20-F 1 zk2227592.htm 20-F RADWARE LTD.
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 20-F

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

 

OR

 

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

 

For the fiscal year ended

December 31, 2021

 

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

image provided by client

RADWARE LTD.

(Exact name of registrant as specified in its charter)

Israel

(Jurisdiction of incorporation or organization)

22 Raoul Wallenberg Street, Tel Aviv 6971917Israel

(Address of principal executive offices)

Guy Avidan

Chief Financial Officer

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

Trading Symbol

Name of each exchange on which registered

Ordinary Shares, NIS 0.05 par value per share

RDWR

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, 2021):

45,871,957 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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes  ☐ No

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

Large Accelerated Filer

Accelerated Filer ☐

Non-Accelerated Filer ☐

Emerging growth company

-2-


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. ☐

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

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

-3-


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.
 
When the following terms and abbreviations appear in the text of this annual report, they have the meanings indicated below:
 

“Companies Law” or the “Israeli Companies Law” are to the Israeli Companies Law, 5759-1999, as amended;
 

“dollars,” “$” or “US$” are to U.S. dollars;
 

“Nasdaq” is to the Nasdaq Stock Market LLC;
 

“NIS” or “shekels” are to New Israeli Shekels.
 

“ordinary shares” are to our Ordinary Shares, par value NIS 0.05 per share;
 

the “SEC” is to the U.S. Securities and Exchange Commission;
 

the "U.S." is to the United States; and
 

“U.S. GAAP” are to generally accepted accounting principles in the United States.
 
We have registered trademarks for, among others, Radware®; Radware Logo:
 
®; OnDemand Switch®; Alteon®; APSolute®; LinkProof®; DefensePro®; CID®; SIPDirector®; AppDirector®; AppXcel®; AppXML®; AppWall®; APSolute Insite®; StringMatch Engine®; Web Server Director®; APSolute Vision®; vDirect®; Alteon VA®; AppShape®; FastView®; DefenseFlow®; CyberStack®; Virtual DefensePro®; VADI® (Virtual Application Delivery Infrastructure); ShieldSquare® and the ShieldSquare Logo: ®, and we have non-registered trademarks for, among others, ADC-VX™ 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 April 4, 2022, the exchange rate between the NIS and the dollar, as quoted by the Bank of Israel, was NIS 3.21 to $1.00. Unless derived from our financial statements or indicated otherwise by the context, 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.
 
- 4 -

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, 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.
 
- 5 -

Table of Contents
 

8
8
8
9
A.
[Reserved]
9
B.
Capitalization and Indebtedness
9
C.
Reasons for the Offer and Use of Proceeds
9
D.
Risk Factors
9
38
A.
History and Development of the Company
38
B.
Business Overview
39
C.
Organizational Structure
58
D.
Property, Plants and Equipment
60
60
61
A.
Operating Results
61
B.
Liquidity and Capital Resources
71
C.
Research and Development, Patents and Licenses, etc.
75
D.
Trend Information
75
E.
Critical Accounting Estimates
79
83
A.
Directors and Senior Management
83
B.
Compensation
87
C.
Board Practices
91
D.
Employees
95
E.
Share Ownership
96
100
A.
Major Shareholders
100
B.
Related Party Transactions
102
C.
Interests of Experts and Counsel
106
107
A.
Consolidated Statements and other Financial Information
107
B.
Significant Changes
107

- 6 -

108
A.
Offer and Listing Details
108
B.
Plan of Distribution
108
C.
Markets
108
D.
Selling Shareholders
108
E.
Dilution
108
F.
Expenses of the Issue
108
109
A.
Share Capital
109
B.
Memorandum and Articles of Association
109
C.
Material Contracts
109
D.
Exchange Controls
109
E.
Taxation
109
F.
Dividends and Paying Agents
124
G.
Statement by Experts
124
H.
Documents on Display
124
I.
Subsidiary Information
124
125
127

128
128
128
128
129
130
130
130
131
132
132
133
133

134
134
134
134

136
 
- 7 -


PART I
 
ITEM 1.
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
 
Not applicable.
 
ITEM 2.
OFFER STATISTICS AND EXPECTED TIMETABLE
 
Not applicable.
 
- 8 -

ITEM 3.
KEY INFORMATION
 
A.           [Reserved]
 
B.           Capitalization and Indebtedness
 
Not applicable.
 
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.
 
Summary of Risk Factors
 
The following constitutes a summary of the material risks relevant to an investment in our Company:

Risks Related to Our Business and Our Industry
 
Changing or severe global economic conditions could have a material adverse effect on our results of operations.
 
We depend upon independent distributors to sell our solutions to customers.  If our distributors do not succeed in selling our products and services, we may not be able to operate profitably.
 
We must manage our anticipated growth effectively in order to remain profitable.
 
The COVID-19 pandemic has impacted and may continue to impact our business, operating results and financial condition.
 
A shortage of components or manufacturing capacity could cause a delay in our ability to fulfill orders or increase our manufacturing costs.
 
We rely on a few vendors to provide our hardware platforms and components for the manufacture of our products.
 
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Our success depends on our ability to attract, train and retain highly qualified personnel.
 
Competition in the market for cyber security and application delivery solutions and in our industry in general is intense. If we are unable to compete effectively, we may lose market share, and we may be unable to maintain profitability.
 
We must develop new solutions and enhance existing solutions to remain competitive.
 
Our reputation and business could be harmed based on real or perceived shortcomings, defects or vulnerabilities in our solutions or if our end-users experience security breaches, which could have a material adverse effect on our business, reputation and operating results.
 
As a security provider, if our internal network system is compromised by cyber-attackers or other malicious actors, or by a critical system failure, our reputation, financial condition and operating results could be materially adversely affected.

Outages, interruptions or delays in hosting services could impair the delivery of our cloud-based security services and harm our business.
 
Our global operations may expose us to additional risks.

We have incurred net losses in the past and may incur losses in the future.

A slowdown in the growth of the cyber security and application delivery solutions market would reduce our addressable market and solutions sales.
 
If the market for our cloud-based solutions does not continue to develop and grow, we may incur capital and operation losses.
 
Our solutions may have long sales cycles, which may reduce the predictability of our financial performance.
 
We may pursue acquisitions or other investments that could disrupt our business and harm our financial condition.

Our business in countries with a history of corruption and transactions with foreign governments increases the risks associated with our international activities.

Currency exchange rates and fluctuations of exchange rates could have a material adverse effect on our results of operations.
 
Undetected defects and errors may increase our costs and impair the market acceptance of our products.
 
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Our business and operating results could suffer if third parties infringe upon our proprietary technology.
 
Our products may infringe on the intellectual property rights of others.
 
Laws, regulations and industry standards affecting our business are evolving, and unfavorable changes could harm our business.
 
Some of our solutions contain “open source” and third-party software, and any failure to comply with the terms of one or more of these open source and third-party software licenses could negatively affect our business.

An increasing amount of intangible assets and goodwill on our books may in the future lead to significant impairment charges.
 
Additional tax liabilities, including due to tax positions we took, could materially adversely affect our results of operations and financial condition.

The adoption of tax reforms 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.
 
If we are unable to realize our investment objectives, our financial condition and results of operations may be adversely affected.
 
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.
 
Major disruptions or deficiencies of our information systems could disrupt our operations and cause unanticipated increases in our costs.
 
Our business may be affected by sanctions, export controls and similar measures targeting Russia and other countries and territories as well as other responses to Russia’s military conflict in Ukraine, including indefinite suspension of operations in Russia and dealings with Russian entities by many multi-national businesses across a variety of industries.

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.
 
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.
 
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Our share price has been volatile in the past and may be subject to volatility in the future.
 
If we are characterized as a passive foreign investment company, our U.S. shareholders may suffer adverse tax consequences.
 
If a U.S. person is treated as owning at least 10% of our ordinary shares, such holder may be subject to adverse U.S. federal income tax consequences.
 
Risks Related to Operations in Israel
 
Political, economic and military instability in the Middle East or Israel may harm our business.
 
The tax benefits we may receive in connection with our preferred enterprise program 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 obtained benefits from the Israeli Innovation Authority, that subject us to ongoing restrictions.
 
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.
 
Your rights and responsibilities as a shareholder will be governed by Israeli law, which may differ in some respects from the rights and responsibilities of shareholders of U.S. companies.
 
Risks Related to Our Business and Our Industry
 
Changing or severe global economic conditions could have a material adverse effect on our results of operations.
 
Our business is affected by global economic conditions, uncertainties and downturns, including as a result of the war in Ukraine (see the risk factor below titled “Our business may be affected by sanctions, export controls and similar measures targeting Russia and other countries and territories as well as other responses to Russia’s military conflict in Ukraine, including indefinite suspension of operations in Russia and dealings with Russian entities by many multi-national businesses across a variety of industries”), the tensions between China and Taiwan and the COVID-19 pandemic, which may impact current and anticipated market demand for our solutions. Uncertainties about current global economic conditions continue to pose a risk as customers may postpone or reduce demand and spending in response to such uncertainties. This could result in, among other things, a reduction in our revenues or a failure to achieve anticipated revenue growth, longer sales cycles, and slower adoption of new technologies as well as downward pressure on the price of our solutions. Each of the above scenarios could have a material adverse effect on our business, operating results and financial condition.
 
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We depend upon independent distributors to sell our solutions to customers.  If our distributors do not succeed in selling our products and services, we may not be able to operate profitably.
 
Our growth strategy depends upon, among other things, increasing sales of our solutions, both directly and indirectly through our different distribution channels. We sell our solutions primarily to independent distributors, including value added resellers (VARs), original equipment manufacturers (OEMs) and global system integrators (GSIs), and are highly dependent upon these distributors’ active marketing and sales efforts. Our distribution agreements with our distributors generally are non-exclusive, ranging in duration with no renewal obligation on the part of our distributors. Our distribution agreements also typically do not prevent our distributors from selling products and services of our competitors and do not contain minimum sales or marketing performance requirements. As a result, our distributors may give higher priority to products and services of our competitors or their own products, thereby reducing their efforts to sell our products and services. 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 services, and we may not succeed in doing so. Any changes in our distributor relationships or 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 and services, could impair our ability to sell our products and services and have a material adverse effect on our business, financial condition and results of operations.
 
We must manage our anticipated growth effectively in order to remain 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 increase and we may not be profitable.
 
The COVID-19 pandemic has impacted and may continue to impact our business, operating results and financial condition.
 
The COVID-19 pandemic has resulted in a widespread health crisis that has adversely affected businesses, economies and financial markets worldwide, placed constraints on the operations of businesses, caused disruptions in global supply chains, and decreased consumer mobility and activity. Our business has been affected in various ways, including in our sales and marketing, our supply chain and our employees.
 
For example, the COVID-19 pandemic has caused companies to shift working arrangements to feature remote access and working from home, and, as a result, required some of our customers to invest in enabling and securing such remote access, resulting in an increased demand for our solutions that offset some of the negative impacts of COVID-19 described in this annual report. There is no guarantee that any increased investments by our customers will continue after the COVID-19 pandemic subsides. At the same time, the COVID-19 pandemic has negatively impacted our business by causing some delays in purchasing decisions by some of our customers, and some difficulties in acquiring new customers given travel limitations and limits on in-person interactions with our customers and prospective customers, as well as some disruptions in our supply chain and delivery of products to customers. For example, circumstances related to the COVID-19 pandemic have triggered disruptions in global supply chains and interruptions and delays involving freight carriers that, in turn, have caused difficulties in timely obtaining components from our suppliers, as well as transportation of our products after manufacture to our customers.
 
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The extent to which COVID-19 will continue to impact our business, financial condition or results of operations, will depend on future developments, which are uncertain and cannot be predicted, including new information which may emerge concerning the severity of COVID-19 and the actions to contain COVID-19 or treat its impact, among others.
 
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 fulfilment issues in the future and certain components are presently available to us only from limited sources (see the risk factor below titled “We rely on a few vendors to provide our hardware platforms and components for the manufacture of our products” and the discussion under Item 4.B "Business Overview—Manufacturing and Suppliers"). We may not be able to diversify sources in a timely and cost-effective manner, which could harm our ability to deliver products to customers and adversely impact present and future sales and profitability.
 
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 or transportation and freight carriers issues 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, such as due to the worldwide chipset shortage, 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 what transpires, and we commit to purchase more components than we actually need. 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 purchases of such dated components for our legacy products.
 
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Any disruption in our supply chain, such as disruptions resulting from failure in telecommunication systems; acts of war, terrorism, cyber-attacks or natural disasters, including major environmental or public health concerns, such as the recent COVID-19 pandemic (see the risk factor above titled “The COVID-19 pandemic has impacted and may continue to impact our business, operating results and financial condition” and the discussion under Item 4.B "Business Overview—Manufacturing and Suppliers"); lack of skilled labor; the disruption of transportation networks; and adverse weather conditions, could have a material adverse effect on our business, financial condition and results of operations.

We rely on a few vendors to provide our hardware platforms and components for the manufacture of our products.
 
We primarily rely on a few original design manufacturers, or ODMs, for the manufacture and supply of our hardware platforms, with approximately 88% of our direct product costs in 2021 related to these vendors. If we are unable to continue to acquire from these ODMs and/or other 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 provider could result in delays, operational problems and increased costs, and may limit our ability to deliver our products to our customers on time during such a transition period, any of which could have a material adverse effect on our business, financial condition and results of operations.
 
Our success depends on our ability to attract, train and retain highly qualified personnel.
 
Our products and services require sophisticated technology, marketing and sales expertise. Accordingly, we need highly trained research and development, sales, marketing, technical, customer support, operations and IT personnel. Competition for such qualified personnel, especially in the cyber security domain, is intense. In particular, while there has been intense competition for such qualified personnel in the Israeli high-tech industry historically, the industry experienced record growth and activity in 2021, which contributed to significant levels of employee attrition and is currently facing a severe shortage of skilled human capital, including qualified personnel in the cyber security domain. In addition, while we utilize non-competition agreements with our employees as a means of improving our employee retention, we may be unable to enforce these agreements under applicable laws. In light of the foregoing, we may not be able to hire or retain sufficient personnel to support our business operations or, if we do, we may be required to offer increased compensation to attract such employees, which could have a material adverse effect on our business, financial condition and results of operations.
 
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Competition in the market for cyber security and application delivery solutions and in our industry, in general, is intense. If we are unable to compete effectively, we may lose market share, and we may be unable to maintain profitability.
 
The cyber security and application delivery solutions marketplace is highly competitive and has very few barriers to entry, particularly in our focus areas. 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 we have, which may limit our ability to effectively compete with them. We expect to continue to face additional competition as new participants enter the market or extend their portfolios into related technologies. Current and future participants may also be able to respond more quickly to new or emerging technologies and changes in customer demands and to devote greater resources to the development, promotion and sale of their products than we can. 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 solutions 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.
 
We must develop new solutions and enhance existing solutions to remain competitive.
 
The market for cyber security and application delivery solutions is characterized by rapid technological changes, driven primarily by accelerated digital transformation including a dramatic increase in work from home initiatives, a rapid shift to online business activity, and increased migration to cloud environments. Such technological changes and transformations are accompanied by, in addition to a rapidly evolving and active cyber threat landscape, changes in application infrastructure tools and increasingly demanding compliance mandates. The challenges we face include:
 

increasing throughput, capacity, performance and efficiency of our core products, to cope with growing velocity and complexity of attacks;
 

adapting to fundamental changes in our customers’ data centers’ infrastructure and changes in the locations of applications and data by offering relevant solutions for   multi-clouds and hybrid cloud environments;
 

offering new solutions to adapt to the changes in applications’ deployment frameworks and workflows, microservice based architecture (Kubernetes orchestration), massive usage of Application Programming Interface (API) stacks and new edge delivery technologies in response to the rise of modern applications buildup and delivery requirements;
 

adapting to changes in the cyber threat landscape, by extending our security coverage to include cloud-native attacks (cloud access management and workloads), application level attacks, usage of open source third party libraries, encrypted attacks, automated attacks and edge delivery related attacks;
 

developing and enhancing our cloud and virtual offerings and expanding our managed security services capabilities to address the industry trend of providing services for the cloud and through the cloud – organically and inorganically; and
 

increasing our support offerings to address the industry trend of increased customer reliance on third party-provided or managed information technology services.
 
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In order to meet these challenges and remain competitive in the market, we have introduced, and must continue to introduce, new solutions and enhancements to our existing solutions. Accordingly, our future success will depend, to a substantial extent, on our ability to accurately and timely identify market trends and anticipate changing market requirements and needs; on our ability to invest (including through acquisition of complimentary solutions) in research and development and timely develop, introduce and support relevant and desired new solutions and enhancements; and on our ability to gain market acceptance of our offerings. There can be no assurances that our continued investment in research and development, including associated capital expenditures, will ultimately allow us to remain competitive in our industry or otherwise result in successful solutions that generate expected sales and support our growth. In addition, diversifying our solution portfolio might expose us to direct competition with new players and might require additional investments in the associated sales and marketing practices.
 
If our research and development efforts do not lead to a corresponding increase in our revenues, if we fail to timely develop and deploy new solutions and enhancements to our existing solutions, or if we fail to gain market acceptance of our new solutions or enhanced solutions, our business, operating results and financial condition could be materially adversely affected.
 
Our reputation and business could be harmed based on real or perceived shortcomings, defects or vulnerabilities in our solutions or if our end-users experience security breaches, which could have a material adverse effect on our business, reputation and operating results.
 
Any errors, defects, or misconfigurations could cause our solutions to not meet specifications, be vulnerable to security attacks or fail to secure networks or applications which could negatively impact customer operations and consequently harm our business and reputation. In addition, we may suffer significant adverse publicity and reputational harm if our solutions are associated, or are believed to be associated with, or fail to reasonably protect against, a security attack or a breach at a high-profile customer. Moreover, any actual or perceived cyber-attack, other security breach, exposure or theft of our or our customers’ data, regardless of whether the breach or theft is attributable to the failure of our solutions, could:
 

adversely affect the market’s perception of our security solutions,
 

cause current or potential customers to look to our competitors for alternatives,
 

require us to expend significant financial resources to analyze, correct or eliminate any vulnerabilities, and
 

lead to investigations, litigation, fines and penalties, any of which could have a material adverse effect on our operations, financial condition and reputation.
 
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Cyber-attackers or other malicious actors are increasingly sophisticated, may be state actors or affiliated with organized crime, and may operate large-scale and complex automated attacks. In addition, the techniques they use to access or sabotage networks or applications or to disrupt operations (for example, via ransomware) change frequently and generally are not recognized until launched against a target. As a result, our solutions may be unable to anticipate these techniques and provide timely protection to our end-users’ networks or applications, particularly due to the increased use by attackers of tools and techniques that are designed to circumvent security controls, to avoid detection and to remove or obfuscate evidence. In addition, the COVID-19 pandemic has significantly impacted online behavior and the security of businesses and individuals, and we have observed a significant increase in cyberattack activity since the beginning of the pandemic. If we fail to identify and respond to new and increasingly complex methods of attack or to update our solutions to detect or prevent such threats in time to protect our end-users’ critical business data, the integrity of our solutions and reputation, as well as our business and operating results, could suffer.
 
Furthermore, security breaches or defects in our solutions could result in loss or alteration of, or unauthorized access to, customers’ data and compromise our customers’ networks and applications that are secured by our physical and cloud solutions. If such a security breach results in the disruption or loss of availability, integrity or confidentiality of customers’ data, we could incur significant liability to our customers and to businesses or individuals whose information was being handled by our customers, in addition to regulatory agencies.  There can be no assurance that limitation of liability, indemnification or other protective provisions that we attempt to include in our contracts would be applicable, enforceable or adequate in connection with a security breach, or would otherwise protect us from any such liabilities or damages with respect to any particular claim
 
There is no guarantee that our solutions will be free of flaws or vulnerabilities. Our end-users may also misuse our solutions, which could result in vulnerabilities to a breach or theft of business data.
 
As a security provider, if our internal network system is compromised by cyber-attackers or other malicious actors, or by a critical system failure, our reputation, financial condition and operating results could be materially adversely affected.
 
We will not succeed with our application and network security solutions unless the marketplace is confident that we provide effective cyber security protection. We provide security solutions, and as a result, we have been and continue to be an attractive target of cyber-attacks and other security incidents, which we have experienced from time to time, that are aimed at our own internal systems and network environment. We are subject to many different types of attacks, including, among others, malware, viruses and attachments to e-mails, web application attacks, e-mails, web application attacks (DDoS) attacks and other disruptive activities of individuals or groups, all of which are 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 and other information and/or cause other interruptions to our services. Furthermore, third parties may attempt to illegally induce employees or customers into disclosing our proprietary information or otherwise compromising the security of our internal networks, systems or physical facilities in order to gain access to our data or our customers’ data.  To date, none of the malicious acts by third parties on our network systems that we have identified has resulted in a material adverse impact to our business or operations. Nonetheless, 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 solutions. Furthermore, the costs to eliminate or address security threats and vulnerabilities before or after a cyber-security incident could be significant.
 
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We rely on third-party service providers to supply physical hosting, cloud environments and specific support technologies in order to deliver and support our security solutions, in addition to internal functions, such as human resources, finance, and electronic communications, all of which are designed to enable us to conduct, monitor and/or protect our business, operations, systems and data assets. Such third-party service providers have from time to time been subject to and continue to be subject to cyber-attacks, malicious actors and other security incidents. While we periodically evaluate the internal security posture of each third-party service provider to determine their level of compliance, we may not be able to detect any breach in the first instance it occurs. These risks may impact the integrity and availability of our solutions and may expose us to legal and reputational liability.
 
Remediation efforts or system redundancy or other continuity measures may be ineffective or inadequate and could result in interruptions, delays or cessation of service and loss of existing or potential customers. There can be no assurance that limitation of liability, indemnification or other protective provisions in our contracts would be applicable, enforceable or adequate in connection with a security breach, or would otherwise protect us from any such liabilities or damages with respect to any particular claim. Additionally, our professional, product and cyber liability insurance coverages may only cover certain liabilities in connection with a security breach or other security incident and may not adequately cover all liabilities actually incurred, and we cannot assure you that insurance will continue to be available to us on commercially reasonable terms, if at all, or that any insurer will not deny coverage as to any future claim.
 
In addition, any such security breach could disrupt or 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.

Outages, interruptions or delays in hosting services could impair the delivery of our cloud-based security services and harm our business.
 
We offer infrastructure that supports our DDoS scrubbing center services, web application firewall (WAF) and bot management cloud-based services. In addition, we provide other services through the cloud, such as Cloud Native Protector (CNP) and Content Delivery Network (CDN). 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 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, or significant disruptions (for example, due to ransomware) to, our internal systems or systems at third-party hosting facilities could result in outages or interruptions in our cloud-based services. Outages or interruptions in our cloud-based security services, whether as a result of impacts to our or our third-party hosting facilities or otherwise,  may cause our customers to experience cyber-attacks and to believe that our cloud-based security services are unreliable, cause us to issue credits or pay penalties or damages, 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 results of operations.
 
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Our global operations may expose us to additional risks.

We currently offer our solutions in over 80 countries. For the years ended December 31, 2021 and 2020, our sales outside North, Central and South America represented approximately 55% and 54%, respectively, of our total sales. We also rely on third-party service providers around the world to supply physical hosting and cloud environments in order to deliver and support our cloud-based services. Our global business operations involve 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 in the interpretations thereof and reduced protection for intellectual property rights in some countries; partial or total expropriation; export duties and quotas; local tax exposure; economic or political instability, including as a result of insurrection, war, natural disasters, and major environmental or public health concerns, such as the recent COVID-19 pandemic; differences in business practices; recessionary environments in multiple foreign markets; and damage to, or failure of, systems at third-party hosting facilities around the word resulting in outages or interruptions in our cloud-based services. 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.

We have incurred net losses in the past and may incur losses in the future.
 
Although we have been profitable in the past several years, we incurred net losses in the past, such as during 2017 and 2016. Our ability to maintain or increase profitability in the future depends in part on the following factors: the economic health of the global economy, including the potential effects of the COVID-19 pandemic; 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 and deliver new solutions in a timely manner; the competitive position of our products and services; the continued acceptance of our solutions 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 remain 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. Our revenues may  not continue to increase or may grow at a lower rate than we have experienced in the past several years or may even decline, which would negatively impact our results of operations and cash flows. We cannot assure you that we will remain profitable.
 
We may 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. 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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A slowdown in the growth of the cyber security and application delivery solutions market would reduce our addressable market and solutions sales.
 
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 solutions 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 at a slower pace than expected, we may not be able to sell enough of our solutions to maintain or increase our profitability.
 
If the market for our cloud-based solutions does not continue to develop and grow, we may incur capital and operation losses.
 
As we continue to expand our cloud-based solution offerings, our investments, both capital and operational, in our cloud business increase. We cannot assure you that sales of our cloud-based solutions will continue to develop and grow. In addition, we cannot assure you that our services and technology will keep pace with the changes in this market. Specifically, the emergence of alternative solutions, such as those offered by Amazon Web Services, Inc. (AWS), Microsoft Azure or Google public cloud, may negatively affect sales of our solutions.
 
Our solutions may have long sales cycles, which may reduce the predictability of our financial performance.
 
Our solutions 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 can be subject to delays associated with customers’ budgetary constraints and lengthy approval and procurement processes. The sales cycles of our solutions to new customers can last for as long as twelve months (and in some cases, for example with carrier customers, even longer) from initial presentation to sale. Long sales cycles result in a delay to our generation of revenue. Long sales cycles also subject us to risks not usually encountered in short sales cycles, 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 solutions or product enhancements introduced by us or by our competitors. These factors complicate our planning processes and reduce the predictability of our financial performance.
 
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We may pursue 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. Past acquisitions have caused, and future acquisitions may cause, us to 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:


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 unified entity;
 

diversion of management’s attention from our core business;
 

substantial expenditures, which could divert funds from other corporate uses;
 

entering markets in which we have little or no experience;
 

loss of key employees of the acquired operations; and
 

known or unknown contingent liabilities, including, but not limited to, tax and litigation costs.
 
We cannot be certain that any past or 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. A failure of any acquisitions or product developments to produce increased revenues could have a material adverse effect on our operations and profitability.
 
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Our business in countries with a history of corruption and transactions with foreign governments increases the risks associated with our international activities.

As we operate and sell internationally, we are subject to the Foreign Corrupt Practices Act of 1977, as amended (the "FCPA"), the U.K. Bribery Act of 2010 (the "UK Bribery Act” and other laws that prohibit improper payments or offers of payments to foreign governments and their officials and political parties for the purpose of obtaining or retaining business. We have operations, deal with and make sales to governmental customers in countries known to experience corruption, particularly certain emerging countries in Eastern Europe, South and Central America, East Asia, Africa and the Middle East. Our activities in these countries create the risk of unauthorized payments or offers of payments by one of our employees, consultants, channel partners or sales agents that could be in violation of various anti-corruption laws, even though these parties may not be under our control. While we have implemented safeguards to prevent these practices by our employees, consultants, channel partners and sales agents, our existing safeguards and any future improvements may prove to be less than effective, and our employees, consultants, channel partners or sales agents may engage in conduct for which we might be held responsible. Violations of the FCPA, the UK Bribery Act or other anti-corruption laws may result in severe criminal or civil sanctions, including suspension or debarment from government contracting, and we may be subject to other liabilities, which could negatively affect our business, operating results and financial condition.
 
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:
 

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 U.S. dollar is weak, our foreign currency-denominated expenses will be higher, whereas if the U.S. dollar is strong, our foreign currency-denominated expenses will be lower. If the NIS strengthens against the U.S. dollar, the dollar value of our Israeli expenses will increase and may have a material adverse effect on our business, operating results and financial condition;
 

A portion of our international sales are denominated in currencies other than U.S. dollars, such as Euros, thereby exposing us to currency fluctuations in such international sales transactions;
 

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
 

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 have 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.”
 
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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 detect and correct 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 these costs, liabilities, lags and delays will continue to be immaterial in the future.  Any insurance coverage that we maintain may also 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.
 
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 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 other jurisdictions 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.  Moreover, any adverse outcome of litigation proceedings, could impact the value of our proprietary technology and have additional significant financial impacts, which may harm our operating results.
 
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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. 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, reputation and operating results.
 
Laws, regulations and industry standards affecting our business are evolving, and unfavorable changes could harm our business.
 
Laws, regulations and industry standards that apply to our business are becoming more prevalent and constantly evolving, particularly in the area of data privacy and cybersecurity. We may be impacted by changes in privacy-related and cybersecurity-related regulations governing the collection, use, retention, sharing and security of personal data that we collect, utilize, or otherwise process from our customers and/or visitors to their websites and others. Complying with a diverse range of privacy and cybersecurity 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 or cybersecurity-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, in the European Economic Area (EEA), we are subject to the General Data Protection Regulation 2016/679 (GDPR) and in the United Kingdom we are subject to the United Kingdom data protection regime consisting primarily of the UK General Data Protection Regulation and the UK Data Protection Act 2018 (UK DP Laws), in each case in relation to our collection, control, processing, sharing, disclosure and other use of data relating to an identifiable living individual (personal data). The GDPR, and national implementing legislation in EEA member states and the United Kingdom, impose a strict data protection compliance regime. Our compliance with GDPR and UK DP Laws, as well as other data privacy and cybersecurity laws around the world, evolving regulations of cloud computing, cross-border data transfer restrictions and other domestic or foreign regulations, has required and will continue to require us to invest significant resources in compliance and compliance-related areas. 
 
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Furthermore, laws, regulations and industry standards are subject to constant and, at times, 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 solutions. If we are unable to adapt our solutions to changing laws, regulations and industry standards in a timely manner, or if our solutions fail to assist our customers with their compliance initiatives, our customers may lose confidence in our solutions and could switch to competing solutions. Recent legal developments in Europe have created complexity and uncertainty regarding transfers of personal data from the EEA and the United Kingdom to the United States. These recent developments may require us to review and amend the legal mechanisms by which we make and/ or receive personal data transfers to or in the U.S.  Such legal developments also cause us to look at our operations and review our data flows to ensure we can continue to meet clients’ increasing requests for data to remain in-country or in-region. At the same, time, if, contrary to this trend, 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 solutions, or none at all. In either case, our sales and financial results would be negatively impacted and could be materially adversely affected.
 
Some of our solutions contain “open source” and third-party software, and any failure to comply with the terms of one or more of these open source and third-party software 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 from 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.
 
In addition, some of our solutions include other software or intellectual property licensed from third parties. This exposes us to risks over which we may have little or no control. There can be no assurance that the licenses from such third-party licensors will continue to be available to us on acceptable terms, if at all. In addition, while we believe we are compliant with the terms of our third-party licenses, such licensors may still assert that we are in breach of the terms of a license, which could give such licensors the right to terminate a license or seek damages from us, or both. Our inability to maintain such licenses or the need to engage in litigation regarding these matters, could result in delays in releases of new products, and could otherwise disrupt our business, unless and until equivalent technology can be identified, licensed or developed at substantially the same costs to us.
 
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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 sheets was, as of December 31, 2021, approximately $51.9 million. 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.
 
Additional tax liabilities, including due to tax positions we took, 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. In the past few years, certain tax authorities who 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 instituted, or settlement negotiations. While we have established reserves based on assumptions and estimates that we believe are reasonable to cover such positions, these reserves may prove to be insufficient and as such, our future results may be adversely affected.
 
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 that aims to promote the economic and social well-being of people around the world, 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.
 

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The adoption of the 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.
 
In December 2017, the Tax Cuts and Jobs Act (the "TCJA") was enacted, which significantly reforms the Code. The TCJA, among other things, includes changes to U.S. federal tax rates, imposes significant additional limitations on the deductibility of certain expenses, restricts the use of net operating loss carryforwards arising after December 31, 2017, and allows for the expensing of capital expenditures.
 
As part of our compliance with the changes pursuant to the TCJA, we made adjustments to our provision for income taxes in 2017 and other items impacted by the TCJA.
 
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 remains uncertain. We therefore recommend our shareholders consult with their legal and tax advisors with respect to such legislation and the potential tax consequences.
 
Additionally, the U.S. presidential administration and members of the U.S. Congress have proposed significant changes in U.S. federal income tax law, regulation and government policy within the United States, which could affect us and our business. For example, these proposals include significant changes to the U.S. federal income taxation of business entities including, among others, an increase in the corporate income tax rate from a fixed 21% to graduated rates of up to 28%, an increase in the tax rate applicable to global intangible low-taxed income and elimination or restriction of certain related exemptions, and the imposition of minimum taxes or surtaxes on certain types of income. These proposals are being considered by U.S. Congress, but the likelihood of these or other changes being enacted or implemented is unclear. We are currently unable to predict whether these or other changes will occur and, if so, the ultimate impact on our business. To the extent that such changes have a negative impact on us, our suppliers or our consumers, including as a result of related uncertainty, these changes may materially and adversely impact our business, financial condition, results of operations and cash flow.
 
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 as strategic assets for purposes of acquisitions and general corporate purposes, including share repurchases. Our cash, cash equivalents, short- and long-term bank deposits and marketable securities totaled $465.8 million as of December 31, 2021, compared with $448.8 million as of December 31, 2020. The performance of the capital markets is the primary factor that affects the values of funds that are held in marketable securities. While we believe we have taken a conservative approach in our investments, by investing the majority of our debt marketable securities portfolio at securities that are rated A- or higher, 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, including, without limitation, by the economic effects of the COVID-19 pandemic.
 
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Financial income is a component of our net income and 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. For example, for the years ended December 31, 2021 and 2020, we had $4.4 million and $7.8 million, respectively, of net financial income, that was primarily derived from the value of our investments. 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.
 
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 bonds 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 (loss) 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 (loss), our reported net income would have decreased by $0.5 million during the year ended December 31, 2021 and would have increased by $1.5 million during the year ended December 31, 2020. 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.
 
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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.
 
Major disruptions or deficiencies of our information systems could disrupt our operations and cause unanticipated increases in our costs.

We have invested, and intend to continue to invest, significant capital and human resources in our information systems, including in a project for company-wide sales, operations and services support systems. Any major disruptions or deficiencies in the design and implementation of our 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.

Our business may be affected by sanctions, export controls and similar measures targeting Russia and other countries and territories as well as other responses to Russia’s military conflict in Ukraine, including indefinite suspension of operations in Russia and dealings with Russian entities by many multi-national businesses across a variety of industries.
 
As a result of Russia’s military conflict in Ukraine, governmental authorities in the United States, the European Union and the United Kingdom, among others, launched an expansion of coordinated sanctions and export control measures, including:
 

blocking sanctions on some of the largest state-owned and private Russian financial institutions (and their subsequent removal from SWIFT);
 

blocking sanctions against Russian and Belarusian individuals, including the Russian President, other politicians and those with government connections or involved in Russian military activities;
 

blocking sanctions against certain Russian businessmen and their businesses, some of which have significant financial and trade ties to the European Union;
 

blocking of Russia’s foreign currency reserves and prohibition on secondary trading in Russian sovereign debt and certain transactions with the Russian Central Bank, National Wealth Fund and the Ministry of Finance of the Russian Federation;
 
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expansion of sectoral sanctions in various sectors of the Russian and Belarusian economies and the defense sector;
 

United Kingdom sanctions introducing restrictions on providing loans to, and dealing in securities issued by, persons connected with Russia;
 

restrictions on access to the financial and capital markets in the European Union, as well as prohibitions on aircraft leasing operations;
 

sanctions prohibiting most commercial activities of U.S. and EU persons in Crimea and Sevastopol;
 

enhanced export controls and trade sanctions targeting Russia’s imports of technological goods as a whole, including tighter controls on exports and reexports of dual-use items, stricter licensing policy with respect to issuing export licenses, and/or increased use of “end-use” controls to block or impose licensing requirements on exports, as well as higher import tariffs and a prohibition on exporting luxury goods to Russia and Belarus;
 

closure of airspace to Russian aircraft; and
 

ban on imports of Russian oil, liquefied natural gas and coal to the United States.
 
As the conflict in Ukraine continues, there can be no certainty regarding whether the governmental authorities in the United States, the European Union, the United Kingdom or other counties will impose additional sanctions, export controls or other measures targeting Russia, Belarus or other territories. Furthermore, in retaliation against new international sanctions and as part of measures to stabilize and support the volatile Russian financial and currency markets, the Russian authorities also imposed significant currency control measures aimed at restricting the outflow of foreign currency and capital from Russia, imposed various restrictions on transacting with non-Russian parties, banned exports of various products and other economic and financial restrictions.
 
Our business must be conducted in compliance with applicable economic and trade sanctions laws and regulations, including those administered and enforced by the U.S. Department of Treasury’s Office of Foreign Assets Control, the U.S. Department of State, the U.S. Department of Commerce, the United Nations Security Council and other relevant governmental authorities. We must be ready to comply with the existing and any other potential additional measures imposed in connection with the conflict in Ukraine. The imposition of such measures could adversely impact our business, including preventing us from performing existing contracts, recognizing revenue, pursuing new business opportunities or receiving payment for products already supplied or services already performed with customers.
 
In 2021 and 2020, 5% and 3%, respectively, of our total revenues were from sales to customers located in Russia.  We continuously review and monitor our contractual relationships with suppliers and customers to establish whether any of them are the target of the applicable sanctions. In the event that we identify a party with which we have a business relationship that is the target of applicable sanctions, we would immediately activate a legal analysis of what gives rise to the business relationship, including any contract, to estimate the most appropriate course of action to comply with the sanction regulations, together with the impact of a contractual termination according to the applicable law, and then proceed as required by the regulatory authorities. However, given the range of possible outcomes, the full costs, burdens, and limitations on our and our customer’s and business partners’ businesses are currently unknown and may become significant.
 
Furthermore, even if an entity is not formally subject to sanctions, customers and business partners of such entity may decide to reevaluate or cancel projects with such entity for reputational or other reasons. As result of the ongoing conflict in Ukraine, many U.S. and other multi-national businesses across a variety of industries, including consumer goods and retail, food, energy, finance, media and entertainment, tech, travel and logistics, manufacturing and others, have indefinitely suspended their operations and paused all commercial activities in Russia and Belarus.  Depending on the extent and breadth of sanctions, export controls and other measures that may be imposed in connection with the conflict in Ukraine, it is possible that our business, financial condition and results of operations could be materially and adversely affected.

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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 April 4, 2022, Yehuda Zisapel, the Chairman of our Board of Directors, beneficially owned approximately 3.95% of our outstanding ordinary shares; Nava Zisapel, beneficially owned approximately 6.76% of our outstanding ordinary shares; and their son, Roy Zisapel, our President, Chief Executive Officer and director, beneficially owned approximately 3.21% of our outstanding ordinary shares (see Item 6.E “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.
 
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 relating to the election of our directors in three staggered classes, the submission of shareholder proposals for shareholders meetings and the quorum requirement for adjourned shareholder meetings 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.
 
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Our share price has been volatile in the past and may be subject to volatility 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 2021 the lowest closing price of our share was $25.15, compared to the highest closing price of our share of $41.74 during the same year. The volatility of our share price may have a negative impact on our financial performance as a result of its negative impact on employee retention. Numerous factors, many of which are beyond our control, may cause the market price and trading volume of our ordinary shares to fluctuate significantly and decrease further, including:
 

operating results that do not meet forecasts by securities analysts;
 

announcements concerning us or our competitors;
 

the introduction of new products and new industry standards;
 

general market conditions and changes in market conditions in our industry;
 

the general state of securities markets (particularly the technology sector);
 

political, economic and other developments in the State of Israel, the U.S. and worldwide, including, for example, the recent military conflict in Ukraine and the COVID-19 pandemic; and
 

any of the events underlying any of the other risks or uncertainties set forth elsewhere in this annual report actually occurs.
 
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.
 
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For our taxable year ended December 31, 2021, 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 2021 and prior taxable years. The tests for determining PFIC status are applied annually, and require a factual determination that depends on, among other things, the composition of our income, assets and activities in each taxable year, and can only be made annually after the close of each taxable year. Furthermore, the aggregate value of our gross assets is likely to be determined in part by reference to the trading price of our ordinary shares, which could fluctuate significantly. We have a substantial balance of cash and other liquid investments, which are passive assets for purposes of the PFIC determination. Accordingly, if our market capitalization declines significantly, it may make our classification as a PFIC more likely for the current or future taxable years. Accordingly, there can be no assurance that we will not become a PFIC in future taxable years.  U.S. shareholders should consult with their 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 titled Item 10.E “Taxation—United States Federal Income Tax Considerations.”

If a U.S. person is treated as owning at least 10% of our ordinary shares, such holder may be subject to adverse U.S. federal income tax consequences.
 
Depending upon the aggregate value and voting power of our ordinary shares that U.S. persons are treated as owning (directly, indirectly, or constructively), we could be treated as a controlled foreign corporation (CFC). Additionally, because our group consists of one or more U.S. subsidiaries, certain of our non-U.S. subsidiaries will be treated as CFCs, regardless of whether or not we are treated as a CFC (although there is currently a pending legislative proposal to significantly limit the application of these rules). If a U.S. person is treated as owning (directly, indirectly or constructively) at least 10% of the value or voting power of our ordinary shares, such person may be treated as a “U.S. shareholder” with respect to each CFC in our group (if any), which may subject such person to adverse U.S. federal income tax consequences. Specifically, a U.S. shareholder of a CFC may be required to annually report and include in its U.S. taxable income its pro rata share of each CFC’s “Subpart F income,” “global intangible low-taxed income” and investments in U.S. property, whether or not we make any distributions of profits or income of a CFC to such U.S. shareholder. If you are treated as a U.S. shareholder of a CFC, failure to comply with these reporting obligations may subject you to significant monetary penalties and may prevent the statute of limitations with respect to your U.S. federal income tax return for the year for which reporting was due from starting. Additionally, a U.S. shareholder that is an individual would generally be denied certain tax deductions or indirect foreign tax credits that may otherwise be allowable to a U.S. shareholder that is a U.S. corporation. We cannot provide any assurances that we will assist investors in determining whether we or any of our non-U.S. subsidiaries are treated as CFCs or whether any investor is treated as a U.S. shareholder with respect to any of such CFC, nor do we expect to furnish to any U.S. shareholders information that may be necessary to comply with the aforementioned reporting and tax paying obligations. The United States Internal Revenue Service provided limited guidance on situations in which investors may rely on publicly available alternative information to comply with their reporting and tax paying obligations with respect to foreign-controlled CFCs. U.S. investors should consult their advisors regarding the potential application of these rules to their investment in our ordinary shares.
 
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Risks Related to Operations in Israel
 
Political, economic and military instability in the Middle East or Israel 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. In addition, the majority of our key employees, officers and directors are residents of Israel. Accordingly, our operations and financial results could be adversely affected if political, economic or 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.
 
Over the past several decades, a number of armed conflicts have taken place between Israel and its Arab neighbors, and a state of hostility and violence, varying in degree and intensity, has existed between Israel and certain other countries or militant groups in the region as well as, since late 2000, between Israel and the Palestinians. These conflicts have strained Israel’s relationship with its Arab citizens, Arab countries and, to some extent, with other countries around the world. In addition, Israel faces threats, including cyber threats, from more distant neighbors, such as Iran (which has previously threatened to attack Israel and is believed to have presence in Syria as well as influence over Hamas in Gaza and Hezbollah, a militia and political group operating in Lebanon). This situation may potentially escalate in the future and 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.

Furthermore, 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 or 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 are called upon to perform military service, especially in times of national emergency, is difficult to predict.

Our commercial insurance does not cover losses that may occur as a result of events associated with the security situation in the Middle East, such as damages to our facilities resulting in disruption of our operations. Although the Israeli government currently covers the reinstatement value of direct damages that are caused by terrorist attacks or acts of war, we cannot be assured that this government coverage will be maintained or will be adequate in the event we submit a claim. 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.

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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. In the past several years, there have been increased efforts by activists to cause companies and consumers to boycott Israeli goods based on Israeli government policies. Similarly, Israeli companies are limited in conducting business with entities from several countries. Restrictive laws, policies or practices directed towards Israel or Israeli businesses could have an adverse impact on our operating results, financial condition or the expansion of our business.

The tax benefits we may receive in connection with our preferred enterprise program 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, including in connection with our preferred enterprise program (see under Item 10.E “Taxation—Israeli Tax Considerations”). 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 cancelled, 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.
 
We have obtained benefits from the Israeli Innovation Authority, that subject us to ongoing restrictions.
 
We have in the past received, and in the future may apply for, royalty-bearing or non-royalty bearing grants from the Israeli Innovation Authority (formerly known as the Office of the Chief Scientist of the Israeli Ministry of Economy and Industry), or the IIA, for research and development programs that meet specified criteria pursuant to the Law for the Encouragement of Research, Development and Technological Innovation in Industry, 1984 (formerly known as the Law for Encouragement of Research and Development in Industry, 1984), and the regulations promulgated thereunder, or the Innovation Law. The terms of the IIA grants limit our ability to manufacture products outside of Israel or to transfer technologies in or outside Israel if such products or technologies were developed using know-how developed with or based upon IIA grants. In addition, a change of control in us and the acquisition of 5% or more of our ordinary shares by a non-Israeli may require notification to the IIA and the provision of an undertaking to comply with the Innovation Law, some of the principal restrictions and penalties of which are the transferability limits described above and elsewhere in this annual report.
 
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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, our corporate headquarters is located in Israel and several of our current officers and directors reside in 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 a 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 and may not be enforced by an Israeli court.
 
We have been informed by our legal counsel in Israel that it may also be difficult to assert U.S. securities law claims in original actions instituted in Israel.  Israeli courts may refuse to hear a claim based on an alleged violation of U.S. securities laws if they determine that Israel is not the most appropriate forum to bring such a claim. In addition, even if an Israeli court agrees to hear a claim, it may determine that Israeli law and not U.S. law is applicable to the claim. There is little binding case law in Israel addressing these matters. If U.S. law is found to be applicable, the content of applicable U.S. law must be proven 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;
 

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;
 

adequate service of process has been effected and the defendant has had a reasonable opportunity to present his arguments and evidence;
 

the judgment is enforceable under the laws of State of Israel and its enforcement is not contrary to the law, public policy, security or sovereignty of the State of Israel;
 

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.
 
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Your rights and responsibilities as a shareholder will be governed by Israeli law, which may differ in some respects from the rights and responsibilities of shareholders of U.S. companies.
 
The rights and responsibilities of the holders of our ordinary shares are governed by our amended and restated articles of association and Israeli law. These rights and responsibilities differ in some respects from the rights and responsibilities of shareholders in typical U.S.-based corporations. For example, a shareholder of an Israeli company has a duty to act in good faith toward the company and other shareholders and to refrain from abusing its power in the company, including, among other things, in voting at the general meeting of shareholders on matters such as amendments to a company’s articles of association, increases in a company’s authorized share capital, mergers and acquisitions and interested party transactions requiring shareholder approval. In addition, a shareholder who knows that it possesses the power to determine the outcome of a shareholder vote or to appoint or prevent the appointment of a director or executive officer in the company has a duty of fairness toward the company. There is limited case law available to assist us in understanding the implications of these provisions that govern shareholders’ actions. These provisions may be interpreted to impose additional obligations and liabilities on holders of our ordinary shares that are not typically imposed on shareholders of U.S. corporations.
 
ITEM 4.
INFORMATION ON THE COMPANY
 
A.           History and Development of the Company
 
Corporate History and Details
 
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., our wholly owned subsidiary in the United States (Radware US), which conducts the sales and marketing of our products and services in the Americas and is our authorized representative and agent in the United States. The principal offices of Radware US are located at 575 Corporate Dr., Lobby 2, Mahwah, New Jersey 07430 and its telephone number is 201-512-9771. We also have several other wholly owned subsidiaries world-wide handling primarily local support and promotion activities.
 
In September 1999, we conducted the initial public offering of our ordinary shares that commenced trading on the Nasdaq.
 
In the past decade we made several acquisitions, including, most recently, the acquisition of the technology and operations of DC Security Ltd. (previously known as SecurityDAM Ltd. (SecurityDAM)), a related party and a cloud DDoS network operator that supplied us with scrubbing center services used for the provision of our cloud DDoS Protection Service.
 
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Recent Major Business Developments
 
In February 2022, we announced a strategic initiative to accelerate the growth of our cloud security business, which entails, among other things, the acquisition of the technology and operations of SecurityDAM, growing our innovation center in India, and expanding our cloud service capacity and delivery network. For additional details, see also Item 7.B “Related Party Transactions”.
 
For recent major product activities, see Item 4.B “Business Overview—Our Solutions” under the captions “Recent Solution Offering Activities” and “Recent Technology Partnerships Activity.”
 
For a discussion of our capital expenditures and divestitures, see Item 5.B “Liquidity and Capital Resources - Principal Capital Expenditures and Divestitures.”
 
B.          Business Overview
 
Overview
 
We are a provider of cyber security and application delivery solutions for cloud, physical,  and software defined data centers (SDDC). Our solutions secures the digital experience by providing infrastructure, application, and corporate IT protection and availability services to enterprises globally. Our solutions are deployed by, among others, enterprises, carriers and cloud service providers.

Our solutions are offered in two main categories:


Products – We offer a range of physical products, software products, product subscriptions and cloud-based subscriptions (or a combination of these) for enterprise and carrier data centers, as part of their IT and application infrastructure.
 

Customer Services (Services) – We offer technical support, professional services, managed services and training and certification to our customers.

Our Solutions
 
Our Products
 
Our physical and software products currently consist of the following key products:

o
DefensePro Attack Mitigation Device. DefensePro® is a real-time network attack mitigation device that protects the data center and application infrastructure against network and application denial of service, application vulnerability exploitation, network anomalies and other emerging network attacks.
 
o
AppWall Web Application Firewall. AppWall® is our Web Application Firewall (WAF) that is designed to secure the delivery of mission-critical Web applications and APIs for corporate networks and in the cloud. AppWall is an ICSA Labs certified WAF that combines positive and negative security models designed to prevent data theft, manipulation of sensitive corporate and customer information and help achieve Payment Card Industry (PCI) compliance.
 
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o
Radware Kubernetes WAF. Radware Kubernetes WAF is a Web Application Firewall solution for CI/CD environments orchestrated by Kubernetes. Our Kubernetes WAF integrates with common software provisioning, testing and visibility tools in the CI/CD pipeline offering both IT security and DevOps personnel detailed insight down to the pod and container levels, and enables organizations to implement application and data security in on-premise and cloud-based implementations.
 
o
DefenseFlow Cyber Command and Control Application. DefenseFlow® is a network-wide cyber command and control application that helps service providers to scale and automate network DDoS attacks 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® Application Delivery Controller/Load Balancer. Alteon is our Application Delivery Controller (ADC). It provides advanced, end-to-end local and global load balancing capabilities for web, cloud and mobile-based applications. Designed to guarantee application service level agreement (SLA), Alteon ADC incorporates a set of next-generation services including secure sockets layer (SSL) offloading, HTTP/2.0 Gateway, vision analytics for application performance monitoring Application Performance Monitoring (APM), AppWall Web Application Firewall (WAF), Authentication Gateway, bandwidth management, and SSL inspection security.
 
We offer Alteon ADC in three different packages (available on each of its models and throughput levels) to address different deployment scenarios and needs:


Alteon Deliver. For applications that require high performance ADCs with advanced layer 4-7 ADC functionality.
 

Alteon Perform. For deployments requiring performance optimization, advanced application performance monitoring, global server load balancing, link load balancing and automated/optimized ADC service operation.
 

Alteon Secure. For applications that require our most advanced protections, including an embedded Web Application and API Protection (WAAP)  module, authentication gateway, bot management, threat intelligence feeds (ERT Security Updates Service, ERT Active Attackers Feed and ERT Location-based Mitigation) and SSL processing from perimeter security devices (with its embedded SSL inspection module).
 
o
LinkProof. LinkProof® is a 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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Our product subscriptions currently consist of the following key subscription-based products:

o
Security Updates Subscription (SUS). Our Security Update Subscription is a security advisory signature service dedicated to protecting network elements, hosts and applications against the latest security vulnerabilities and threats. The Security Update Subscription delivers weekly, emergency and custom attack signature updates to current subscribers to protect against known attack patterns. The service is available for DefensePro and AppWall products, including AppWall for Alteon.
 
o
ERT Active Attackers Feed. Our Emergency Response Team (ERT) Active Attackers Feed (EAAF) is available on top of our  security product offering. EAAF offers real-time detection and mitigation of active attacks and infections as they occur. EAAF correlates data from multiple sources — Radware’s Global Deception Network, Cloud Security Services customers and the Company’s ERT researchers — and automatically generates continuous, validated lists of IPs currently involved in malicious activity related to distributed denial-of-service (DDoS) and web attacks.
 
o
ERT Protection Packages. Our ERT Protection packages bundle our ERT services into two packages: ERT Silver Protection Package and ERT Gold Protection Package. ERT Silver Protection Package consolidates Security Update Subscription (SUS), ERT Active Attackers (EAAF), and Geolocation Protection (GEO) subscriptions. ERT Gold Protection Package includes ERT under Attack Service on top of the ERT Silver Package.
 
o
Alteon Global Elastic License (GEL). Alteon GEL is a purchasing and deployment subscription that enables a high level of flexibility for ADC services across datacenters, private and public clouds. GEL enables dynamic ADC capacity allocation and the ability to move that capacity across environments, without having to invest separately in a dedicated ADC infrastructure for each and every location where organization’s applications are deployed (e.g. on premise, public cloud etc.). This application delivery licensing model helps to eliminate planning risks in the purchase and deployment of ADC services, enabling continuous investment protection of the ADC infrastructure throughout its lifecycle duration.
 
o
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 our customers immediate visibility to health, real-time status, performance and security of our products from one central, unified console (even if the customer has multiple data centers). A vision analytics module provides an intuitive, customizable GUI with granular forensic insights into application performance, denial-of-service and web application attacks.
 
o
MSSP Portal.  The Managed Security Service Provider (MSSP) Portal is a turnkey, multi-tenant DDoS detection and mitigation service portal. The Portal collects and aggregates security attack measurement and events (including traffic utilization, attack distribution and alerts) and displays them in real-time and historical reports. Our MSSP Portal enables service providers to resell cyber security mitigation services to their customers as a managed service.
 
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Our cloud-based subscriptions offerings currently consist of the following key cloud-based subscriptions:

o
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 network-layer attacks, server-based attacks and application-layer DDoS attacks.
 
Our Cloud DDoS Service is offered in multiple deployment options to meet an organization’s specific needs:
 

Always-On Cloud DDoS Protection Service. This 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. This service is mostly suitable for organizations that have applications hosted in the cloud or those that are not able to deploy an on-premise attack mitigation device in their data center.
 

Always-On Hybrid Cloud DDoS Protection Service. For companies that place a high premium on the user experience and wish to avoid even the slightest possible downtime as a result of DDoS attacks, this solution enables them to deploy an always-on cloud DDoS protection service together with an on-premise hardware appliance. This helps ensure that services are protected against any type of attack, at all times.
 

On-Demand Cloud DDoS Protection Service. This service protects against Internet pipe saturation and is activated when the attack threatens to saturate the organization’s Internet pipe. This service is mostly suitable for organizations that are looking for the lowest cost solution and are less sensitive to real-time detection of DDoS attacks.
 

On-Demand Cloud Hybrid DDoS Protection Service. This DDoS mitigation solution is mostly suitable for organizations who can deploy our on-premise attack mitigation device DefensePro in their data center. The On-premise DefensePro device detects and mitigates all type on DDoS attacks in real-time. Volumetric DDoS attacks are mitigated in the cloud.
 
o
Cloud WAF Service. Our Cloud WAF Service provides enterprise-grade, continuously adaptive web application and API  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 offers dynamic security policies with automatic false positive correction, built-in DDoS protection, integrated bot mitigation and application analytics to simplify security event management by taking massive amounts of alerts and consolidating them into a small, manageable set of user activities.
 
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o
Bot Manager. Our Bot Manager is designed to protect web applications, mobile applications and APIs from emerging generations of automated threats (bots) targeting applications and systems, including account takeover, denial of inventory, DDoS, card fraud, web scraping and other OWASP automated threats, and also helps organizations reduce expenses and increase revenue.
 
o
Cloud Native Protector (CNP) Service. Our CNP service provides an agentless cloud-native security solution for applications, workloads and infrastructure hosted on AWS and Microsoft Azure. Our CNP service offers multi-layered protection to reduce risk by continuously verifying compliance against multiple security standards, identifying publicly exposed assets, keeping track of asset inventory with prioritized cross-cloud visibility, fortifying the cloud threat surface with context-aware smart hardening, and providing advanced attack detection and remediation capabilities to stop data theft attempts.
 
Customer Services
 
We offer technical support, professional services, managed services and training and certification to our customers. Our key customer services currently consist of the following:

o
Certainty Support Program. We offer technical support for all our products through our Certainty Support Program. Certainty support levels include:
 

o
Basic. This level provides business day access including weekends from 9 a.m. to 5 p.m. (local time) to technical support center services and technical documentation, either via the Web, e-mail or direct phone support during working days. New software releases are available for units covered under the certainty support program.
 

o
Standard. This level increases access to the technical support center 24/7/365 and adds next business day replacement of failed hardware and waives customer shipping costs.
 

o
Advanced. This level increases certainty support level standard to four hours' replacement of failed hardware advanced replacement.
 
o
Professional Services. Our professional services group is staffed by a global team of experts possessing extensive knowledge and experience in security and application delivery both in data centers and the cloud. The group offers a full range of services to design, implement, automate and optimize our customer solutions. We offer the following key professional services:
 

o
Design and Planning. This service plans and designs applications for future growth with Radware engineers. The service starts with a review of business goals, network optimization assessment and overview of application architecture and security requirements to help create a comprehensive deployment plan that is tailored to organizational IT requirements.
 
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o
Application and Security Optimization Services. This service analyzes and reviews the current implementation and design and provide recommendations to help optimize the system and achieve business goals.


o
Resident Engineer. Our Resident Engineer service is a proactive on-site engineer who performs operations, design and automation activities. From initial deployment to ongoing management and day-to-day operation, our resident engineer decreases the time demands on our customers’ staff, allowing them to focus on their core business.
 

o
Technical Account Manager. Our technical account manager (TAM) is a proactive consultant that implements best practices, provides guidance and optimizes networking and application resources.
 
o
ERT Service.  Our Emergency Response Team (ERT) is a group of security experts available 24x7 for proactive security support services for customers facing an array of application- and network-layer attacks. These services include:
 

o
ERT Managed Security Service. Our ERT offers a fully managed application- and network-security service. The service covers a broad range of attack types from different forms of DoS to a variety of application attacks against our customers’ servers or data centers. It includes immediate response, onboarding, consulting, remote management and reporting.
 

o
ERT Under Attack Service. Our ERT under-attack service provides almost immediate response by our security expert. The ERT engineer will take the lead in fighting off attacks and provide postmortem analysis of security events to the customer. The ERT under-attack service is designed to let organizations know there is someone they can rely on in an emergency situation, guaranteeing support throughout the attack life cycle from the moment it begins. The ERT experts assist large enterprises worldwide with complex multi-vector attacks against their networks, data centers and application services.
 
Recent Solution Offering Activities
 
During 2021, our key activities regarding our solution offerings consisted of the following:
 

We added new capabilities into our DefensePro Attack Mitigator device, including the following:
 

o
Keyless SSL Protection, which provides SSL attack detection, characterization, and mitigation without requiring SSL decryption. In addition to Keyless SSL Protection, we began delivering during 2021 additional user options, including Selective Full SSL Protection, which minimizes latency and interruptions to legitimate user sessions by applying decryption only when under attack and only to suspicious sessions. These new capabilities are available on DefensePro and Cloud DDoS Protection services.
 
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o
Quantiles DoS Protection capability that enables service providers and carriers to surgically and automatically mitigate phantom flood attacks and traffic anomalies that historically have gone undetected. The solution automatically divides incoming traffic into segments or quantiles. With this new granular level of detection, service providers and carriers can intercept “lower volume” DDoS flood attacks — also known as phantom floods — that would otherwise escape notice within dynamic high bandwidth networks. For organizations, this automated capability is designed to eliminate the costly and often complex process of extensive manual configuration and ongoing threshold tuning.
 

In response to the ever-increasing volume of attacks and strong business demand, we have upgraded our Cloud DDoS Protection Service capacity to absorb DDoS attacks of up to 8Tbps. We also announced the opening of an additional new cloud scrubbing center in Amsterdam, expanding the number of our scrubbing centers to 14, deployed globally.
 

We added new capabilities to our Cloud WAF service including: OpenAPI protections, API schema discovery and schema enforcement, help GDPR compliance through source IP encryption, IPv6 based access control lists (ACLs) and rules and integrated a new content delivery network (CDN) service that enables self-service onboarding, cache management and embeds dashboard widgets. We have also continued to expand our Cloud WAF network adding new Cloud WAF PoPs in Amsterdam and Moskow and upgraded our  Chennai and Hong Kong PoPs infrastructure.
 

We have continued to integrate additional application security features into our Alteon line of ADCs to provide protection in one platform across all environments. Alteon’s new Integrated Application Protection includes a WAF to protect from web-based attacks, Bot Manager to block malicious automated threats, API protection to secure APIs and provide full visibility on API targeted threats, and ERT Active Attackers Feed – real-time data feed of known attackers, identified by Radware’s global network, to allow Alteon to block potential attacks before they occur.
 

We continued to add capabilities to our Alteon ADC including support for high availability (HA) in AWS cloud and Azure cloud, server load balancing for HTTP/3 protocol.
 
Recent Technology Partnerships Activity
 
During 2021, our key activities regarding our offerings through technology partners and solution providers consisted of the following:
 

We continued our investment in the OEM agreement with Israeli-based Check Point Software Technologies Ltd. (Check Point) by opening a demo lab for Check Point powered by Radware solutions: Cloud DDoS Protection and SSL Protection. Check Point sales engineers and Check Point channel partners can demonstrate these solutions to prospects as part of the sales process.
 
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We partnered with Toronto-based Oncore Cloud Services, Inc., a professional service provider, to resell our cloud security portfolio, with a focus on Radware's Cloud Native Protector.
 

We partnered with Netsync Network Solutions, a Houston-based technology solutions and services provider, to help Netsync’s enterprise and public sector customers safeguard their AWS workloads with our Cloud Native Protector service. This partnership joins an earlier partnership in 2021 to resell our Cloud DDoS Protection service to State, Local and Education (SLED) agencies in the U.S. as part of Netsync’s offerings.
 

We partnered with Azion Technologies, Inc. a provider of edge computing in Brazil, to resell our Bot Manager solution into Azion customer base.
 

We partnered with Internap Holdings, LLC (INAP), a Virginia-based Radware premier partner and a provider of performance-driven, secure hybrid infrastructure solutions to deploy our Cloud WAF and Cloud DDoS Protection Services to organizations worldwide.
 

We extended our partnership with Acantho S.p.A, a telecommunications subsidiary of Italy-based Hera Spa (Hera Group), to provide cloud web application security protection to enterprise customers in Italy. Acantho offers our Cloud WAF service, including Bot Manager, to enterprise customers for enhanced quality of service and application security.
 
Our Competitive Strengths and Growth Strategies
 
Our Competitive Strengths
 
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 several elements, including the following:
 

Innovation, Proprietary Technologies and Thought Leadership. We are offering innovative solutions in our domain. We were one of the first companies to offer hybrid attack mitigation solutions; behavioral DDoS attacks detection with automated real-time signature creation for attack mitigation; device fingerprinting technology implementation for Bot-based attacks detection; auto-policy generation for our WAF solution; protection against encrypted attacks without opening the sessions for DDOS protection; and artificial intelligence (AI) to detect attacks targeting workloads in public clouds. 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.
 
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Automation. We are offering automated attack detection and mitigation solutions that reduce the total cost of ownership of cyber security solutions, including behavioral analysis technology to detect zero-day DDoS attacks; automated real-time signature creation for DDoS attacks mitigation; intent-based behavioral analysis and machine learning models to detect automated bot attacks; and machine learning (positive security model) to detect zero-day web application attacks.
 

Wide attacks coverage. Our solutions offer a wide coverage against attacks, including mitigation of all four generations of Bot attacks; negative and positive security models to defend against known (OWASP top-10) and zero-day web application attacks (standard solutions typically cover OWASP top-10 attacks only); advanced DDoS attacks protection such as DNS flood attacks, burst floods, SSL flood attacks and IoT botnets.
 

Industry Awards. We gained multiple industry awards during 2021, including the following:
 

o
Forrester research - The Forrester Wave™: DDoS Mitigation Solutions, Q1 2021 – Leader;
 

o
Quadrant Knowledge Solutions - 2021 DoS Mitigation SPARK Matrix - Technology Leader, June 2021;
 

o
Gartner Magic Quadrant for Web Application and API Protection (WAAP) - Visionary, September 2021; and
 

o
Gartner Peer Insights: “Voice of the Customer”, Web Aplication Firewalls -  Customers’ Choice, January 2021.
 
We are not responsible for any of these awards or the entities or publications that award them.
 
Our Growth Strategy
 
Our growth strategy is based on several key elements:
 

Focus on data center solutions. We focus on developing and selling holistic cyber security and application delivery solutions for physical,  cloud and hybrid data centers and cloud applications.
 
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Continue investing in cloud and cyber security. We aim to offer superior and innovative cyber security solutions and cloud-based solutions and expand our portfolio in these two dimensions. We also invest in go-to-market efforts related to cloud security services and public cloud solutions.
 

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 Cisco, Check Point and Nokia, that provide critical access to certain large customers allowing us to sell our solutions. We intend to further increase our market footprint through collaboration with leading partners.
 

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 product and service offerings.
 
Sales and Marketing
 
Sales.  We market and sell our products and services primarily through indirect sales channels that consist of distributors and resellers located in North, Central and South 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, 2021, we had a total of 243 sales and marketing personnel. We have subsidiaries and representative offices and branches in several countries (see Item 4.C “Organizational Structure”), to promote and market our products and services and provide customer support in their respective regions.
 
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 and services.  We seek to build upon our marketing and branding efforts globally to achieve greater worldwide sales and leverage sophisticated digital platforms and activity to scale our presence globally. Our marketing initiatives are principally directed at developing brand awareness, optimizing our digital presence, searchability and awareness, generating qualified leads and providing sales and marketing tools to our distributors/resellers to promote sales. We participate in major trade shows and virtual events, regionally based events/seminars and offer support to our distributors and resellers who participate in these events. We also participate in our partners’ events, such as Cisco Live and Checkpoint Experience, to promote our solutions within their audiences. Additionally, we focus on our customer base to deliver an integrated Customer 360 experience including regular communications, facilitating support and training needs, maximize customer lifetime value and developing customer advocacy. 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, OEMs, VARs, GSIs and other companies that have formed strategic alliances with us.
 
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Customers and End-Users
 
With the exception of our limited direct sales to selected customers, we sell our products and services through distributors or resellers who then sell our products and services to end users.
 
We have a globally diversified end-user base, consisting of corporate enterprises, including banks, insurance companies, manufacturing, retail companies, media companies, government agencies and utilities, 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.
 
In 2021, approximately 45% of our revenues were in the North, Central and South America (principally in the United States), 34% were in Europe, Middle East and Africa (EMEA) and 21% in Asia-Pacific, compared to 46%, 31% and 23%, respectively, in 2020, and 42%, 30% and 28%, respectively, in 2019. Other than the United States, which accounted for 35% of our total revenues in 2021, no other single country accounted for more than 10% of our revenues for 2021, 2020 and 2019.
 
In 2021, approximately 58% of our revenues derived from product sales and 42% derived from service sales, compared to 53% and 47% respectively in each of 2020 and 2019. This reflects an increase in our cloud and product subscriptions as well as in our hardware-based products in 2021 as compared to 2020.
 
In 2021, approximately 73% of our revenues derived from the enterprise market and 27% derived from the carrier market, compared to approximately 71% and 29%, respectively, in 2020 and 68% and 32%, respectively, in 2019.
 
As of December 31, 2021, 2020 and 2019, no single customer accounted for more than 10% of our revenues.
 
For additional details regarding the breakdown of our revenues by geographical distribution and by activity, see “Item 5.A– “Operating Results.”

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. 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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Customer Support Services
 
Our technical support team, which consisted of 302 employees worldwide as of December 31, 2021, supports our sales force during the sales process, assists our customers, resellers and distributors with the initial installation, set-up and ongoing support of our products, and trains them on how to best use our solutions. The technical support team also assists with service onboarding processes and provides training to end users of our services. In addition, our technical team trains and certifies our distributors and resellers 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 offerings 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.
 
Research and Development
 
We invest in research and development to expand the features of our existing solutions, develop new solutions and features and improve our existing technologies and features. We believe that our future success will depend upon our ability to maintain our technological expertise, enhance our existing solutions and introduce, on a timely basis, new commercially viable solutions 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, 2021, our research and development staff consisted of 365 employees and 68 subcontractors. Research and development activities take place mainly at our facilities in Israel; Bangalore, India; Vancouver, Canada; and North Carolina, United States as well as by 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 Application Security, Infrastructure Security, Application Delivery, Management and Control, Cloud Services and Chief Technology Officer group. 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.”
 
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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 industry certifications.
 
We rely to a large extent 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.
 
We primarily rely on two ODMs to manufacture and to supply our hardware platforms, whereby, in 2021, approximately 62% of our direct product costs were from one of these vendors and 17% were from the other vendor.
 
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 and services. For example, in order to overcome the risk of not meeting the committed SLA to our customers due to importation blocking in different countries associated with the outbreak of the COVID-19 pandemic, we had allocated sufficient inventory that was sent directly from the ODM vendors to worldwide warehouses to be shipped to customers, when needed, at the destination country, rather than being shipped from Israel. In this respect, we have been certified during 2021 for ISO 22301 (Business Continuity Management System). Furthermore, in order to minimize potential delays in product supplies by certain of our ODMs whose lead time had been significantly extended due to the worldwide chipset shortage, we had paid expedite fees to several components manufacturers. 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, on a timely basis, 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.
 
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.
 
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We have registered trademarks for, among others, Radware®; Radware Logo:
 
®; OnDemand Switch®; Alteon®; APSolute®; LinkProof®; DefensePro®; CID®; SIPDirector®; AppDirector®; AppXcel®; AppXML®; AppWall®; APSolute Insite®; StringMatch Engine®; Web Server Director®; APSolute Vision®; vDirect®; Alteon VA®; AppShape®; FastView®; DefenseFlow®; CyberStack®; Virtual DefensePro®; VADI® (Virtual Application Delivery Infrastructure);  ShieldSquare®   and the ShieldSquare Logo: ®; and we have non registered trademarks for, among others, ADC-VX™ and Inflight™.  We own registered U.S. copyrights in all of our primary software product lines.
 
We have registered patents in the United States, Canada and other jurisdictions 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; the activation of multiple virtual services on a switching platform; the behavioral analysis and detection of zero-day and DoS network attack patterns; a new method based on Quantiles for network edge DDoS and network anomalies protection in our DefensePro product; our new paraphrase-based algorithm for hypertext transfer protocol (HTTP) and keyless HTTPS attack mitigation behavioral mechanisms in our DefensePro; our domain name service floods behavioral protection; our web and API application protection, including our Bot Manager augmented by the new block-chain based methods for addressing  automated threats (for public-facing services) and advanced threats (for private or authenticated services); new AI/ML methods to address and automate analysis of our CWAF customer’s applications for proactive false-positive and false-negative service tuning, 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 software-defined networking (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. These applications may not result in any patent being issued, and, even 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. 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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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:
 

DDoS Mitigation: Akamai Technologies, Inc., or Akamai, Imperva Inc., or Imperva, and Netscout Systems, Inc.
 

Web Application Firewalls and Bot Management: Akamai, Imperva, Cloudflare, Inc., F5 Networks, Inc., or F5, and AWS
 

Application Delivery: F5, A10 Networks, Inc. and Citrix Systems, Inc.
 

Public Cloud Security: Palo Alto Networks, Inc., AWS, 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.
 
We are seeing new types of competitors from within the public cloud providers – as more companies rely on these environments to host their services and applications, these vendors start providing cyber security solutions that are typically fairly basic and customized for their own environment.  As we see more and more companies relying on more than one public cloud vendor, we expect to see additional competitors and rapid evolution of solutions and offerings.
 
An increase in competition may lower prices and reduce demand and margins as well as increase costs associated with sales and marketing to maintain or increase market share; which, in turn, may impair our ability to increase profitability. Furthermore, the dynamic market environment, as illustrated by the above acquisitions, poses a challenge in predicting market trends and expected growth. We believe that our success will depend primarily on our continued ability to provide more technologically advanced and cost-effective application delivery and cyber security solutions; and more responsive customer service and support, than our competitors.  However, we cannot assure you that all of the products and services we offer in our portfolio will compete successfully with similar competitor solutions. Furthermore, should competition intensify, we may have to reduce the prices of some of our products and services and, where possible, accelerate investments in delivering advanced innovative solutions which will negatively impact our business and financial condition. See also above under “Business Overview–Our Competitive Strengths and Strategies.”
 
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Government Regulations
 
Data Privacy and Data Protection Laws
 
Our activities in the cyber security market require that we comply with laws and regulations in the area of data privacy and data protection governing the collection, use, retention, sharing and security of personal data. For example, the GDPR and UK DP Laws (each as referenced above), include operational requirements for companies that receive or process personal data of residents of the European Union and the UK, and non-compliance will result in significant penalties. Many other countries in which we operate have their own data protection and data security laws that we need to comply with in collecting, utilizing, or otherwise processing personal data from our customers and/or visitors to their websites and others. 
 
Environmental and Security Management 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 believe we are currently in compliance with the RoHs and WEEE regulations, ISO 14001 standards (regrading Environmental Management Systems), ISO/IEC 27001:2013 and ISO 27032: 2012 standards (both in regard to Information Security Management System), ISO 28000 (Supply Chain Security management) and OHSAS 18001:2007 (Occupational Health and Safety Management).
 
Israeli Innovation Authority
 
From time to time, eligible participants may receive grants under programs of the IIA. 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 Innovation Law.
 
Under the Innovation 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 50% of certain approved expenditures of such programs, as determined by said committee.
 
The Innovation Law 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, subject to payment of a transfer fee pursuant to which the grant recipient pays to the IIA a portion of the sale price paid in consideration for such IIA-funded know-how; or a portion of the consideration paid in respect of licensing the IIA-funded know-how, as the case may be (according to certain formulas, which may result in repayment of up to 600% of the grant amounts plus interest). Under certain circumstances, such as in the event that the grant recipient receives know-how from a third party in exchange for its IIA-funded know-how, such transfer fee may not apply.
 
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The Innovation 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 Innovation 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 needs to sign an undertaking to comply with the Innovation 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 2021, 2020 and 2019 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. Research and development grants deducted from research and development expenses, net amounted to $1.0 million, $0.9 million and $0.9 million for the years ended December 31, 2021, 2020 and 2019, respectively.
 
In addition, during 2021, one of our Israeli subsidiaries received royalty-bearing grants from the IIA for approved research and development project. The grants under this project are required to be repaid based on revenues from the sale of products incorporating know-how developed, in whole or in part with the grants. These grants amounted to $0.3 million for the year ended December 31, 2021.
 
Environmental, Social and Governance Matters

At Radware, we aim to help customers protect their critical applications and secure their digital experiences. As we pursue this goal, we recognize our responsibility to ensure our business practices promote socially and environmentally responsible economic growth. In order to promote this corporate responsibility and sustainability approach, we have implemented, and will continue to implement, various Environmental, Social and Governance (ESG) principles and activities into our daily business practices, including those summarized below.

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Most recently, in December 2021, we have also released our inaugural ESG Report available www.radware.com/corporategovernance  (information contained on our website is not incorporated herein by reference and shall not constitute part of this annual report) so as to expand our ESG-related disclosures on what we have accomplished thus far on this front and what we strive to achieve.

Environmental

We are committed to building a more sustainable world through the products, services and solutions we offer and the way we operate. This means, among other things, that we aim to operate our business in a manner which meets or exceeds all environmental laws and compliance guidelines and striving to improve our environmental performance across the entire supply chain.
 
While we continue to develop a comprehensive program that recognizes our environmental impact, we have already implemented various activities to measure and foster our environmental commitment, including the following:
 

We have implemented key performance indicators (KPIs), which set quantitative reduction goals for the use of water, power and paper;
 

We work with our suppliers to maintain compliance with various environmental laws and guidelines, such as RoHS and WEEE in the EU, and adopted our Conflict Minerals Policy available at www.radware.com/corporategovernance/conflictminerals (information contained on our website is not incorporated herein by reference and shall not constitute part of this annual report) which outlines our practices and procedures with respect to responsible sourcing of minerals from conflict-affected and high-risk areas; and
 

Our corporate headquarters in Tel Aviv, Israel, as well as our Training rooms in Tel Aviv are designed in the “TED” style to serve as multifunctional work spaces while the operations room utilizes NVX video technology in order to minimize the amount of copper wiring required to function and travels. At our headquarters, we offer EV charging stations to our employees and visitors, and where applicable according to local requirements, we offer recycling and we properly dispose of e-waste.
 
Social

We believe that the foundation of our success lies in our diverse, engaged and motivated workforce, and we continuously advocate for our team by creating a work environment in which our employees can thrive in the spirit of productivity and development. This means, among other things, that we aim to operate our business in a manner which promotes a work environment that is free of discrimination and harassment and otherwise attend to our employees’ wellbeing.
 
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While we continue to develop a comprehensive program that recognizes our social  impact, we have already implemented various activities to measure and foster our social commitment, including the following:
 

We are an equal-opportunity employer and make employment decisions on the basis of a person’s qualifications and our business needs. This is demonstrated by our Human Rights and Labor Standards Policy;
 

Our corporate policy maintains zero tolerance for harassment, sexual harassment and discrimination, and it imposes significant consequences for behavior deemed to create a hostile work environment. This is demonstrated by our Code of Conduct and Ethics as well as our Human Rights and Labor Standards Policy;
 

We offer an attractive mix of compensation and benefit plans to support our employees and their families’ physical, mental, and financial well-being. This includes allowing the majority of our employees to have a direct ownership interest in Radware by participating in our equity-based incentive plans;
 

We are committed to maintaining a healthy, safe, and secure work environment that protects our employees and the public from harm. This is demonstrated by the measures we implemented in order to overcome the challenges presented by the COVID-19 pandemic, whereby we implemented a program of global engagement activities that consists of, among other things, improving virtual communication channels; our “going virtual” activities, including new virtual onboarding, virtual learning ramp up, global hackathon, and virtual branding; and wellbeing and employee care activities, in which we supported the wellbeing of each of our employees and their families by providing quarantine packages, holiday deliveries, virtual activities, live shows, talent competitions, and family meal vouchers.
 
Governance

As part of our sustainable and other ESG operations policies, we aim that our corporate governance and corporate behavior mechanisms align the interest of all our stakeholders. This means, among other things, that we developed and strive to maintain a strong set of corporate values that will inspire ethical behavior across all decision-making processes, and a management and control system to ensure that ethics and security issues are given their due weight.
 
While we continue to develop a comprehensive program that recognizes our corporate governance and ethical conduct, we have already implemented various activities to measure and foster this commitment, including the following:
 

Corporate Governance and Board Practices: Our corporate governance policies and practices are designed to foster effective board oversight in service of the long-term interests of our shareholders. Our Board of Directors consists of seven (7) members, of whom five (5) qualify as “independent directors” under the Nasdaq rules and one (1) is a woman. The Audit and Compensation Committees of our Board of Directors, which are charged with significant functions in our risk oversight and compensation philosophy, respectively, currently consist of four (4) members, all of whom qualify as “independent directors” under the Nasdaq rules and one (1) of whom is a woman. For further details on our corporate governance as well as our board of directors and its committees’ roles and practices, see Items 6.C (“Board Practices”) and 16.G (“Corporate Governance”).
 
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Ethical Business Conduct: All of our directors, officers, service providers and employees must conduct themselves in accordance with our Code of Conduct and Ethics available at www.radware.com/corporategovernance/ (information contained on our website is not incorporated herein by reference and shall not constitute part of this annual report). Our Code of Conduct and Ethics is intended to promote various elements of ethical business conduct, including compliance with laws; avoiding conflict of interests and personal exploitation of corporate opportunities; fair dealing; confidentiality of information; and other policies and guidelines in connection with insider trading and anti-corruption laws and policies.
 
C.          Organizational Structure
 
We have a wholly owned subsidiary in the United States, Radware Inc., which conducts the sales and marketing of our products and services in the United States. We also have subsidiaries in other countries, most of which typically conduct sales and marketing of our products and services in their respective locations. We have also established representative offices in Taiwan. Our subsidiaries include:
 
Name of Subsidiary
Place of Incorporation
Radware Inc.
New Jersey, United States
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
Kaalbi Technologies Limited Ltd.
India
Radware (India) Cyber Security Solutions Private Limited
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
Radware Canada Holdings Inc.
Canada
Radware Iberia, S.L.U.
Spain
Edgehawk Security Ltd.
Israel
CNP Ltd.
Israel
CSR Cloud Security Ltd.
Israel
 
* We own 91% of this subsidiary, which ceased its activities since 2017. All other listed subsidiaries are wholly owned.
 
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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.  Yehuda Zisapel, his brother, Zohar Zisapel, and Nava Zisapel are founders, directors and/or shareholders 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.
Binat Business Ltd.
BYNET Data
Communications Ltd.*
CloudRide 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.
DC Security Ltd. (previously known as SecurityDAM Ltd.)

 
* a RAD-Bynet Group company with whom we currently transact business
 
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 all entities within the RAD-Bynet Group or of all the holdings of Messrs. Yehuda and Zohar Zisapel.
 
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 and services. See also Item 7.B “Related Party Transactions.”
 
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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 2021.
 
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.
 
Israel. Our headquarters and principal administrative, finance, research and development and marketing operations are located in approximately 108,000 square feet of leased office space in Tel Aviv, Israel, in two buildings: one building, consisting of approximately 40,000 square feet, plus storage and parking space, and the second building, consisting of approximately 68,000 square feet, plus parking spaces. Both buildings have leases that expire in June 2030 (with one of the two buildings having a termination option by us in June 2025 by way of prior notice) and are leased from, among others, affiliated companies owned by Yehuda, Nava and/or Zohar Zisapel, as applicable. For more information, see Item 7.B “Related Party Transactions.”
 
In addition, we lease approximately 3,600 square feet of space in Jerusalem, Israel, for development facilities from an affiliated company owned by Yehuda and Nava Zisapel. The lease expires in July 2025. We also sublease approximately 15,000 square feet for manufacturing facilities in Jerusalem, Israel, from an affiliated company owned by Yehuda, Nava and Zohar Zisapel. The lease expires in July 2022. For more information, see Item 7.B “Related Party Transactions.”
 
Other locations. In the United States, we lease approximately 16,900 square feet of property in Mahwah, New Jersey, consisting of approximately 12,700 square feet of office space and 4,200 square feet of warehouse space from a company controlled by Yehuda, Nava and Zohar Zisapel. The lease expires in December 2025. For more information, see Item 7.B “Major Shareholders and Related Party Transactions – Related Party Transactions.”
 
We lease approximately 3,850 square feet of property for our research and development facilities in North Carolina, the lease for which will expire in March 2026. In addition, we lease approximately 5,700 square feet of property in Sunnyvale, California, the lease for which will expire in February 2022.
 
We also 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.
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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 for physical, cloud, and software defined data centers (SDDC). Our solutions portfolio secures the digital experience by providing infrastructure, application, and corporate IT protection and availability services to enterprises globally. Our solutions are deployed by, among others, enterprises, carriers and cloud service providers.

We began sales in 1997, and currently have nearly 30 local offices, subsidiaries or branches globally across Asia-Pacific, Europe and North, Central and South America.

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. 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 solutions:
 

We recognize physical and software product revenues when control of the product is transferred to the customer (i.e., when our performance obligation is satisfied), which typically occurs at shipment and we recognize revenues from product and cloud subscriptions, as part of the product revenues, ratably over the subscription period.
 

Revenues from post-contract customer support (PCS), which mainly represents help-desk support and unit repairs or replacements, professional services and ERT services, are recognized ratably over the contract or subscription period, which is typically between one year and three years.
 
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, 2021, 2020 and 2019, revenues derived from sales of the Company’s products and product subscriptions constituted approximately 58%, 53% and 53%, respectively, of our total revenues, with the remaining revenues being derived from services.
 
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Results of Operations
 
The following discussion of our results of operations for the years ended December 31, 2021, 2020 and 2019, including the following tables, which present selected financial information 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:

   
2021
   
2020
   
2019
 
   
(US $ in thousands)
 
Revenues:
                       
Products
 
$
170,438
   
$
132,934
   
$
133,605
 
Services
   
116,058
     
117,093
     
118,467
 

   
286,496
     
250,027
     
252,072
 
Cost of revenues:
                       
Products    
42,191
     
34,645
     
35,056
 
Services
   
10,255
     
10,439
     
10,118
 

   
52,446
     
45,084
     
45,174
 
Gross profit
   
234,050
     
204,943
     
206,898
 
Operating expenses, net:
                       
Research and development, net
   
74,098
     
66,836
     
61,841
 
Sales and marketing
   
119,842
     
113,015
     
109,556
 
General and administrative
   
21,885
     
18,924
     
18,584
 
Total operating expenses
   
215,825
     
198,775
     
189,981
 
Operating income
   
18,225
     
6,168
     
16,917
 
Financial income, net
   
4,407
     
7,796
     
8,792
 
Income before taxes on Income
   
22,632
     
13,964
     
25,709
 
Taxes on income
   
14,821
     
4,328
     
3,143
 
Net income
   
7,811
     
9,636
     
22,566
 

The following table sets forth, for the periods indicated, certain financial data expressed as a percentage of our total revenues:
 
   
2021
   
2020
   
2019
 
Revenues:
                 
Products    
59
%
   
53
%
   
53
%
Services    
41
     
47
     
47
 
      100       100      
100
 
Cost of Revenues:
                       
Products
   
15
     
14
      14
 
Services    
3
      4
      4
 
      18
      18
      18
 
Gross profit
   
82
     
82
     
82
 
Operating expenses, net:
                       
Research and development, net
   
26
     
27
     
25
 
Sales and marketing
   
42
     
45
     
43
 
General and administrative
   
7
     
8
     
7
 
Total operating expenses
   
75
     
80
     
75
 
Operating income
   
6
     
2
     
7
 
Financial income, net
   
2
     
3
     
3
 
Income before taxes on Income
   
8
     
6
     
10
 
Taxes on income
   
(5
)
   
(2
)
   
(1
)
Net income
   
3
%
   
4
%
   
9
%

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Comparison of Years Ended December 31, 2021, 2020 and 2019
 
Revenues.
 
Our revenues are derived from sales of our solutions. Revenues from physical products and software-based products are recognized when control of the promised goods is transferred to the customer, either upon shipment or when the product is delivered, depending on the commercial terms of each transaction. Revenues from product subscriptions and cloud subscriptions are recognized ratably over the subscription period. Revenues from post-contract customer support, which represent mainly help-desk support, unit repairs or replacements, professional services and ERT services are recognized ratably over the contract period. For additional details regarding the manner in which we recognize revenues, see the discussion under the caption “Critical Accounting Policies – Revenue Recognition” above.
 
The following table provides a breakdown of our revenues 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:
 
 
(US$ in thousands)
 

2021
   

2020
   

2019
   
% Change
2021 vs. 2020
   
% Change
2020 vs. 2019
 
Products
   
170,438
     
59
%
   
132,934
     
53
%
   
133,605
     
53
%
   
28
%
   
(1
)%
Services
   
116,058
     
41
%
   
117,093
     
47
%
   
118,467
     
47
%
   
(1
)%
   
(1
)%
Total
   
286,496
     
100
%
   
250,027
     
100
%
   
252,072
     
100
%
   
15
%
   
(1
)%
 
The following table shows a breakdown of our total revenues 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:
 
 
(US$ in thousands)
 

2021
   

2020
   

2019
   
% Change
2021 vs. 2020
   
% Change
2020 vs. 2019
 
North, Central and South America (principally the United States)(*)
   
128,770
     
45
%
   
114,413
     
46
%
   
106,429
     
42
%
   
13
%
   
8
%
EMEA (Europe, the Middle East and Africa)
   
98,388
     
34
%
   
78,362
     
31
%
   
75,275
     
30
%
   
26
%
   
4
%
Asia-Pacific
   
59,338
     
21
%
   
57,252
     
23
%
   
70,368
     
28
%
   
4
%
   
(19
)%
Total
   
286,496
     
100
%
   
250,027
     
100
%
   
252,072
     
100
%
   
15
%
   
(1
)%

(*) For the years ended December 31, 2021, 2020 and 2019, our revenues from the United States were $98.9 million, $93.7 million and $85.4 million, respectively, representing 35%, 37% and 34% of total revenues for these years, respectively.
 
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Revenues in 2021 were $286.5 million compared with revenues of $250.0 million in 2020, an increase of 15%. The increase in revenues was due to an increase in product revenue, in all geographic regions, primarily in EMEA as described below.
 
Revenues in 2020 were $250.0 million compared with revenues of $252.1 million in 2019, a decrease of 1%. The decrease in revenues was primarily due to a decrease in maintenance revenues as described in more detail below.
 
In 2021, our product revenues were $170.4 million, an increase of 28% compared to $132.9 million in 2020, reflecting an increase in cloud services, product subscriptions and in appliance products. In 2020, our product revenues were $132.9 million, approximately the same level as in 2019, reflecting an increase in product subscriptions, offset by a decrease in our hardware-based products.
 
In 2021, our service revenues were $116.1 million, compared to $117.1 million in 2020 and $118.5 million in 2019. The decrease in service revenues in both 2021 and 2020 is due to the decrease in maintenance revenues, partially offset by an increase in service subscriptions.
 
During 2021, our revenues from the enterprise market increased by 18% to $208.2 million from $176.9 million in 2020, and revenues from the carrier market increased by 7% to $78.3 million from $73.1 million in 2020. During 2020, our revenues from the enterprise market increased by 2% to $176.9 million from $172.6 million in 2019, whereas revenues from the carrier market decreased by 8% to $73.1 million from $79.5 million in 2019.
 
Our revenues in North, Central and South America increased in 2021 by 13% compared to 2020. Revenues from the EMEA region increased in 2021 by 26% compared to 2020. Revenues in the Asia-Pacific region decreased in 2021 by 4% compared to 2020. The growth in North, Central and South America and in EMEA is attributed to high demand for our cloud security solutions in those regions.
 
Our revenues in North, Central and South America increased in 2020 by 8% compared to 2019, mainly due to greater demand for cloud-based security solutions in those regions. Revenues from the EMEA region increased in 2020 by 4% compared to 2019. Revenues in the Asia-Pacific region decreased in 2020 by 19% compared to 2019 mainly due to recognition of large appliance deals in 2019.
 
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Other than the United States, no other single country accounted for more than 10% of our revenues for the years ended December 31, 2021, 2020 and 2019.
 
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, license fees paid to third parties, fees paid to managed security service providers (related parties), inventory write-offs, 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 and as a percentage of the relative product and services revenues:
 
(US$ in thousands)
 
2021
   
2020
   
2019
 
Cost of Products
   
42,191
     
24.8
%
   
34,645
     
26.1
%
   
35,056
     
26.2
%
Cost of Services
   
10,255
     
8.8
%
   
10,439
     
8.9
%
   
10,118
     
8.5
%
Total
   
52,446
     
18.3
%
   
45,084
     
18.0
%
   
45,174
     
17.9
%

Cost of products as a percentage of product revenues in 2021 was 24.8%, compared to 26.1% in 2020. Cost of products in 2021 and 2020 included amortization of intangible assets in the amount of $1.9 million for 2021 and 2020. Our cost of products as a percentage of product revenues, excluding amortization of intangible assets, represented approximately 23.7% of product revenues in 2021, compared to 24.6% in 2020. The decrease in cost of products as a percentage of product revenues is mainly due to a different mix of sales of our products and product subscriptions.
 
Cost of services as a percentage of service revenues in 2021 was 8.8% compared to 8.9% in 2020.
 
Cost of products as a percentage of product revenues in 2020 was 26.1%, approximately the same as 2019. Cost of products in 2020 and 2019 included amortization of intangible assets in the amount of $1.9 million and $2.3 million, respectively. Our cost of products as a percentage of product revenues, excluding amortization of intangible assets, represented approximately 24.6% of product revenues in 2020, compared to 24.5% in 2019.
 
Cost of services as a percentage of service revenues in 2020 was 8.9% compared to 8.5% in 2019.
 
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Operating Expenses.
 
The following table sets forth a breakdown of our operating expenses for the periods indicated as well as the percentage change between such periods:
 

(US$ in thousands)
 

2021
   

2020
   

2019
   
% Change
2021 vs. 2020
   
% Change
2020 vs. 2019
 
Research and development, net
 
$
74,098
   
$
66,836
   
$
61,841
     
11
%
   
8
%
Selling and marketing
   
119,842
     
113,015
     
109,556
     
6
%
   
3
%
General and administrative
   
21,885
     
18,924
     
18,584
     
16
%
   
2
%
Total
 
$
215,825
   
$
198,775
   
$
189,981
     
9
%
   
5
%

Our operating expenses increased by 9% in 2021 to $215.8 million from $198.8 million in 2020. The increase is primarily attributed to personnel costs and related expenses, impact of the weakening of the dollar mainly against the NIS and fees paid to subcontractors and consultants.
 
Our operating expenses increased by 5% in 2020 to $198.8 million from $190.0 million in 2019. The increase is primarily attributed to personnel costs and related expenses as well as stock-based compensation expenses. Such increase was partially offset by the decrease in travel and marketing expenses related to the COVID-19 pandemic.
 
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 solutions, 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 $74.1 million in 2021, an increase of $7.3 million, or 11%, compared with R&D expenses of $66.8 million in 2020. This increase is primarily a result of: (1) $1.4 million due to an increase in personnel costs, including salary raises awarded and other salaries related expenses offset by lower average headcount compared to previous year,  (2) $3.4 million related to the impact of the weakening of the dollar mainly against the NIS, (3) $1.3 million increase in subcontractors, and (4) a $1.0 million increase in stock-based compensation expenses (see also “Stock-based compensation expenses” below).
 
R&D expenses were $66.8 million in 2020, an increase of $5.0 million, or 8%, compared with R&D expenses of $61.8 million in 2019. This increase is primarily a result of: (1) $3.1 million due to an increase in personnel costs compared to previous year, driven by the growth in average headcount during 2020, as well as salary raises awarded and other salary related expenses, (2) $1.0 million related to the impact of the weakening of the dollar mainly against the NIS, and (3) $1.6 million increase in stock-based compensation expenses (see also “Stock-based compensation expenses” below). This was partially offset by a $0.6 million decrease in expenses due to reductions in travel caused by the COVID-19 pandemic. Sales and Marketing Expenses.
 

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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 and services, operational costs of our offices which are located outside Israel and are engaged in the promotion, marketing and support of our solutions, 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 $119.8 million in 2021, an increase of $6.8 million, or 6%, compared with sales and marketing expenses of $113.0 million in 2020. This increase is mainly related to an increase of (1) $3.9 million due to a headcount increase, as well as salary raises and other salary related expenses such as sales incentive commissions, (2) $2.6 million related to the impact of the weakening of the dollar, mainly against the NIS, and (3) $0.5 million increase in stock-based compensation expenses (see also “Stock-based compensation expenses” below).
 
Sales and marketing expenses were $113.0 million in 2020, an increase of $3.5 million, or 3%, compared with sales and marketing expenses of $109.6 million in 2019. This increase is mainly related to an increase of $10.6 million due to a headcount increase, as well as salary raises and other salary related expenses, such as sales incentive commissions. This increase was partially offset by a $ 5.7 million reduction in travel expenses and $1.9 million of lower marketing expenses, each as a result of the COVID-19 pandemic.
 
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 $21.9 million in 2021, an increase of $3.0 million, or 16%, compared with general and administrative expenses of $18.9 million in 2020. The increase in general and administrative expenses in 2021 was primarily due to (1) $0.2 million related to personnel costs and related expenses, (2) $0.9 million related to the impact of the weakening of the USD against the NIS, (3) $0.7 million related to fees paid to outside consultants for tax, financial and legal services , (4) $1.4 million related to increase in insurance premiums, mainly due to directors and officers liability insurance. Such increase was partially offset by $0.5 million related to lower stock-based compensation expenses (see also “Stock-based compensation expenses” below).
 
General and administrative expenses were $18.9 million in 2020, an increase of $0.3 million, or 2%, compared with general and administrative expenses of $18.6 million in 2019. The increase in general and administrative expenses in 2020 was primarily due to an increase of $0.2 million related to personnel costs and related expenses, an increase of $0.2 million related to the impact of the weakening of the USD against the NIS and an increase of $0.6 million related to higher stock-based compensation expenses (see also “Stock-based compensation expenses” below). Such increase was partially offset by a $0.6 million decrease related to fees paid last year to outside consultants primarily related to our acquisition in 2019 of Kaalbi Technologies Private Ltd., formerly known as ShieldSquare, an India-based provider of bot mitigation and bot management space, and the intellectual property litigation that settled in 2019.
 
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For a discussion of the impact of foreign currency fluctuations our business, see Item 11 “Quantitative and Qualitative Disclosures about Market Risk.”
 
Stock-based compensation expenses.
 
Our expenses also include the 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.
 
The following tables summarize the stock options and restricted share units (RSUs) that were granted during the years 2021, 2020 and 2019, and their weighted average grant-date fair value:

Stock options:

   
2021
   
2020
   
2019
 
Grants
   
248,233
     
1,037,444
     
1,167,458
 
Weighted average grant-date fair value
   
6.87
     
4.74
     
5.54
 

RSUs:

   
2021
   
2020
   
2019
 
Grants
   
1,143,097
     
995,419
     
776,788
 
Weighted average grant-date fair value
   
32.57
     
22.54
     
23.41
 

Stock-based compensation expenses in 2021 totaled $17.6 million, an increase of $1.1 million, or 7%, compared with expenses of $16.5 million in 2020. The reason for the increase in our stock-based compensation expenses in 2021 is primarily due to the significant increase in our weighted average grant date fair value of RSUs granted throughout 2021.

Stock-based compensation expenses in 2020 totaled $16.5 million, an increase of $3.5 million, or 27%, compared with expenses of $13.1 million in 2019. The reason for the increase in our stock-based compensation expenses in 2020 is primarily due to the increase in the quantity of RSUs granted throughout 2019 and specifically in the end of the year and therefore the related expense was recorded mainly in 2020.

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Financial Income, Net.
 
Financial income, net consists primarily of interest earned on short- 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 $4.4 million in 2021, compared with $7.8 million in 2020. The net decrease of $3.4 million is primarily attributed to a $3.8 million decrease in interest from our investments, partially offset by a $0.5 million decrease in foreign currency exchange losses.
 
Financial income, net was $7.8 million in 2020, compared with $8.8 million in 2019. The net decrease of $1.0 million is primarily attributed to a decrease in interest from our investments due to lower market yield.
 
Income Taxes.
 
Israeli companies are generally subject to corporate tax on their taxable income at the rate of 23% for the 2021 and 2020 tax years. We elected to apply the Preferred Enterprise regime under the Law for the Encouragement of Capital Investment, 1959 (the “Investments Law”) as of the 2014 tax year. The election is irrevocable. Under the Preferred Enterprise regime, a preferred income of an enterprise located in the center of Israel is subject to a tax rate of 16%. Pursuant to Amendment 73 to the Investments Law adopted in 2017, a company located in the center of Israel that meets the conditions for “Preferred Technological Enterprises”, is subject to a tax rate of 12%. We believe we meet those conditions.
 
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.
 
Our effective tax rate in 2021 was 65% compared with an effective tax rate of 31% in 2020. The increase in the effective tax rate in 2021 as compared to 2020 is primarily due to a settlement we reached with the Israeli Tax Authority during November 2021 in relation to our corporate tax returns for the years 2015-2018 and the release of Trapped Earnings as described in Item 10.E “Taxation—Israeli Tax Considerations.”

Our effective tax rate in 2020 was 31% compared with an effective tax rate of 12% in 2019. The increase in the effective tax rate in 2020 as compared to 2019 is primarily due to the release of a valuation allowance we made in 2019 and the write-off of unused withholding tax balances.

For additional disclosure and explanations regarding our income taxes, including Preferred Technology Enterprise program, see Note 14 to our consolidated financial statements included elsewhere in this annual report and Item 10.E “Taxation—Israeli Tax Considerations.”
 
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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 3.D “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 4.B “Business Overview—Government Regulations” and Item 3.D “Risk Factors—Government regulations affecting our business are evolving, and unfavorable changes could harm our business” and “—Risks Related to Operations in Israel.”
 
Impact of Russia-Ukraine Conflict
 
Following Russia’s military conflict in Ukraine, the United States and other countries launched economic sanctions and severe export control restrictions against Russia and Belarus, and the United States and other countries could launch wider sanctions and export restrictions and take other actions should the conflict further escalate. For information on the possible impact of the Russia-Ukraine Conflict, see Item 3.D “Risk Factors – Our business may be affected by sanctions, export controls and similar measures targeting Russia and other countries and territories as well as other responses to Russia’s military conflict in Ukraine, including indefinite suspension of operations in Russia and dealings with Russian entities by many multi-national businesses across a variety of industries – Risk Related to Our Business and Our Industry”.
 
Impact of COVID-19
 
For information on the impact of the COVID-19 pandemic, see Item 5.B “Trend Information—COVID-19 Update.”
 
Related Parties
 
We have entered into a number of agreements for the lease of real property and the purchase of certain products and services from certain companies, of which Yehuda Zisapel, Zohar Zisapel and/or Nava Zisapel are co-founders, directors and/or shareholders, that form part of the RAD-Bynet Group. In February 2022, we have also acquired the technology and operations of one of these RAD-Bynet Group entities, SecurityDAM. Mr. Yehuda Zisapel, the Chairman of our Board of Directors, and Mr. Roy Zisapel, our President and Chief Executive Officer and a director, hold a majority stake and a minority stake, respectively, in SecurityDAM. Mr. Roy Zisapel also serves as a director of RAD Data Communications Ltd., a company in the RAD-Bynet Group.
 
We believe that the terms of the transactions in which we have entered with these member entities 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 that 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.

For more details about these transactions, see below under Item 7.B “Related Party Transactions.”
 
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B.          Liquidity and Capital Resources
 
General
 
Since our inception, we have financed our operations through a combination of issuing equity securities, including two public offerings in October 1999 and February 2000, research and development and marketing grants from the Government of Israel, and cash generated by operations.
 
The Company’s equity as a percentage of its total assets was 58% on December 31, 2021, compared with 62% at December 31, 2020 and 66% at December 31, 2019.
 
Cash and cash equivalents, short- and long-term bank deposits and short- and long-term marketable securities were $465.8 million at December 31, 2021, compared with $448.8 million and $427.7 million at December 31, 2020 and 2019, respectively.
 
Principal Capital Expenditures and Divestitures
 
Capital expenditures were $5.6 million, $8.7 million and $8.2 million for the years ended December 31, 2021, 2020 and 2019, respectively. These expenditures were mainly comprised of investments in cloud infrastructure, enterprise resource planning (ERP) modules, leasehold improvements, machinery and equipment, computers, lab equipment and testing tools.
 
We expect to engage in additional capital spending to support possible growth in our operations, infrastructure and personnel. In 2022, we anticipate that the majority of our capital expenditures will be primarily for additional infrastructure to support our cloud-based solutions and for R&D testing, lab equipment and additional investments in new modules for our ERP system.
 
We did not have 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):
 
   
2021
   
2020
   
2019
 
Net cash provided by operating activities
 
$
71,774
   
$
63,865
   
$
52,852
 
Net cash provided by (used in) investing activities
   
7,849
     
(14,368
)
   
(50,793
)
Net cash used in financing activities
   
(41,881
)
   
(35,477
)
   
(6,511
)
 
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Net cash provided by operating activities for 2021, 2020 and 2019 was $71.8 million, $63.9 million and $52.9 million, respectively. Our net income in 2021, 2020 and 2019 was $7.8 million, $9.6 million and $22.6 million, respectively.
 
Net cash provided by operating activities was $71.8 million for the year ended December 31, 2021 compared to $63.9 million net cash provided in operating activities for the year ended December 31, 2020. The change resulted primarily from an increase of $3.6 million in accrued interest on bank deposits, an increase of $3.2 million in deferred revenues, an increase of $2.4 million in inventories, an increase of $1.0 million in other receivables and prepaid expenses and an increase of $2.9 million in trade payables. This increase was partially offset by a decrease of $2.1 million in trade receivables, net, a decrease of $1.8 million in our net income, and a $4.2 million change in deferred income taxes, net.
 
Net cash provided by operating activities was $63.9 million for the year ended December 31, 2020 compared to $52.9 million net cash provided in operating activities for the year ended December 31, 2019. The change resulted primarily from an increase of $14.5 million in deferred revenues, increase of $8.5 million in other payables and accrued expenses, a decrease of $8.2 million in trade receivables, net, increase of $3.5 million in stock-based compensation and $1.5 million change in deferred income taxes, net. This increase was partially offset by a decrease of $12.9 million in our net income, decrease of $4.5 million in inventories, decrease of $4.2 million in trade payables and decrease of $3.3 million in accrued interest on bank deposits.   
 
Net cash provided by investing activities was $7.8 million for the year ended December 31, 2021, an increase of $22.2 million compared to net cash used in investing activities of $14.4 million for the year ended December 31, 2020. The increase was due to a net increase of $19.0 million in proceeds from short- and long-term deposits and marketable securities and an increase of $3.1 million due to lower capital expenditures.

Net cash used in investing activities was $14.4 million for the year ended December 31, 2020, a decrease of $36.4 million compared to net cash used in investing activities of $50.8 million for the year ended December 31, 2019. The decrease was due to a net decrease of $24.8 million in investments in short- and long-term deposits and marketable securities, a decrease of $12.2 million in payment for the acquisition of a subsidiary offset by an increase of $0.5 million in capital expenditures and $0.1 million investment in other long-term assets.

Net cash used in financing activities was $41.9 million for the year ended December 31, 2021, an increase of $6.4 million compared to net cash used in financing activities of $35.4 million for the year ended December 31, 2020. Net cash used in financing activities was attributed primarily to the repurchase of our ordinary shares. In 2021 and 2020, we repurchased ordinary shares in the amount of $52.5 million and $45.3 million, respectively. In addition, proceeds from exercise of stock options decreased by $1.3 million and there was a decrease of $2.1 million in payment of deferred consideration related to the acquisition of ShieldSquare which was paid in 2020.

Net cash used in financing activities was $35.4 million for the year ended December 31, 2020, an increase of $28.9 million compared to net cash used in financing activities of $6.5 million for the year ended December 31, 2019. Net cash used in financing activities was attributed primarily to the repurchase of our ordinary shares. In 2020 and 2019, we repurchased ordinary shares in the amount of $45.3 million and $24.5 million, respectively. In addition, proceeds from exercise of stock options decreased by $6.1 million in 2020 and $2.1 million payment of deferred consideration related to the acquisition of ShieldSquare.


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Cash and Cash Equivalents

As of December 31, 2021, we had cash and cash equivalents, including short- and long-term bank deposits and short- and long-term marketable securities, of $465.8 million, compared to $448.8 million as of December 31, 2020 and $427.7 million as of December 31, 2019. As of December 31, 2021, approximately 42%, 6% and 31% of our short- and long-term bank deposits were deposited in Israel with major Israeli banks which are rated AAA, A and BBB+, respectively, as determined by S&P’s Maalot, and the balance of 21% was deposited in the U.S. branch of another major Israeli bank which is rated A, as determined by S&P’s Maalot. As of December 31, 2021, the longest contractual duration of any of our bank deposits was 2.0 years, the weighted average duration of our deposits was 1.5 years, and the weighted average time to maturity was 0.8 years.
 
Our marketable securities portfolio includes investments in foreign banks and government debentures and in debt securities 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, 2021, 38% of our marketable securities portfolio was invested in debt securities of financial institutions and 62% in debt securities of corporations. From a geographic perspective, 53% of our marketable securities portfolio was invested in debt securities of U.S. issuers, 7% was invested in debt securities of European issuers and 40% was invested in debt securities of other geographic-located issuers. As of December 31, 2021, 92% of our marketable securities portfolio was rated A- or higher and 8% was rated BBB or BBB+, 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 us to meet our own cash obligations. Further, we believe we generate sufficient cash from our Israeli operations to fund our operating and capital requirements and, therefore, do not need or intend to repatriate any of the earnings of our foreign subsidiaries.
 
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Other Material Contractual Obligations
 
The following table summarizes our material contractual obligations as of December 31, 2021 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)
30,215
5,545
8,446
6,274
9,950
Total contractual cash obligations (2)(3)
30,215
5,545
8,446
6,274
9,950
* Become due during 2022.
 
(1) Consists of outstanding operating leases for the Company’s facilities. The lease agreements expire in the years 2022 to 2030, although certain of our leases have renewal options.
 
(2) Payments for uncertain income tax positions of $5.3 million under Accounting Standards Codification (ASC) 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(t) and 14(a) of our consolidated financial statements.
 
(3) Severance payments of $4.8 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(v) of our consolidated financial statements.
 
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.
 
Outlook
 
Our capital requirements depend on numerous factors, including market acceptance of our products and services 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 and other elements of our strategy for a period of no less than the next 12 months.
 
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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, 2021, we had 365 employees and 68 subcontractors engaged primarily in research and development activities, compared to 361 employees and 55 subcontractors at the end of 2020. For a further discussion of research and development, see Item 5.A “Operating Results.”
 
For a discussion regarding the benefits provided under programs of the IIA, see Item 4.B “Business Overview—Israeli Innovation Authority.”
 
D.          Trend Information
 
General
 
We have identified the following key trends and uncertainties that we believe will materially influence our market, financial condition and the demand for our solutions:
 

Applications are migrating to the public cloud.  The migration to public cloud exposes organizations to new threats that require consistent security across all cloud environments. Organizations also prefer to purchase security services as a subscription, to match the subscription-based consumption of hosting services.
 

Datacenter architecture is changing. 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. New emerging edge clouds coupled with the emerging 5G breakouts and SD-WAN will enable enterprises to leverage their IoT strategy effectively. Many organizations use a mixed infrastructure that includes a combination of one or more of the above and therefore require broader overarching protection that encompasses both the datacenter and cloud-based applications that can be built and delivered as “lift and shift” and “born-in-the cloud” modes. In addition, this mixed environment often involves 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.
 

Application modernization requires new security tools. Application infrastructure is changing, from monolithic applications to modern applications and web sites in which deployment workflows, front-end built-tools and API-centric architectures are used. The rise of cloud-native ecosystems, increasingly adapting cloud-direct and micro-services architecture packaged as containers, is providing a built-in ’on-demand’ elasticity and availability application infrastructure. This enables introducing and running the new generation of cloud-native applications, in a fast, adaptive and more efficient way by interacting with DevOps CICD tools and methods. As such, the AppSec blast radius is expanded and requires injection of security controls within the application lifecycle generation at early stages, to avoid slowdown in development, to sanitize, for example, usage of opensource software used by developers and might leak in malicious code (recent Log4J library). Various “shift-left” methods are used and specifically adapted for various target deployment environments.
 
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The above-mentioned cloud-native application delivery opens the door for leakage through the open cloud interface. A new family of attack surfaces manifested by the fact that the cloud APIs are publicly published, and DevOps processes are done from the outside of the cloud “perimeter” (the insider becomes the outsider). “Cloud-native” infiltrations are enabled by the usage of cloud-IAM (identify and access) misconfigurations or account take over techniques and by various vulnerabilities of publicly exposed web and API interfaces. This creates a need for a new protection posture for compliance, permissions hardening, vulnerabilities detection as well as cloud-native detection (infiltrations and exfiltration) and response tools under new industry categories: CIEM (“Cloud Infrastructure Entitlement Management”), CSPM (“Cloud Security Posture Management”) and CWPP (“Cloud Workload Protector Platform”) and CTDR (Cloud Threat Detection and Response).
 

Organizations’ attack surfaces are increasing due to a changing economy. This was caused by a combination of two forces. First, working from home due to COVID-19 required organizations to enable remote access to applications and services that were previously not exposed. This eliminated the traditional network perimeter , and now every home computer or mobile device has become the new perimeter. Second, an increase in the online consumption of goods has accelerated organizations’ digital transformation  and migration to the cloud. The result is more opportunities for attackers to leverage the increased attack surface.
 

Increasing complexity and intensity of security threats. The increasing complexity and intensity of security threats landscape require expertise in identifying the attacks and state-of-the-art security to mitigate the attacks and safeguard the assets.  Attack delivery is aided by the growing presence of connected devices (IoT) which increases the threat surface against any kind of infrastructure, as well as traffic encryption (dark data) assisting hiding attacks. Furthermore, attack tools are increasingly available to all through the dark net and becoming more sophisticated as hackers use automation and weaponize artificial intelligence. This leads to ever morphing and scalable attack vectors at all levels, from volumetric botnets through web and API-centric attacks, as well as new attack surfaces that utilize Kubernetes-platforms (container orchestration platform of choice).  The mass amount of uncontrolled IoT devices and cloud hosting opens the door for a new generation of botnets and automated bots, hard to classify and block. Most organizations are not able to keep up with these developments with their internal cyber security resources and seek managed security services.
 
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Increasing expectations for applications availability and frictionless performance, due to the increasing dependence on applications in today’s business world. Businesses are sensitive to the resilience and availability of their applications, given their customers’ expectations of flawless experience and optimal performance. As such, exposed web and API based applications are the target for attackers that utilize both the server side as well as the client/browser side platforms for spreading their malicious code. New security controls utilize the power of artificial intelligence (AI) and machine learning (ML) to control the delivery of AppSec services (false positives) as well as detection of zero-day.
 

COVID-19. The potential effects of the COVID-19 pandemic (see below under “COVID-19 Update”).
 
We believe that our business, comprised of application security and delivery solutions, 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 and meet the requirements arising from these trends.
 

We continuously focus on innovation and believe that our solutions have, in many instances, a technological advantage over competing solutions.
 

We offer our solutions in a wide array of deployment models (on-premise solutions, 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.
 
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 and implementing our growth strategy, as more fully described under Item 4.B “Business Overview–Our Growth Strategy” above, may not convert into revenues growth in a given period, due to our shift towards subscription-based product sales, where revenues are recognized throughout the subscription period.
 
In addition, while we believe that the above trends will present significant opportunities for us, they also pose significant challenges, risks and uncertainties, including the following:
 

We operate in a highly competitive environment, and some of our competitors have larger internal resources, and a larger installed base.
 

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, including an inability to maintain a high subscription renewal rate.
 
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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. In particular, the recent COVID-19 pandemic may negatively affect economic conditions regionally as well as globally, disrupt operations situated in countries particularly exposed to the contagion, affect supply chains or otherwise negatively impact our business.
 

The other risks and uncertainties we face, as described under Item 3.D “Risk Factors.”
 
COVID-19 Update

The COVID-19 pandemic has resulted in a widespread health crisis that has adversely affected businesses, economies and financial markets worldwide, placed constraints on the operations of businesses, and decreased consumer mobility and activity. Our business has been affected in various ways from the COVID-19 pandemic, including the following:


Manufacturing and Supplies: During 2021, we experienced some slowdowns in our supply chain. Such slowdowns were mainly associated with the need to deliver appliances to customers’ locations around the world. We have undertaken various measures in order to overcome these disruptions, primarily in order to mitigate the risk of failing to timely respond to our customers’ delivery requirements in the face of importation blocking in different countries. As a result, the overall impact of COVID-19 on our manufacturing and supply chain was immaterial.


Human Resources: At the outset of the COVID-19 pandemic, we shifted our operations to enable work from home and, in compliance with constantly developing regulations enacted in Israel and abroad, we continue to allow our office employees to work, partially or primarily, from their homes.

While, taken as a whole, we do not believe COVID-19 had a significant impact on our business in 2021, the impacts of the global pandemic on our business and financial outlook remain unknown. In particular, there is no guaranty that any increased investments in cyber protection solutions by our customers as described above will continue after the COVID-19 pandemic subsides and the extent to which COVID-19 will impact our business, financial condition or results of operations will depend on future developments, which are uncertain and cannot be predicted. We intend to continue to actively monitor the situation and may take further actions as may be required by applicable regulations or that we deem are necessary or desirable to address the needs of our employees, customers, partners and suppliers.

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E.           Critical Accounting Estimates
 
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;
 

Deferred contract costs;
 

Investment in marketable securities;
 

Goodwill;
 

Stock-based compensation; and
 

Income taxes.
 
Revenue Recognition. We recognize revenues in accordance with the Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (ASC 606). As such, we identify a contract with a customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to each performance obligation in the contract and recognize revenues when (or as) we satisfy a performance obligation.
 
Our solutions are sold primarily through distributors and resellers, all of which are considered end-users.
 
Our arrangements typically contain various combinations of our products and subscriptions and PCS, which are distinct and are accounted for as separate performance obligations. We allocate the transaction price to each performance obligation based on its relative standalone selling price (SSP). If the SSP is not observable, we estimate the SSP taking into account available information such as geographic specific factors, customer grouping and internally approved pricing guidelines related to the performance obligation. For PCS, we determine the standalone selling price based on observable renewals prices. For subscriptions, we determine the standalone selling price based on standalone new subscription transactions and renewals. For products, the SSP is not observable, and therefore, we estimate the product SSP taking into account available information such as geographic specific factors, customer grouping and internally approved historical pricing guidelines.
 
Deferred revenues include unearned amounts received under post-contract customer support and subscription agreements and are classified as short- and long-term based on their contractual term. Deferred revenue amounts which represent uncollected amounts are offset against trade receivables.
 
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We record a provision for estimated sale returns, credits and stock rotation granted to customers on our products in the same period that the related revenues are recorded in accordance with ASC 606. These estimates are based on historical sales returns, stock rotations and other factors known to us. Such provisions amounted to $2.5 million and $2.7 million as of December 31, 2021 and 2020, respectively.
 
Deferred Contract Costs. We capitalize sales commission as costs of obtaining a contract when they are incremental and if they are expected to be recovered. Our contracts include performance obligations related to various goods and services, some of which are satisfied at a point in time and others over time. Commission costs related to performance obligations satisfied at a point in time are expensed at the time of sale, which is when revenue is recognized. Commission costs related to long-term service contracts and performance obligations satisfied over time are deferred and recognized on a systematic basis that is consistent with the transfer of the goods or services to which the asset relates. Sales commissions paid for new contracts, which are not commensurate with sales commissions paid for renewal contracts, are capitalized and amortized over an expected period of benefit. We apply judgment in estimating the amortization period, by taking into consideration our customer contract terms, history of renewals, expected length of customer relationship, as well as the useful life of the underlying technology and products. Accordingly, we determined the expected period of benefit to be approximately 3.37 years. Amortization expense is included in Sales and Marketing expenses in the accompanying consolidated statements of income. Deferred sales commission costs capitalized are periodically reviewed for impairment.
 
As of December 31, 2021, and 2020, the amount of deferred sales commission was approximately $23.9 million and $20.9 million, respectively, and is included in other long-term assets on the balance sheets.
 
As of December 31, 2021, and 2020, we recorded amortization expenses in connection with deferred sales commissions in the amount of approximately $10.1 million and $9.9 million, respectively.
 
Investment in Marketable Securities. We account for investments in debt marketable securities in accordance with Accounting Standards Codification, or ASC 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 our debt 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.
 
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The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization together with interest on securities are included in financial income, net.
 
In 2020, we adopted ASU 2016-13, Topic 326 "Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments" which modified the other than temporary impairment model for available for sale debt securities. Available-for-sale securities are periodically evaluated for unrealized losses. For unrealized losses in securities that we intend to hold and will not more likely than not be required to sell before recovery, we further evaluate whether declines in fair value below amortized cost are due to credit or non-credit related factors. We consider credit related impairments to be changes in value that are driven by a change in the creditor's ability to meet its payment obligations and record an allowance and recognize a corresponding loss in financial income, net when the impairment is incurred. Unrealized non-credit related losses and unrealized gains are reported as a separate component of accumulated other comprehensive income in our consolidated balance sheets until realized. The amortized cost of marketable securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization together with interest on securities is included in financial income, net. Credit loss impairments for the years ended December 31, 2021, and 2020 were immaterial.
 
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 a quantitative goodwill impairment test. If the entity elects not to use this option, or if the entity determines that it is more likely than not that the fair value of a reporting unit is less than its carrying value, then the entity prepares a quantitative analysis to determine whether the carrying value of a reporting unit exceeds its estimated fair value. If the carrying value of a reporting unit exceeds its estimated fair value, the entity recognizes an impairment of goodwill for the amount of this excess.
 
We operate in one operating segment, and this segment comprises our single reporting unit. We conduct our annual test of impairment for goodwill on December 31st of each year, or more frequently if impairment indicators are present. No impairment was recorded during 2021, 2020 and 2019.
 
Stock-based compensation. We account for stock-based compensation in accordance with ASC 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 our consolidated statement of income.
 
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. Forfeitures are 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.
 
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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 share awards is based on the market value of the underlying shares at the date of grant. During 2020, we granted potential shares to be issued for performance share awards, subject to a market condition based on the performance of the Company’s stock price, to our President and Chief Executive Officer. The fair value of this award was determined using a Monte Carlo simulation methodology. The Monte Carlo simulation model utilizes multiple input variables that determine the probability of satisfying the market condition stipulated in the award and calculates the fair value of each award.
 
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.
 
 Income Taxes. We account for income taxes in accordance with ASC 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.
 
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. We accrue interest and penalty, if any, that are 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, 2021 and 2020 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 14 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.
 
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)
80
Chairman of the Board of Directors
Yair Tauman (1)(2)(3)(4)
73
Director
Stanley B. Stern (2)(4)(6)
64
Director, Chairman of the Audit Committee
Naama Zeldis (2)(3)(4)(5)
58
Director
Gabi Seligsohn (2)(3)(6)
55
Director, Chairman of the Compensation Committee
Yuval Cohen (1)(2)(3)(4)
59
Director
Roy Zisapel (5)
51
President, Chief Executive Officer and Director
Guy Avidan
59
Chief Financial Officer
Yoav Gazelle
52
Chief Business Officer
David Aviv
66
Chief Technology Officer
Gabi Malka
46
Chief Operating Officer
Sharon Trachtman
53
Acting Chief Marketing Officer
 
(1)  Term as director expires at the annual meeting of shareholders to be held in 2024.
(2)  Qualified as an independent director, as determined under the Nasdaq rules.
(3)  Serves on the Compensation Committees of the Board of Directors.
(4)  Serves on the Audit Committees of the Board of Directors.
(5)  Term as director expires at the annual meeting of shareholders to be held in 2022.
(6)  Term as director expires at the annual meeting of shareholders to be held in 2023.

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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 US 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 private companies in the RAD-Bynet Group. See Item 4.C “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.
 
Professor Yair Tauman has served as a member of our Board of Directors since October 2010 (until February 2020, as an external director). 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 Stony Brook Center for Game Theory, New York. He was a professor at Tel-Aviv University for 25 years until 2009 and, prior thereto, served as a professor at the Kellogg School of Management at Northwestern University. His areas of research include game theory and industrial organization. Professor Tauman currently serves on the board of directors of other private companies from different sectors, including online auctions, social networking and fintech. Professor 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.
 
Stanley B. Stern has served as a member of our Board of Directors since September 2020. Mr. Stern is currently the chairman of the board of directors of AudioCodes Ltd. (Nasdaq, TASE: AUDC) (AudioCodes), a leading vendor of advanced communications software, products and productivity solutions for the digital workplace, and serves as a member of the boards of directors of the following public companies: Ormat Technologies, Inc. (NYSE: ORA), Ekso Bionics Holdings, Inc. (Nasdaq: EKSO). Since 2013, Mr. Stern has served as the president of Alnitak Capital, a strategic advisory firm, engaged primarily in high-tech, alternative energy and healthcare. Previously, from 2004 until 2013, Mr. Stern served in various positions at Oppenheimer & Co., including as a Managing Director and Head of Investment Banking, Technology, Israeli Banking and FIG. From 2002 until 2004, he was a Managing Director and the Head of Investment Banking at C.E. Unterberg, Towbin where he focused on the technology and defense related sectors. From January 2000 until January 2002, Mr. Stern was the President of STI Ventures Advisory USA Inc., a venture capital firm focusing on technology investments. Prior to his term at STI Ventures, he spent over 20 years at CIBC Oppenheimer in the investment banking department and started the technology banking group in 1990.  In the past, Mr. Stern was a board member of several public and private companies, including Given Imaging Ltd. and Fundtech Ltd., and the chairman of the boards of directors of Tucows, Inc. and of SodaStream International Ltd., until its sale to Pepsico in December 2018. Mr. Stern holds a B.A. degree in economics and accounting from City University of New York, Queens College, and an M.B.A. from Harvard University.
 
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Naama Zeldis has served as a member of our Board of Directors since September 2020. Ms. Zeldis currently serves as the Chief Executive Officer of Aquarius-Spectrum Ltd., a private company specializing in innovative solutions for monitoring urban water pipes and detecting hidden leaks from the earliest stage. Formerly, Ms. Zeldis served as Chief Financial Officer for a variety of high-tech and industrial companies, such as Tahal Group from 2013 to 2020, Netafim Ltd. from 2005 to 2013, the Israeli subsidiary of Electronic Data Systems from 2001 to 2005 and Radguard Ltd., formerly with the RAD-Bynet Group, from 1999 to 2001. Ms. Zeldis currently serves on the board of directors of Orbit Technologies Ltd. (TASE: ORBI), a company specializing in satellite communications, tracking systems, airborne communication and audio managements solutions. Ms. Zeldis has also served as a member of the boards of directors of several other companies, including Nova Measuring Instruments Ltd. (Nasdaq: NVMI), Rafael Advanced Defense Systems Ltd. and Metalink Ltd. She holds a B.A. degree in accounting from the Tel Aviv University and a B.A. degree in economics and an M.B.A. from the Hebrew University in Jerusalem.
 
Gabi Seligsohn has served as a member of our Board of Directors since May 2020. Mr. Seligsohn served as the Chief Executive Officer of Kornit Digital Ltd. (Nasdaq: KRNT) (Kornit Digital), a company engaged in the area of digital printing on textiles, from April 2014 through July 2018. From August 2006 until August 2013, he served as the President and Chief Executive Officer of Nova Measuring Instruments Ltd. (Nasdaq: NVMI), a company specializing in the design, development and production of optical metrology solutions for the semiconductor industry. Prior thereto, from 1998 to 2006, he served in several leadership positions in Nova. Mr. Seligsohn was recently appointed as Chairman of the board of directors of Augwind Energy Tech Storage Ltd. (TASE: AUGN), and also serves on the boards of directors Kornit Digital and Ion Acquisition Corporation 1 & 2 (SPACs) (NYSE: IACA-UN and NYSE: IACB-UN, as well as serves as a director on the board of directors of PubPlus, a privately owned company. Mr. Seligsohn holds an LL.B. degree from the University of Reading, England.
 
Yuval Cohen is the founding and managing partner of Fortissimo Capital Fund, a private equity fund headquartered in Israel, that was established in 2004. From 1997 through 2002, Mr. Cohen was a General Partner at Jerusalem Venture Partners, an Israeli-based venture capital fund, and prior thereto, he held executive positions at various Silicon Valley companies, including DSP Group, Inc. (NASDAQ: DSPG), and Intel Corporation (NASDAQ: INTC). Currently, Mr. Cohen serves as the chairman of the board of directors of Kornit Digital Ltd. (NASDAQ: KRNT) and as a director of Wix.com Ltd. (NASDAQ: WIX). He also serves on the board of directors of several privately-held portfolio companies of Fortissimo. Mr. Cohen holds a B.Sc. degree in industrial engineering from the Tel Aviv University and an M.B.A. from Harvard University.
 
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 US 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 serves as a director of Rad data communications, a private company in the RAD-Bynet Group. 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, and Nava Zisapel, who is one of our major shareholders.
 
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Guy Avidan has served as our Chief Financial Officer since February 2022. Prior to joining Radware, he was with Kornit Digital, where he served as President at KornitX from November 2020 to November 2021 and as Chief Financial Officer from November 2014 to November 2020, in which role he led Kornit to its initial public offering on Nasdaq. Prior to joining Kornit Digital, Mr. Avidan was Vice President of Finance and Chief Financial Officer at AudioCodes. In addition, Mr. Avidan has 15 years of experience serving in various other executive capacities, including co-President and Chief Financial Officer at MRV Communications, Inc. (NASDAQ: MRVC) as well as Vice President of Finance and Chief Financial Officer at Ace North Hills, which was acquired by MRV Communications. Mr. Avidan is a certified public accountant and holds a B.A. degree in economics and accounting from Haifa University in Israel.
 
Yoav Gazelle has served as our Chief Business Officer since January 2022 and as our Vice President, International Sales since January 2019. Prior to that, Mr. Gazelle served as our Vice President, EMEA & CALA from June 2013 to January 2019. 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.
 
David Aviv has served as our Chief Technology Officer since 2016 and as our Vice President, Advanced Services, since 2004. Mr. Aviv oversees the technology strategy for the Company’s solutions for enterprise, carrier and cloud solutions and is involved in researching and developing key algorithms and concepts that will guide the direction of the Company’s future solutions. Prior to joining Radware, he was the VP of Engineering at 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.
 
Gabi Malka has served as our Chief Operating Officer since March 2014. Mr. Malka oversees product management, research & development, cloud services, and customer support. From May 2005 to February 2014, Mr. Malka served as Vice President of Research & Development at HP Software (formerly Mercury). Prior to HP Software, from 2000 to 2005, Mr. Malka served as Vice President of Research & Development of AppStream (acquired by Symantec). Prior to AppStream, from 1998 to 2000, Mr. Malka directed Research & Development at Amdocs Limited. Mr. Malka holds a B.A. from American InterContinental University and has furthered his post-graduate education at Tel Aviv University (Lahav Business School), and Harvard Business School.
 
Sharon Trachtman has served as our Acting Chief Marketing Officer since February 2021. In parallel she continues to serve as our Chief Business Operation Officer. Ms. Trachtman has been with our cCmpany since its inception in 1997. Since September 1997 she held various senior positions in Radware, such as Product Management Vice President and Marketing Vice President. From November 1994 to September 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.
 
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Additional Information
 
Under Nasdaq requirements, a majority of the members of our Board of Directors are required to be “independent” as defined under the Nasdaq rules. We currently satisfy this requirement because five of our seven directors (namely, Mr. Stanley Stern, Prof. Yair Tauman, Mr. Gabi Seligsohn, Ms. Naama Zeldis and Mr. Yuval Cohen) qualify as “independent directors” under the Nasdaq rules.
 
Yehuda Zisapel, the Chairman of the Board of Directors, co-founder of the Company, and a 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 November 2020. 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.

During 2021, the composition of our Board of Directors has changed. In December 2021, Mr. Yuval Cohen was elected to our Board of Directors.
 
In the past year, we have experienced several changes in senior management. In June 2021, Mr. Doron Abramovitch, who served as our Chief Financial Officer since September 2015, left. In June 2021, Ms. Anna Convery-Pelletier, who served as our Chief Marketing Officer since December 2016, left. And, in January 2022, Mr. Raffi Kesten, who served as our Chief Business Officer since June 2019, left.
 
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. Our compensation policy for our executive officers and directors, or the Compensation Policy, which is approved by our shareholders, is designed to correlate executive compensation with our objectives and goals.

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The following table sets forth all salaries, fees, commissions and bonuses and pension retirement and other similar benefits we paid or accrued with respect to all of our directors and officers as a group for the 2021 fiscal year. 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
 
             
2020 - All directors and officers as a group, consisting of 16 persons*
 
$
3,710,200
   
$
542,300
 
                 
2021 - All directors and officers as a group, consisting of 13 persons**
 
$
3,864,790
   
$
531,240
 

* Includes 4 persons who served as our directors in 2020 and are no longer serving as our directors and 3 directors who were appointed during 2020.
 
** Includes 3 persons who served as our officers in 2021 and are no longer serving as our officers and one director who was appointed during 2021.
 
During 2021, we granted to our directors and officers listed in Item 6.A above, in the aggregate, 38,999 RSUs at a weighted average grant date fair value per RSU of $30.77 and options to purchase 160,000 ordinary shares at a weighted average exercise price per share of $32.71. The options and RSUs expire sixty-two months after grant. The weighted average grant date fair value of these options was $7.08 per option. 
 
For a discussion of the accounting method and assumptions used in valuation of such options, see Note 2(s) to our consolidated financial statements included elsewhere in this annual report. See also Item 6.E “Share Ownership— Share Option Plans” below.
 
For a discussion of the compensation granted to our five most highly compensated executive officers during 2021, see “Compensation of Executive Officers” below, and for a discussion of the compensation paid to our non-employee directors, see “Compensation of Directors” below.
 
We currently hold directors and officers liability insurance with an aggregate coverage limit of $35 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.
 
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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, 2021. 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, 2021.

Name and Principal
Position (1)

Year

Salary
Bonus (including Sales
Commissions) (2)
Equity-Based
All Other
Total
Compensation (3)
Compensation (4)
 
 
(US$ in thousands)
Roy Zisapel, President, Chief Executive Officer and Director*
2021
462 (5)
600 (6)
--
143
1,205
Yoav Gazelle, VP International Sales
2021
223
245
336
44
848
Raffi Kesten, Chief Business Officer
2021
394
337
--
92
823
David Aviv, Chief Technology Officer*
2021
312
66
285
76
739
Gabi Malka, Chief Operating Officer*
2021
323
132
--
80
535


(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.
 

(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.
 
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(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(s) 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 one 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 6.E below.
 

(5)
Mr. Roy Zisapel is entitled to a gross base salary of $400,000 (or the equivalent in NIS) per annum, which includes payment for managing our entire on-going North America activities. The additional $62,000 over the aggregated total $400,000 annual salary is attributed to the change in the $/NIS exchange rate from the date of the Shareholders’ Annual General Meeting in 2012 where Mr. Zisapel’s salary was approved to the average $/NIS exchange rate in 2021.
 

(6)
Consistent with our Compensation Policy, and as approved by our shareholders in November 2020, Mr. Roy Zisapel is entitled to an annual bonus of up to $600,000 (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
 
Our non-employee directors are entitled to the following compensation: (i) annual compensation in the amount of NIS 120,800 (currently equivalent to approximately $37,645) per year of service; (ii) per meeting remuneration of NIS 3,600 (currently equivalent to approximately $1,122) 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 meetings. 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.

In addition, our non-employee 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).

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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, since our ordinary shares are listed on the Nasdaq Global Select Market, we are also subject to the Nasdaq rules.
 
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. In accordance with current Nasdaq requirements, nominees for election as directors are approved and recommended to the Board of Directors by 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 Ms. Naama Zeldis has such expertise.
 
Staggered Board
 
In accordance with the terms of our Articles of Association, our Board of Directors is divided into three classes with each class of directors serving until, generally, the third annual meeting following their election as follows:
 
Class
 
Term expiring at
the annual meeting
for the year
 
Directors
         
Class II
 
2022
 
Roy Zisapel and Naama Zeldis
Class III
 
2023
 
Gabi Seligsohn and Stanley Stern
Class I
 
2024
 
Yehuda Zisapel, Yair Tauman and Yuval Cohen

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 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 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.
 
For a description of how long our directors and officers have served in their current positions, please see Item 6.A “Directors and Senior Management.”
 
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External Directors and Israeli Relief Regulations
 
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, are required to appoint at least two external directors. However, pursuant to Israeli regulations promulgated under the Companies Law, companies whose shares are traded on specified non-Israeli stock exchanges, including Nasdaq, and which do not have a controlling shareholder, such as Radware, may elect to opt out of the requirement to maintain external directors as well as elect to opt out of the composition requirements under the Companies Law with respect to the audit and compensation committees.
 
Consistent with the aforesaid relief regulations, in February 2020, we elected to opt out from the requirement to appoint external directors and from the composition requirements for the audit and compensation committees under the Companies Law. Our eligibility to opt out is conditioned upon: (i) the continued listing of our ordinary shares on the Nasdaq (or one of a few other specified non-Israeli stock exchanges); (ii) there not being a controlling shareholder of our Company; and (iii) our compliance with the SEC rules and Nasdaq requirements as to the composition of (a) our board of directors (which requires that we maintain a majority of independent directors on our board of directors) and (b) the audit and compensation committees of our board of directors (which, subject to certain exceptions, require that such committees consist solely of independent directors (at least three and two members, respectively), as described under the Nasdaq rules).

Our election to exempt our Company from compliance with the external director and audit and compensation committee requirements can be reversed at any time by our Board of Directors, in which case we would need to hold a shareholder meeting to once again appoint external directors, whose election, by a special majority, would initially be for a three-year term.
 
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.
 
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Audit Committee
 
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. To the extent a company is required to appoint external directors, the audit committee must include all of the external directors and comply with additional requirements as to the composition thereof under the Companies Law. However, when we elected to exempt our Company from the external director requirement, we concurrently elected to exempt our Company from all of such requirements.
 
Our Board has determined that all directors serving on our Audit Committee (namely, Mr. Stanley Stern, Ms. Naama Zeldis, Prof. Yair Tauman and Yuval Cohen) 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 Ms. Naama Zeldis 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 pre-approving 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 7.B of Form 20-F.
 
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, (1) identifying irregularities in the business management of the Company, including in consultation with the internal auditor and/or the Company’s independent accountants, and recommending remedial measures to the Board of Directors, (2) reviewing, and, where appropriate, approving certain interested party transactions specified under the Companies Law, as more fully described in Exhibit 2.1 to this annual report under the heading “Approval of Specified Related Party Transactions under Israeli Law,” and (3) examining and monitoring the work of our internal auditor.
 
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 any of our attorneys appearing and practicing before the SEC 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.
 
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. To the extent a company is required to appoint external directors, the compensation committee must include all of the external directors and comply with additional requirements as to the composition thereof under the Companies Law. However, when we elected to exempt our Company from the external director requirement, we concurrently elected to exempt our Company from all of such requirements.
 
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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. 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.
 
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. Gabi Seligsohn, Prof. Yair Tauman, Ms. Naama Zeldis and Mr. Yuval Cohen, all of whom are independent directors.
 
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 2021*:
 
 
Name of Body
 
No. of Meetings
in 2021
    Average
Attendance
Rate**
 
Board of Directors
   
23
     
98.55
%
Audit Committee
   
11
     
100
%
Compensation Committee
   
10
     
100
%

* Excludes ad-hoc committees.
** Meetings at which a director was not allowed to attend as a matter of applicable law were not counted as a failure to attend.
     Each director attended at least 96% of all Board meetings.**
 
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Directors’ Service Contracts
 
Except as described in Item 6.B 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. Mr. Oren Groupi, CPA, Partner in KPMG Israel, is our internal auditor.
 
Additional Information
 
For additional information regarding the fiduciary duties and other legal requirements relating to the conduct of our directors and executive officers, see in Exhibit 2.1 to this annual report under the heading “Board of Directors.”
 
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. The employees in our other jurisdictions sign employment agreements, which differ according to customary practices in the country in which they are located. All our employees worldwide sign confidentiality and non-compete terms and conditions.
 
The following table details certain data on our workforce (including temporary employees and subcontractors) as at the period indicated:
 
 
As of December 31,
 
   
2021
   
2020
   
2019
 
Approximate numbers of employees and subcontractors by geographic location:
                 
      Israel
    488       494      
482
 
North, Central and South America (principally the United States)
    226      
226
     
221
 
EMEA (Europe, the Middle East and Africa)
   
125
      116      
108
 
Asia-Pacific
   
304(
*)
   
286(
*)
   
283(
*)
Total workforce
   
1,143
     
1,122
     
1,094
 
Approximate numbers of employees and subcontractors by category of activity:
                       
Research and development
   
433(
*)
   
416(
*)
   
415(
*)
Sales, technical support, business development and marketing
    578       574       539  
Management, operations and administration
    132       132       140  
Total workforce
   
1,143
     
1,122
     
1,094
 

(*) Includes 68, 55 and 57 subcontractors, as of December 31, 2021, 2020 and 2019, respectively.

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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, we and our Israeli employees 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.
 
The employees of our subsidiaries are subject to local labor laws, regulations and/or collective bargaining agreements that vary from country to country.
 
Our employees are not represented by a labor union.
 
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 April 4, 2022. Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. Ordinary shares relating to options or RSUs currently exercisable or exercisable (vested in the case of RSUs) within 60 days of the date of this table are deemed outstanding for computing the percentage of the person holding such securities but are not deemed outstanding for computing the percentage of any other person.  Except as indicated by footnote, and subject to community property laws where applicable, the persons named in the table above have sole voting and investment power with respect to all shares shown as beneficially owned by them:
 


Name
 
Number of
ordinary
shares
   
Percentage of
outstanding
ordinary shares**
 
Yehuda Zisapel (1)
   
1,786,611
     
3.95
%
Roy Zisapel (2)
   
1,452,284
     
3.21
%
Gabi Seligsohn (3)
   
*
     
*
 
Stanley Stern (3)
   
*
     
*
 
Naama Zeldis (3)
   
*
     
*
 
Yair Tauman (3)
   
*
     
*
 
Yuval Cohen
   
*
     
*
 
Gabi Malka (3)
   
*
     
*
 
David Aviv (3)
   
*
     
*
 
Sharon Trachtman (3)
   
*
     
*
 
Guy Avidan (3)
   
*
     
*
 
Yoav Gazelle (3)
   
*
     
*
 
All directors and executive officers as a group (12 persons) (4)
   
3,527,245
     
7.74
%
 
* Reflects ownership of less than 1%.
 
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** The percentages shown are based on 45,251,606 ordinary shares issued and outstanding as of April 4, 2022. This figure of outstanding ordinary shares excludes (i) 12,000 RSUs and (ii) employee stock options to purchase an aggregate of 300,350 ordinary shares at a weighted average exercise price of approximately 23.37 per share, with the latest expiration date of these options being in November 2025 (of which, options to purchase 250,350 of our ordinary shares were exercisable as of April 4, 2022).
 
(1) Consists of (i) 1,438,111 shares held directly by Yehuda Zisapel; (ii) 324,500 shares held of record by Neurim Pharmaceuticals (1991) Ltd., an Israeli company wholly owned in equal parts by Yehuda Zisapel and Nava Zisapel; and (iii) 24,000 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 24,000 options at an exercise price of $27.15, which expire in November 2023. In addition, Nava Zisapel holds 2,735,676 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.
 
(2) Consists of 1,452,284 shares.
 
(3) Owns less than 1% of our outstanding ordinary shares (including options held by each such individual, 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 3,214,895 shares, 12,000 RSUs and 300,350 options to purchase ordinary shares. The options consist of (i) 15,000 options at an exercise price of $17.35, which expire in December 2022, (ii) 30,000 options at an exercise price of $17.63, which expire in October 2022, (iii) 40,000 options at an exercise price of $22.51, which expire in December 2024, (iv) 31,350 options at an exercise price of $22.70, which expire in January 2025, (v) 30,000 options at an exercise price of $23.46, which expire in July 2025, (vi) 40,000 options at an exercise price of $24.06, which expire in July 2025, (vii) 20,000 options at an exercise price of $24.32, which expire in November 2025, (viii) 20,000 options at an exercise price of $24.74, which expire in November 2025, (ix) 50,000 options at an exercise price of $26.36, which expire in October 2023 and (x) 24,000 options at an exercise price of $27.15, which expire in November 2023.
 
  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.
 
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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, including cashless exercises; and
 

any other matter necessary or desirable for the administration of the plan.
 
In addition, the Share Incentive Plan provides that, unless 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 62 months from the date of the grant of the option. As of December 31, 2021, 33,312,967 ordinary shares have been reserved for equity grants under the plan, of which we have granted (i) options to purchase 27,941,346 ordinary shares at a weighted average exercise price of $7.70 per ordinary share and (ii) and issued 4,501,870 RSUs.
 
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, 2021, 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 62 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 33,312,967 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.
 
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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, 2021, a total of 255,560 shares had been purchased under the ESPP. During 2021, no shares were 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 April 4, 2022, 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**
 
             
Artisan Partners Limited Partnership (1)
   
4,097,761
     
9.06
%
                 
Senvest Management, LLC (2)
   
3,180,659
     
7.03
%
                 
Nava Zisapel (3)
   
3,060,176
     
6.76
%
                 
Legal & General Investment Management (Holdings) Limited (4)
   
2,398,808
     
5.30
%

* Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. Ordinary shares relating to options or RSUs currently exercisable or exercisable (vested in the case of RSUs) within 60 days of the date of this table are deemed outstanding for computing the percentage of the person holding such securities but are not deemed outstanding for computing the percentage of any other person.  Except as indicated by footnote, and subject to community property laws where applicable, the persons named in the table above have sole voting and investment power with respect to all shares shown as beneficially owned by them.
 
** The percentages shown are based on 45,251,606 ordinary shares issued and outstanding as of April 4, 2022. This figure of outstanding ordinary shares excludes (i) 12,000 RSUs and (ii) employee stock options to purchase an aggregate of 300,350  ordinary shares at a weighted average exercise price of approximately $23.37 per share, with the latest expiration date of these options being in November 2025 (of which, options to purchase 250,350 of our ordinary shares were exercisable as of April 4, 2022).
 
(1) Shares are beneficially owned by Artisan Partners Limited Partnership, Artisan Investments GP LLC, Artisan Partners Holdings LP, Artisan Partners Asset Management Inc. and Artisan Partners Funds, Inc. (collectively, “Artisan”). This information is based on information provided in Amendment No. 1 to the Statement on Schedule 13G filed with the SEC by Artisan on February 4, 2022. The business address of Artisan is 875 East Wisconsin Avenue, Suite 800, Milwaukee, WI 53202.
 
(2) Shares are beneficially owned by Senvest Management, LLC and Mr. Richard Mashaal (collectively, “Senvest”). This information is based on information provided in Amendment No. 17 to the Statement on Schedule 13G filed with the SEC by Senvest on February 9, 2022. The business address of Senvest is 540 Madison Avenue, 32nd Floor, New York, New York 10022.
 
(3) Of the ordinary shares beneficially owned by Ms. Nava Zisapel, (i) 2,467,843 are held directly; (ii) 267,833 are held of record by Carm-AD Ltd., an Israeli company owned 100% by Nava Zisapel; and (iii) 324,500 are held of record by Neurim Pharmaceuticals (1991) Ltd., an Israeli company wholly owned in equal parts by Yehuda Zisapel and Nava Zisapel. As noted in footnote 1 in Item 6.E “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.
 
(4) This information is based on information provided in the Statement on Schedule 13G filed with the SEC by Legal & General Investment Management (Holdings) Limited (“LGIM”) and GO UCITS ETF Solutions LLP (“GO UCITF”) on February 14, 2022. According to such information, of the ordinary shares beneficially owned by LGIM and GO UCITF per the table above, LGIM has sole dispositive power with respect to such shares and, together with GO UCITF, shared voting power over such shares. The business address of LGIM and GO UCITF is One Coleman Street, London, England, EC2R 5AA.
 
To 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.
 
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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. 17 to the Statement on Schedule 13G filed with the SEC by Senvest on February 9, 2022, Senvest beneficially owned 3,180,659 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 12, 2021, 3,221,414 of our outstanding ordinary shares and (ii) as of February 7, 2020, 5,401,595 of our outstanding ordinary shares.
 

Based on Amendment No. 6 to the Statement on Schedule 13G filed with the SEC by Cadian Cadian Capital Management, LP, Cadian Capital Management GP, LLC and Mr. Eric Bannasch (collectively, “Cadian”) on February 14, 2022, Cadian does not beneficially own any 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 12, 2021, 4,380,953 of our outstanding ordinary shares and (ii) as of February 13, 2020, 4,232,009 of our outstanding ordinary shares.
 

Based on Amendment No. 2 to the Statement on Schedule 13G filed with the SEC by Morgan Stanley and Morgan Stanley Capital Services LLC (collectively, “Morgan Stanley”) on November 9, 2021, Morgan Stanley owned 315,853 of our outstanding ordinary shares. Based on previous amendments to the Schedule 13G filed with the SEC by Morgan Stanley on February 11, 2021, Morgan Stanley beneficially owned 2,661,708 of our outstanding ordinary shares.
 
Major Shareholders Voting Rights
 
Our major shareholders do not have different voting rights from those of other shareholders.
 
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Record Holders
 
Based on a review of the information provided to us by our transfer agent, as of April 4, 2022, there were 26 holders of record of our ordinary shares, of which 16 record holders, holding approximately 7.96% of our ordinary shares, had registered addresses in Israel, and of which 7 record holders, holding approximately 92.03% 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 92.03% of our outstanding ordinary shares as of said date).
 
B.           Related Party Transactions
 
Overview
 
We have entered into a number of agreements with certain companies that form part of the RAD-Bynet Group, of which Yehuda, Nava and Zohar Zisapel are co-founders, directors and/or shareholders. Yehuda Zisapel, the Chairman of our Board of Directors, and Roy Zisapel, our President and Chief Executive Officer and a director, also hold approximately 89% and 11%, respectively, in one of these RAD-Bynet Group entity, SecurityDAM. Mr. Roy Zisapel also serves as a director of RAD Data Communications Ltd., another company in the RAD-Bynet Group.
 
Under these agreements, we lease property and purchase certain products and services from certain member entities of the RAD-Bynet Group. In addition, as described below, in February 2022, we acquired the technology and operations of SecurityDAM, to which we sometime refer as the SecurityDAM Acquisition.
 
The RAD-Bynet Group consists of manufacturers of communications solutions comprised of hardware and/or software and communications solution providers, distributors and integrators as well as service providers. The RAD-Bynet Group includes companies dealing in advanced communication technology, 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 that provide services that 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 and services. 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 4.C “Organizational Structure,” for additional details about the group.
 
We believe that our transactions and arrangements with affiliated parties, including members of the RAD-Bynet Group, are in the ordinary course of our business (other than the SecurityDAM Acquisition) 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, such as to the extent they relate to compensation terms of our directors, require approval by our shareholders. In this respect, as permitted by the Companies Law, our Audit Committee established internal policies 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 that do not meet the criteria require pre-approval of our Audit Committee and such other corporate approvals prescribed by the Companies Law.
 
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We believe that the terms of the transactions to which we have entered into with member entities 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 that might be available to us 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.
 
The SecurityDAM Acquisition
 
On February 17, 2022, we completed the acquisition of SecurityDAM's technology and operations pursuant to an Asset Purchase Agreement, dated as of February 16, 2022, by and between us and SecurityDAM (the “Purchase Agreement”).
 
As previously disclosed, Yehuda Zisapel, the Chairman of our Board of Directors (the “Board”), and Roy Zisapel, our President and Chief Executive Officer and a member of the Board (together, the “Key Shareholders”), hold a majority stake and a minority stake, respectively, in SecurityDAM. Until the completion of the acquisition, SecurityDAM was the sole provider of scrubbing center services for our cloud DDoS protection service through a global network of scrubbing centers pursuant to agreements we entered into with SecurityDAM in 2014 and 2015 (as amended, the “SDM Agreements”). Such scrubbing center services include, for example, building and operating the network services for DDOS mitigation, managing the routing of traffic to and from these centers to customer premises, diverting the traffic of an attacked site of a customer to a scrubbing center, developing the customer portal of the service and the operation, monitoring and automation software required for operating the service. Total cost of services received from SecurityDAM amounted to approximately $11.5 million in 2021, compared to $10.2 million in 2020 and $7.1 million in 2019, and, generally, were based on a percentage of the revenues we generated related to SecurityDAM’s services.
 
- 103 -

Under the Purchase Agreement, we acquired, on a cash-free, debt-free basis, substantially all of SecurityDAM’s operating assets, including technology, and assumed certain specified post-closing liabilities related to the contracts assigned by SecurityDAM to us, for a purchase price of (i) $30.0 million (subject to adjustments for intra-party balances related to the SDM Agreements and certain other deductions) (the “Closing Payment”) plus (ii) contingent payments of up to $12.5 million based on the performance of our cloud DDoS protection service after the acquisition, in each case, plus VAT.

The Purchase Agreement includes customary representations, warranties and covenants by the parties, which survived the closing and, in the case of representations and warranties, will expire, subject to certain exceptions, fifteen months following the closing. Under the Purchase Agreement, the parties have also agreed to indemnify each other against certain losses, including losses for breaches of representations, warranties, covenants and certain additional liabilities. SecurityDAM’s indemnification obligations are subject to certain limitations, including (1) a cap of $3.0 million on its obligation to indemnify us for breach of representations (other than fundamental representations and certain other circumstances set forth in the Purchase Agreement) and (2) a restriction that indemnification may not be sought for breach of representations (other than fundamental representations and certain other circumstances set forth in the Purchase Agreement) unless and until the aggregate amount of damages equals or exceeds $250,000. Pursuant to the Purchase Agreement, we retained $3.0 million from the Closing Payment as security for the satisfaction of indemnification obligations of SecurityDAM.
 
SecurityDAM, the Key Shareholders and certain key employees of SecurityDAM entered into non-competition agreements with us whereby they agreed, among other things, that, for the periods set forth therein, they would refrain from competing with us in the business that SecurityDAM conducted prior to the closing, with certain exceptions set forth therein.
 
Since SecurityDAM is a related party, our Board determined to form a special committee of directors consisting solely of independent directors (the “Special Committee”) to examine the transaction and its alternatives, determine whether to pursue the transaction, and negotiate and approve its terms. The Special Committee engaged Stifel, Nicolaus & Company, Incorporated as its independent financial advisor and Gross & Co. as its independent legal advisor. Based on the unanimous recommendation of the Special Committee, the Purchase Agreement was also approved by the Audit Committee of the Board and all of the disinterested Board members.

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 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 2030 with an option to terminate by us by way of prior notice in June 2025. The annual rent amounts to approximately $705,000.
 
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Another, second lease, consists of five floors in the Or Tower in Tel Aviv, Israel with approximately 68,000 square feet, plus parking spaces. The lease expires in June 2030. The annual rent amounts to approximately $2,000,000. In this annual report, we sometime refer to this lease as well as the lease described above as the “Lease Agreements for the Company’s Headquarters.”
 

We also lease approximately 3,600 square feet of space in Jerusalem, Israel, for development facilities from an affiliated company owned by Yehuda and Nava Zisapel. This lease expires in July 2025. The annual rent amounts to approximately $97,000.
 

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 July 2025. The annual rent amounts to approximately $287,000.
 

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, from an affiliated company owned by Yehuda, Nava and Zohar Zisapel. The annual rent amounts to approximately $188,000. The lease expires in December 2025.
 
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 with discounts on our solutions 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 $3.1 million in 2021, compared to $3.2 million in 2020.
 
Additional RAD-Bynet Group Equipment and Services
 
We purchase the following additional equipment services from members of the RAD-Bynet Group: network management, IT and communication services, equipment testing and repair, inventory, cloud hosting services, electricity charges, parking and building maintenance, reception and security services, vehicles and human resource administration and marketing services.
 
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 rata 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 that are engaged in our industry, the RAD-Bynet Group companies initiate 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 who are our customers out of the total number of participants in the events).
 
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Following is a summary of the general purchases of products and services from the RAD-Bynet Group companies (excluding leases, distribution and the services previously provided by SecurityDAM, which are described above) during 2021:
 
Entity
Products/Services
   
Bynet Data Communications Ltd.
Network management, IT and communication equipment, testing and repair, mutual marketing activities
   
Internet Binat Ltd.
IT and communication services
   
Bynet System Applications Ltd.
Communication equipment and services
   
Rad Data Communications Ltd.
Operating services and manpower
   
Cloudride Ltd.
Cloud hosting services, mutual marketing activities
   
Bynet Electronics Ltd.
Testing equipment and related services
 
The total cost of our purchases from the RAD-Bynet Group entities referenced in the table above amounted to approximately $3.3 million in 2021, compared to $2.7 million in 2020.