shares have been listed for quotation on the Nasdaq Global Select Market since September 30, 1999 under the symbol “RDWR”. From May 12, 2004 to March 8, 2009, our ordinary shares were also listed on the Tel Aviv Stock Exchange, or TASE. We voluntarily delisted our ordinary shares from the TASE primarily due to low trading volume.
The following table sets forth the high and low sale price for our ordinary shares as reported by the Nasdaq Global Select Market for the periods indicated:
Nasdaq Global Select Market
High
Low
2013
$
19.28
$
13.70
2014
$
22.67
$
15.91
2015
$
24.91
$
12.60
2016
$
15.20
$
9.98
2017
$
20.48
$
14.38
2016
First Quarter
$
14.76
$
10.18
Second Quarter
$
12.48
$
10.50
Third Quarter
$
13.87
$
10.97
Fourth Quarter
$
14.85
$
11.85
2017
First Quarter
$
16.37
$
14.38
Second Quarter
$
18.26
$
15.17
Third Quarter
$
18.18
$
16.32
Fourth Quarter
$
20.48
$
16.93
Six months prior to filing
October 2017
$
17.54
$
16.93
November 2017
$
20.44
$
19.14
December 2017
$
20.48
$
19.40
January 2018
$
20.43
$
19.45
February 2018
$
21.34
$
19.55
March 2018*
$
21.76
$
20.47

*  Through March 25, 2018
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On March 25, 2018, the last reported sale price of our ordinary shares on the Nasdaq was $21.19 per share.
B. Plan of Distribution
Not applicable.
C. Markets
Our ordinary shares are listed for quotation on the Nasdaq Global Select Market under the symbol “RDWR”.
D. Selling Shareholders
Not applicable.
E. Dilution
Not applicable.
F. Expenses of the Issue
Not applicable.
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ITEM 10.
ADDITIONAL INFORMATION
A. Share Capital
Not applicable.
B. Memorandum and Articles of Association
Set out below is a description of certain provisions of our Memorandum of Association and Articles of Association, and of the Companies Law related to such provisions. This description is only a summary and does not purport to be complete and is qualified by reference to the full text of the Memorandum and Articles which are incorporated by reference to exhibits to this annual report and by Israeli law.
We were first registered under Israeli law on May 16, 1996 as a private company, and on November 18, 1999 became a public company. Our registration number with the Israeli registrar of companies is 52-004437-1.
Objects and Purposes
Pursuant to our Articles of Association, our objective is to engage, directly or indirectly, in any lawful undertaking or business whatsoever, including, without limitation, as stipulated in our Memorandum of Association, which was filed with the Israeli Registrar of Companies.
Shares; Transfer of Shares
Our registered capital is divided into 60,000,000 ordinary shares of nominal (par) value NIS 0.05 each.  There are no other classes of shares.  All of our outstanding shares are fully paid and non-assessable.  The shares do not entitle their holders to preemptive rights and fully paid ordinary shares may be freely transferred pursuant to our Articles of Association unless such transfer is restricted or prohibited by another instrument.
Dividend and Liquidation Rights
According to the Israeli Companies Law, a company may distribute dividends only out of its “profits,” as such term is defined in the Israeli Companies Law, as of the end of the most recent fiscal year or as accrued over a period of two years, whichever is higher.  Our Board of Directors is authorized to declare dividends, provided that there is no reasonable concern that payment of the dividend will prevent us from satisfying our existing and foreseeable obligations as they become due, and provided further that our shareholders approve the final dividend declared by the Board of Directors, in an amount not to exceed the Board of Directors’ recommendation.  Notwithstanding the foregoing, even where there are no sufficient profits, dividends may be paid with the approval of a court, provided that there is no reasonable concern that payment of the dividend will prevent us from satisfying our existing and foreseeable obligations as they become due.  Profits, for purposes of the Israeli Companies Law, means the greater of retained earnings or earnings accumulated during the preceding two years, after deduction of previous distributions that were not already deducted from the surplus, as evidenced by financial statements prepared no more than six months prior to the date of distribution.
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In the event of our liquidation, after satisfaction of liabilities to creditors, our assets will be distributed to the holders of ordinary shares in proportion to their respective holdings.  This liquidation right may be affected by the grant of preferential dividends or distribution rights to the holders of a class of shares with preferential rights that may be authorized in the future.
Voting, Shareholders’ Meetings and Resolutions
We have two types of general shareholder meetings:  the annual general meeting and the extraordinary general meeting.  An annual general meeting must be held once in every calendar year, but not more than 15 months after the last annual general meeting.  The Board of Directors may convene an extraordinary general meeting whenever it deems fit, and is obliged to do so upon the request of any of: (i) two directors or one fourth of the then serving directors; (ii) one or more shareholders who hold at least 5% of the issued share capital and at least 1% of the voting rights; or (iii) one or more shareholders who hold at least 5% of the voting rights.
In accordance with our Articles of Association, unless a longer period for notice is prescribed by the Israeli Companies Law, at least seven days and not more than forty-five days’ notice of any general meeting of shareholders must be given.  Under the Companies Law, shareholder meetings generally require prior notice of not less than 21 days or, with respect to certain matters, such as election of directors and affiliated party transactions, not less than 35 days.
Holders of ordinary shares have one vote for each ordinary share held on all matters submitted to a vote of shareholders. A shareholder may only vote the shares for which all calls have been paid, except in separate general meetings of a particular class.
The quorum required for an ordinary meeting of shareholders consists of at least two shareholders present in person or by proxy who hold or represent between them at least 35% of the outstanding voting shares unless otherwise required by applicable rules.  A meeting adjourned for lack of a quorum, if convened upon requisition under the provisions of the Companies Law, shall be dissolved, but in any other case is adjourned to the same day in the following week at the same time and place or any time and place as the chairman may designate with the consent of a majority of the voting power represented at the meeting and voting on the matter adjourned.  At such reconvened meeting, the required quorum consists of any two members present in person or by proxy.
Under the Companies Law, unless otherwise provided in the Articles of Association or applicable law, all resolutions of the shareholders require a simple majority of the shares present, in person or by proxy, and voting on the matter.  However, our articles of association require approval of at least 75% of the shares present and voting to increase our share capital or to change its structure, grant any special rights to the holders of a class of shares with preferential rights or change such rights previously granted or remove directors from office.
Subject to the Companies Law, a resolution in writing signed by the holders of all of our ordinary shares entitled to vote at a meeting of shareholders or to which all such shareholders have given their written consent is required to adopt the resolution in lieu of a meeting.
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General Duties of Shareholders
Under the Companies Law, each and every shareholder has a duty to act in good faith in exercising his rights and fulfilling his obligations towards the company and other shareholders and refrain from abusing his power in the company, such as in voting in the general meeting of shareholders on the following matters:
·
any amendment to the articles of association;
·
an increase of the company’s authorized share capital;
·
a merger; or
·
approval of certain related party transactions and actions, which require shareholder approval pursuant to the Companies Law.
In addition, each and every shareholder has the general duty to refrain from depriving rights of other shareholders.
Furthermore, any controlling shareholder, any shareholder who knows that it possesses the power to determine the outcome of a shareholder vote and any shareholder that, pursuant to the provisions of the articles of association, has the power to appoint or to prevent the appointment of an office holder in the company or any other power toward the company is under a duty to act in fairness towards the company.  These various shareholder duties may restrict the ability of a shareholder to act in what the shareholder perceives to be its own best interests.
Restrictions on Non-Israeli Residents
The ownership or voting of our ordinary shares by non-residents of Israel, except with respect to citizens of countries which are in a state of war with Israel, is not restricted in any way by our Memorandum of Association or Articles of Association or by the laws of the State of Israel.
Mergers and Acquisitions under Israeli Law
There are no specific provisions of our Memorandum or Articles of Association that would have an effect of delaying, deferring or preventing a change in control of us or that would operate only with respect to a merger, acquisition or corporate restructuring involving us (or any of our subsidiaries), except those relating to the staggered board as described in Item 6 above and certain provisions of the Companies Law described below, which may have such effect.
The Israeli Companies Law includes provisions that allow a merger transaction and requires that each company that is party to a merger approve the transaction by its board of directors and a vote of the majority of its shares, voting on the proposed merger at a shareholders meeting.  For purposes of the shareholder vote, unless a court rules otherwise, the merger will not be deemed approved if shares, representing a majority of the voting power present at the shareholders meeting and which are not held by the other party to the merger (or by any person who holds 25% or more of the voting power of the right to appoint 25% or more of the directors of the other party), vote against the merger.  Upon the request of a creditor of either party of the proposed merger, the court may delay or prevent the merger if it concludes that there exists a reasonable concern that as a result of the merger, the surviving company will be unable to satisfy the obligations of any of the parties to the merger.  In addition, a merger may not be completed unless at least (i) 50 days have passed from the time that a proposal of the merger has been filed with the Israeli Registrar of Companies by each merging company and (ii) 30 days have passed since the merger was approved by the shareholders of each merging company.
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In addition, provisions of the Companies Law that deal with “arrangements” between a company and its shareholders may be used to effect squeeze-out transactions in which the target company becomes a wholly-owned subsidiary of the acquirer. These provisions generally require that the merger be approved by a majority of the participating shareholders holding at least 75% of the shares voted on the matter.  In addition to shareholder approval, court approval of the transaction is required, which entails further delay.  The Companies Law also provides for a merger between Israeli companies, after completion of the above procedure for an “arrangement” transaction and court approval of the merger.
The Companies Law also provides that an acquisition of shares of a public company must be made by means of a “special” tender offer if as a result of the acquisition (1) the purchaser would become a 25% or greater shareholder of the company and there is no 25% or greater shareholder in the company, or (2) the purchaser would become a 45% or greater shareholder of the company and there is no 45% or greater shareholder in the company.  These requirements do not apply if, in general, the acquisition (1) was made in a private placement that received shareholder approval, (2) was from a 25% or greater shareholder of the company which resulted in the acquirer becoming a 25% or greater shareholder of the company, or (3) was from a 45% or greater shareholder of the company which resulted in the acquirer becoming a 45% or greater shareholder of the company. A “special” tender offer must be extended to all shareholders, but the offeror is not required to purchase more than 5% of the company’s outstanding shares, regardless of how many shares are tendered by shareholders.  In general, the tender offer may be consummated only if (i) at least 5% of the company’s outstanding shares will be acquired by the offeror and (ii) the number of shares tendered in the offer exceeds the number of shares whose holders objected to the offer.
If, as a result of an acquisition of shares, the acquirer will hold more than 90% of a company’s outstanding shares, the acquisition must be made by means of a tender offer for all of the outstanding shares. In general, if less than 5% of the outstanding shares are not tendered in the tender offer and more than half of the offerees who have no personal interest in the offer tendered their shares, all the shares that the acquirer offered to purchase will be transferred to it. Shareholders may request appraisal rights in connection with a full tender offer for a period of six months following the consummation of the tender offer, but the acquirer is entitled to stipulate that tendering shareholders will forfeit such appraisal rights.
In addition, our Board of Directors may decide to adopt a shareholder rights plan without further shareholder approval.
Finally, Israeli tax law treats stock-for-stock acquisitions between an Israeli company and a foreign company less favorably than does U.S. tax law.  For example, Israeli tax law subjects a shareholder who exchanges his ordinary shares for shares in another corporation to taxation on half the shareholder’s shares two years following the exchange and on the balance four years thereafter even if the shareholder has not yet sold the new shares.
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Modification of Class Rights
Our Articles of Association provide that the rights attached to any class (unless otherwise provided by the terms of such class), such as voting, rights to dividends and the like, may be varied by written consent of holders of seventy-five percent of the issued shares of that class, or by adoption by the holders of seventy-five percent (75%) of the shares of that class at a separate class meeting. Subject thereto, the conditions imposed by our Articles of Association governing changes in the rights of any class of shares, are no more stringent than is required by Israeli law.
Board of Directors
According to the Companies Law and our Articles of Association, the management of our business is vested in our Board of Directors.  Our Articles of Association provide that the Board of Directors shall consist of not less than five and not more than nine directors as shall be determined by our shareholders (in October 2006 our shareholders fixed the maximum size of our Board of Directors at nine members).  In accordance with our Articles of Association, our Board of Directors (other than our external directors) is divided into three classes with each class serving until the third annual meeting following their election, as more fully described in “Item 6– Directors, Senior Management and Employees – Board Practices – Staggered Board.” There is no requirement under our Articles of Association or under Israeli law for directors to retire on attaining a specific age. Our Articles of Association do not require directors to hold our ordinary shares to qualify for election.
The Board of Directors may exercise all such powers and may take all such actions that are not specifically granted to our shareholders.  As part of its powers, our Board of Directors may cause the Company to borrow or secure payment of any sum or sums of money for the purposes of the Company, at such times and upon such terms and conditions as it thinks fit, including the grants of security interests on all or any part of the property of the Company.  In addition, the Companies Law requires that transactions between a company and its office holders (which term includes directors) or that benefit its office holders, including arrangements as to the compensation of office holders, be approved as provided for in the Companies Law and the company’s Articles of Association, as more fully described in Item 6C under “Approval of Specified Related Party Transactions Under Israeli Law”.
A resolution proposed at any meeting of the Board of Directors shall be deemed adopted if approved by a majority of the directors present and voting on the matter.
Exculpation, Insurance and Indemnification
Exculpation of Office Holders
Under the Companies Law, an Israeli company may not exempt an office holder from liability for a breach of his or her duty of loyalty, but may exempt in advance an office holder from his or her liability to the company, in whole or in part, for a breach of his duty of care (except in connection with distributions), provided that the articles of association of the company allow it to do so.  Our Articles of Association allow us to exempt our office holders to the maximum extent permitted by law.
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Insurance of Office Holders
As permitted by the Companies Law, our Articles of Association provide that we may enter into a contract for the insurance of the liability of any of our office holders, with respect to an act performed in the capacity of an office holder for:
a breach of his or her duty of care to us or to another person;
a breach of his or her duty of loyalty to us, provided that the office holder acted in good faith and had reasonable cause to assume that his or her act would not prejudice our interests;
a financial liability imposed upon him or her in favor of another person;
expenses he or she incurs as a result of administrative proceedings that may be instituted against him or her under Israeli securities laws, if applicable, and payments made to injured persons under specific circumstances thereunder; and
any other matter in respect of which it is permitted or will be permitted under applicable law to insure the liability of an office holder in the Company.
Indemnification of Office Holders
As permitted by the Companies Law, our Articles of Association provide that we may indemnify any of our office holders against the following obligations and expenses imposed on the office holder with respect to an act performed in the capacity of an office holder:
a financial liability incurred by, or imposed on him or her in favor of another person by a court judgment, including a settlement or an arbitration award approved by the court. Such indemnification may be approved (i) after the liability has been incurred or (ii) in advance, provided that our undertaking to indemnify is limited to events that our Board of Directors believes are foreseeable in light of our actual operations at the time of providing the undertaking and to a sum or criterion that our Board of Directors determines to be reasonable under the circumstances;
reasonable litigation expenses, including attorney’s fees, expended by the office holder as a result of an investigation or proceeding instituted against him or her by a competent authority, provided that such investigation or proceeding either (A) concluded without the filing of an indictment against him or her or (B) concluded with the imposition of financial liability in lieu of criminal proceedings other than with respect to a criminal offense that does not require proof of criminal intent or in connection with a financial sanction;
reasonable litigation expenses, including attorneys’ fees, expended by the office holder or charged to him or her by a court in connection with proceedings we institute against him or her or instituted on our behalf or by another person, a criminal indictment from which he or she was acquitted, or a criminal indictment in which he or she was convicted for a criminal offense that does not require proof of criminal intent;
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expenses he or she incurs as a result of administrative proceedings that may be instituted against him or her under Israeli securities laws, if applicable, and payments made to injured persons under specific circumstances thereunder; and
any other matter in respect of which it is permitted or will be permitted under applicable law to indemnify an office holder in the Company.
Limitations on Insurance and Indemnification
The Companies Law provides that a company may not indemnify an office holder, or enter into an insurance contract which would provide coverage for any monetary liability incurred as a result of any of the following:
A breach by the office holder of his or her duty of loyalty unless, with respect to indemnification or insurance coverage, the office holder acted in good faith and had a reasonable basis to believe that the act would not prejudice the company;
A breach by the office holder of his or her duty of care if the breach was done intentionally or recklessly unless the breach was done negligently;
Any act or omission done with the intent to derive an illegal personal benefit; or
Any fine levied against the office holder.
In addition, under the Companies Law, indemnification of, and procurement of insurance coverage for, our office holders must be approved by our Audit Committee and our Board of Directors and, if the beneficiary is a director, by our shareholders.
We currently hold directors and officers liability insurance for the benefit of our office holders with an aggregate coverage limit of $25 million, including side A coverage. In addition, we provide our directors and officers indemnification pursuant to the terms of a Letter of Indemnification substantially in the form approved by our shareholders.
C. Material Contracts
See the summary of the terms of the Headquarters Lease in “Item 7B – Major Shareholders and Related Party Transactions – Related Party Transactions – Lease of Property.
D. Exchange Controls
There are currently no Israeli currency control restrictions on payments of dividends or other distributions with respect to our ordinary shares or the proceeds from the sale of the shares, except for the obligation of Israeli residents to file reports with the Bank of Israel regarding certain transactions.  However, legislation remains in effect pursuant to which currency controls can be imposed by administrative action at any time.
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E. Taxation
Holders of our ordinary shares should consult their own tax advisors as to the United States, Israeli or other tax consequences of the purchase, ownership and disposition of our ordinary shares, including, in particular, the effect of any foreign, state or local taxes.
Israeli Tax Considerations
The following is a summary of the material current tax structure applicable to companies incorporated in Israel and some Israeli Government programs benefiting us, with special reference to its effect on us.  The following also contains a discussion of the material Israeli tax consequences to purchasers of our ordinary shares and Israeli government programs benefiting us.  To the extent that the discussion is based on new tax legislation which has not been subject to judicial or administrative interpretation, we cannot assure you that the views expressed in the discussion will be accepted by the Israel tax authorities or courts. This summary does not discuss all the aspects of Israeli tax law that may be relevant to a particular investor in light of his or her personal investment circumstances or to some types of investors subject to special treatment under Israeli law. Examples of this kind of investor include traders in securities or persons that own, directly or indirectly, 10% or more of our outstanding voting capital, all of whom are subject to special tax regimes not covered in this discussion. Some parts of this discussion are based on new tax legislation which has not been subject to judicial or administrative interpretation.  The discussion is not intended, and should not be construed, as legal or professional tax advice and is not exhaustive of all possible tax considerations.
General Corporate Tax Structure
Generally, Israeli companies are subject to “Corporate Tax” on their taxable income. As of 2017, the corporate tax rate is 24% (in 2015 and 2016, the corporate tax rate was 26.5% and 25%, respectively). Under an amendment to the Israeli Tax Ordinance enacted in December 2016, the corporate tax rate decreased to 23% for 2018 and thereafter. However, the effective tax rate payable by a company that qualifies as an Industrial Company that derives income from an Approved Enterprise, a Beneficiary Enterprise or a Preferred Enterprise (as discussed below), like us, may be considerably less. Capital gains derived by an Israeli company are subject to the prevailing corporate tax rate.
Tax Benefits Under the Law for the Encouragement of Capital Investments, 1959
The 2005 Amendment to the Investments Law
An amendment to the Investments Law, which was published on April 1, 2005 (the “Amendment”), changed certain provisions of the Investments Law. As a result of the Amendment, a company is no longer obliged to obtain Approved Enterprise status in order to receive the tax benefits previously available under the Alternative Benefits provisions, and therefore generally there is no need to apply to the Investment Center for this purpose (Approved Enterprise status remains mandatory for companies seeking grants). Rather, the Company may claim the tax benefits offered by the Investments Law directly in its tax returns by notifying the ITA within 12 months of the end of that year, provided that its facilities meet the criteria for tax benefits set out by the Amendment. A company is also granted a right to approach the Israeli Tax Authority for a pre-ruling regarding their eligibility for benefits under the Amendment.
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The Amendment applies to new investment programs and investment programs with an election year commencing after 2004, but does not apply to investment programs approved prior to April 1, 2005. The Amendment provides that terms and benefits included in any certificate of approval that was granted before the Amendment became effective (April 1, 2005) will remain subject to the provisions of the Investment Law as in effect on the date of such approval.
Tax benefits are available under the Amendment to production facilities (or other eligible facilities), which are generally required to derive more than 25% of their business income from export to specific markets with a population of at least 12 million (following an amendment which became effective as of July 2013, the export criteria was increased to markets with population of at least 14 million; such export criteria will further increase in the future by 1.4% per annum) and meet additional criteria stipulate in the amendment (referred to as a “Privileged Enterprise”). In order to receive the tax benefits, the Amendment states that the company must make an investment in the Privileged Enterprise, which meets all of the conditions, including exceeding a certain percentage or a minimum amount specified in the Investments Law. Such investment may be made over a period of no more than three years ending at the end of the year in which the company requested to have the tax benefits apply to the Privileged Enterprise (the “Year of Election”). Where the company requests to have the tax benefits apply to an expansion of existing facilities, then only the expansion will be considered a Privileged Enterprise and the company’s effective tax rate will be the result of a weighted combination of the applicable rates. In this case, the minimum investment required in order to qualify as a Privileged Enterprise is required to exceed a certain percentage or a minimum amount of the company’s production assets before the expansion.
The extent of the tax benefits available under the Amendment to qualifying income of a Privileged Enterprise depend on, among other things, the geographic location in Israel of the Beneficiary Enterprise. The geographic location of the company at the year of election will also determine the period for which tax benefits are available. Such tax benefits include an exemption from corporate tax on undistributed income for a period of between two to ten years, depending on the geographic location of the Privileged Enterprise in Israel, and a reduced corporate tax rate of between 10% to 25% for the remainder of the benefits period, depending on the level of foreign investment in the company in each year if it is a qualified FIC. A company qualifying for tax benefits under the Amendment which pays a dividend out of income derived by its Privileged Enterprise during the tax exemption period will be subject to corporate tax in respect of the gross amount of the dividend at the otherwise applicable rate of 10%-25%. Dividends paid out of income attributed to a Privileged Enterprise are generally subject to withholding tax at source at the rate of 15% or such lower rate as may be provided in an applicable tax treaty.
The duration of tax benefits is subject to a limitation of the earlier of 7 to 10 years from the commencement year, or 12 years from the first day of the Year of Election.
The benefits available to a Privileged Enterprise are subject to the fulfillment of conditions stipulated in the Investment Law and its regulations. If a company does not meet these conditions, it may be required to refund the amount of tax benefits, as adjusted by the Israeli consumer price index, and interest, or other monetary penalties.
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We elected 2009 and 2012 as “Years of Election” according to the law prior to the 2011 Amendment mentioned below.
Tax-exempt income generated under the provisions of the Investments Law, as amended, will subject us to taxes upon distribution or liquidation and we may be required to record a deferred tax liability with respect to such tax-exempt income.
Preferred Enterprise – The 2011 Amendment
On December 29, 2010, the Israeli parliament approved an amendment to the Investments Law, effective as of January 1, 2011, which constitutes a reform of the incentives regime under such law.
The amendment generally abolishes the previous tax benefit routes that were afforded under the Investment Law, specifically the tax-exemption periods previously allowed, and introduces new tax benefits for industrial enterprises meeting the criteria of the law, which include the following:
A reduced corporate tax rate for industrial enterprises, provided that more than 25% of their annual income is derived from export, which will apply to the enterprise’s entire preferred income so that in the tax years 2011 and 2012 the reduced tax rate was 10% for preferred income derived from industrial facilities located in development area A and 15% for those located elsewhere in Israel, in the tax year 2013 the reduced tax rate was 7% for development area A and 12.5% for the rest of Israel, and for the tax years  of 2014, 2015 and 2016, the reduced tax rate is 9% for development area A and 16% for the rest of Israel, and as of the tax year 2017 and onwards, the reduced tax rate is 7.5% for development area A and 16% for the rest of Israel.
The reduced tax rates will no longer be contingent upon making a minimum qualifying investment in productive assets.
A definition of “preferred income” was introduced into the Investments Law to include certain types of income that are generated by the Israeli production activity of a preferred enterprise.
A reduced dividend withholding tax rate of 15% will apply to dividends paid from preferred income to both Israeli and non-Israeli investors, which tax rate was increased to 20% for dividends paid from preferred income which was accumulated from 2014 and onwards, and with an exemption from such withholding tax applying to dividends paid to an Israeli company.
A “Preferred Company” (as defined in the Investments Law) may generally elect to apply the provisions of the amendment to preferred income produced or generated by it commencing on January 1, 2011. The amendment provides various transition provisions which allow, under certain circumstances, to apply the new regime to investment programs previously approved or elected under the Investments Law in its previous form.
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Under the transition provisions of the new legislation, we decided to irrevocably implement the new law, effective January 1, 2014.
A substantial portion of our taxable operating income is derived from our Preferred Enterprise programs and we expect that a substantial portion of any taxable operating income that we may realize in the future will be also derived from such programs.
In December 2016, the Economic Efficiency Law (Legislative Amendments for Applying the Economic Policy for the 2017 and 2018 Budget Years), 2016 which includes Amendment 73 to the Law ("Amendment 73") was published. According to Amendment 73, a preferred enterprise located in development area A will be subject to a tax rate of 7.5% instead of 9% effective from January 1, 2017 and thereafter (the tax rate applicable to preferred enterprises located in other areas remains at 16%).

Benefits under the new regime of “Preferred Technology Enterprise” will include:
·
A reduced flat corporate tax rate of 12% (or 7.5% for entities located in Development Area A) on qualifying income deriving from eligible Intellectual Property (“Preferred Technology Income”), subject to satisfaction of a number of conditions, including compliance with a minimal amount or ratio of annual R&D expenditure and R&D employees, as well as having at least 25% of annual income derived from export.
·
A 12% capital gains tax rate on the sale of a preferred intangible asset to a foreign affiliated enterprise, provided that the asset was initially purchased from a foreign resident at an amount of NIS 200 million or more.
·
A withholding tax rate of 20% for dividends paid from Preferred Technology Income (with an exemption on dividends paid to an Israeli company). Such rate may be reduced to 4% on dividends paid to a foreign resident company, subject to certain conditions regarding percentage of foreign ownership of the distributing entity.
·
Special technological preferred enterprise - an enterprise for which total consolidated revenues of its parent company and all subsidiaries exceed NIS 10 billion. Such enterprise will be subject to tax at a rate of 6% on profits deriving from intellectual property, regardless of the enterprise's geographical location.
Accordingly, the above changes in the tax rates relating to technological enterprises were not considered in the computation of deferred taxes as of December 31, 2016 .
From time to time, the Israeli Government has discussed reducing the benefits available to companies under the Investment Law. The termination or substantial reduction of any of the benefits available under the Investment Law could materially increase our tax liabilities.
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Tax Benefits under the 2017 Amendment
The 2017 Amendment was enacted as part of the Economic Efficiency Law that was published on December 29, 2016, and is effective as of January 1, 2017. The 2017 Amendment provides new tax benefits for two types of “Technology Enterprises”, as described below, and is in addition to the other existing tax beneficial programs under the Investment Law.

The 2017 Amendment provides that a technology company satisfying certain conditions will qualify as a “Preferred Technology Enterprise” and will thereby enjoy a reduced corporate tax rate of 12% on income that qualifies as “Preferred Technology Income”, as defined in the Investment Law. The tax rate is further reduced to 7.5% for a Preferred Technology Enterprise located in development Zone A. In addition, a Preferred Technology Enterprise will enjoy a reduced corporate tax rate of 12% on capital gain derived from the sale of certain “Benefitted Intangible Assets” (as defined in the Investment Law) to a related foreign company if the Benefitted Intangible Assets were acquired from a foreign company on or after January 1, 2017 for at least NIS 200 million, and the sale receives prior approval from the National Authority for Technological Innovation, or NATI.

The 2017 Amendment further provides that a technology company satisfying certain conditions will qualify as a “Special Preferred Technology Enterprise” and will thereby enjoy a reduced corporate tax rate of 6% on “Preferred Technology Income” regardless of the company’s geographic location within Israel. In addition, a Special Preferred Technology Enterprise will enjoy a reduced corporate tax rate of 6% on capital gain derived from the sale of certain “Benefitted Intangible Assets” to a related foreign company if the Benefitted Intangible Assets were either developed by an Israeli company or acquired from a foreign company on or after January 1, 2017, and the sale received prior approval from NATI. A Special Preferred Technology Enterprise that acquires Benefitted Intangible Assets from a foreign company for more than NIS 500 million will be eligible for these benefits for at least ten years, subject to certain approvals as specified in the Investment Law. Dividends distributed by a Preferred Technology Enterprise or a Special Preferred Technology Enterprise, paid out of Preferred Technology Income, are generally subject to withholding tax at source at the rate of 20% or such lower rate as may be provided in an applicable tax treaty (subject to the receipt in advance of a valid certificate from the Israel Tax Authority allowing for a reduced tax rate). However, if such dividends are paid to an Israeli company, no tax is required to be withheld. If such divided are distributed to a foreign company and other conditions are met, the withholding tax rate will be 4%.

We have examined the impact of the 2017 Amendment and the degree to which we will qualify as a Preferred Technology Enterprise and have elected to adopt it as of 2017 onwards.
Tax Benefits Under the Law for the Encouragement of Industry (Taxes), 1969
Under the Law for the Encouragement of Industry (Taxes), 1969 (the “Industry Encouragement Law”), Industrial Companies are entitled to the following preferred corporate tax benefits, among others:
Deduction of purchases of know-how and patents over an eight-year period for tax purposes;
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Right to elect, under specified conditions, to file a consolidated tax return with additional related Israeli Industrial Companies;
Accelerated depreciation rates on equipment and buildings; and
Deductions over a three-year period of expenses involved with the issuance and listing of shares on a recognized stock market.
Eligibility for benefits under the Industry Encouragement Law is not subject to receipt of prior approval from any governmental authority.  Under the Industry Encouragement Law, an “Industrial Company” is defined as a company resident in Israel, at least 90% of the income of which, in any tax year, exclusive of income from government loans, capital gains, interest and dividends, is derived from an “Industrial Enterprise” owned by it.  An “Industrial Enterprise” is defined as an enterprise, located in Israel, owned by an Industrial Company, whose major activity in a given tax year is industrial production activity.
We believe that we currently qualify as an Industrial Company within the definition of the Industry Encouragement Law.  No assurance can be given that we will continue to qualify as an Industrial Company or that the benefits described above will be available in the future.
Capital Gains Tax on Sales of Our Ordinary Shares
Israeli law generally imposes a capital gains tax on the sale of any capital assets by residents of Israel, as defined for Israeli tax purposes, and on the sale of assets located in Israel, including shares in Israeli companies, by non-residents of Israel, unless a specific exemption is available or unless a tax treaty between Israel and the shareholder’s country of residence provides otherwise.  The law distinguishes between real gain and inflationary surplus.  The inflationary surplus is a portion of the total capital gain which is equivalent to the increase of the relevant asset’s purchase price which is attributable to the increase in the Israeli consumer price index or, in certain circumstances, a foreign currency exchange rate, between the date of purchase and the date of sale. The real gain is the excess of the total capital gain over the inflationary surplus.
Generally, as of January 1, 2012, the tax rate applicable to capital gains derived from the sale of shares, whether listed on a stock market or not, is 25% for Israeli individuals, unless such shareholder claims a deduction for financing expenses in connection with such shares, in which case the gain will generally be taxed at a rate of 30%. Additionally, if such shareholder is considered a “significant shareholder” at any time during the 12-month period preceding such sale, i.e., such shareholder holds directly or indirectly, including with others, at least 10% of any means of control in the company, the tax rate shall be 30%. However, the foregoing tax rates do not apply to: (i) dealers in securities; and (ii) shareholders who acquired their shares prior to an initial public offering (that may be subject to a different tax arrangement). Israeli companies are subject to the Corporate Tax rate on capital gains derived from the sale of listed shares.
As of January 1, 2013, shareholders that are individuals who have taxable income that exceeds NIS 800,000 in a tax year (linked to the Israeli CPI each year, which equated to NIS 807,143 in the 2017 tax year), will be subject to an additional tax, referred to as High Income Tax, at the rate of 2% on their taxable income for such tax year which is in excess of such threshold. For this purpose taxable income will include taxable capital gains from the sale of our shares and taxable income from dividend distributions. For this purpose, taxable income includes taxable capital gains from the sale of our shares and taxable income from dividend distributions. Under an amendment to the Israeli Tax Ordinance enacted in December 2016, the rate of High Income Tax for 2017 and thereafter will increase to 3% and will be applicable to annual income exceeding NIS 640,000 (linked to the Israeli CPI each year, which equated to NIS 614,880 in 2018).
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The tax basis of our ordinary shares acquired prior to January 1, 2003 will generally be determined in accordance with the average closing share price in the three trading days preceding January 1, 2003. However, a request may be made to the tax authorities to consider the actual adjusted cost of the shares as the tax basis if it is higher than such average price.
Non-Israeli residents are exempt from Israeli capital gains tax on any gains derived from the sale of shares of Israeli companies publicly traded on a recognized stock exchange or regulated market outside of Israel, provided however that such capital gains are not derived from a permanent establishment in Israel and such shareholders did not acquire their shares prior to an initial public offering. However, non-Israeli corporations will not be entitled to such exemption if Israeli residents (i) have a controlling interest of more than 25% in such non-Israeli corporation, or (ii) are the beneficiaries or are entitled to 25% or more of the revenues or profits of such non-Israeli corporation, whether directly or indirectly.
In some instances where our shareholders may be liable to Israeli tax on the sale of their ordinary shares, the payment of the consideration may be subject to the withholding of Israeli tax at the source.
Pursuant to the Convention Between the government of the United States of America and the government of Israel with Respect to Taxes on Income, as amended (the “U.S.-Israel Tax Treaty”), the sale, exchange or disposition of ordinary shares by a person who (i) holds the ordinary shares as a capital asset, (ii) qualifies as a resident of the United States within the meaning of the U.S.-Israel Tax Treaty and (iii) is entitled to claim the benefits afforded to such person by the U.S.-Israel Tax Treaty, generally, will not be subject to the Israeli capital gains tax. Such exemption will not apply if (i) such Treaty U.S. Resident holds, directly or indirectly, shares representing 10% or more of our voting power during any part of the 12-month period preceding such sale, exchange or disposition, subject to certain conditions, or (ii) the capital gains from such sale, exchange or disposition can be allocated to a permanent establishment in Israel.  In such case, the sale, exchange or disposition of ordinary shares would be subject to Israeli tax, to the extent applicable; however, under the U.S.-Israel Tax Treaty, such Treaty U.S. Resident would be permitted to claim a credit for such taxes against the U.S. federal income tax imposed with respect to such sale, exchange or disposition, subject to the limitations in U.S. laws applicable to foreign tax credits. The U.S.-Israel Tax Treaty does not relate to U.S. state or local taxes.
Taxation of Dividends paid to Non-Resident Holders of Shares
Non-residents of Israel are subject to income tax on income accrued or derived from sources in Israel.  Such sources of income include passive income such as dividends. On distributions of dividends other than bonus shares, or stock dividends, income tax is applicable at the rate of 25%, or 30% for a shareholder that is considered a “significant shareholder” at any time during the 12-month period preceding such distribution, unless a different rate is provided in a treaty between Israel and the shareholder’s country of residence. A “substantial shareholder” is generally a person who alone or together with such person’s relative or another person who collaborates with such person on a permanent basis, holds, directly or indirectly, at least 10% of any of the “means of control” of the corporation. “Means of control” generally include the right to vote, receive profits, nominate a director or an executive officer, receive assets upon liquidation, or order someone who holds any of the aforesaid rights how to act, regardless of the source of such right.
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However, a distribution of dividends to non-Israeli residents is subject to withholding tax at source at a rate of 15% if the dividend is distributed from income attributed to an Approved Enterprise, a Preferred Enterprise or a Privileged Enterprise, unless a reduced tax rate is provided under an applicable tax treaty. Pursuant to the Tax Amendment, effective January 1, 2014, if the dividend is being paid out of certain income attributable to a Preferred Enterprise, the dividend will be subject to tax at the rate of 20% (and not 15%). A different rate may be provided in a treaty between Israel and the shareholder’s country of residence, as mentioned below.
Under the U.S.-Israel Tax Treaty, the maximum tax on dividends paid to a holder of ordinary shares who is a Treaty U.S. Resident is 25%. However, if the income out of which the dividend is paid is not generated by an Approved Enterprise, Privileged Enterprise or Preferred Enterprise, and not more than 25% of our gross income consists of interest or dividends, dividends paid to a U.S. corporation holding at least 10% of our issued voting power during the part of the tax year which precedes the date of payment of the dividend and during the whole of its prior tax year, are generally taxed at a rate of 12.5%. Dividends generated by an Approved Enterprise, Privileged Enterprise or Preferred Enterprise, are taxed at the rate of 15% under the U.S.-Israel Tax Treaty.
United States Federal Income Tax Considerations
Subject to the limitations described herein, the following discussion summarizes certain United States federal income tax consequences to a U.S. Holder of our ordinary shares.  A “U.S. Holder” means a holder of our ordinary shares who is:
An individual citizen or resident of the United States for U.S. federal income tax purposes;
A corporation (or other entity taxable as a corporation for U.S. federal income tax purposes) created or organized in the United States or under the laws of the United States or any political subdivision thereof or the District of Columbia;
An estate, the income of which is subject to U.S. federal income tax regardless of its source; or
A trust (i) if, in general a court within the United States is able to exercise primary supervision over its administration and one or more U.S. persons have the authority to control all of its substantial decisions, or (ii) that has in effect a valid election under applicable U.S. Treasury Regulations to be treated as a U.S. person.
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This discussion considers only U.S. Holders that will own their ordinary shares as capital assets (generally, for investment) and does not purport to be a comprehensive description of all of the tax considerations that may be relevant to each person’s decision to purchase our ordinary shares. Certain aspects of U.S. federal income taxation relevant to a holder of our ordinary shares that is not a U.S. Holder and not a partnership or other pass-through entity (a “Non-U.S. Holder”) are also discussed below.
This discussion is based on current provisions of the Code, current and proposed Treasury Regulations promulgated thereunder, and administrative and judicial decisions as of the date hereof, all of which are subject to change, possibly on a retroactive basis.  This discussion does not address all aspects of U.S. federal income taxation that may be relevant to any particular U.S. Holder in light of such holder’s individual circumstances.  In particular, this discussion does not address the potential application of the alternative minimum tax or U.S. federal income tax consequences to U.S. Holders that are subject to special treatment, including U.S. Holders that:
Are broker-dealers or insurance companies;
Dealers or traders in securities, commodities or currencies;
Have elected mark-to-market accounting method;
Are tax-exempt organizations or retirement plans;
Are grantor trusts;
Partnerships or other pass-through entities;
Partners or other equity owners in partnerships or other pass-through entities;
U.S. Holders selling our ordinary shares short,
U.S. Holders deemed to have sold our ordinary shares in a “constructive sale,”
Are S corporations;
Are financial institutions or “financial services entities” ;
Hold their ordinary shares as part of a straddle, “hedge”, “integrated” or “conversion transaction” with other investments;
Are certain former citizens or long-term residents of the United States;
Acquired their ordinary shares upon the exercise of employee stock options or otherwise as compensation;
Are real estate investment trusts or regulated investment companies;
Pension funds;
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Own directly, indirectly or by attribution at least 10% of our shares by vote or value; or
Have a functional currency that is not the U.S. dollar.
If an entity treated as a partnership for U.S. federal income tax purposes holds our ordinary shares, the tax treatment of the entity and an equity owner in such entity will generally depend on the status of the equity owner and the activities of the entity.  Such an equity owner or entity should consult its own tax advisor as to its tax consequences.
In addition, this discussion does not address any aspect of state, local or non-United States tax laws or the possible application of United States federal gift or estate taxes.
Each holder of our ordinary shares is advised to consult such holder’s own tax advisor with respect to the specific tax consequences to such holder of purchasing, holding or disposing of our ordinary shares, including the applicability and effect of federal, state, local and foreign laws and possible changes in the tax laws in such holder’s particular circumstances.
Taxation of Ordinary Shares
Taxation of Dividends Paid On Ordinary Shares. Subject to the discussion below under “Passive Foreign Investment Company Status”, a U.S. Holder will be required to include in gross income as dividend income the amount of any distribution paid on our ordinary shares, including any non-U.S. taxes withheld from the amount paid, to the extent the distribution is paid out of our current or accumulated earnings and profits as determined for U.S. federal income tax purposes. Distributions in excess of such earnings and profits will be applied against and will reduce the U.S. Holder’s basis in our ordinary shares and, to the extent in excess of such basis, will be treated as gain from the deemed sale or exchange of our ordinary shares.  The dividend portion of such distributions generally will not qualify for the dividends received deduction available to corporations and thus will be subject to tax at the rate applicable to their taxable income.
Dividends that are received by non-corporate U.S. Holders will generally be taxed at the rate applicable to long-term capital gains (currently a maximum rate of 20%), provided that such dividends meet the requirements of “qualified dividend income.” Such income may also be subject to a 3.8% Net Investment Income Tax (NIIT) on individuals, estates or trusts. Dividends that fail to meet such requirements, and dividends received by corporate U.S. Holders, are taxed at ordinary income rates.  No dividend received by a U.S. Holder will be a qualified dividend (1) if the U.S. Holder held the ordinary share with respect to which the dividend was paid for less than 61 days during the 121-day period beginning on the date that is 60 days before the ex-dividend date with respect to such dividend, excluding for this purpose, under the rules of Code Section 246(c), any period during which the U.S. Holder has an option to sell, is under a contractual obligation to sell, has made and not closed a short sale of, is the grantor of a deep-in-the-money or otherwise nonqualified option to buy, or has otherwise diminished its risk of loss by holding other positions with respect to, such ordinary share (or substantially identical securities); or (2) to the extent that the U.S. Holder is under an obligation (pursuant to a short sale or otherwise) to make related payments with respect to positions in property substantially similar or related to the ordinary share with respect to which the dividend is paid.  If we were to be a PFIC (as such term is defined in the Code) for any year, dividends paid on our ordinary shares in such year or in the following year would not be qualified dividends. In addition, a non-corporate U.S. Holder will be able to take a qualified dividend into account in determining its deductible investment interest (which is generally limited to its net investment income) only if it elects to do so; in such case the dividend will be taxed at ordinary income rates.
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Distributions of current or accumulated earnings and profits paid in foreign currency to a U.S. Holder (including any non-U.S. taxes withheld therefrom) will generally be includible in the income of a U.S. Holder in a U.S. dollar amount calculated by reference to the exchange rate on the day the distribution is received regardless of whether the foreign currency is converted into U.S. dollars.  A U.S. Holder that receives a foreign currency distribution and converts the foreign currency into U.S. dollars after the date of receipt may have foreign exchange gain or loss based on any appreciation or depreciation in the value of the foreign currency against the U.S. dollar, which will generally be U.S. source ordinary income or loss.
U.S. Holders may have the option of claiming the amount of any non-U.S. income taxes withheld on a dividend distribution either as a deduction from gross income provided a deduction is claimed for all of the foreign income taxes the U.S. Holder pays or accrues in the particular year or as a dollar-for-dollar credit against their U.S. federal income tax liability. Individuals who do not claim itemized deductions, but instead utilize the standard deduction, may not claim a deduction for the amount of the non-U.S. income taxes withheld, but such amount may be claimed as a credit against the individual’s U.S. federal income tax liability.  A deduction does not reduce U.S. tax on a dollar-for-dollar basis like a tax credit. The deduction, however, is not subject to the limitations applicable to foreign tax credits, but may be subject to other limitations and each US Holder is urged to consult its own tax advisor. The amount of non-U.S. income taxes which may be claimed as a credit in any year is subject to complex limitations and restrictions, which must be determined on an individual basis by each U.S. Holder. These limitations include, among others, rules which limit foreign tax credits allowable with respect to specific classes of income to the U.S. federal income taxes otherwise payable with respect to each such class of income. The total amount of allowable foreign tax credits in any year generally cannot exceed the pre-credit U.S. tax liability for the year attributed to non-U.S. source taxable income.  A U.S. Holder will be denied a foreign tax credit with respect to non-U.S. income tax withheld from a dividend received on the ordinary shares if such U.S. Holder has not held the ordinary shares for at least 16 days of the 31-day period beginning on the date which is 15 days before the ex-dividend date with respect to such dividend, or to the extent such U.S. Holder is under an obligation to make related payments with respect to positions in substantially similar or related property. Any days during which a U.S. Holder has substantially diminished its risk of loss on the ordinary shares are not counted toward meeting the required 16-day holding period.  Distributions of current or accumulated earnings and profits generally will be foreign source passive income for U.S. foreign tax credit purposes.
Taxation of the Disposition of Ordinary Shares. Subject to the discussion below under “Passive Foreign Investment Company Status,” upon the sale, exchange or other disposition of our ordinary shares (other than with respect to certain non-recognition transactions), a U.S. Holder will recognize capital gain or loss in an amount equal to the difference between such U.S. Holder’s basis in such ordinary shares, which is usually the cost of such shares, and the amount realized on the disposition. A U.S. Holder that uses the cash method of accounting calculates the U.S. dollar value of the proceeds received on the sale as of the date that the sale settles, while a U.S. Holder that uses the accrual method of accounting is required to calculate the value of the proceeds of the sale as of the “trade date,” unless such U.S. Holder has elected to use the settlement date to determine its proceeds of sale. Capital gain from the sale, exchange or other disposition of our ordinary shares held more than one year is long-term capital gain, and may be eligible for a reduced rate of taxation for individuals, estates or trusts (currently taxable at a maximum of 20%).  U.S. Holders should consult their own tax advisors regarding the availability of the reduced rate of U.S. federal income tax on dividends in light of their own particular circumstances. Gains or losses recognized by a U.S. Holder on a sale, exchange or other disposition of our ordinary shares generally will be treated as U.S. source income for U.S. foreign tax credit purposes. The deductibility of a capital loss recognized on the sale, exchange or other disposition of our ordinary shares may be subject to limitations. A U.S. Holder that receives foreign currency upon disposition of our ordinary shares and subsequently converts the foreign currency into U.S. dollars or disposes of such foreign currency, may have foreign exchange gain or loss based on any appreciation or depreciation in the value of the foreign currency against the U.S. dollar, which will generally be U.S. source ordinary income or loss.
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Net Investment Income .  Certain non-corporate U.S. holders may be subject to an additional 3.8% surtax on all or a portion of their “net investment income,” which may include dividends on, or capital gains recognized from the disposition of, our ordinary shares subject to certain limitations and exceptions.  U.S. holders are urged to consult their own tax advisors regarding the implications of the additional net investment income on their investment in our ordinary shares.
Passive Foreign Investment Company Status .  We will be a PFIC if (taking into account certain “look-through” rules with respect to the income and assets of our corporate subsidiaries) either (i) 75 percent or more of our gross income in a taxable year is passive income or (ii) the average percentage of our total assets (by value, determined on a quarterly basis) which produce, or are held for the production of, passive assets during the taxable year is at least 50 percent. Passive income for this purpose generally includes dividends, interest, royalties, rents, gains from commodities and securities transactions. If we were a PFIC, each U.S. Holder would (unless it made one of the elections discussed below on a timely basis) be taxed on gain recognized from the disposition of our ordinary shares (including gain deemed recognized if the ordinary shares are used as security for a loan) and upon receipt of certain excess distributions with respect to our ordinary shares as if such income had been recognized ratably over the U.S. Holder’s holding period for the ordinary shares.  The U.S. Holder’s income for the current taxable year would include (as ordinary income) amounts allocated to the current year and to any period prior to the first day of the first taxable year for which we were a PFIC.  Tax would also be computed at the highest ordinary income tax rate in effect for each other period to which income is allocated, and an interest charge on the tax as so computed would also apply.  The tax liability with respect to the amount allocated to the taxable year prior to the taxable year of the distribution or disposition cannot be offset by any net operating losses. Additionally, if we were a PFIC, U.S. Holders who acquire our ordinary shares from decedents (other than certain nonresident aliens) would be denied the normally-available step-up in basis for such shares to fair market value on the date of death and, instead, would generally have a tax basis in such shares equal to the lower of the decedent’s basis or the fair market value of such shares on the date of the decedent’s death . Further, if we are a PFIC, each U.S. Holder generally will be required to file an annual report with the IRS. If we are classified as a PFIC in any year with respect to which a U.S. Holder owns our ordinary shares, we will continue to be treated as a PFIC with respect to such U.S. Holder in all succeeding years during which the U.S. Holder owns our ordinary shares, regardless of whether we continue to meet the tests described above unless such U.S. Holder elects to apply the QEF or the mark-to-market election (described below) and certain conditions are met.
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As an alternative to the tax treatment described above, a U.S. Holder could elect to treat us as a “qualified electing fund” (“QEF”), in which case the U.S. Holder would be required to include in income, for each taxable year that we are a PFIC, its pro rata share of our ordinary earnings as ordinary income and its pro rata share of our net capital gain as capital gain, subject to a separate election to defer payment of taxes, which deferral is subject to an interest charge.  Any income inclusion will be required whether or not such U.S. Holder owns our ordinary shares for an entire taxable year or at the end of our taxable year.  The amount so includable will be determined without regard to our prior year losses or the amount of cash distributions, if any, received from us.  Special rules apply if a U.S. Holder makes a QEF election after the first year in its holding period in which we are a PFIC.  We will supply U.S. Holders with the information needed to report income and gain under a QEF election if we are a PFIC.  A U.S. Holder’s basis in its ordinary shares will increase by any amount included in income and decrease by any amounts not included in income when distributed because such amounts were previously taxed under the QEF rules.  So long as a U.S. Holder’s QEF election is in effect beginning with the first taxable year in which we were a PFIC during the U.S. Holder’s holding period for its ordinary shares, any gain or loss realized by such holder on the disposition of its ordinary shares held as a capital asset ordinarily would be a capital gain or loss.  Such capital gain or loss ordinarily would be long-term if such U.S. Holder had held such ordinary shares for more than one year at the time of the disposition and would be eligible for a reduced rate of taxation for certain non-corporate U.S. holders. The QEF election is made on a shareholder-by-shareholder basis, applies to all ordinary shares held or subsequently acquired by an electing U.S. Holder and can be revoked only with the consent of the IRS.
As an alternative to making a QEF election, a U.S. Holder of PFIC stock which is “marketable stock” (e.g., “regularly traded” on the Nasdaq Global Select Market) may in certain circumstances avoid certain of the tax consequences generally applicable to holders of stock in a PFIC by electing to mark the stock to market as of the beginning of such U.S. Holder’s holding period for the ordinary shares.  As a result of such election, in any taxable year that we are a PFIC, a U.S. Holder would generally be required to report gain or loss to the extent of the difference between the fair market value of the ordinary shares at the end of the taxable year and such U.S. Holder’s tax basis in its ordinary shares at that time.  Any gain under this computation, and any gain on an actual disposition of the ordinary shares in a taxable year in which we are a PFIC, would be treated as ordinary income.  Any loss under this computation, and any loss on an actual disposition of the ordinary shares in a taxable year in which we are a PFIC, generally would be treated as ordinary loss to the extent of the cumulative net-mark-to-market gain previously included.  Any remaining loss from marking ordinary shares to market will not be allowed, and any remaining loss from an actual disposition of ordinary shares generally would be capital loss.  A U.S. Holder’s tax basis in its ordinary shares is adjusted annually for any gain or loss recognized under the mark-to-market election.  There can be no assurances that there will be sufficient trading volume with respect to our ordinary shares for the ordinary shares to be considered “regularly traded” or that our ordinary shares will continue to trade on the Nasdaq Global Select Market.  Accordingly, there are no assurances that the ordinary shares will be marketable stock for these purposes.  As with a QEF election, a mark-to-market election is made on a shareholder-by-shareholder basis, applies to all ordinary shares held or subsequently acquired by an electing U.S. Holder and can only be revoked with consent of the IRS (except to the extent the ordinary shares no longer constitute “marketable stock”).
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As indicated above, we will be a PFIC for any taxable year if the average percentage (by fair market value determined on a quarterly basis) of our assets held for the production of, or that produce, passive income is at least 50 percent.  The Code does not specify how a corporation must determine the fair market value of its assets for this purpose and the issue has not been definitively determined by the IRS or the courts.  The market capitalization approach has generally been used to determine the fair market value of the assets of a publicly traded corporation.  The IRS and the courts, however, have accepted other valuation methods besides the market capitalization approach in certain other valuation contexts. For our 2017 taxable year, we believe that we should not be classified as a PFIC. However, there can be no assurance that the IRS will not challenge this treatment and it is possible that the IRS could attempt to treat us as a PFIC for 2017 and possibly prior taxable years. The tests for determining PFIC status are applied annually and it is difficult to make accurate predictions of our future income, assets and market capitalization, including the future price of our ordinary shares, which are all relevant to this determination of whether we are classified as a PFIC.  Accordingly, there can be no assurance that we will not become a PFIC in future taxable years.
U.S. Holders are urged to consult their tax advisors about the PFIC rules, including eligibility for and the manner and advisability of making, the QEF election or the mark-to market election.
Tax Consequences for Non-U.S. Holders of Ordinary Shares
Except as described in “Information Reporting and Backup Withholding” below, a Non-U.S. Holder of ordinary shares will not be subject to U.S. federal income or withholding tax on the payment of dividends on, and the proceeds from the disposition of, ordinary shares, unless, in the case of U.S. federal income taxes:
such item is effectively connected with the conduct by the Non-U.S. Holder of a trade or business in the United States and, in the case of a resident of a country which has a treaty with the United States, such item is attributable to a permanent establishment or, in the case of an individual, a fixed place of business, in the United States; or
the Non-U.S. Holder is an individual who holds the ordinary shares as a capital asset and is present in the United States for 183 days or more in the taxable year of the disposition and certain other requirements are met.
Information Reporting and Backup Withholding
U.S. Holders (other than certain exempt recipients, such as corporations) generally are subject to information reporting requirements with respect to dividends paid in the United States on ordinary shares and proceeds received from the sale, exchange, redemption or other disposition of ordinary shares.  Under the Code, a U.S. Holder may be subject, under certain circumstances, to backup withholding with respect to dividends paid on our ordinary shares and proceeds received from the sale, exchange, redemption or other disposition of ordinary shares unless such holder provides proof of an applicable exemption or correct taxpayer identification number and otherwise complies with applicable requirements of the backup withholding rules.
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Any US Holders required to establish their exempt status generally must provide a properly executed IRS Form W-9 (Request for Taxpayer Identification Number and Certification).
A U.S. Holder of ordinary shares who provides an incorrect taxpayer identification number may be subject to penalties imposed by the IRS.  Amounts withheld under the backup withholding rules are not an additional tax and may be refunded or credited against the U.S. Holders U.S. federal income tax liability, provided the required information is timely furnished to the IRS.
Non-U.S. Holders generally are not subject to information reporting or backup withholding with respect to dividends paid on, or the proceeds from the disposition of, ordinary shares, provided that such Non-U.S. Holder provides a taxpayer identification number, certifies to its foreign status, or otherwise establishes an exemption.
Certain U.S. holders (and to the extent provided in IRS guidance, certain non-U.S. holders) who hold interests in “specified foreign financial assets” (as defined in Section 6038D of the Code) are generally required to file an IRS Form 8938 as part of their U.S. federal income tax returns to report their ownership of such specified foreign financial assets, which may include our ordinary shares, if the total value of those assets exceed certain thresholds. Substantial penalties may apply to any failure to timely file IRS Form 8938. In addition, in the event a holder that is required to file IRS Form 8938 does not file such form, the statute of limitations on the assessment and collection of U.S. federal income taxes of such holder for the related tax year may not close until three years after the date that the required information is filed.  Holders should consult their own tax advisors regarding their tax reporting obligations.

F. Dividends and Paying Agents
Not applicable.
G. Statement by Experts
Not applicable.
H. Documents on Display
We are subject to the informational requirements of the Exchange Act, applicable to foreign private issuers and fulfill the obligations with respect to such requirements by filing reports and other information with the SEC. You may read and copy any document we file with the SEC without charge at the SEC’s public reference room at 100 F Street, N.E., Washington, D.C. 20549.  Copies of such material may be obtained by mail from the Public Reference Branch of the SEC at such address, at prescribed rates.  Please call the SEC at 1-800-SEC-0330 for further information on the public reference room. Such materials are also available free of charge at the website of the SEC at www.sec.gov and on our website www.radware.com.  The content of our website is not incorporated by reference into this annual report.
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As a foreign private issuer, we are exempt from the rules under the Exchange Act prescribing the furnishing and content of proxy statements, and our officers, directors and principal shareholders are exempt from the reporting and “short-swing” profit recovery provisions contained in Section 16 of the Exchange Act.  In addition, we are not required under the Exchange Act to file periodic reports and financial statements with the SEC as frequently or as promptly as U.S. companies whose securities are registered under the Exchange Act.
Notwithstanding the foregoing, we furnish reports with the SEC on Form 6-K containing unaudited financial information for the first three quarters of each fiscal year and we solicit proxies and furnish proxy statements for all meetings of shareholders, a copy of which proxy statement is furnished promptly thereafter with the SEC under the cover of a Current Report on Form 6-K. We also post our Annual Report on Form 20-F on our web site (www.radware.com) as soon as practicable following the filing of the Annual Report on Form 20-F with the SEC.
The documents concerning our Company which are referred to in this annual report may also be inspected at our offices located at 22 Raoul Wallenberg Street, Tel Aviv 6971917, Israel.
I. Subsidiary Information
Not applicable.
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ITEM 11.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk, including fluctuations in interest rates and foreign currency exchange rates. Our primary market risk exposure occurs because we generate a portion of our revenues in foreign currencies, mainly in Chinese Yuan, but also in Australian Dollar and Euro and incur a portion of our expenses in foreign currencies, mainly in NIS, but also in Euro and other foreign currencies . We generally do not engage in hedging or other transactions intended to manage risks relating to foreign currency exchange rate or interest rate fluctuations.
In addition, as of December 31, 2017, we had cash and cash equivalents, including short-term and long-term bank deposits and short-term and long-term marketable securities, of $344.3 million. As of that date, approximately 95% of our cash, cash equivalents and marketable securities are held by Radware Ltd. in Israeli or U.S. financial institutions.
The majority of our cash and cash equivalents, and short-term and long-term bank deposits are invested in banks in Israel and, to a smaller extent, in banks in the United States. The Israeli bank deposits are not insured, while the deposits made in the United States are in excess of insured limits and are not otherwise insured.  If one or more of these financial institutions were to become insolvent, the loss of these investments would have a material adverse effect on our financial condition.
Exposure to Interest Rate Fluctuations
We do not invest in, or otherwise hold, for trading or other purposes, any financial instruments subject to market risk, with the exception of the following:
Approximately half of our cash throughout the world is invested in fixed-income securities and is affected by changes in interest rates. Interest rates are highly sensitive to many factors, including governmental monetary policies and domestic and international economic and political conditions. These securities are readily available for sale and are treated as such in our financial statements.
A decline in market interest rates, such as the significant global decline in 2008 and 2009, that continued through 2016, has had an adverse effect on our investment income. This is because, in a declining interest rate environment, borrowers may seek to refinance their borrowings at lower rates and, accordingly, prepay or redeem securities held earlier than initially expected. This action may cause us to reinvest the redeemed proceeds in lower yielding investments. An increase in market interest rates could also have an adverse effect on the value of our investment portfolio, for example, by decreasing the fair values of the fixed income securities that comprise a substantial majority of our investment portfolio.
Our investments consist primarily of government and corporate debentures and bank deposits. As of December 31, 2017, approximately 14% of our portfolio was invested in foreign banks and government debentures, 13% in other corporate debentures and the rest of the funds were invested in bank deposits and money market funds. Although we believe that we generally adhere to conservative investment guidelines, the continuing turmoil in the financial markets may result in impairments of the carrying value of our investment assets. Realized losses in our investments portfolio may adversely affect our financial position and results.
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Any significant decline in our investment income or the value of our investments as a result of falling interest rates, deterioration in the credit of the securities in which we have invested, or general market conditions, could have an adverse effect on our results of operations and financial condition.
We currently have no debt.
Exposure to Currency Fluctuations
Approximately 86% of our sales in 2017 were denominated in dollars or are dollar-linked and we incur most of our expenses in dollars, NIS, and Euros. We believe that the dollar is the primary currency of the economic environment in which we operate. Thus, our functional and reporting currency is the dollar and monetary accounts maintained in currencies other than the dollar are re-measured into U.S. dollars in accordance with ASC No. 830 “Foreign Currency Matters”. Changes in currency exchange rates between our functional currency and the currency in which a transaction is denominated are included in our results of operations as financial income (expense) in the period in which the currency exchange rates change.
Our revenues and expenses may be affected by fluctuations in the value of the dollar as it relates to foreign currencies, mainly the NIS, Euro, Chinese Yuan and Australia Dollar. For example, if there were no changes in the average exchange rates of the dollar relative to the NIS, Euro, Chinese Yuan and Australia Dollar during the year in 2017 compared to the average exchange rates in 2016, our revenues would have been lower in an amount of $0.6 million and our expenses would have been lower in an amount of $4.3 million.  Assuming our revenues and expenses in 2018 remain at the same level and with the same currency mix as in 2017, a 10% weakening in the value of the dollar relative to all currencies in which we operate would result in an increase in revenues of $2.9 million and an increase in our expenses of $10.7 million.
The following table presents information about the changes in the exchange rates of the U.S. dollar relative to the NIS, Euro, Chinese Yuan and Australian Dollar:
Year ended December 31,
U.S. dollar against:
NIS
Euro
Chinese Yuan
Australian Dollar
2013
(7.0
)%
(4.3
)%
(2.7
)%
16.0
%
2014
12
%
13.4
%
3.0
%
9.1
%
2015
0.3
%
11.6
%
5.2
%
12.2
%
2016
(1.5
)%
3.5
%
6.2
%
1.2
%
2017
(9.8
)%
(12.2
)%
6.7
%
(7.5
)%
2018 (1)
0.7
%
(2.8
)%
(3.0
)%
(1.1
)%
(1)   January 1, 2018 through March 25, 2018
ITEM 12.
DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
ITEMS 12A, 12B AND 12C
Not applicable.
ITEM 12D
The Company does not have any outstanding American Depositary Shares or American Depositary Receipts.
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PART II
ITEM 13.      DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
Not applicable.
ITEM 14.      MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
ITEMS 14A, 14B, 14C, 14D AND 14E
Not applicable.
ITEM 14E
The effective date of the registration statement (Commission File Number 333-10752) for our initial public offering of our ordinary shares was September 29, 1999.  The offering commenced on October 5, 1999, and terminated after the sale of all the securities registered.  The managing underwriter of the offering was Salomon Smith Barney. We registered 8,050,000 ordinary shares in the offering, including shares issued pursuant to the exercise of the underwriters’ over-allotment option.  Of such shares, we sold 7,000,000 ordinary shares at an aggregate offering price of $63.0 million ($9.00 per share) and certain selling shareholders sold an aggregate of 1,050,000 ordinary shares at an aggregate offering price of $9.45 million ($9.00 per share).  Under the terms of the offering, we incurred underwriting discounts of $4.41 million.  We also incurred estimated expenses of $1.82 million in connection with the offering.  None of the expenses consisted of amounts paid directly or indirectly to any of our directors, officers, general partners or their associates, any persons owning ten percent or more of any class of our equity securities, or any of our affiliates.  The net proceeds that we received as a result of the offering were approximately $56.8 million.  None of the use of proceeds consisted of amounts paid directly or indirectly to any of our directors, officers, general partners or their associates, any persons owning ten percent or more of any class of our equity securities, or any of our affiliates.
In January 2000, we raised net proceeds of approximately $60.0 million in a public offering of our ordinary shares.
The net proceeds of the two offerings are kept in short-term and long-term bank deposits and in marketable securities.
ITEM 15.      CONTROLS AND PROCEDURES
· Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), as of December 31, 2017. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2017, our disclosure controls and procedures were effective to ensure that: (1) information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms; and (2) such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
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· Management’s Annual Report on Internal Control Over Financial Reporting and Attestation Report of Registered Public Accounting Firm
Our management, under the supervision of our Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting for us. Our internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that:
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets,
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors, and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projection of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of our internal control over financial reporting as of December 31, 2017. In conducting its assessment of internal control over financial reporting, our management based its evaluation on the framework in “Internal Control – Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Our management has concluded based on its assessment, that our internal control over financial reporting was effective as of December 31, 2017 based on these criteria.
The effectiveness of our internal control over financial reporting as of December 31, 2017, has been audited by Kost, Forer, Gabbay & Kasierer (A Member of Ernst & Young Global), an independent registered public accounting firm who audited and reported on the consolidated financial statements of the company for the year ended December 31, 2017.
· Attestation Report of the Registered Public Accounting Firm
This annual report includes an attestation report of our independent registered public accounting firm regarding internal control over financial reporting on page F-3 of our audited consolidated financial statements set forth in “Item 18 – Financial Statements”, and incorporated herein by reference.
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· Changes in Internal Control Over Financial Reporting
During the year ended December 31, 2017, no changes in our internal control over financial reporting have occurred that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
Our Board of Directors has determined that Mr. Avraham Asheri, a member of our Audit Committee, is a financial expert as defined in the applicable regulations, and has determined that such member is “independent” as such term is defined in the Nasdaq listing standards. The education and experience of the Audit Committee financial expert is presented in “Item 6 – Directors, Senior Management and Employees – Directors and Senior Management” and is incorporated herein by reference.
ITEM 16B. CODE OF ETHICS
We have adopted a Code of Conduct and Ethics which applies to all directors, officers and employees of the Company, including our President and Chief Executive Officer, Chief Financial Officer, Director of Finance and Corporate Controller.  Our Code of Conduct and Ethics has been posted on our Internet website, http://www.radware.com/corporategovernance/ .
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Fees Paid to Independent Public Accountants
In the annual meeting held in September 2017, our shareholders approved the reappointment of Kost, Forer, Gabbay & Kasierer, a member of Ernst & Young Global (“Ernst & Young”), to serve as our independent auditors until the next annual meeting.
The following table sets forth, for each of the years indicated, the aggregate fees billed by Ernst & Young and the percentage of each of the fees out of the total amount paid to them classified by category:
Year Ended December 31,
2016
2017
(US$ in thousands)
Audit and Audit Related Fees (1)
315
70
%
341
54
%
Tax Fees (2)
92
21
%
165
26
%
All Other Fees (3)
41
9
%
124
20
%
Total
449
100
%
630
100
%
(1) Audit Fees include fees associated with the annual audit, including the audit of internal control over financial reporting, the reviews of the Company’s quarterly financial statements, statutory audits required internationally, special implementation project of new revenue standard 606, consents and assistance with and review of documents filed with the SEC.
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(2) Tax Fees included tax compliance, including the preparation of tax returns, tax planning and tax advice, including assistance with tax audits and appeals, advice related to acquisitions, transfer pricing and assistance with respect to requests for rulings from tax authorities.
(3) Other Fees include fees for consultation with Company management about accounting or disclosure treatment of transactions or events and consulting services such as obtaining grants from the Government of Israel for approved research and development projects.
Audit Committee’s pre-approval policies and procedures
Our Audit Committee oversees our independent auditors.  See also the description in “Item 6C- Directors, Senior Management and Employee - Board Practices.”
Our Audit Committee has adopted a policy requiring management to obtain the Committee’s approval before engaging our independent auditors to provide any other audit or permitted non-audit services to us or our subsidiaries. Pursuant to this policy, which is designed to assure you that such engagements do not impair the independence of our auditors, and which is discussed and approved at the end of each calendar year, the Audit Committee pre-approves annually a catalog of specific audit and non-audit services in the categories Audit Service, Audit-Related Service and Tax Consulting Services that may be performed by our auditors.  In addition, the Audit Committee limited the aggregate amount in fees our auditors may receive during fiscal year for non-audit services in certain categories, unless pre-approved. Our Director of Finance reviews all individual management requests to engage our independent auditors as a service provider in accordance with this catalog and, if the requested services are permitted pursuant to the catalog, approve the request accordingly. We inform the Audit Committee about these approvals on a quarterly basis. Services that are not included in the catalog require pre-approval by the Audit Committee on a case-by-case basis.  Our Audit Committee is not permitted to approve any engagement of our auditors if the services to be performed either fall into a category of services that are not permitted by applicable law or the services would be inconsistent with maintaining the auditors’ independence.
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
None.
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ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
During 2017, we repurchased our ordinary shares under a share repurchase plan, in an aggregate amount of $0.4 million, as follows:
Period
(a) Total Number of Shares (or Units) Purchased
(b) Average Price Paid per Share (or Units) (in US$)
(c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs (1)(2)
(d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs (1)(2)
January 1 through 31
0
N/A
0
$
24,840,431(1
)
February 1 through 28
0
N/A
0
$
24,840,431(1
)
March 1 through 31
0
N/A
0
$
24,840,431(1
)
April 1 through 30
0
N/A
0
$
24,840,431(1
)
May 1 through 31
0
N/A
0
$
40,000,000(2
)
June 1 through 30
0
N/A
0
$
40,000,000(2
)
July 1 through 31
0
N/A
0
$
40,000,000(2
)
August 1 through 31
0
N/A
0
$
40,000,000(2
)
September 1 through 30
25,782
15.99
25,782
$
39,587,815(2
)
October 1 through 31
0
N/A
0
$
39,587,815(2
)
November 1 through 30
0
N/A
0
$
39,587,815(2
)
December 1 through 31
0
N/A
0
$
39,587,815(2
)
(1) In February 2016, the Company’s Board of Directors authorized a plan for the repurchase of up to an aggregate of $40.0 million of the Company’s ordinary shares in the open market, subject to normal trading restrictions, or in privately negotiated transactions.  This plan was announced in a press release dated February 3, 2016 and expired on February 2, 2017.
(2) In April 2017, the Company’s Board of Directors authorized a new plan for the repurchase of up to an aggregate of $40.0 million of the Company’s ordinary shares in the open market, subject to normal trading restrictions, or in privately negotiated transactions.  This plan was announced in a press release dated April 24, 2017 and will expire on April 24, 2018.
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ITEM 16F. CHANGE IN REGISTRANT ’ S CERTIFYING ACCOUNTANT
None.
ITEM 16G. CORPORATE GOVERNANCE
We are a foreign private issuer whose ordinary shares are listed on the Nasdaq Global Select Market.  As such, we are required to comply with U.S. federal securities laws, including the Sarbanes-Oxley Act, and the Nasdaq rules, including the Nasdaq corporate governance requirements.  The Nasdaq rules provide that foreign private issuers may follow home country practice in lieu of certain qualitative listing requirements subject to certain exceptions and except to the extent that such exemptions would be contrary to U.S. federal securities laws, so long as the foreign issuer discloses that it does not follow such listing requirement and describes the home country practice followed in its reports filed with the SEC.  Below is a concise summary of the significant ways in which our corporate governance practices differ from the corporate governance requirements of Nasdaq applicable to domestic U.S. listed companies:
The Nasdaq rules require that an issuer have a quorum requirement for shareholders meetings of at least one-third of the outstanding shares of the issuer’s common voting stock. We have chosen to follow home country practice with respect to the quorum requirements of an adjourned shareholders meeting. Our articles of association, as permitted under the Israeli Companies Law and Israeli practice, provide that the quorum requirements for an adjourned meeting are the presence of a minimum of two shareholders present in person.
The Nasdaq rules require shareholder approval of stock option plans and other equity compensation arrangements available to officers, directors or employees and any material amendments thereto. We have decided to follow home country practice in lieu of obtaining shareholder approval for our current or future equity incentive plans.  However, subject to exceptions permitted under the Companies Law, we are required to seek shareholder approval of any grants of options to directors and controlling shareholders or plans that require shareholder approval for other reasons.
Additionally, we have chosen to follow our home country practice in lieu of the requirements of Nasdaq Rule 5250(d)(1), relating to an issuer’s furnishing of its annual report to shareholders. Specifically, we file annual reports on Form 20-F, which contain financial statements audited by an independent accounting firm, electronically with the SEC and post a copy on our website.
ITEM 16H. MINE SAFETY DISCLOSURE
Not applicable.
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PART III
ITEM 17.      FINANCIAL STATEMENTS
We have responded to Item 18 in lieu of this item.
ITEM 18.      FINANCIAL STATEMENTS
The Financial Statements required by this item are found at the end of this annual report, beginning on page F-1.
ITEM 19.      EXHIBITS
The exhibits filed with or incorporated into this annual report are listed on the index of exhibits below.
Exhibit No.
Exhibit
101
The following financial information from the Registrant’s Annual Report on Form 20-F for the year ended December 31, 2017, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Operations; (iii) Consolidated Statement of Comprehensive Income (Loss); (iv) Statements of Changes in Shareholders’ Equity; (v) Consolidated Statements of Cash Flows; and (vi) Notes to Consolidated Financial Statements, tagged as blocks of text and in detail*
- 142 -
¶ Translated from Hebrew
* Filed herewith.
** Furnished herewith.
(A)  Incorporated by reference to Exhibit 3.1 to the Registration Statement on Form S-8, filed with the SEC on December 30, 2013.
(B)  Incorporated by reference to Exhibit 3.2 to the Registration Statement on Form S-8, filed with the SEC on December 30, 2013.
(C)  Incorporated by reference to Annex B to the Proxy Statement filed as Exhibit 1.2 to Report of Foreign Private Issuer on Form 6-K submitted to the SEC on July 28, 2011.
(D)  Incorporated by reference to Exhibit 4.3 to the Annual Report on Form 20-F for the year ended December 31, 2001, filed with the SEC on April 5, 2002.
(E) Incorporated by reference to Exhibit 4.7 to the Annual Report on Form 20-F for the year ended December 31, 2008, filed with the SEC on March 25, 2009.
(F) Incorporated by reference to Exhibit 4.6 to the Annual Report on Form 20-F for the year ended December 31, 2012, filed with the SEC on March 28, 2013.
(G) Incorporated by reference to Exhibit 4.8 to the Annual Report on Form 20-F for the year ended December 31, 2009, filed with the SEC on April 29, 2010.
(H) Incorporated by reference to Exhibit 4.9 to the Annual Report on Form 20-F for the year ended December 31, 2009, filed with the SEC on April 29, 2010.
(I)  Incorporated by reference to Appendix A to the Proxy Statement filed as Exhibit 1.2 to Report of Foreign Private Issuer on Form 6-K submitted to the SEC on September 30, 2015.
- 143 -
SIGNATURE
The registrant hereby certifies that it meets all of the requirements for filing on Form 20‑F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
RADWARE LTD.
By:
/s/ Roy Zisapel
Roy Zisapel
Chief Executive Officer
Date: March 28, 2018
- 144 -

RADWARE LTD. AND ITS SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2017
U.S. DOLLARS IN THOUSANDS
INDEX



Kost Forer Gabbay & Kasierer
144 Menachem Begin Road
Tel-Aviv 6492102, Israel
Tel: +972-3-6232525
Fax: +972-3-5622555
ey.com
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and Board of Directors of

RADWARE LTD.
Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Radware Ltd. and subsidiaries ("the Company") as of December 31, 2017 and 2016, the related consolidated statements of income (loss), comprehensive income (loss), changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 2017 and the related notes (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles..

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated March 28, 2018 expressed an unqualified opinion thereon.

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ KOST FORER GABBAY & KASIERER
A Member of Ernst & Young Global

We have served as the Company's auditor since 2002.
Tel-Aviv, Israel
March 28, 2018
F - 2
Kost Forer Gabbay & Kasierer
144 Menachem Begin Road
Tel-Aviv 6492102, Israel
Tel: +972-3-6232525
Fax: +972-3-5622555
ey.com
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and Board of Directors of
RADWARE LTD.
Opinion on the Internal Control over Financial Reporting

We have audited Radware Ltd. and subsidiaries' internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) ("the COSO criteria"). In our opinion, Radware Ltd. and subsidiaries ("the Company") maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2017 and 2016, the related consolidated statements of income (loss), comprehensive income (loss), changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 2017 and the related notes and our report dated March 28, 2018 expressed an unqualified opinion thereon.

Basis for Opinion

The Company's management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management's Report on Internal Control over Financial Reporting . Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.

Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Tel-Aviv, Israel
/s/ KOST FORER GABBAY & KASIERER
March 28, 2018
A Member of Ernst & Young Global
F - 3
RADWARE LTD. AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
U.S. dollars in thousands

December 31,
2017
2016
ASSETS
CURRENT ASSETS:
Cash and cash equivalents
$
65,237
$
79,639
Available-for-sale marketable securities
42,573
20,452
Short-term bank deposits
93,151
125,995
Trade receivables (net of allowance for doubtful accounts and sales reserves in a total amount of $ 1,993 and $ 1,236 in 2017 and 2016, respectively)
16,150
19,407
Other current assets and prepaid expenses
12,252
4,159
Inventories
18,772
17,114
Total current assets
248,135
266,766
LONG-TERM INVESTMENTS:
Available-for-sale marketable securities
54,427
74,967
Long-term bank deposits
88,911
19,092
Severance pay fund
3,251
2,597
Total long-term investments
146,589
96,656
Property and equipment, net
23,642
26,354
Intangible assets, net
10,415
2,399
Goodwill
32,174
30,069
Other long-term assets
8,133
8,092
Total assets
$
469,088
$
430,336
The accompanying notes are an integral part of the consolidated financial statements.
F - 4
RADWARE LTD. AND ITS SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
U.S. dollars in thousands, except share and per share data

December 31,
2017
2016
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade payables
$
5,367
$
5,971
Deferred revenues
69,829
53,061
Employees and payroll accruals
16,470
11,713
Other payables and accrued expenses
15,704
14,519
Total current liabilities
107,370
85,264
LONG-TERM LIABILITIES:
Deferred revenues
43,482
31,100
Other long-term liabilities
2,880
14,209
Total long-term liabilities
46,362
45,309
COMMITMENTS AND CONTINGENT LIABILITIES
SHAREHOLDERS' EQUITY:
Share capital -
Ordinary shares of NIS 0.05 par value -
Authorized: 60,000,000 at December 31, 2017 and 2016; Issued: 53,884,864 and 52,913,976 shares at
December 31, 2017 and 2016, respectively; Outstanding: 44,133,954 and 43,188,850
shares at December 31, 2017 and 2016, respectively
673
663
Additional paid-in capital
349,250
325,338
Treasury stock (9,750,910) and (9,725,128) of Ordinary shares at December 31, 2017 and 2016, respectively
(116,442
)
(116,029
)
Accumulated other comprehensive loss
(443
)
(20
)
Retained earnings
82,318
89,811
Total shareholders' equity
315,356
299,763
Total liabilities and shareholders' equity
$
469,088
$
430,336
The accompanying notes are an integral part of the consolidated financial statements.
F - 5
RADWARE LTD. AND ITS SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (LOSS)
U.S. dollars in thousands, except per share data

Year ended
December 31,
2017
2016
2015
Revenues:
Products
$
117,968
$
110,186
$
136,793
Services
93,401
86,399
79,773
Total revenues
211,369
196,585
216,566
Cost of revenues:
Products
30,862
27,320
29,159
Services
8,754
8,375
9,041
Total cost of revenues
39,616
35,695
38,200
Gross profit
171,753
160,890
178,366
Operating expenses, net:
Research and development, net
59,003
51,732
49,987
Sales and marketing
108,744
103,774
93,347
General and administrative
17,577
18,133
17,033
Other income
(6,900
)
-
-
Total operating expenses, net
178,424
173,639
160,367
Operating income (loss)
(6,671
)
(12,749
)
17,999
Financial income, net
4,830
5,741
5,867
Income (loss) before taxes on income
(1,841
)
(7,008
)
23,866
Taxes on income
5,652
1,651
5,297
Net income (loss)
$
(7,493
)
$
(8,659
)
$
18,569
Basic net earnings (loss) per share
$
(0.17
)
$
(0.20
)
$
0.40
Diluted net earnings (loss) per share
$
(0.17
)
$
(0.20
)
$
0.40
The accompanying notes are an integral part of the consolidated financial statements.
F - 6
RADWARE LTD. AND ITS SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
U.S. dollars in thousands, except per share data

Year ended
December 31,
2017
2016
2015
Net income (loss)
$
(7,493
)
$
(8,659
)
$
18,569
Other comprehensive income (loss) before tax:
Unrealized gains (losses) on available-for-sale securities:
Changes in unrealized gains (losses)
(530
)
68
3,903
Less: reclassification adjustments for losses (gains) included in net income (loss)
(18
)
(1,771
)
(2,438
)
Other comprehensive income (loss) before tax
(548
)
(1,703
)
1,465
Income tax benefits (expense) related to components of other comprehensive income (loss)
125
426
(419
)
Other comprehensive income (loss), net of tax
(423
)
(1,277
)
1,046
Comprehensive income (loss)
$
(7,916
)
$
(9,936
)
$
19,615
The accompanying notes are an integral part of the consolidated financial statements.
F - 7
RADWARE LTD. AND ITS SUBSIDIARIES
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
U.S. dollars in thousands, except share data

Number of
outstanding Ordinary
shares
Share
capital
Additional
paid-in
capital
Treasury
stock, at cost
Accumulated
other comprehensive
income (loss)
Retained earnings
Total
Balance as of January 1, 2015
46,926,497
$
654
$
294,084
$
(41,153
)
$
211
$
79,901
$
333,697
Repurchase of ordinary shares
(2,824,772
)
-
-
(52,896
)
-
-
(52,896
)
Issuance of shares upon exercise of stock options
677,122
7
8,739
-
-
-
8,746
Stock based compensation
-
-
9,329
-
-
-
9,329
Tax benefit related to exercise of stock options
-
-
632
-
-
-
632
Other comprehensive income, net of tax
-
-
-
-
1,046
-
1,046
Net income
-
-
-
-
-
18,569
18,569
Balance as of December 31, 2015
44,778,847
661
312,784
(94,049
)
1,257
98,470
319,123
Repurchase of ordinary shares
(1,884,030
)
-
-
(21,980
)
-
-
(21,980
)
Issuance of shares upon exercise of stock options
294,033
2
1,581
-
-
-
1,583
Stock based compensation
-
-
11,520
-
-
-
11,520
Tax deficiency related to exercise of stock options
-
-
(547
)
-
-
-
(547
)
Other comprehensive loss, net of tax
-
-
-
-
(1,277
)
-
(1,277
)
Net loss
-
-
-
-
-
(8,659
)
(8,659
)
Balance as of December 31, 2016
43,188,850
663
325,338
(116,029
)
(20
)
89,811
299,763
Repurchase of ordinary shares
(25,782
)
-
-
(413
)
-
-
(413
)
Issuance of shares upon exercise of stock options
970,886
10
10,881
-
-
-
10,891
Stock based compensation
-
-
13,031
-
-
-
13,031
Other comprehensive loss, net of tax
-
-
-
-
(423
)
-
(423
)
Net loss
-
-
-
-
-
(7,493
)
(7,493
)
Balance as of December 31, 2017
44,133,954
$
673
$
349,250
$
(116,442
)
$
(443
)
$
82,318
$
315,356

The accompanying notes are an integral part of the consolidated financial statements.
F - 8
RADWARE LTD. AND ITS SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
U.S. dollars in thousands

Year ended
December 31,
2017
2016
2015
Cash flows from operating activities:
Net income (loss)
$
(7,493
)
$
(8,659
)
$
18,569
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization
11,232
10,372
9,401
Stock based compensation
13,031
11,520
9,329
Gain from sale of available-for-sale marketable securities
(18
)
(1,771
)
(2,438
)
Amortization of premiums, accretion of discounts and accrued interest on available-for-sale marketable securities, net
1,546
1,949
3,208
Accrued interest on bank deposits
226
1,179
(1,998
)
Increase (decrease) in accrued severance pay, net
(210
)
401
125
Decrease (increase) in trade receivables, net
3,390
7,003
(773
)
Changes in deferred income taxes, net
91
(2,687
)
215
Decrease (increase) in other current assets and prepaid expenses
(7,969
)
883
(103
)
Decrease (increase) in inventories
(1,658
)
(792
)
522
Decrease in trade payables
(734
)
(3,284
)
(562
)
Increase in deferred revenues (short-term and long-term)
28,781
12,964
3,849
Increase (decrease) in other payables and accrued expenses and other long-term liabilities
(8,753
)
8,855
424
Excess tax deficiency (benefit) from stock-based compensation stock options
-
547
(632
)
Net cash provided by operating activities
31,462
38,480
39,136
Cash flows from investing activities:
Purchase of property and equipment
(7,210
)
(9,404
)
(13,774
)
Investment in other long-term assets
(6
)
(53
)
(100
)
Proceeds from (investment in) bank deposits, net
(37,200
)
31,295
(33,824
)
Purchase of available-for-sale marketable securities
(24,595
)
(16,219
)
(13,442
)
Proceeds from maturity of available-for-sale marketable securities
20,075
17,205
26,530
Proceeds from redemption of available-for-sale marketable securities
863
5,535
27,757
Payment for the acquisition of subsidiary, net of cash acquired
(8,269
)
-
-
Net cash provided by (used in) investing activities
(56,342
)
28,359
(6,853
)
The accompanying notes are an integral part of the consolidated financial statements.
F - 9

RADWARE LTD. AND ITS SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
U.S. dollars in thousands

Year ended
December 31,
2017
2016
2015
Cash flows from financing activities:
Proceeds from exercise of stock options
10,891
1,583
8,746
Excess tax (deficiency) benefit from stock-based compensation
-
(547
)
632
Repurchase of ordinary shares
(413
)
(21,980
)
(52,896
)
Net cash provided by (used in) financing activities
10,478
(20,944
)
(43,518
)
Increase (decrease) in cash and cash equivalents
(14,402
)
45,895
(11,235
)
Cash and cash equivalents at the beginning of the year
79,639
33,744
44,979
Cash and cash equivalents at the end of the year
$
65,237
$
79,639
$
33,744
Supplemental disclosure of cash flow information:
Cash paid during the year for income taxes
$
14,352
$
1,730
$
1,853
The accompanying notes are an integral part of the consolidated financial statements.
F - 10
RADWARE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 1:-
GENERAL
a.
Radware Ltd. (the "Company"), an Israeli corporation commenced operations in April 1997. The Company and its subsidiaries (the "Group") are engaged in the development, manufacture and sale of Cyber Security and Application Delivery solutions that help to secure the digital experience for users of business-critical applications in virtual, cloud and software defined data centers. The Company's products are marketed worldwide.

b.
The Company has established wholly-owned subsidiaries in the United States, France, Germany, Singapore, the United Kingdom, Japan, Korea, Canada, India, Australia, Italy, Hong Kong, China and Spain. In addition, the Company has established representative office in Taiwan. The Company holds 91% of one of its Israeli subsidiaries ("the Israeli Subsidiary"). The Company's subsidiaries are engaged primarily in sales, marketing and support activities of its core products, except for the Israeli subsidiary which is engaged primarily in real-time consumer applications across the web. The Israeli subsidiary operations were immaterial for the years ended December 31, 2017, 2016 and 2015. The net loss attributable to non-controlling interests represents 0.77%, 1.92% and 0.69% out of the consolidated net income (loss)  2017, 2016 and 2015, respectively.
c.
On January 30, 2017 ("the Closing Date"), the Company acquired 100% outstanding shares of Seculert Ltd. ("Seculert"), a company based in Israel and engaged in cyber-attack detection and HTTP analytics solutions and developing user and entity behavioral analysis ("UEBA") solutions. The consideration to acquire Seculert was $10,000 in cash and additional contingent consideration of up to $10,000, based on certain milestones to be achieved. The milestone-based contingent consideration was measured at fair value at the Closing Date and recorded as a liability on the balance sheet in the amount of $1,981 ($1,550 as of December 31, 2017). The derived goodwill from this acquisition is attributable to additional capabilities of the Group to expand its products portfolio. Goodwill generated from this business combination is primarily attributable to synergies between the Company's and Seculert's respective products and services.
The acquisition was accounted for as a business combination. The Company recorded IPR&D, technology and goodwill in amount of $ 7,088, $2,183 and $ 2,105 respectively. The estimated useful life of the IPR&D and technology is approximately 9 years.
Pro forma results of operations for this acquisition have not been presented because they are not material to the consolidated results of operations.

d.
The Company depends on a few vendors to supply certain hardware platforms and components for the production of its products. If one of these suppliers fails to deliver or delays the delivery of the necessary components, the Company will be required to seek alternative sources of supply. A change in suppliers could result in manufacturing delays, which could cause a possible loss of sales and, consequently, could adversely affect the Company's results of operations and financial position.

F - 11
RADWARE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES

The consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States ("U.S. GAAP").

a.
Use of estimates:

The preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates, judgments and assumptions. The Company's management believes that the estimates, judgments and assumptions used are reasonable based upon information available at the time these estimates are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

On an ongoing basis, the Company's management evaluates estimates, including those related to fair values and useful lives of intangible assets, tax assets and liabilities, fair values of stock-based awards, as well as in estimates used in applying the revenue recognition policy related to separation of multiple elements. Such estimates are based on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities.

b.
Financial statements in United States dollars:

A majority of the Group's revenues are denominated in United States dollars ("dollar" or "U.S. dollars"). In addition, a substantial portion of the Company's and certain of its subsidiaries' costs are denominated in dollars. The Company's management believes that the dollar is the primary currency of the economic environment in which the Company and its subsidiaries operate. Thus, the functional and reporting currency of the Company and its subsidiaries is the dollar. Accordingly, monetary accounts maintained in currencies other than the dollar are re-measured into dollars in accordance with Accounting Standards Codification ("ASC") No. 830 "Foreign Currency Matters". Changes in currency exchange rates between the Company's functional currency and the currency in which a transaction is denominated are included in the Company's results of operations as financial income, net in the period in which the currency exchange rates change.

c.
Principles of consolidation:

The consolidated financial statements include the accounts of the Group. Intercompany balances and transactions including profits from intercompany sales not yet realized outside the Group, have been eliminated upon consolidation.

F - 12
RADWARE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)

d.
Cash equivalents:

Cash equivalents are short-term highly liquid investments that are readily convertible to cash with original maturities of three months or less, at acquisition.

e.
Bank deposits:

Bank deposits with maturities of more than three months but less than one year are included in short-term deposits. Such short-term deposits are stated at cost which approximates market values.

Bank deposits with maturities of more than one year are included in long-term deposits. Deposits as of December 31, 2017 do not have contractual maturities that exceed 2.25 years. Such long-term deposits are stated at cost which approximates market values.

f.
Investment in marketable securities:

The Company accounts for investments in marketable securities in accordance with ASC No. 320, "Investments- Debt and equity Securities". Management determines the appropriate classification of its investments at the time of purchase and reevaluates such determinations at each balance sheet date.

The Company classified all of its debt and equity securities as available-for-sale securities. Available-for-sale securities are carried at fair value, with the unrealized gains and losses reported in "accumulated other comprehensive income (loss)" in shareholders' equity. Realized gains and losses on sales of investments are included in financial income, net and are derived using the specific identification method for determining the cost of securities.

The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization together with interest and dividends on securities are included in financial income, net.

The Company recognizes an impairment charge when a decline in the fair value of its investments below the cost basis is judged to be other-than-temporary. The factors considered in making such a determination include the duration and severity of the impairment, the reason for the decline in value, the potential recovery period and the Company's intent to sell, including whether it is more likely than not that the Company will be required to sell the investment before recovery of cost basis. For securities that are deemed other-than-temporarily impaired, the amount of impairment recognized in the statement of income (loss) is limited to the amount related to credit losses, while impairment related to other factors is recognized in other comprehensive income (loss).

During the years 2017, 2016 and 2015, the Company did not record any other-than-temporary impairment loss with respect to its available-for-sale marketable securities.

F - 13
RADWARE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)

The Company's unrealized loss on debt securities in corporate bonds relates to several bonds. Because the Company has the ability to hold these debt securities until a recovery of fair value, which may be the maturity date of such bonds, the Company does not consider these securities to be other-than-temporarily impaired at December 31, 2017.

g.
Inventories:

Inventories are stated at the lower of cost or net realizable value. Inventory write-off is provided to cover risks arising from slow-moving items, technological obsolescence, excess inventories and discontinued products. Inventory write-offs totaled $ 2,324, $ 1,071 and $ 750 in 2017, 2016 and 2015, respectively, and have been included in cost of revenues of product.

Cost is determined as follows:

Raw materials and components - using the "first-in, first-out" method.

Work-in-progress and finished products - raw materials as above with the addition of subcontracting costs - calculated on the basis of direct subcontractors costs and with direct overhead costs.

The Company assesses the carrying value of its inventory for each reporting period to ensure inventory is reported at the lower of cost or net realizable value in accordance with ASC 330-10-35. Charges for obsolete and slow moving inventories are recorded based upon an analysis of specific identification of obsolete inventory items and quantification of slow moving inventory items. These assessments consider various factors, including historical usage rate, technological obsolescence, estimated current and future market values and new product introduction. In cases when there is evidence that the anticipated utility of goods, in their disposal in the ordinary course of business, will be less than the historical cost of the inventory, the Company recognizes the difference as a current period charge to earnings and carries the inventory at the reduced cost basis until it is sold or disposed of.

h.
Property and equipment, net:

Property and equipment are stated at cost, net of accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets at the following annual rates:
%
Computers, peripheral equipment and software
15 - 33 (mainly 33)
Office furniture and equipment
6 - 20 (mainly 15)
Leasehold improvements
Over the shorter of the term of
the lease or the useful life of the asset


F - 14
RADWARE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)

i.
Impairment of long lived assets and intangible assets subject to amortization:

Property and equipment and intangible assets subject to amortization are reviewed for impairment in accordance with ASC No. 360, "Accounting for the Impairment or Disposal of Long-Lived Assets," whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted cash flows expected to be generated by the assets. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets.

Intangible assets acquired in a business combination are recorded at fair value at the date of acquisition. Following initial recognition, intangible assets are carried at cost less any accumulated amortization and any accumulated impairment losses. The useful lives of intangible assets are assessed to be either finite or indefinite. Intangible assets that are not considered to have an indefinite useful life are amortized over their estimated useful lives, which range from 5 to 9 years. Some of the acquired customer arrangements are amortized over their estimated useful lives in proportion to the economic benefits realized. This accounting policy results in accelerated amortization of such customer arrangements as compared to the straight-line method. All other intangible assets are amortized over their estimated useful lives on a straight-line basis. During 2017, 2016 and 2015, no impairment losses were recorded.

j.
Goodwill:

Goodwill represents the excess of the purchase price in a business combination over the fair value of the net tangible and intangible assets acquired. Under ASC 350 "Intangibles – Goodwill and Other" ("ASC 350"), goodwill is not amortized, but rather is subject to an annual impairment test. ASC 350 requires goodwill to be tested for impairment at least annually or between annual tests in certain circumstances, and written down when impaired. Goodwill is tested for impairment by comparing the fair value of the reporting unit with its carrying value.

ASC 350 allows an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. If the qualitative assessment does not result in a more likely than not indication of impairment, no further impairment testing is required. If it does result in a more likely than not indication of impairment, the two-step impairment test is performed. Alternatively, ASC 350 permits an entity to bypass the qualitative assessment for any reporting unit and proceed directly to performing the first step of the goodwill impairment test.
The Company operates in one operating segment, and this segment comprises its single reporting unit. The Company performs assessment of qualitative factors during the fourth quarter of each fiscal year, or more frequently if impairment indicators are present. This analysis determined that no indicators of impairment existed for 2017, 2016 and 2015.


F - 15
RADWARE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)

k.
Contingencies

The Company is currently involved in various claims and legal proceedings. The Company reviews the status of each matter and assesses its potential financial exposure. If the potential loss from any claim or legal proceeding is considered probable and the amount can be reasonably estimated, the Company accrues a liability for the estimated loss.

l.
Revenue recognition:

The Group's revenues are derived from sales of our products and services:

·
Revenues from product are recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, no further obligation exists and collectability is probable. Revenues from product subscriptions are recognized ratably over the subscription period.

·
Revenues from post-contract customer support ("PCS") and service subscriptions, which represents mainly software update subscriptions, help-desk support and unit repairs or replacements, are recognized ratably over the contract or subscription period, which is typically between one year and three years.

The timing for revenue recognition of the various products and customers is dependent upon satisfaction of such criteria and generally varies from shipment to delivery to the customer depending on the specific shipping terms of a given transaction, as stipulated in the agreement with each customer.

The Company's products and services generally qualify as separate units of accounting. As such, revenues from multiple element arrangements that include products, PCS and subscriptions are separated into their various elements using the relative selling price method. The estimated selling price for each deliverable is based on its vendor specific objective evidence ("VSOE"), if available, third party evidence ("TPE") if VSOE is not available, or estimated selling price ("ESP") if neither VSOE nor TPE is available.

The Company establishes VSOE for post-contract customer support based on the price charged when such element is sold separately (renewals). The price may vary in the territories and vertical markets in which the Company conducts business. Price is determined by using a consistent percentage of the Company's product price lists, in the same territories and markets. For the product and subscriptions, the Company determines the ESP based on management's estimated selling price by considering several external and internal factors including, but not limited to, pricing practices including discounting, margin objectives and competition. The determination of ESP is made through consultation with and approval of management, taking into consideration the pricing model and go-to-market strategy.
F - 16
RADWARE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)

The Company records a provision for estimated sale returns and stock rotation granted to customers on products in the same period the related revenues are recorded in accordance with ASC No. 605. These estimates are based on historical sales returns, stock rotations and other known factors. Such provisions amounted to $1,657 and $ 984 as of December 31, 2017 and 2016, respectively.

Deferred revenues include unearned amounts collected under post-contract customer support and subscription agreements, and are classified in short and long-term based on their contractual term.

m. Shipping and handling fees and costs:

Shipping and handling fees charged to the Company's customers are recognized as product revenue in the period shipped and the related costs for providing these services are recorded as a cost of revenues.

n. Cost of revenues:

Cost of products is comprised of cost of software and hardware production, manuals, packaging, license fees paid to third parties, inventory write-offs and amortization of acquired technology.

Cost of services is comprised of cost of post-sale customer support and hosting services.

o. Warranty costs:

The Company generally provides a one year warranty for all of its products. A provision is recorded for estimated warranty costs at the time revenues are recognized based on the Company's experience. Warranty expenses for the years ended December 31, 2017, 2016 and 2015 were immaterial.

p.
Research and development expenses:

Research and development costs are charged to the statements of income (loss) as incurred. ASC No. 985-20, "Software - Costs of Software to Be Sold, Leased, or Marketed", requires capitalization of certain software development costs subsequent to the establishment of technological feasibility.

Based on the Company's product development process, technological feasibility is established upon completion of a working model. Costs incurred by the Company between completion of the working models and the point at which the products are ready for general release, have been insignificant. Therefore, all research and development costs are expensed as incurred.

F - 17
RADWARE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)

q. Grants:

During 2016-2017, the Company received non-royalty-bearing grants from the Government of Israel for approved research and development projects. These grants are recognized at the time the Company is entitled to such grants on the basis of the costs incurred as provided by the relevant agreement and included as a deduction from research and development expenses.

Research and development grants deducted from research and development expenses amounted to $ 545, $ 880 and 0 in 2017, 2016 and 2015, respectively.

r.
Accounting for stock-based compensation:

The Company accounts for stock-based compensation in accordance with ASC No. 718, "Compensation-Stock Compensation" ("ASC 718"). ASC 718 requires companies to estimate the fair value of equity-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as an expense over the requisite service periods in the Company's consolidated statement of income (loss).

The Company recognizes compensation expenses for the value of its awards based on the accelerated attribution method over the requisite service period of each of the awards, net of estimated forfeitures. ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Estimated forfeitures are based on actual historical pre-vesting forfeitures. The Company adopted ASU 2016-09 (see below) in the first quarter of fiscal year 2017. The Company elected to retain its existing accounting policy and estimate expected forfeitures.

The Company selected the Black-Scholes-Merton option pricing model to account for the fair value of its stock-options awards with only service conditions and whereas the fair value of the restricted stocks awards is based on the market value of the underlying shares at the date of grant. The option-pricing model requires a number of assumptions, of which the most significant are the expected stock price volatility and the expected option term. Expected volatility was calculated based upon actual historical stock price movements over an historical period equivalent to the option's expected term. The expected option term represents the period of time that options are expected to be outstanding. Expected term of options is based on historical experience. The risk-free interest rate is based on the yield from U.S. treasury bonds with an equivalent term. The Company has historically not paid dividends and has no foreseeable plans to pay dividends.

F - 18
RADWARE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)

The Company accounted for changes in award terms as a modification in accordance with ASC 718. A modification to the terms of an award should be treated as an exchange of the original award for a new award with total compensation cost equal to the grant-date fair value of the original award plus the incremental value measured at the same date. Under ASC 718, the calculation of the incremental value is based on the excess of the fair value of the new (modified) award based on current circumstances over the fair value of the original award measured immediately before its terms are modified based on current circumstances .

The Company measures the fair value of restricted stock units ("RSUs") based on the market value of the underlying shares at the date of grant.

The fair value of the Company's stock options granted to employees and directors for the years ended December 31, 2017, 2016 and 2015 was estimated using the following weighted average assumptions:

Employees' stock option plan:
Year ended
December 31,
2017
2016
2015
Risk free interest rate
1.66
%
1.12
%
1.21
%
Dividend yields
0
%
0
%
0
%
Expected volatility
32
%
34
%
34
%
Weighted average expected term from grant date (in years)
3.80
3.88
3.86
On January 1, 2017, the Company adopted Financial Accounting Standards Board ("FASB") Accounting Standards Update ("ASU") No. 2016-09 (Topic 718) Compensation—Stock Compensation: Improvements to Employee Stock-Based Payment Accounting, which simplifies several aspects of the accounting for stock-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, forfeiture, statutory tax withholding requirements, and classification on the statement of cash flows.

The impact of the adoption on the Company's consolidated Financial Statements was as follows:

·
Income tax accounting: The Company is required to record excess tax benefits and tax deficiencies related to stock-based compensation as income tax benefit or expense in the statement of income (loss) prospectively when share-based awards vest or are settled. Since the Company utilized the entire previously unrecognized excess tax benefits before the adoption, no a cumulative-effect was recorded in the opening retained earnings.

F - 19
RADWARE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)

·
Cash flow presentation of excess tax benefits: The Company is required to classify excess tax benefits along with other income tax cash flows as an operating activity either prospectively or retrospectively. The Company elected to apply the change in presentation to the statements of cash flows prospectively from January 1, 2017.

s.
Income taxes:

The Company accounts for income taxes in accordance with ASC No. 740, "Income Taxes" ("ASC 740"). This statement prescribes the use of the liability method whereby deferred tax assets and liability account balances are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Group provides a valuation allowance, if necessary, to reduce deferred tax assets to their estimated realizable value if it is more likely than not that a portion or all of the deferred tax assets will not be realized.

Deferred tax liabilities and assets are classified as non-current in accordance with ASU 2015-17.

ASC 740 contains a two-step approach to recognizing and measuring a liability for uncertain tax positions. The first step is to evaluate the tax position taken or expected to be 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 of the technical merits, the tax position will be sustained on audit, including resolution of any related appeals or litigation processes.
The second step is only addressed if the first step has been satisfied (i.e. the position is more likely than not to be sustained) otherwise a full liability in respect of a tax position not meeting the more likely than not criteria is recognized.

The second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. The Company accrues interest and penalty, if any related to unrecognized tax benefits in its taxes on income.

t.
Concentrations of credit risks:

Financial instruments that potentially subject the Company and its subsidiaries to concentrations of credit risk consist principally of cash and cash equivalents, bank deposits, available-for-sale marketable securities and trade receivables.

F - 20
RADWARE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data

NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)

The majority of the Group's cash, cash equivalents and bank deposits are invested in major banks in Israel and the U.S. Deposits in the U.S. may be in excess of insured limits and are not insured in other jurisdictions. Generally, these cash equivalents may be redeemed upon demand and, therefore management believes that it bears a lower risk. The short-term and long-term bank deposits are held in financial institutions which management believes are institutions with high credit standing, and accordingly, minimal credit risk from geographic or credit concentration exists with respect to these bank deposits. As of December 31, 2017, 85% of the Group's short-term and long-term bank deposits were deposited in major Israeli banks in Israel which are rated AA+ and AAA, as determined by the Israeli affiliate of Standard & Poor's ("S&P"), and 15% were deposited in the U.S. branch of another major Israeli bank which is also rated AAA, as determined by the Israeli affiliate of S&P.

As of December 31, 2017, the maximal contractual duration of any of the Group's bank deposits was 2.25 years, the weighted average duration of the Group's deposits was 1.59 years, and the weighted average time to maturity was 0.87 years.

The Group's available-for-sale marketable securities include investments in foreign banks, government debentures and corporate debentures. The financial institutions that hold the Group's marketable securities are major U.S. financial institutions, located in the United States. The Company's management believes that the Group's marketable securities portfolio is a diverse portfolio of highly-rated securities and the Group's investment policy limits the amount the Group's may invest in each issuer, and accordingly, management believes that minimal credit risk exists from geographic or credit concentration with respect to these securities.

As of December 31, 2017, 44% of the Group's marketable securities portfolio was invested in debt securities of financial institutions, 2% in debt securities of governmental institutions, and 54% in debt securities of corporations.

From geographic prospective, 50% of the Group's marketable securities portfolio was invested in debt securities of U.S. issuers, 22% was invested in debt securities of European issuers and 28% was invested in debt securities of other geographic-located issuers. As of December 31, 2017, 92% of the Group's marketable securities portfolio was rated A- or higher, as determined by S&P, 4% was rated BBB or BBB+ and 4% was rated BB-.

The trade receivables of the Group are mainly derived from sales to customers located primarily in the United States, Europe, the Middle East, Africa and Asia Pacific. The Company performs ongoing credit evaluations of its customers. An allowance for doubtful accounts is determined with respect to those amounts that the Company has determined to be doubtful of collection. In certain circumstances, the Company may require from its customers letters of credit, other collateral or additional guarantees. Bad debt expenses for the years ended December 31, 2017, 2016 and 2015 were $ 109, nil and $ 80, respectively. Total write offs during 2017, 2016 and 2015 amounted to nil.

F - 21
RADWARE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)

u.
Employee related benefits:

Severance pay:

The Group's liability for severance pay with respect to its Israeli employees for periods prior to April 1, 2007 (the "Transition Date") is calculated pursuant to the Israeli Severance Pay Law – 1963 ("ISP Law"), based on the most recent salary of the employees multiplied by the number of years of employment as of the Transition Date. The Company recorded as expenses the increase in the severance liability, net of earnings (losses) from the related investment fund. Israeli employees were entitled to one month's salary for each year of employment, or a portion thereof. Until the Transition Date, the Group's liability was partially funded by monthly payments deposited with insurers; any unfunded amounts would be paid from operating funds and are covered by a provision established by the Company.

The carrying value of the deposited funds for the Group's Israeli employees severance pay for employment periods prior to the Transition Date include profits and losses accumulated up to the balance sheet date. The deposited funds may be withdrawn only upon the fulfillment of the obligation pursuant to the ISP Law or employment agreements.

Effective as of the Transition Date, the Group's agreements with employees in Israel are in accordance with Section 14 of the ISP Law which provide that the employer's contributions to severance pay fund shall cover its entire severance obligation with respect to period of employment subsequent to the Transition Date. Upon termination, the release of the contributed amounts from the fund to the employee shall relieve the employer from any further severance obligation and no additional payments are required to be made by the employer to the employee. As a result, the related obligation and amounts deposited in respect of such obligation are not stated on the balance sheets, as the employer is legally released from severance obligation to employees once the amounts have been fully deposited, and the Company has no legal ownership in the amounts deposited. Consequently, effective from the Transition Date, the Company increased its contribution to the deposited funds to cover the full amount of the employees' salaries.

Severance pay expenses for the years ended December 31, 2017, 2016 and 2015 amounted to approximately $ 3,296, $ 3,603 and $ 2,886, respectively. Accrued severance pay is included in other long-term liabilities in the balance sheets.

F - 22
RADWARE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)

v.
Fair value of financial instruments:

The Company measures its cash equivalents, deposits, available-for-sale marketable securities and contingent consideration at fair value. Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability. A three-tier fair value hierarchy is established as a basis for considering such assumptions and for inputs used in the valuation methodologies in measuring fair value:

Level 1 - Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 - Include other inputs that are directly or indirectly observable in the marketplace.
Level 3 - Unobservable inputs which are supported by little or no market activity.
The carrying amounts of cash equivalents, trade receivables, trade payables, short-term bank deposits and other payables and accrued expenses, approximate at fair value because of their generally short maturities.

w. Comprehensive income (loss):

The Company accounts for comprehensive income (loss) in accordance with ASC No. 220, "Comprehensive Income." This statement establishes standards for the reporting and display of comprehensive income (loss) and its components in a full set of general purpose financial statements. Comprehensive income (loss) generally represents all changes in shareholders' equity during the period except those resulting from investments by, or distributions to, shareholders. The Company determined that its only item of other comprehensive income (loss) relate to available-for-sale marketable securities adjustment.

x. Treasury stock:

The Company repurchases its ordinary shares from time to time on the open market and holds such shares as treasury stock. The Company presents the cost to repurchase treasury stock as a reduction of shareholders' equity. The voting rights attached to treasury stock are revoked.

F - 23
RADWARE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data

NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)

y.
Basic and diluted net income (loss) per share:

Basic net income (loss) per share is computed based on the weighted average number of ordinary shares outstanding during each period. Diluted net income (loss) per share is computed based on the weighted average number of ordinary shares outstanding during each period, plus potential dilutive ordinary shares considered outstanding during the period, if any, in accordance with ASC No. 260, "Earnings Per Share". The total number of ordinary shares related to outstanding stock options excluded from the calculation of diluted income (loss) per share as they would have been anti-dilutive was 981,750, 4,665,638 and 4,174,953 for the years ended December 31, 2017, 2016 and 2015, respectively.

z.
Business combinations:

The Company accounted for business combination in accordance with ASC No. 805, "Business Combinations" ("ASC 805"). ASC No. 805 requires recognition of assets acquired, liabilities assumed, and any non-controlling interest at the acquisition date, measured at their fair values as of that date. Any excess of the fair value of net assets acquired over purchase price and any subsequent changes in estimated contingencies are to be recorded in earnings. In addition, changes in valuation allowance related to acquired deferred tax assets and in acquired income tax position are to be recognized in earnings.

aa.
New accounting pronouncements not yet effective:

In May 2014, the FASB issued a new standard related to revenue recognition. Under the new standard, revenue is recognized when a customer obtains control of promised goods or services and is recognized in an amount that reflects the consideration, which the entity expects to receive in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flow arising from contracts with customers. The guidance permits two methods of modification: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the modified retrospective method.). The Company will adopt the new standard, effective January 1, 2018, using the modified retrospective method applied to those contracts, which were not substantially completed as of January 1, 2018. The cumulative adjustment related to the revenue recognition will decrease the Company's retained earnings by $142.

The most significant impact of the new standard related to the way the Group accounts for commission expense. The Group has also considered the impact of the guidance in ASC 340-40 "Other Assets and Deferred Costs" under the new standard. Under ASC 340-40, it may be required to capitalize and amortize certain incremental costs of obtaining a contract such as the maintenance portion of sales commission costs. The cumulative impact to the Group's retained earnings as of January 1, 2018 will increase by approximately $10,200. Adoption of the standard related to revenue recognition had no impact to cash from or used in operating, investing or financing activities on the Group's consolidated statement of cash flows.

F - 24
RADWARE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)

ab.
Impact of recently issued accounting pronouncements:

In February 2016, the FASB issued ASU 2016-02. ASU 2016-02 changes the current lease accounting standard by requiring the recognition of lease assets and lease liabilities for all leases, including those currently classified as operating leases. This new guidance is to be applied under a modified retrospective application to the earliest reporting period presented for reporting periods beginning after December 15, 2018. Early adoption is permitted. The Company is currently evaluating the potential impact of this new guidance on its financial statements.

In June 2016, the FASB Issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The new standard requires financial assets measured at amortized cost be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The standard will be effective for the Company beginning January 1, 2020, with early application permitted. The Company is evaluating the impact of adopting this new accounting guidance on its consolidated financial statements .

In January 2017, FASB issued ASU 2017-01, Business Combinations (Topic 805) Clarifying the Definition of Business. ASU 2017-01 clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The update to the standard is effective for interim and annual periods beginning after December 15, 2017, and applied prospectively. The Company does not expect the adoption of this standard will have a material impact on the consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04, simplifying the Test for Goodwill Impairment (Topic 350). This standard eliminates Step 2 from the goodwill impairment test, instead requiring an entity to recognize a goodwill impairment charge for the amount by which the goodwill carrying amount exceeds the reporting unit's fair value. This guidance is effective for interim and annual goodwill impairment tests in fiscal years beginning after December 15, 2019 with early adoption permitted. This guidance must be applied on a prospective basis. The Company does not expect the adoption of this standard will have a material impact on the consolidated financial statements.

In May 2017, the FASB issued ASU 2017-09, changing the terms or conditions of a share-based payment award must be accounted for as modifications. Entities will apply the modification accounting guidance if the value, vesting conditions or classifications of the award changes. The guidance also clarifies that a modification to an award could be significant and therefore require disclosure, even if modification accounting is not required. Therefore, an entity will have to make all of the disclosures about modifications that are required today, in addition to disclosing that the compensation expense has not change. This guidance is effective for interim and fiscal years beginning after December 15, 2017 with early adoption permitted. This guidance must be applied on a prospective basis. The Company does not expect the adoption of this standard will have a material impact on the consolidated financial statements.

F - 25
RADWARE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 3:-
MARKETABLE SECURITIES

Marketable securities with contractual maturities of less than one year are as follows:

December 31,
2017
2016
Adjusted
Gross unrealized
Gross unrealized
Market
Adjusted
Gross unrealized
Gross unrealized
Market
cost
losses
gains
value
cost
losses
gains
value
Foreign banks and government debentures
$
22,294
$
(63
)
$
3
$
22,234
$
15,361
$
(10
)
$
51
$
15,402
Corporate debentures
20,354
(20
)
5
20,339
5,046
-
4
5,050
Total available-for-sale marketable securities
$
42,648
$
(83
)
$
8
$
42,573
$
20,407
$
(10
)
$
55
$
20,452

Marketable securities with contractual maturities from one to three years are as follows:

December 31,
2017
2016
Adjusted
Gross unrealized
Gross unrealized
Market
Adjusted
Gross unrealized
Gross unrealized
Market
cost
losses
gains
value
cost
losses
gains
value
Foreign banks and government debentures
$
14,463
$
(61
)
$
2
$
14,404
$
31,040
$
(45
)
$
76
$
31,071
Corporate debentures
9,554
(19
)
32
9,567
28,980
(26
)
65
29,019
Total available-for-sale marketable securities
$
24,017
$
(80
)
$
34
$
23,971
$
60,020
$
(71
)
$
141
$
60,090

Marketable securities with contractual maturities of more than three years are as follows:

December 31,
2017
2016
Adjusted
Gross unrealized
Gross unrealized
Market
Adjusted
Gross unrealized
Gross unrealized
Market
cost
losses
gains
value
cost
losses
gains
value
Foreign banks and government debentures
$
13,603
$
(198
)
$
-
$
13,405
$
7,738
$
(111
)
$
-
$
7,627
Corporate debentures
17,308
(257
)
-
17,051
7,281
(60
)
29
7,250
Total available-for-sale marketable securities
$
30,911
$
(455
)
$
-
$
30,456
$
15,019
$
(171
)
$
29
$
14,877


F - 26
RADWARE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 3:-
MARKETABLE SECURITIES (Cont.)

Investments with continuous unrealized losses for less than 12 months and 12 months or greater and their related fair values as of December 31, 2017 and 2016 were as follows:

December 31, 2017
Investments with continuous unrealized losses for less than 12 months
Investments with continuous unrealized losses for 12 months or greater
Total investments with continuous unrealized losses
Fair
Value
Unrealized losses
Fair
value
Unrealized losses
Fair
value
Unrealized losses
Foreign banks and government debentures
$
40,104
$
(275
)
$
6,486
$
(48
)
$
46,590
$
(323
)
Corporate debentures
29,280
(226
)
8,173
(69
)
37,453
(295
)
Total available-for-sale marketable securities
$
69,384
$
(501
)
$
14,659
$
(117
)
$
84,043
$
(618
)

December 31, 2016
Investments with continuous unrealized losses for less than 12 months
Investments with continuous unrealized losses for 12 months or greater
Total investments with continuous unrealized losses
Fair
value
Unrealized losses
Fair
value
Unrealized losses
Fair
value
Unrealized losses
Foreign banks and government debentures
$
20,118
$
(139
)
$
2,325
$
(28
)
$
22,443
$
(167
)
Corporate debentures
13,444
(79
)
1,013
(6
)
14,457
(85
)
Total available-for-sale marketable securities
$
33,562
$
(218
)
$
3,338
$
(34
)
$
36,900
$
(252
)

As of December 31, 2017 the Company had 14 investments with continuous unrealized loss for more than 12 months.

As of December 31, 2017 and 2016, interest receivable amounted to $ 833 and $ 866, respectively, and is included within available-for-sale marketable securities in the balance sheets.
NOTE 4:-
FAIR VALUE MEASUREMENTS

In accordance with ASC 820, "Fair Value Measurements and Disclosures", the Company measures its cash equivalents, available-for-sale marketable securities and acquisition related contingent consideration at fair value on recurring basis. Cash equivalents and marketable securities are classified within Level 1 or Level 2. This is because these assets are valued using quoted market prices or alternative pricing sources and models utilizing market observable inputs.

The liability with respect to contingent consideration regarding Seculert Ltd. acquisition is classified within Level 3 because this liability is valued using valuation techniques. Some of the inputs to these models are unobservable in the market and are significant.

F - 27
RADWARE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 4:-
FAIR VALUE MEASUREMENTS
The Company's financial assets and liabilities measured at fair value on a recurring basis, including interest receivable components consisted of the following types of instruments as of December 31, 2017 and 2016:
December 31, 2017
Fair value measurements using input type
Level 1
Level 2
Level 3
Total
Assets
Cash equivalents:
Money market funds
$
501
$
-
$
-
$
501
Available-for-sale:
Foreign banks and government debentures
-
50,043
-
50,043
Corporate debentures
-
46,957
-
46,957
Total financial assets
$
501
$
97,000
$
-
$
97,501

Liabilities
Contingent consideration
$
-
$
-
$
1,550
$
1,550
Total financial liabilities
$
-
$
-
$
1,550
$
1,550

December 31, 2016
Fair value measurements using input type
Level 1
Level 2
Level 3
Total
Cash equivalents:
Money market funds
$
578
$
-
$
-
$
578
Available-for-sale:
Foreign banks and government debentures
-
54,100
-
54,100
Corporate debentures
-
41,319
-
41,319
Total financial assets
$
578
$
95,419
$
-
$
95,997

The table below presents the changes in Level 3 contingent consideration obligation measured on a recurring basis and related to business combination of Seculert in January 2017:

December 31, 2017
Fair value at the beginning of the year
$
-
Acquisition date fair value of contingent consideration related to investment in Seculert (see Note 1c)
1,981
Changes in the fair value of contingent consideration in Seculert
(431
)
Fair value at the end of the year
$
1,550

F - 28
RADWARE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 4:-
FAIR VALUE MEASUREMENTS (Cont.)

The fair value of the contingent consideration related to the investment in Seculert was $1,550 as of December 31, 2017. The Company estimated the fair value of the contingent consideration using Monte Carlo simulation with a discount rate of 16% and based on various probabilities for Seculert to meet the revenues milestone and the completion of the R&D development (refer to Note 1c for further details). As of December 31, 2017 the R&D millstone was not achieved and no payments to Seculert's shareholders were due. Accordingly, the Company recorded a net income of $431 in 2017.

Changes in the contingent consideration are recorded in the statements of operations in operating expenses under Research and development, net.
NOTE 5:-
INVENTORIES

Inventories are comprised of the following:
December 31,
2017
2016
Raw materials and components
$
1,963
$
1,989
Work-in-progress
279
429
Finished products
16,530
14,696
$
18,772
$
17,114
NOTE 6:- PROPERTY AND EQUIPMENT, NET
December 31,
2017
2016
Cost:
Computer, peripheral equipment and software
$
84,670
$
78,521
Office furniture and equipment
10,416
10,103
Leasehold improvements
5,790
5,607
100,876
94,231
Accumulated depreciation:
Computer, peripheral equipment and software
67,275
59,696
Office furniture and equipment
6,684
5,382
Leasehold improvements
3,275
2,799
77,234
67,877
Property and equipment, net
$
23,642
$
26,354

Depreciation expenses for the years ended December 31, 2017, 2016 and 2015 were $ 10,001,     $ 9,253 and $ 8,163, respectively.
F - 29

RADWARE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 6:- PROPERTY AND EQUIPMENT, NET (Cont.)

In 2016, the Company commenced a project for a global roll-out of its Enterprise Resource Planning systems ("ERP"). The Company capitalizes costs incurred related to the system according to ASC 350-40 "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use". As of December 31, 2017 and 2016, the Company capitalized $1,526 and $ 2,721, respectively, which is included in "Computer, peripheral equipment and software".
NOTE 7:-
INTANGIBLE ASSETS, NET

Intangible assets:
Weighted
average
amortization
December 31,
Period
2017
2016
(years)
Cost:
Acquired technology
7.9
$
25,561
$
16,314
Customers relationships and brand name
5.8
9,817
9,817
35,378
26,131
Accumulated amortization:
Acquired technology
15,297
14,160
Customers relationships and brand name
9,666
9,572
24,963
23,732
Intangible assets, net
$
10,415
$
2,399

Amortization expenses for the years ended December 31, 2017, 2016 and 2015 were $ 1,231, $ 1,119 and $ 1,238 respectively.

Future estimated amortization expenses for the years ending:

December 31,
2018
$
1,726
2019
1,713
2020
1,072
2021
1,039
2022 and thereafter
4,865
Total
$
10,415


F - 30

RADWARE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 8:-
OTHER PAYABLES AND ACCRUED EXPENSES
December 31,
2017
2016
Accrued expenses and other
$
5,939
$
8,330
Subcontractors accrual
1,692
2,081
Accrued taxes
6,523
4,108
Contingent consideration related to the acquisition
1,550
-
$
15,704
$
14,519
NOTE 9:-
COMMITMENTS AND CONTINGENT LIABILITIES

a.
Lease commitments:

The facilities of the Group are leased under various operating lease agreements, which expire on various dates, the latest of which is on May 31, 2022. Aggregate minimum rental payments under non-cancelable operating leases as of December 31, 2017 and for each succeeding fiscal year indicated below are (in the aggregate) as follows:

2018
$
5,711
2019
4,190
2020
2,412
2021
675
2022
39
$
13,027

Total rent expenses for the years ended December 31, 2017, 2016 and 2015 were $ 6,161, $ 5,377 and $ 4,998 respectively (see also Note 15b).

b.
Litigation:

1.
On April 4, 2016, F5 Networks, Inc. ("F5") filed a lawsuit against our Subsidiary ("Radware Inc.") in the United States District Court for the Western District of Washington, alleging infringement of three U.S. patents of F5 relating to Radware Inc. ADC and WAF products.  The Company denies that any of its products infringe any valid claims of the asserted F5 patents and it intends to continue to vigorously oppose F5's claims.  On December 16, 2016, the Company filed an amended counterclaim in this action for patent infringement of a recently issued Radware patent directed to outbound link load balancing.  In June 2017, the case was transferred to the United States District Court for the Northern District of California.  In November 2017, the Court entered a partial stay of the case pending resolution of an Inter Partes Review of Radware's patent through the end of April 2018.  However, since discovery and litigation is still in a preliminary stage, the Company, based on its legal advisors, cannot estimate what impact, if any, the litigation may have on its results of operations, financial condition or cash flows.

F - 31
RADWARE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 9:-
COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)
2.
On August 29, 2013, F5 filed an amended answer and counterclaim in an action brought by the Company against F5 on May 1, 2013 for infringement of three of the Company’s patents regarding link load balancing technology. The Company prevailed in its affirmative case at trial, resulting in a damages award of $6,800 plus costs. The Court also permanently enjoined F5 from infringing the Company’s patents-in-suit.  In its counterclaim, F5 alleged infringement of four F5 patents related to cookie persistence technology. In particular, while F5 acknowledged that the Company is licensed to each of the F5 patents-in-suit, F5 contends that the Company’s AppDirector and Alteon product lines perform unlicensed modes of the patents-in-suit. F5’s counterclaim further alleged trade libel and unfair competition resulting from statements allegedly made by the Company asserting that F5 is responsible for certain internet service problems at major banks, including the Bank of America. On December 6, 2013, the Company filed an answer denying the allegations in F5’s counterclaims. On June 26, 2014, pursuant to the parties’ joint stipulation, the Court dismissed with prejudice F5’s patent infringement counterclaim with respect to the Company’s AppDirector product line. In June 2015, in response to the Company’s Summary Judgment Motion, F5 conceded that the current version of Alteon does not infringe any of the F5 patents-in-suit and that its allegations are limited to a previous version of Alteon. On January 7, 2016, pursuant to the parties’ joint stipulation, the Court dismissed with prejudice F5’s trade libel and unfair competition counterclaims.  On May 9, 2016, F5 accepted our offer for judgment of $40 all of F5’s remaining claims and on September 7, 2016 the Court entered judgment in the same amount. This portion of the judgment is not appealable. After judgment, both the Company and F5 appealed other portions of the judgment to the Federal Circuit. F5 appealed the judgment for the Company, while the Company appealed orders that limited the amount of damages and the scope of the permanent injunction. F5 has posted a bond with the Court for the entire judgment amount in favor of the Company.
The Federal Circuit affirmed the entire judgment on September 18, 2017 and remanded the case to the District Court on October 25, 2017, upon expiration of the time allowed for either party to request reconsideration of the affirmance.  Upon remand, the case was re-assigned to Judge Chabria on November 21, 2017.  On November 28, 2017, the Company moved to release the bond posted by F5. On December 6, 2017, the Court granted the Company’s motion.  On January 16, 2018 the Company filed the necessary tax documents to collect the funds, which, together with interest amounted to $6,900 and which were in turn released by the Court on January 29, 2018.
The above amount was recorded as other income in the statement of loss as of December 31, 2017.
F-32
RADWARE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 9:-
COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)

3.
In July 2017 the Company reached a settlement with the Israeli Tax Authorities ("ITA") regarding the Company's corporate tax returns from the years 2012, 2013 and 2014. The settlement amounted to a total payment of $ 10,728 (NIS 37,727). The Company had a provisions for the related years in the amount of $ 10,950. The amount in excess (approximately $ 200) was recorded as an additional tax benefit during 2017.

4.
From time to time, the Company is party to other various legal proceedings, claims and litigation that arise in the normal course of business. It is the opinion of management that the ultimate outcome of these matters will not have a material adverse effect on the Company's financial position, results of operations or cash flows and believes that it had provided an adequate accrual to cover the costs to resolve the aforementioned legal proceedings, demands and claims.
NOTE 10:- SHAREHOLDERS' EQUITY

The Company's shares are listed for trade on the NASDAQ Global Select Market under the symbol "RDWR".

a. Rights of shares:

Ordinary Shares:

The ordinary shares confer upon the holders the right to receive notice to participate and vote in shareholders meetings of the Company and to receive dividend, if declared.

b. Treasury stock:

In April 2016, the Company's Board of Directors authorized a new plan for the repurchase of up to an aggregate amount of $ 40,000 of the Company's Ordinary shares in the open market, subject to normal trading restrictions, or in privately negotiated transactions. This plan expired on April 30, 2017. In April 2017 the Company's Board of Directors authorized a new plan for the repurchase of up to an aggregate of $ 40,000 of the Company's Ordinary shares in the open market, subject to normal trading restrictions, or in privately negotiated transactions. This plan will expire on April 24, 2018. During 2017 and 2016 the Company purchased a total of 25,782 and 1,884,030 of its Ordinary shares for total consideration of $ 413 and $ 21,980, respectively. Total consideration for the purchase of these Ordinary shares was recorded as Treasury stock, at cost, as part of shareholders' equity.

c. Dividends:

Dividends, if any, will be paid in NIS. Dividends paid to shareholders outside Israel may be converted to U.S. dollars on the basis of the exchange rate prevailing at the date of the conversion. The Company does not intend to pay cash dividends in the foreseeable future.
F-33
RADWARE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 10:- SHAREHOLDERS' EQUITY (Cont.)

d. Stock Option Plans:

The Company has two stock option plans, the Company's Key Employee Share Incentive Plan (1997) as amended and restated (the "1997 Plan") and the Directors and Consultants Option Plan (the "DC Plan" and together with the 1997 Plan, Stock Option Plans"). Under the Stock Option Plans, options may be granted to officers, directors, employees and consultants of the Group. The exercise price per share under the Stock Option Plans was generally not less than the market price of an Ordinary share at the date of grant. The options expire 5.2 years from the grant date. The options vest primarily over four years. Each option is exercisable for one ordinary share. Any options, which are forfeited or not exercised before expiration, become available for future grants.

Pursuant to the Stock Option Plans, the Company reserved for issuance 30,272,967 Ordinary shares. As of December 31, 2017, an aggregate of 1,128,012 ordinary shares of the Company were still available for future grants.

On February 1, 2010, the Company's Board of Directors adopted an additional addendum to the share option plan allowing the allocation of short-term options to grantees who are not residents of Israel or the United States, with a grant price of 90% of the closing market price of the shares on the NASDAQ on the date of grant of a respective option award. As of December 31, 2016, 1,000,000 Ordinary shares have been reserved for option grants under this addendum. As of December 31, 2016, an aggregate of 763,306 ordinary shares of the Company, under this addendum, were still available for future grants.

Restricted Shares Units ("RSUs"):

In addition to granting stock options, since 2013, the Company started to routinely grant Restricted Stock Units ("RSUs") under the 1997 Plan. RSUs vest primarily over a four years period of employment. RSUs that are cancelled or forfeited become available for future grants.

Employee Stock Purchase Plan ("ESPP"):

On February 1, 2010 the Company's Board of Directors adopted the 2010 Employee Share Purchase Plan ("ESPP"), which provides for the issuance of a maximum of 2,000,000 Ordinary shares. Pursuant to the ESPP, eligible employees (including only Israeli and United States residents) could have up to 10% of their net income withheld, up to certain maximums, to be used to purchase the Company's Ordinary shares. The ESPP is implemented with overlapping one year Offering Periods, each one consisting of two purchases, once in every six-month period. The price of each Ordinary share purchased under the ESPP is equal to 90% of the closing price for the shares on the respective Offering Date.

As of December 31, 2017, 1,744,440 Ordinary shares are available for issuance under future ESPP. During 2017, 2016 and 2015 there was no offering under the ESPP.

F-34
RADWARE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 10:- SHAREHOLDERS' EQUITY (Cont.)

Modification of Stock Options:
During 2016, the Board of Directors of the Company approved the repricing of 667,750 stock options for several employees and senior management, previously granted under the Stock Option Plans. As a result, the exercise price of the options was lowered to the price per share of the stock at the free market. There was no change in the number of shares subject to each option, vesting or other terms of the options. The incremental expense for the repricing of the options is approximately $1,187. For the years ended December 31, 2017 and 2016, the Company recorded expenses totaling $389 and $359, respectively, associated with the repricing.

A summary of employees and directors option activity under the Company's Stock Option Plans as of December 31, 2017is as follows:

Number of options
Weighted-average exercise price
Weighted- average remaining contractual term
(in years)
Aggregate intrinsic value
Outstanding at January 1, 2017
6,028,888
$
14.33
3.27
$
5,070
Granted
1,768,300
16.22
Exercised
(693,166
)
15.56
Expired
(58,700
)
19.12
Forfeited
(496,279
)
14.46
Outstanding at December 31, 2017
6,549,043
$
14.66
3.08
$
31,202
Exercisable at December 31, 2017
2,090,022
$
15.00
1.37
$
9,267
Vested and expected to vest at December 31, 2017
5,996,960
$
14.63
2.98
$
28,744
The aggregate intrinsic value of options outstanding at December 31, 2017, 2016 and 2015 represents intrinsic value of 6,506,043, 3,925,483 and 2,581,163, respectively, outstanding options that are in-the-money as of December 31, 2017.
The aggregate intrinsic value of options exercisable at December 31, 2017, 2016 and 2015 represents intrinsic value of 2,068,522, 982,890 and 1,035,702 outstanding options that are in-the-money as of December 31, 2017.

The weighted-average grant-date fair value of options granted during the years ended December 31, 2017, 2016 and 2015 was $ 4.31, $ 3.48 and $ 5.29, respectively.

As of December 31, 2017, there was approximately $ 10,265 of total unrecognized compensation costs related to non-vested share-based compensation arrangements granted under the Company's stock option plans (including expenses associated with the repricing).. That cost is expected to be recognized over a weighted-average period of 1.60 years. Total grant-date fair value of vested options for the year ended December 31, 2017 was approximately $ 10,532.

F-35
RADWARE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 10:- SHAREHOLDERS' EQUITY (Cont.)

The options outstanding under the Company's Stock Option Plans as of December 31, 2017, 2016 and 2015 have been separated into ranges of exercise price as follows:

December 31, 2017
Outstanding
Exercisable
Weighted
average
Weighted
Weighted
Ranges of
remaining
average
average
exercise
Number of
contractual
exercise
Number of
exercise
price
options
life (years)
price
options
price
$
10.04-14.74
4,253,357
2.94
13.53
1,227,982
14.00
$
15.09-19.30
2,252,686
3.36
16.63
840,540
16.26
$
20.62-23.66
43,000
2.47
22.79
21,500
22.79
6,549,043
2,090,022

The following table summarizes information relating to RSUs, as well as changes to such awards during 2017:

Year ended
December 31,
2017
Number in thousands
Outstanding at January 1, 2017
1,282,930
Granted
400,495
Vested
(277,720
)
Forfeited
(126,203
)
Outstanding as of December 31, 2017
1,279,502

As of December 31, 2017, there was approximately $ 10,667 of total unrecognized compensation costs related to non-vested RSUs granted under the Company's stock option plans. That cost is expected to be recognized over a weighted-average period of 1.60 years.
The weighted-average grant date fair value of RSUs granted during the year ended December 31, 2017, 2016 and 2015 were $ 16.24, 12.79 and 18.36, respectively.
Stock-based compensation was recorded in the following items within the consolidated statements of income (loss):

Year ended
December 31,
2017
2016
2015
Cost of revenues
$
241
$
180
$
141
Research and development, net
3,867
3,339
2,456
Sales and marketing
6,894
5,661
4,098
General and administrative
2,029
2,340
2,634
Total expenses
$
13,031
$
11,520
$
9,329

F-36
RADWARE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 11:-
EARNINGS (LOSS) PER SHARE

The following table sets forth the computation of basic and diluted net earnings per share:

Year ended
December 31,
2017
2016
2015
Numerator for basic and diluted net earnings (loss) per share:
Net income (loss)
$
(7,493
)
$
(8,659
)
$
18,569
Weighted average shares outstanding, net of treasury stock:
Denominator for basic net  earnings (loss) per share
43,475,844
43,868,221
45,895,321
Effect of dilutive securities:
Employee stock options
-
-
843,283
Denominator for diluted net earnings (loss) per share
43,475,844
43,868,221
46,738,604
Basic net earnings (loss) per share
$
(0.17
)
$
(0.20
)
$
0.40
Diluted net earnings (loss) per  share
$
(0.17
)
$
(0.20
)
$
0.40


F-37
RADWARE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data

NOTE 12:-
TAXES ON INCOME

a. General:

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
2017
2016
Beginning balance
$
13,217
$
12,306
Additions for prior year tax positions
290
911
Decrease for prior year tax positions
(1,245
)
-
Additions for current year tax positions
-
-
Decreases relating to the settlement with tax authorities
(10,728
)
-
Ending balance
$
1,534
$
13,217

In July 2017 the Company reached a settlement with the Israeli Tax Authorities ("ITA") regarding the Company's corporate tax returns from the years 2012, 2013 and 2014. As a result the Company's Israeli tax returns have been examined for all years including and prior to fiscal 2014, and the Company is no longer subject to audit for these periods. (See also Note 9b(2)).

As of December 31, 2017, the entire amount of the unrecognized tax benefits could affect the Company's income tax provision and the effective tax rate.

During the years ended December 31, 2017, 2016 and 2015 amounts of $ 290, $ 911, and $ 36, respectively, were added to the unrecognized tax benefits derived from interest and exchange rate differences expenses related to prior years' uncertain tax positions. As of December 31, 2017 and 2016, the Company had accrued interest liability related to uncertain tax positions in the amounts of $ 134 and $ 1,225 respectively, which is included within income tax accrual on the balance sheets.

Exchange rate differences are recorded within financial income, net, while interest is recorded within taxes on income expense.

The Company's U.S subsidiary files income tax return in the U.S federal jurisdiction. Tax returns have been examined for all years prior to fiscal 2010, and the Company's U.S subsidiary is no longer subject to audit for these periods.

The Company believes that it has adequately provided for any reasonably foreseeable outcome related to tax audits and settlement. The final tax outcome of its tax audits could be different from that which is reflected in the Company's income tax provisions and accruals. Such differences could have a material effect on the Company's income tax provision and net income in the period in which such determination is made.


F-38
RADWARE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data

NOTE 12:-
TAXES ON INCOME (Cont.)

b.
Israeli taxation:

1.
Foreign Exchange Regulations:

Commencing in taxable year 2003, the Company has elected to measure its taxable income and file its tax return under the Israeli Income Tax Regulations. Under the Foreign Exchange Regulations the Israeli company is calculating its tax liability in U.S. Dollars according to certain orders. The tax liability, as calculated in U.S. Dollars is translated into NIS according to the exchange rate as of December 31st of each year.

2.
Tax rates:

The Israeli corporate tax rate in 2017 is 24% (2016 -25% and 2015 – 26.5%). A company is taxable on its real capital gains at the corporate tax rate in the year of sale.

In August 2013, the Israeli Parliament issued the Law for Changing National Priorities (Legislative Amendments for Achieving Budget Targets for 2013 and 2014), 2013 ("the Budget Law"), which consists, among others, of taxation of revaluation gains effective from August 1, 2013 but contingent on the publication of regulations that define what should be considered as "retained earnings not subject to corporate tax" and regulations that set forth provisions for avoiding double taxation of foreign assets. As of the date of approval of these financial statements, no such regulations were issued.

In December 2016, the Israeli Parliament approved the Economic Efficiency Law (Legislative Amendments for Applying the Economic Policy for the 2017 and 2018 Budget Years), 2016 which reduces the corporate income tax rate to 24% (instead of 25%) effective from January 1, 2017 and to 23% effective from January 1, 2018.

3.
Tax benefits under the Law for the Encouragement of Capital Investments, 1959 ("the Law"):

Under the amended Law, as amended in April 2005 a company may claim the tax benefits offered by the Investment Law directly in its tax returns, provided that its facilities meet the criteria for tax benefits set out by the Amendment. A company is also granted a right to approach the Israeli Tax Authorities for a pre-ruling regarding their eligibility for benefits under the Amendment.

The Company's income derived from the Privileged Enterprise will be entitled to a tax exemption for a period of two years and to an additional period of five to eight years with reduced tax rates of 10%-25% (based on percentage of foreign ownership).

F-39
RADWARE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 12:-
TAXES ON INCOME (Cont.)

Tax benefits are available under the Amendment to production facilities (or other eligible facilities), which are generally required to derive more than 25% of the Company's business income from export. In order to be eligible for the tax benefits, the Amendment states that a company must make an investment in the Privileged Enterprise exceeding a minimum amount specified in the law. Such investment may be made over a period of no more than three years ending at the end of the year in which the company requested to have the tax benefits apply to the Privileged Enterprise ("the Year of Election"). Where a company requests to have the tax benefits apply to an expansion of existing facilities, then only the expansion will be considered a Privileged Enterprise and the company's effective tax rate will be the result of a weighted combination of the applicable rates. In this case, the minimum investment required in order to qualify as a Privileged Enterprise is required to exceed a certain percentage of the company's production assets before the expansion. The duration of tax benefits is subject to a limitation of the earlier of 7 to 10 years from the commencement year, or 12 years from the first day of the year of election.

The Company elected 2009 and 2012 as years of election according to the Law prior to the reform mentioned below.

In the event of distribution of dividends from tax-exempt income generated under Privileged or Approved Enterprise, the amount distributed will be subject to the same reduced corporate tax rate that would have been applied to the Approved Enterprise's and Privileged Enterprise's income.

In addition, as a result of the amendment, tax-exempt income attributed to Privileged Enterprise, will subject the Company to taxes upon distribution in any manner including complete liquidation.

Out of the Company's retained earnings as of December 31, 2017, $ 128,750 are tax-exempted attributable to its Privileged Enterprise programs. If such tax-exempt income is distributed in a manner other than upon complete liquidation of the Company, it would be taxed at the corporate tax rate applicable to such profits, and an income tax liability of up to $ 30,900 would be incurred as of December 31, 2017.

The Company's Board of Directors has determined that it will not distribute any amounts of its undistributed tax-exempt income as dividend. The Company intends to reinvest its tax-exempt income and not to distribute such income as a dividend. Accordingly, no deferred income taxes have been provided on income attributable to the Company's Approved Enterprise and Privileged Enterprise programs as the undistributed tax exempt income is essentially permanent by reinvestment.

F-40
RADWARE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 12:-
TAXES ON INCOME (Cont.)

In 2012, new legislation amending to the Investment Law was adopted. Under this new legislation, a uniform corporate tax rate will apply to all qualifying income of certain Industrial Companies, as opposed to the current law's incentives, which are limited to income from Approved Enterprises during their benefits period. Under the new law as amended in July 2013, and starting January 1, 2014 the uniform tax rate will be 9% in areas in Israel designated as Development Zone A and 16% elsewhere in Israel.

Under the transition provisions of the new legislation, the Company decided to irrevocably implement the new law, effective January 1, 2014.

Income from sources other than the "Preferred Enterprise" will be subject to the tax at the regular rate.
In December 2016, the Economic Efficiency Law (Legislative Amendments for Applying the Economic Policy for the 2017 and 2018 Budget Years), 2016 which includes Amendment 73 to the Law for the Encouragement of Capital Investments ("the Amendment") was published. According to the Amendment, a preferred enterprise located in development area A will be subject to a tax rate of 7.5% instead of 9% effective from January 1, 2017 and thereafter (the tax rate applicable to preferred enterprises located in other areas remains at 16%).
The new tax tracks under the Amendment are as follows:
Technological Preferred Enterprise - an enterprise for which total consolidated revenues of its parent company and all subsidiaries are less than NIS 10 billion. A technological preferred enterprise, as defined in the Law, which is located in the center of Israel will be subject to tax at a rate of 12% on profits deriving from intellectual property (in development area A - a tax rate of 7.5%).

Special technological preferred enterprise - an enterprise for which total consolidated revenues of its parent company and all subsidiaries exceed NIS 10 billion. Such enterprise will be subject to tax at a rate of 6% on profits deriving from intellectual property, regardless of the enterprise's geographical location.

Any dividends distributed to "foreign companies", as defined in the Law, deriving from income from the technological enterprises will be subject to tax at a rate of 4%.

F-41
RADWARE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 12:-
TAXES ON INCOME (Cont.)
The technological preferred enterprise regulation stipulated by the law was enacted during the second quarter of 2017, effective from January 1, 2017. The Company applied the new preferred enterprise effective from January 1, 2017.

c.
Taxes on income are comprised as follows:

Year ended
December 31,
2017
2016
2015
Current taxes
$
5,561
$
4,338
$
5,082
Deferred taxes
91
(2,687
)
215
$
5,652
$
1,651
$
5,297
Domestic
$
238
$
283
$
3,084
Foreign
5,414
1,368
2,213
$
5,652
$
1,651
$
5,297

Year ended
December 31,
2017
2016
2015
Domestic taxes:
Current taxes
$
238
$
494
$
2,715
Deferred taxes
-
(211
)
369
238
283
3,084
Foreign taxes:
Current taxes
5,323
3,844
2,367
Deferred taxes
91
(2,476
)
(154
)
5,414
1,368
2,213
$
5,652
$
1,651
$
5,297


F-42

RADWARE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 12:-
TAXES ON INCOME (Cont.)

d.
Deferred income taxes:

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's and its subsidiaries' deferred tax liabilities and assets are as follows:

December 31,
2017
2016
Carryforward tax losses
$
8,280
$
2,210
Deferred revenues
6,598
5,764
Temporary differences
5,216
5,881
Unrealized losses on marketable securities
132
7
Intangible assets
-
36
Deferred tax assets before valuation allowance
20,226
13,898
Valuation allowance
(5,121
)
(1,495
)
Net deferred tax asset
15,105
12,403
Intangible assets, including goodwill
(5,646
)
(2,997
)
Depreciable assets
(2,008
)
(1,989
)
Deferred tax liability
(7,654
)
(4,986
)
Net deferred tax assets
$
7,451
$
7,417

The net change in the total valuation allowance for the year ended December 31, 2017 was mainly relates to the losses carryforwards of the Israeli subsidiaries that the Company concluded that it is not more likely than not that the net deferred tax assets will be realized and therefore a valuation allowance has been recorded against these assets.

December 31,
2017
2016
Domestic deferred tax asset, net
$
1,359
$
1,233
Foreign deferred tax asset, net
6,092
6,184
$
7,451
$
7,417

F-43

RADWARE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 12:-
TAXES ON INCOME (Cont.)

e.
Foreign:

During 2017, the Company's subsidiary in the U.S. is subject to U.S. federal tax at the rate of 34%.

On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the "TCJA") was signed into law making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a corporate tax rate decrease from 34% to 21% effective for tax years beginning after December 31, 2017. The Company has calculated its best estimate of the impact of the TCJA in its year end income tax provision in accordance with its understanding of the TCJA and guidance available as of the date of this filing and as a result has recorded $ 3,249 as an additional income tax expense in the fourth quarter of 2017, the period in which the legislation was enacted.
The aforesaid provisional amounts are based on the Company’s initial analysis of the Act as of December 31, 2017. Given the significant complexity of the Act, anticipated guidance from the U.S. Treasury about implementing the Act, the potential for additional guidance from the Securities and Exchange Commission or the Financial Accounting Standards Board related to the Act, as well as additional analysis and revisions to be conducted by the Company, these estimates may be adjusted during 2018 .

Through December 31, 2017, the U.S. subsidiary had a U.S. federal loss carry forward of $ 5,075, which can be carried forward and offset against taxable income up to 20 years, expiring between fiscal 2024 and fiscal 2027.

Utilization of U.S. net operating losses may be subject to substantial annual limitation due to the "change in ownership" provisions of the Internal Revenue Code of 1986 and similar state provisions. The annual limitation may result in the expiration of net operating losses before utilization.

f.       Income taxes of non-Israeli subsidiaries:

Non-Israeli subsidiaries are taxed according to the tax laws in their respective countries of residence.

The Company does not provide deferred tax liabilities when it intends to reinvest earnings of foreign subsidiaries indefinitely.

F-44
RADWARE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 12:-
TAXES ON INCOME (Cont.)

g.
A reconciliation between the theoretical tax expense, assuming all income is taxed at the statutory tax rate applicable to income of the Company and the actual tax expense as reported in the statement of operations is as follows:

Year ended
December 31,
2017
2016
2015
Income (loss) before taxes, as reported in the consolidated statements of income
$
(1,841
)
$
(7,008
)
$
23,866
Statutory tax rate
24
%
25
%
26.5
%
Theoretical tax expense (benefit) on the above amount at the Israeli statutory tax rate
$
(442
)
$
(1,752
)
$
6,324
Tax adjustment in respect of different tax rate of foreign subsidiary
334
427
622
Non-deductible expenses and other permanent differences
375
200
322
Deferred taxes on losses for which valuation allowance was provided, net
1,288
463
377
Utilization of tax losses and deferred taxes  for which valuation allowance was provided, net
(709
)
-
(555
)
Stock compensation relating to stock options per ASC No. 718
1,976
1,342
1,186
Income taxes in respect of prior years
(1,038
)
-
-
Change of Federal tax rate
3,249
-
-
Approved, Privileged and Preferred enterprise loss (benefits) (*)
347
916
(3,047
)
Other
272
55
68
Actual tax expense
$
5,652
$
1,651
$
5,297
(*) Basic earnings per share amounts of the benefit resulting from the "Approved, Privileged and Preferred Enterprise" status
$
0.00
$
0.03
$
0.07
Diluted earnings per share amounts of the benefit resulting from the "Approved, Privileged and Preferred Enterprise" status
$
0.00
$
0.03
$
0.06
F-45
RADWARE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 12:-
TAXES ON INCOME (Cont.)

h.
Income (loss) before income taxes is comprised as follows:

Year ended
December 31,
2017
2016
2015
Domestic
$
(5,918
)
$
(11,475
)
$
20,247
Foreign
4,077
4,467
3,619
Income (loss) before income taxes
$
(1,841
)
$
(7,008
)
$
23,866
NOTE 13:-
GEOGRAPHIC INFORMATION

Summary information about geographic areas:

The Company operates in one reportable segment (see Note 1 for a brief description of the Company's business). The total revenues are attributed to geographic areas based on the location of the end-users.

The following table presents total revenues for the years ended December 31, 2017, 2016 and 2015 from a geographical perspective:

Year ended
December 31,
2017
2016
2015
Revenues from sales to customers located at:
The United States
$
78,464
$
67,953
$
69,125
America – other
19,437
16,780
19,560
EMEA *)
56,589
53,724
62,689
Asia Pacific
56,879
58,128
65,192
$
211,369
$
196,585
$
216,566

*)
Europe, the Middle East and Africa.


F-46
RADWARE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data

NOTE 13:-
GEOGRAPHIC INFORMATION (Cont.)

The following table presents long-lived assets as of December 31, 2017 and 2016 from a geographical perspective:

December 31,
2017
2016
Long-lived assets, by geographic region:
America (principally the United States)
$
1,822
$
1,973
Israel
20,832
22,963
EMEA - other
251
357
Asia Pacific
737
1,061
$
23,642
$
26,354
NOTE 14:-
SELECTED STATEMENTS OF INCOME DATA

Financial income, net:
Year ended
December 31,
2017
2016
2015
Financial income (expenses):
Interest on bank deposits and other
$
3,528
$
2,947
$
2,580
Amortization of premiums, accretion of discounts and interest on marketable debt securities, net
2,008
1,813
2,153
Gain from sale of available-for-sale marketable securities
18
1,771
2,438
Bank charges
(89
)
(116
)
(157
)
Foreign currency translation differences, net
(635
)
(674
)
(1,147
)
$
4,830
$
5,741
$
5,867


F-47
RADWARE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data

NOTE 15:- BALANCES AND TRANSACTIONS WITH RELATED PARTIES

Represents transactions and balances with other entities in which certain members of the Company's Board of Directors, management or shareholders have interest:

a.
The following related party balances are included in the balance sheets:

December 31,
2017
2016
Trade receivables and prepaid expenses
$
1,207
$
1,620
Trade payables and accrued expenses
$
205
$
636

b.
The following related party transactions are included in the statements of income:

Year ended
December 31,
2017
2016
2015
Revenues (1)
$
2,547
$
1,766
$
2,304
Cost of revenues (2)
$
4,280
$
3,095
$
1,691
Operating expenses, net - primarily lease, sub-contractors and communications (3)
$
4,853
$
4,546
$
4,640
Purchase of property and equipment
$
1,663
$
1,869
$
5,463

(1)
Distribution of the Company's products on a non-exclusive basis.

(2)
Related to cost of product purchased from one of the related companies.

(3)
The Company leases office space and purchases other miscellaneous services from certain companies, which are considered to be related parties. In addition, the Company subleases part of the office space to related parties and provides certain services to related parties.
F- 48
TABLE OF CONTENTS
Part IItem 1. Identity Of Directors, Senior Management and AdvisersItem 2. Offer Statistics and Expected TimetableItem 3. Key InformationItem 4. Information on The CompanyItem 4A. Unresolved Staff CommentsItem 5. Operating and Financial Review and ProspectsItem 6. Directors, Senior Management and EmployeesItem 7. Major Shareholders and Related Party TransactionsItem 8. Financial InformationItem 9. The Offer and ListingItem 10. Additional InformationItem 11. Quantitative and Qualitative Disclosures About Market RiskItem 12. Description Of Securities Other Than Equity SecuritiesPart IIItem 13. Defaults, Dividend Arrearages and DelinquenciesItem 14. Material Modifications To The Rights Of Security Holders and Use Of ProceedsItem 15. Controls and ProceduresItem 16A. Audit Committee Financial ExpertItem 16B. Code Of EthicsItem 16C. Principal Accountant Fees and ServicesItem 16D. Exemptions From The Listing Standards For Audit CommitteesItem 16E. Purchases Of Equity Securities By The Issuer and Affiliated PurchasersItem 16F. Change in Registrant S Certifying AccountantItem 16G. Corporate GovernanceItem 16H. Mine Safety DisclosurePart IIIItem 17. Financial StatementsItem 18. Financial StatementsItem 19. ExhibitsNote 1:- GeneralNote 2:- Significant Accounting PoliciesNote 2:- Significant Accounting Policies (cont.)Note 3:- Marketable SecuritiesNote 3:- Marketable Securities (cont.)Note 4:- Fair Value MeasurementsNote 4:- Fair Value Measurements (cont.)Note 5:- InventoriesNote 6:- Property and Equipment, NetNote 6:- Property and Equipment, Net (cont.)Note 7:- Intangible Assets, NetNote 8:- Other Payables and Accrued ExpensesNote 9:- Commitments and Contingent LiabilitiesNote 9:- Commitments and Contingent Liabilities (cont.)Note 10:- Shareholders' EquityNote 10:- Shareholders' Equity (cont.)Note 11:- Earnings (loss) Per ShareNote 12:- Taxes on IncomeNote 12:- Taxes on Income (cont.)Note 13:- Geographic InformationNote 13:- Geographic Information (cont.)Note 14:- Selected Statements Of Income DataNote 15:- Balances and Transactions with Related Parties

Exhibits

1.1 Memorandum of Association (A) 1.2 Amended and Restated Articles of Association (B) 4.1 Form of Directors and Officers Indemnity Deed (C) 4.2 Distributor Agreement with Bynet Data Communications Ltd. (D) 4.3 Summary of Material Terms of the Lease Agreements for the Companys Headquarters (E) 4.4 1997 Key Employee Share Incentive Plan, as amended and restated (F) 4.5 2010 Addendum (for international grantees) (G) 4.6 Radware Ltd. 2010 Employee Share Purchase Plan (H) 4.7 Amended and Restated Compensation Policy for Executive Officers and Directors (I) 8.1 List of Subsidiaries* 12.1 Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002* 12.2 Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002* 13.1 Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002** 13.2 Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002** 15.1 Consent of Independent Registered Public Accounting Firm*