Radware (RDWR) Risk Factors

We maintain substantial balances of cash and liquid investments as strategic assets for purposes of acquisitions and general corporate purposes, including share repurchase. Our cash, cash equivalents, short and long-term bank deposits and marketable securities totaled $427.7 million as of December 31, 2019. 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 outbreak. Financial income is a component of our net income (loss). As of December 31, 2019, our investment portfolio, including cash and cash equivalents, deposits and marketable securities, had a carrying value of $427.7 million, compared with $401.1 million as of December 31, 2018. For the years ended December 31, 2019, 2018 and 2017, we had $8.8 million, $7.3 million and $4.8 million, respectively, of net financial income. The outlook for our financial income is dependent, in part, on the future direction of interest rates, exchange rates, the amount of any share repurchases or acquisitions that we make and the amount of cash flows from operations that are available for investment. The performance of the capital markets affects the values of our funds that are held in marketable securities. These assets are subject to market fluctuations and will yield uncertain returns. Due to certain market developments, including investments' rating downgrades, the fair value of these investments may decline. If market conditions continue to fluctuate, the fair value of our investments may be impacted accordingly. Although our investment guidelines stress diversification and capital preservation, our investments are subject to a variety of risks, including risks related to general economic conditions, interest rate fluctuations and market volatility. In particular, our investment portfolios include a significant amount of interest rate-sensitive instruments, such as bonds, which, in addition to the inherent risk associated with the debt, may be adversely affected by changes in interest rates. Changes in interest rates and credit quality may also result in fluctuations in the income derived from, or the valuation of, our fixed income securities. Interest rates are highly sensitive to many factors, including governmental monetary policies, domestic and international economic and political conditions and other factors beyond our control. For example, benchmark interest rates, such as the U.S. Federal Funds Rate, are currently relatively low, which is likely to significantly impact our investment income. Increases in interest rates will decrease the value of our investments in fixed-income securities. If increases in interest rates occur during periods when we sell investments to satisfy liquidity needs, we may experience investment losses. Conversely, if interest rates decline, reinvested funds will earn less than expected. In terms of credit risk, our investment portfolio policy is "buy and hold," while minimizing credit risk by setting maximum concentration limit per issuer and credit rating. Our investments consist primarily of government and corporate debentures and bank deposits. Although we believe that we generally adhere to conservative investment guidelines, if turmoil in the financial markets reoccurs in the future, it may result in impairments of the carrying value of our investment assets since we classify our investments in marketable securities as available-for-sale. Changes in the fair value of investments classified as available-for-sale are not recognized as income (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 increase by $1.1 million during the year ended December 31, 2019 and would have decreased by $1.1 million during the year ended December 31, 2018. 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.

Pursuant to Section 1502 of the Dodd-Frank Act, United States publicly traded companies, such as Radware, are required to disclose use or potential use of "conflict minerals" that are mined from the Democratic Republic of Congo or adjoining countries (collectively, "Covered Countries"). Conflict minerals are defined by the SEC as columbite-tantalite (coltan), cassiterite, gold, wolframite, or their derivatives, which are limited to tantalum, tin and tungsten ("conflict minerals" or "3TG"). These requirements necessitate due diligence efforts to assess whether such minerals are used in our products in order to make the relevant required annual disclosures. These requirements could adversely affect the sourcing, supply and pricing of materials used in our products. We have conducted an analysis of our products and found that small quantities of 3TG could potentially be found in our products. The products that we manufacture are highly complex, typically containing thousands of parts from many direct suppliers. In general, we primarily rely on third-party assembly and manufacturing vendors to provide our finished products and, in this respect, these vendors typically receive components and subassemblies included in our products from other suppliers and subcontractors. We have relationships with a vast network of suppliers throughout the world, and there are generally multiple tiers between the 3TG mines and our direct suppliers. Therefore, we must rely on our direct suppliers to cooperate with us and work with their own upstream suppliers or sub-contractors in order that they may provide us with accurate information about the origin of 3TG in the components we purchase from them. In particular, many of our supplier contracts have fixed durations and we cannot unilaterally impose new contract terms or flow-down requirements that would otherwise compel these suppliers to support our due diligence efforts with respect to 3TG content. Currently, we do not have sufficient information from our suppliers to determine the country of origin of the conflict minerals used in our products or the facilities used to process those conflict minerals. Therefore, we cannot exclude the possibility that some of these conflict minerals may have originated in Covered Countries and are not from recycled or scrap sources. We may face reputational challenges that could impact future sales (i) based on the fact that we are unable to verify with sufficient accuracy the origins of all conflict minerals used in our products, and thus are unable to determine if such conflict minerals originate in the Covered Countries and are not entirely from recycled or scrap sources, or (ii) if we later determine that certain of our products contain minerals not determined to be "conflict free," (meaning that such minerals originate from one of the Covered Countries and have not been verified as "conflict free" by an independent third party audit body). Additionally, there are, and will be, ongoing costs associated with complying with these disclosure requirements pursuant to Section 1502 of the Dodd-Frank Act, including funding of the due diligence process to determine the sources of those minerals that may be used or which are necessary to the production of our products in order to make the relevant required annual disclosures.

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. Although in many cases we use standard parts and components for our products, certain components are presently available to us only from limited sources (see the risk factor below titled "We rely on a few vendors to provide our hardware platforms and components for the manufacture of our products and on a single managed security service provider to provide us with scrubbing center services required for the provision of our cloud DDoS protection service" and the discussion under Item 4 "Information on the Company--"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 seriously 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 experienced by our suppliers or contract manufacturers, or strong demand in the industry for those parts, especially if there is growth in the overall economy. If there is growth in the economy, such growth is likely to create greater pressures on us and our suppliers to accurately project overall component demand and component demands within specific product categories and to establish optimal component levels. If shortages or delays persist, the price of these components may increase, or the components may not be available at all. We may also encounter shortages if we do not accurately anticipate our needs. We may not be able to secure enough components at reasonable prices or of acceptable quality to build new products in a timely manner in the quantities or configurations needed. Accordingly, our revenues and gross margins could be materially and adversely affected until other sources can be developed. In addition, our operating results could be materially and adversely affected if we anticipate greater demand than actually develops and we commit to purchase more components than we actually require. We see this specifically with respect to dated components, which we need to order in large quantities due to manufacturing stoppage. Due to technology advancement, we are required from time to time to make "last buy" type of stock purchases of such dated components for our legacy products. 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 outbreak); subcontractors' lack of skilled labor; the disruption of transportation networks; and adverse weather conditions, could result in a material adverse effect on our business, financial condition and results of operations.

The majority of our cash and cash equivalents, and short and long-term bank deposits are invested in banks in Israel and, to a smaller extent, in banks in the United States. The Israeli bank deposits are not insured, while the deposits made in the United States are in excess of insured limits and are not otherwise insured. If one or more of these financial institutions were to become insolvent, the loss of these investments would have a material adverse effect on our financial condition.

We currently offer our solutions in over 70 countries. For the years ended December 31, 2019 and 2018, our sales outside the Americas (which include the U.S. and Canada, as well as Central America and Latin America (CALA)) represented approximately 58% and 56%, 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 outbreak; 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.

The IT marketplace is competitive and has very few barriers to entry. In particular, the cyber security and application delivery market in which we focus is highly competitive. We expect competition to intensify in the future, and we may lose market share if we are unable to compete effectively. Most of our competitors have greater financial, personnel and other resources than 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. 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.