Investing in our common stock involves a high degree of risk. You should carefully
consider the following risks and all other information contained herein, including our consolidated financial statements and the
related notes thereto, before investing in our common stock. The risks and uncertainties described below are not the only ones
we face. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, also may become
important factors that affect us. If any of the following risks materialize, our business, financial condition and results of operations
could be materially harmed. In that case, the trading price of our common stock could decline, and you may lose some or all of
your investment.
Risks Related to Our Business and Industry
The market for software that analyzes, secures, manages and migrates enterprise
data is new and unproven and may not grow.
We believe our future success depends in large part on the growth of the market for software
that enables enterprises to analyze, secure, manage and migrate their data. In order for us to market and sell our products,
we must successfully demonstrate to enterprise IT and business personnel the potential value of their data and persuade them to
devote a portion of their budgets to the single integrated platform that we offer to manage, protect and extract value from this
resource. We cannot provide any assurance that enterprises will recognize the need for our products or, if they do, that they
will decide that they need a solution that offers the range of functionalities that we offer. Software solutions focused on
enterprise data may not yet be viewed as a necessity, and accordingly, our sales effort is and will continue to be focused in large
part on explaining the need for, and value offered by, our solution. We can provide no assurance that the market for our solution
will continue to grow at its current rate or at all. The failure of the market to develop would materially adversely impact our
results of operations.
Our quarterly results of operations have fluctuated and may fluctuate significantly
due to variability in our revenues which could adversely impact our stock price.
Our revenues and other results of operations have fluctuated from quarter to quarter
in the past and could continue to fluctuate in the future. As a result, comparing our revenues and results of operations on a period-to-period
basis may not be meaningful, and you should not rely on any particular past quarter or other period results. Our revenues depend
in part on the conversion of enterprises that have installed an evaluation license for our software into paying customers. In this
regard, most of our sales are typically made during the last three weeks of every quarter. We may fail to meet market expectations
for that quarter if we are unable to close the number of transactions that we expect during this short period and closings are
deferred to a subsequent quarter. In addition, our sales cycle from initial contact to delivery of and payment for the software
license generally becomes longer and less predictable with respect to large transactions and often involves multiple meetings or
consultations at a substantial cost and time commitment to us. Although we try to minimize the potential impact of large transactions
on our quarterly results of operations, the closing of a large transaction in a particular quarter may raise our revenues in that
quarter and thereby make it more difficult for us to meet market expectations in subsequent quarters, and our failure to close
a large transaction in a particular quarter may adversely impact our revenues in that quarter. In addition, we base our current
and future expense levels on our revenue forecasts and operating plans, and our expenses are relatively fixed in the short term.
Accordingly, we would likely not be able to reduce our costs sufficiently to compensate for an unexpected shortfall in revenues
and even a relatively small decrease in revenues could disproportionately and adversely affect our financial results for that quarter.
The variability and unpredictability of these and other factors, many of which are outside
of our control, could result in our failing to meet or exceed financial expectations for a given period. If our revenues or results
of operations fall below the expectations of investors or any securities analysts that cover our stock, the price of our common
stock could decline substantially
A failure to hire and integrate additional sales and marketing personnel or maintain
their productivity could adversely affect our results of operations and growth prospects.
Our business requires intensive sales and marketing activities. Our sales and marketing
personnel are essential to attracting new customers and expanding sales to existing customers, both of which are key to our future
growth. We face a number of challenges in successfully expanding our sales force. We must locate and hire a significant number
of qualified individuals, and competition for such individuals is intense. In addition, as we expand into new markets
with which we have less familiarity, we will need to recruit individuals who are multilingual or who have skills particular to
a certain geography, and it may be difficult to find candidates with those qualifications. We may be unable to achieve our hiring
or integration goals due to a number of factors, including, but not limited to, the number of individuals we hire, challenges in
finding individuals with the correct background due to increased competition for such hires and increased attrition rates among
new hires and existing personnel. Furthermore, based on our past experience, it often can take up to 12 months before a new
sales force member is trained and operating at a level that meets our expectations. We invest significant time and resources
in training new members of our sales force, and we may be unable to achieve our target performance levels with new sales personnel
as rapidly as we have done in the past due to larger numbers of hires or lack of experience training sales personnel to operate
in new jurisdictions. Our failure to hire a sufficient number of qualified individuals, to integrate new sales force members within
the time periods we have achieved historically or to keep our attrition rates at levels comparable to others in our industry may
materially impact our projected growth rate.
Failure to attract, recruit and retain highly qualified engineers could adversely
affect our results of operations and growth prospects.
Our future success and growth depends, in part, on our ability to continue to recruit
and retain highly skilled personnel, particularly engineers. Any of our employees may terminate their employment at any time and
competition for highly skilled engineering personnel is frequently intense, especially in Israel, where we have a substantial presence
and need for qualified engineers. Moreover, to the extent we hire personnel from other companies, we may be subject to allegations
that they have been improperly solicited or may have divulged proprietary or other confidential information to us. If we are unable
to attract or retain qualified engineers, our ability to innovate, introduce new products and compete would be adversely impacted,
and our financial condition and results of operations may suffer.
If we fail to manage our rapid growth effectively, our business and results of
operations will be adversely affected.
We have experienced rapid growth in a relatively short period of time. Our revenues grew
from $53.4 million in 2012 to $164.5 million in 2016. Our number of employees and independent contractors increased from 399
as of December 31, 2012 to 1,171 as of June 30, 2017. During this period, we also established and expanded our operations
in a number of countries outside the United States. We intend to continue to grow our business and plan to continue to hire new
employees, particularly in our sales and marketing and research and development groups. If we cannot adequately train these new
employees, including our sales force, software engineers and customer support staff, our sales may not grow at the rates we project
or our customers may lose confidence in the knowledge and capability of our employees. In addition, we are expanding our current
operations, and we intend to make investments to continue our expansion efforts. We must successfully manage our growth to achieve
our objectives. Although our business has experienced significant growth in the past, we cannot provide any assurance that our
business will continue to grow at the same rate, or at all.
Our ability to effectively manage any significant growth of our business will depend
on a number of factors, including our ability to do the following:
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effectively recruit, integrate, train and motivate a large number of new employees, including our sales force and engineers,
while retaining existing employees, maintaining the beneficial aspects of our corporate culture and effectively executing our business
plan;
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satisfy existing customers and attract new customers;
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effectively manage existing channel partnerships and expand to new ones;
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successfully introduce new products and enhancements;
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improve our key business applications and processes to support our business needs;
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enhance information and communication systems to ensure that our employees and offices around the world are well-coordinated
and can effectively communicate with each other and our growing customer base;
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enhance our internal controls to ensure timely and accurate reporting of all of our operations and financial results;
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protect and further develop our strategic assets, including our intellectual property rights; and
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make sound business decisions in light of the scrutiny associated with operating as a public company.
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These activities will require significant investments and allocation of valuable management
and employee resources, and our growth will continue to place significant demands on our management and our operational and financial
infrastructure. There are no guarantees we will be able to grow our business in an efficient or timely manner, or at all. Moreover,
if we do not effectively manage the growth of our business and operations, the quality of our software could suffer, which could
negatively affect our brand, results of operations and overall business.
Our failure to continually enhance and improve our technology could adversely affect
sales of our products.
The market is characterized by the exponential growth in enterprise data, rapid technological
advances, changes in customer requirements, including customer requirements driven by changes to legal, regulatory and self-regulatory
compliance mandates, frequent new product introductions and enhancements and evolving industry standards in computer hardware and
software technology. As a result, we must continually change and improve our products in response to changes in operating systems,
application software, computer and communications hardware, networking software, data center architectures, programming tools and
computer language technology. Moreover, the technology in our products is especially complex because it needs to effectively identify
and respond to a user’s data retention, security and governance needs, while minimizing the impact on database and file system
performance. Our products must also successfully interoperate with products from other vendors.
We cannot guarantee that we will be able to anticipate future market needs and opportunities
or be able to extend our technological expertise and develop new products or expand the functionality of our current products in
a timely manner or at all. Even if we are able to anticipate, develop and introduce new products and expand the functionality of
our current products, there can be no assurance that enhancements or new products will achieve widespread market acceptance.
Our product enhancements or new products could fail to attain sufficient market acceptance
for many reasons, including:
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failure to accurately predict market demand in terms of product functionality and to supply products that meet this demand
in a timely fashion;
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inability to interoperate effectively with the database technologies and file systems of prospective customers;
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defects, errors or failures;
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negative publicity or customer complaints about performance or effectiveness; and
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poor business conditions, causing customers to delay IT purchases.
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If we fail to anticipate market requirements or stay abreast of technological changes,
we may be unable to successfully introduce new products, expand the functionality of our current products or convince our customers
and potential customers of the value of our solutions in light of new technologies. Accordingly, our business, results of operations
and financial condition could be materially and adversely affected.
We are dependent on the continued services and performance of our co-founder,
Yakov Faitelson, the loss of whom could adversely affect our business.
Our future performance depends in large part on the continued services and continuing
contributions of our co-founder, our Chief Executive Officer and President, Yakov Faitelson, to successfully manage our company,
to execute on our business plan and to identify and pursue new opportunities and product innovations. The loss of services of Mr. Faitelson
could significantly delay or prevent the achievement of our development and strategic objectives and adversely affect our business.
Due to our rapid growth, we have a limited operating history at our current scale,
which makes it difficult to evaluate and predict our future prospects and may increase the risk that we will not be successful.
We have been growing rapidly in recent periods and, as a result, have a relatively short
history operating our business at its current scale. For example, we have significantly increased the number of our employees and
have expanded our operations and product offerings. This limits our ability to forecast our future operating results and subjects
us to a number of uncertainties, including our ability to plan for and model future growth. We have encountered and will continue
to encounter risks and uncertainties frequently experienced by growing companies in new markets that may not develop as expected.
Because we depend in part on the market’s acceptance of our products, it is difficult to evaluate trends that may affect
our business. If our assumptions regarding these trends and uncertainties, which we use to plan our business, are incorrect or
change in reaction to changes in our markets, or if we do not address these risks successfully, our operating and financial results
could differ materially from our expectations and our business could suffer. Moreover, although we have experienced significant
growth historically, we may not continue to grow as quickly in the future.
Our future success will depend in large part on our ability to, among other things:
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maintain and expand our business, including our customer base and operations, to support our growth, both domestically and
internationally;
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hire, integrate, train and retain skilled talent, including members of our sales force and software engineers;
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develop new products and services and bring products and services in beta to market;
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renew maintenance and support agreements with, and sell additional products to, existing customers;
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increase market awareness of our products and enhance our brand; and
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maintain compliance with applicable governmental regulations and other legal obligations, including those related to intellectual
property, international sales and taxation.
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If we fail to address the risks and difficulties that we face, including those associated
with the challenges listed above as well as those described elsewhere in this “Risk Factors” section, our business
will be adversely affected, and our results of operations will suffer.
If we are unable to attract new customers and expand sales to existing customers,
both domestically and internationally, our growth could be slower than we expect and our business may be harmed.
Our future growth depends in part upon increasing our customer base. Our ability to achieve
significant growth in revenues in the future will depend, in large part, upon the effectiveness of our sales and marketing efforts,
both domestically and internationally, and our ability to attract new customers. If we fail to attract new customers and maintain
and expand those customer relationships, our revenues will grow more slowly than expected, and our business will be harmed.
Our future growth also depends upon expanding sales of our products to existing customers
and their organizations. If our customers do not purchase additional licenses or capabilities, our revenues may grow more slowly
than expected, may not grow at all or may decline. Additionally, increasing incremental sales to our current customer base requires
increasingly sophisticated and costly sales efforts that are targeted at senior management. There can be no assurance that our
efforts would result in increased sales to existing customers ("upsells") and additional revenues. If our efforts to
upsell to our customers are not successful, our business would suffer. Moreover, while substantially all of our software is currently
licensed and sold under perpetual license agreements, we also enter into term license agreements with our customers. Due to the
differences in revenue recognition principles, applied to perpetual versus term license sales, shifts in the mix of term and subscription
licenses could produce significant variation in the revenues we recognize in a given period.
We may face increased competition in our market.
While there are some companies which offer certain features similar to those embedded
in our solutions, as well as others with whom we compete in certain tactical use cases, we believe that we do not currently compete
with a company that offers the same breadth of functionalities that we offer in a single integrated solution. Nevertheless, we
do compete against a select group of software vendors, such as Veritas Technologies LLC and Quest Software, that provide standalone
solutions, similar to those found in our comprehensive software suite, in the specific markets in which we operate. We also face
direct competition with respect to certain of our products, specifically DatAnywhere, Data Transport Engine, DatAnswers and DatAdvantage
for Directory Services. As we augment our functionality with insider threat detection and user behavior analytics, we may face
increased perceived and real competition with other security technologies. In the future, as customer requirements evolve and new
technologies are introduced, we may experience increased competition if established or emerging companies develop solutions that
address the enterprise data market. Furthermore, because we operate in a relatively new and evolving area, we anticipate that competition
will increase based on customer demand for these types of products.
In particular, if a more established company were to target our market, we may face significant
competition. They may have competitive advantages, such as greater name recognition, larger sales, marketing, research and acquisition
resources, access to larger customer bases and channel partners, a longer operating history and lower labor and development costs,
which may enable them to respond more quickly to new or emerging technologies and changes in customer requirements or devote greater
resources to the development, promotion and sale of their products than we do. Increased competition could result in us failing
to attract customers or maintain licenses at the same rate. It could also lead to price cuts, alternative pricing structures or
the introduction of products available for free or a nominal price, reduced gross margins, longer sales cycles and loss of market
share.
In addition, our current or prospective channel partners may establish cooperative relationships
with any future competitors. These relationships may allow future competitors to rapidly gain significant market share. These developments
could also limit our ability to obtain revenues from existing and new customers.
Our ability to compete successfully in our market will also depend on a number of factors,
including ease and speed of product deployment and use, the quality and reliability of our customer service and support, total
cost of ownership, return on investment and brand recognition. Any failure by us to successfully address current or future competition
in any one of these or other areas may reduce the demand for our products and adversely affect our business, results of operations
and financial condition.
We have a history of losses, and we may not be profitable in the future.
We have incurred net losses in each year since our inception, including a net loss of
$15.9 million for the six months ended June 30, 2017 and net losses of $17.7 million and $21.3 million for the years ended December 31,
2016 and 2015, respectively. Because the market for our software is rapidly evolving and has not yet reached widespread adoption,
it is difficult for us to predict our future results of operations. We expect our operating expenses to increase over the next
several years as we hire additional personnel, particularly in sales and marketing and research and development groups, expand
and improve the effectiveness of our distribution channels, and continue to develop features and applications for our software.
Prolonged economic uncertainties or downturns could materially adversely affect
our business.
Our business depends on our current and prospective customers’ ability and willingness
to invest money in information technology services, which in turn is dependent upon their overall economic health. Negative conditions
in the general economy both in the United States and abroad, including conditions resulting from financial and credit market fluctuations
and terrorist attacks on the United States, Europe, Asia Pacific or elsewhere, could cause a decrease in corporate spending on
enterprise software in general.
Continuing uncertainty in the global economy, particularly in EMEA, which accounted for
approximately one-third of our revenues in 2016 and for the six months ended June 30, 2017, and where we have experienced inconsistent
growth rates over the last few years, makes it extremely difficult for our customers and us to forecast and plan future business
activities accurately. This could cause our customers to reevaluate decisions to purchase our product or to delay their purchasing
decisions, which could lengthen our sales cycles.
We have a significant number of customers in the financial services, healthcare, public
sector and industrial industries. A substantial downturn in any of these industries, or a reduction in public sector spending,
may cause enterprises to react to worsening conditions by reducing their capital expenditures in general or by specifically reducing
their spending on information technology. Customers may delay or cancel information technology projects, choose to focus on in-house
development efforts or seek to lower their costs by renegotiating maintenance and support agreements. To the extent purchases of
licenses for our software are perceived by customers and potential customers to be discretionary, our revenues may be disproportionately
affected by delays or reductions in general information technology spending. In addition, the increased pace of consolidation in
certain industries may result in reduced overall spending on our software. If the economic conditions of the general economy or
industries in which we operate worsen from present levels, our business, results of operations and financial condition could be
adversely affected.
If we are unable to maintain successful relationships with our channel partners,
our business could be adversely affected.
We rely on channel partners, such as distribution partners and resellers, to sell licenses
and support and maintenance agreements for our software. In 2016 and for the six months ended June 30, 2017, our channel partners
fulfilled substantially all of our sales, and we expect that sales to channel partners will continue to account for substantially
all of our revenues for the foreseeable future. Our ability to achieve revenue growth in the future will depend in part on our
success in maintaining successful relationships with our channel partners.
Our agreements with our channel partners are generally non-exclusive, meaning our channel
partners may offer customers the products of several different companies. If our channel partners do not effectively market and
sell our software, choose to use greater efforts to market and sell their own products or those of others, or fail to meet the
needs of our customers, our ability to grow our business, sell our software and maintain our reputation may be adversely affected.
Our contracts with our channel partners generally allow them to terminate their agreements for any reason upon 30 days’ notice.
A termination of the agreement has no effect on orders already placed. The loss of a substantial number of our channel partners,
our possible inability to replace them, or the failure to recruit additional channel partners could materially and adversely affect
our results of operations. If we are unable to maintain our relationships with these channel partners, our business, results of
operations, financial condition or cash flows could be adversely affected.
If our technical support or professional services are not satisfactory to our customers,
they may not renew their maintenance and support agreements or buy future products, which could adversely affect our future results
of operations.
Our business relies on our customers’ satisfaction with the technical support and
professional services we provide to support our products. While substantially all of our software is sold under perpetual license
agreements, all of our maintenance and support agreements are sold on a term basis. Our customers typically purchase one year of
software maintenance and support as part of their initial purchase of our products, with an option to renew their maintenance agreements.
In order for us to maintain and improve our results of operations, it is important that our existing customers renew their maintenance
and support agreements when the contract term expires. For example, our maintenance renewal rate for each of the years ended December 31,
2015 and 2016 and for the six months ended June 30, 2017 was over 90%.
If we fail to provide technical support services that are responsive, satisfy our customers’
expectations and resolve issues that they encounter with our products and services, then they may elect not to purchase or renew
annual maintenance and support contracts and they may choose not to purchase additional products and services from us. Accordingly,
our failure to provide satisfactory technical support or professional services could lead our customers not to renew their agreements
with us or renew on terms less favorable to us, and therefore have a material and adverse effect on our business and results of
operations.
Because we derive substantially all of our revenues and cash flows from sales of
licenses for a single platform of products, failure of the products in the platform to satisfy customers or to achieve increased
market acceptance would adversely affect our business.
In 2016 and for the six months ended June 30, 2017, we generated substantially all of
our revenues from sales of licenses for four of our current product families, DatAdvantage, DataPrivilege, IDU Classification Framework
and Data Transport Engine. We expect to continue to derive a majority of our revenues from license sales relating to this platform
in the future. As such, market acceptance of this platform of products is critical to our continued success. Demand for licenses
for our platform of products is affected by a number of factors, some of which are outside of our control, including continued
market acceptance of our software by referenceable accounts for existing and new use cases, technological change and growth or
contraction in our market. We expect the proliferation of unstructured data to lead to an increase in the data analysis demands,
and data security and retention concerns, of our customers, and our software, including the software underlying our platform of
products, may not be able to scale and perform to meet those demands. If we are unable to continue to meet customer demands or
to achieve more widespread market acceptance of our software, our business, operations, financial results and growth prospects
will be materially and adversely affected.
Failure to protect our proprietary technology and intellectual property rights
could substantially harm our business.
The success of our business depends on our ability to obtain, protect and enforce our
trade secrets, trademarks, copyrights, patents and other intellectual property rights. We attempt to protect our intellectual property
under patent, trademark, copyrights and trade secret laws, and through a combination of confidentiality procedures, contractual
provisions and other methods, all of which offer only limited protection.
As of July 31, 2017, we had 43 issued patents in the United States and 39
pending U.S. patent applications. We also had 13 patents issued and 61 applications pending for examination in non-U.S.
jurisdictions, and 15 pending PCT, patent applications, all of which are counterparts of our U.S. patent applications. We
may file additional patent applications in the future. The process of obtaining patent protection is expensive and
time-consuming, and we may not be able to prosecute all necessary or desirable patent applications at a reasonable cost or in
a timely manner all the way through to the successful issuance of a patent. We may choose not to seek patent protection for
certain innovations and may choose not to pursue patent protection in certain jurisdictions. Furthermore, it is possible that
our patent applications may not issue as granted patents, that the scope of our issued patents will be insufficient or not
have the coverage originally sought, that our issued patents will not provide us with any competitive advantages, and that
our patents and other intellectual property rights may be challenged by others or invalidated through administrative process
or litigation. In addition, issuance of a patent does not guarantee that we have an absolute right to practice the patented
invention. Our policy is to require our employees (and our consultants and service providers that develop intellectual
property included in our products) to execute written agreements in which they assign to us their rights in potential
inventions and other intellectual property created within the scope of their employment (or, with respect to consultants and
service providers, their engagement to develop such intellectual property), but we cannot assure you that we have adequately
protected our rights in every such agreement or that we have executed an agreement with every such party. Finally, in order
to benefit from patent and other intellectual property protection, we must monitor, detect and pursue infringement claims in
certain circumstances in relevant jurisdictions, all of which is costly and time-consuming. As a result, we may not be able
to obtain adequate protection or to enforce our issued patents or other intellectual property effectively.
In addition to patented technology, we rely on our unpatented proprietary technology
and trade secrets. Despite our efforts to protect our proprietary technologies and our intellectual property rights, unauthorized
parties, including our employees, consultants, service providers or customers, may attempt to copy aspects of our products or obtain
and use our trade secrets or other confidential information. We generally enter into confidentiality agreements with our employees,
consultants, service providers, vendors, channel partners and customers, and generally limit access to and distribution of our
proprietary information and proprietary technology through certain procedural safeguards. These agreements may not effectively
prevent unauthorized use or disclosure of our intellectual property or technology and may not provide an adequate remedy in the
event of unauthorized use or disclosure of our intellectual property or technology. We cannot assure you that the steps taken by
us will prevent misappropriation of our trade secrets or technology or infringement of our intellectual property. In addition,
the laws of some foreign countries where we operate do not protect our proprietary rights to as great an extent as the laws of
the United States, and many foreign countries do not enforce these laws as diligently as government agencies and private parties
in the United States.
Moreover, industries in which we operate, such as data security, data retention and data
governance are characterized by the existence of a large number of relevant patents and frequent claims and related litigation
regarding patent and other intellectual property rights. From time to time, third parties have asserted and may assert their patent,
copyright, trademark and other intellectual property rights against us, our channel partners or our customers. Successful claims
of infringement or misappropriation by a third party could prevent us from distributing certain products or performing certain
services or could require us to pay substantial damages (including, for example, treble damages if we are found to have willfully
infringed patents and increased statutory damages if we are found to have willfully infringed copyrights), royalties or other fees.
Such claims also could require us to cease making, licensing or using solutions that are alleged to infringe or misappropriate
the intellectual property of others or to expend additional development resources to attempt to redesign our products or services
or otherwise to develop non-infringing technology. Even if third parties may offer a license to their technology, the terms of
any offered license may not be acceptable, and the failure to obtain a license or the costs associated with any license could cause
our business, results of operations or financial condition to be materially and adversely affected. In some cases, we indemnify
our channel partners and customers against claims that our products infringe the intellectual property of third parties. Defending
against claims of infringement or being deemed to be infringing the intellectual property rights of others could impair our ability
to innovate, develop, distribute and sell our current and planned products and services. If we are unable to protect our intellectual
property rights and ensure that we are not violating the intellectual property rights of others, we may find ourselves at a competitive
disadvantage to others who need not incur the additional expense, time and effort required to create the innovative products that
have enabled us to be successful to date.
Interruptions or performance problems, including associated with our website or
support website or any caused by cyber-attacks, may adversely affect our business.
Our continued growth depends in part on the ability of our existing and potential customers
to quickly access our website and support website. Access to our support website is also imperative to our daily operations and
interaction with customers, as it allows customers to download our software, fixes and patches, as well as open and respond to
support tickets and register license keys for evaluation or production purposes. We have experienced, and may in the future experience,
website disruptions, outages and other performance problems due to a variety of factors, including technical failures, cyber-attacks,
natural disasters, infrastructure changes, human or software errors, capacity constraints due to an overwhelming number of users
accessing our website simultaneously and denial of service or fraud. In some instances, we may not be able to identify the cause
or causes of these website performance problems within an acceptable period of time. It may become increasingly difficult to maintain
and improve the performance of our websites, especially during peak usage times and as our software becomes more complex and our
user traffic increases. If our websites are unavailable or if our users are unable to download our software, patches or fixes within
a reasonable amount of time or at all, we may suffer reputational harm and our business would be negatively affected.
Real or perceived errors, failures or bugs in our software could adversely affect
our growth prospects.
Because our software uses complex technology, undetected errors, failures or bugs may
occur. Our software is often installed and used in a variety of computing environments with different operating system management
software, and equipment and networking configurations, which may cause errors or failures of our software or other aspects of the
computing environment into which it is deployed. In addition, deployment of our software into computing environments may expose
undetected errors, compatibility issues, failures or bugs in our software. Despite testing by us, errors, failures or bugs may
not be found in our software until it is released to our customers. Moreover, our customers could incorrectly implement or inadvertently
misuse our software, which could result in customer dissatisfaction and adversely impact the perceived utility of our products
as well as our brand. Any of these real or perceived errors, compatibility issues, failures or bugs in our software could result
in negative publicity, reputational harm, loss of or delay in market acceptance of our software, loss of competitive position or
claims by customers for losses sustained by them. In such an event, we may be required, or may choose, for customer relations or
other reasons, to expend additional resources in order to help correct the problem.
If our software is perceived as not being secure, customers may reduce the use
of or stop using our software, and we may incur significant liabilities.
Our software involves the transmission of data between data stores, and between data
stores and desktop and mobile computers, and may in the future involve the storage of data. Any security breaches with respect
to such data could result in the loss of this information, litigation, indemnity obligations and other liabilities. While we have
taken steps to protect the confidential information that we have access to, including confidential information we may obtain through
our customer support services or customer usage of our products, we have no direct control over the substance of the content. Therefore,
if customers use our software for the transmission of personally identifiable information and our security measures are breached
as a result of third-party action, employee error, malfeasance or otherwise, our reputation could be damaged, our business may
suffer and we could incur significant liability. Because techniques used to obtain unauthorized access or sabotage systems change
frequently and generally are not identified until they are launched against a target, we may be unable to anticipate these techniques
or to implement adequate preventative measures. While we maintain insurance coverage for some of the above events, the potential
liabilities associated with these events could exceed the insurance coverage we maintain. Any or all of these issues could tarnish
our reputation, negatively impact our ability to attract new customers or sell additional products to our existing customers, cause
existing customers to elect not to renew their maintenance and support agreements or subject us to third-party lawsuits, regulatory
fines or other action or liability, thereby adversely affecting our results of operations.
We are subject to federal, state and industry privacy and data security regulations,
which could result in additional costs and liabilities to us or inhibit sales of our software.
Although our current software products do not transmit our customers’ data to us,
we collect and utilize demographic and other information, including personally identifiable information, from and about users (such
as customers, potential customers and others) as they interact with us over the internet and otherwise provide us with information
whether via our website or blog or through email or other means. Users may provide personal information to us in many contexts,
including through our direct telephonic support service, blog alert sign-up, product purchase, survey registration, or when accessing
our online support portals or using other community or social networking features. Because we may collect and utilize this information,
we are subject to laws and regulations regarding the collection, use and disclosure of personal information. In the United States,
these include rules and regulations promulgated under the authority of the Federal Trade Commission, the Health Insurance Portability
and Accountability Act of 1996, and state breach notification laws. Internationally, virtually every jurisdiction in which we operate
has established its own data security and privacy legal framework with which we or our customers must comply, including the General
Data Protection Regulation adopted in the European Union and which will become enforceable on May 25, 2018.
Further, the regulatory framework for privacy issues worldwide is rapidly evolving and
is likely to remain uncertain for the foreseeable future. Many federal, state and foreign government bodies and agencies have adopted
or are considering adopting laws and regulations. In addition, privacy advocates and industry groups may propose new and different
self-regulatory standards that either legally or contractually apply to us. Because the interpretation and application of privacy
and data protection laws are still uncertain, it is possible that these laws may be interpreted and applied in a manner that is
inconsistent with our existing data management practices or the features of our software. If so, in addition to the possibility
of fines, lawsuits and other claims, we could be required to fundamentally change our business activities and practices or modify
our software, which could have an adverse effect on our business. Any inability to adequately address privacy concerns, even if
unfounded, or comply with applicable privacy or data protection laws, regulations and policies, could result in additional cost
and liability to us, damage our reputation, inhibit sales and adversely affect our business.
Our long-term growth depends, in part, on being able to continue to expand internationally
on a profitable basis, which subjects us to risks associated with conducting international operations.
Historically, we have generated a majority of our revenues from customers in the United
States. For the year ended December 31, 2016, and six months ended June 30, 2017, approximately 61% and 64%, respectively, of our
total revenues were derived from sales in the United States. Nevertheless, we have operations across the globe, and we plan to
continue to expand our international operations as part of our long-term growth strategy. The further expansion of our international
operations will subject us to a variety of risks and challenges, including:
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sales and customer service challenges associated with operating in different countries;
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increased management travel, infrastructure and legal compliance costs associated with having multiple international operations;
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difficulties in receiving payments from different geographies, including difficulties associated with currency fluctuations,
payment cycles, transfer of funds or collecting accounts receivable, especially in emerging markets;
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variations in economic or political conditions between each country or region;
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economic uncertainty around the world and adverse effects arising from economic interdependencies across countries and regions;
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uncertainty around how Brexit will impact the United Kingdom’s access to the European Union Single Market, the related
regulatory environment, the global economy and the resulting impact on our business;
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compliance with foreign laws and regulations and the risks and costs of non-compliance with such laws and regulations;
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compliance with laws and regulations for foreign operations, including the U.S. Foreign Corrupt Practices Act of 1977, or the
FCPA, the U.K. Bribery Act of 2010, import and export control laws, tariffs, trade barriers, economic sanctions and other regulatory
or contractual limitations on our ability to sell our software in certain foreign markets, and the risks and costs of non-compliance;
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heightened risks of unfair or corrupt business practices in certain geographies and of improper or fraudulent sales arrangements
that may impact financial results and result in restatements of financial statements and irregularities in financial statements;
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reduced protection for intellectual property rights in certain countries and practical difficulties and costs of enforcing
rights abroad;
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compliance with the laws of numerous foreign taxing jurisdictions and overlapping of different tax regimes; and
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uncertainty around a potential reverse or renegotiation of international trade agreements and partnerships under the administration
of U.S. President Donald J. Trump.
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Any of these risks could adversely affect our international operations, reduce our revenues
from outside the United States or increase our operating costs, adversely affecting our business, results of operations and financial
condition and growth prospects. There can be no assurance that all of our employees, independent contractors and channel partners
will comply with the formal policies we have and will implement, or applicable laws and regulations. Violations of laws or key
control policies by our employees, independent contractors and channel partners could result in delays in revenue recognition,
financial reporting misstatements, fines, penalties or the prohibition of the importation or exportation of our software and services
and could have a material adverse effect on our business and results of operations.
If currency exchange rates fluctuate substantially in the future, our results of
operations, which are reported in U.S. dollars, could be adversely affected.
Our functional and reporting currency is the U.S. dollar, and we generate a majority
of our revenues and incur a majority of our expenses in U.S. dollars. Revenues and expenses are also incurred in other currencies,
primarily Euros, Pounds Sterling, Canadian dollars and NIS
. Accordingly, changes in
exchange rates may have a material adverse effect on our business, results of operations and financial condition. The exchange
rates between the U.S. dollar and foreign currencies have fluctuated substantially in recent years and may continue to fluctuate
substantially in the future. Furthermore, a strengthening of the U.S. dollar could increase the cost in local currency of our software
and our maintenance renewals to customers outside the United States, which could adversely affect our business, results of operations,
financial condition and cash flows. For example, the U.S. election in 2016, subsequent actions of the Trump administration and
the Brexit referendum have caused significant volatility in global stock markets and currency exchange rate fluctuations. Volatility
in exchange rates is currently expected to continue in the short term as the United Kingdom negotiates its exit from the European
Union which is scheduled to occur by the end of March 2019. Brexit and the withdrawal of the United Kingdom from the European Union,
as well as other member countries public discussions about the possibility of withdrawing from the European Union, may also create
global economic uncertainty, which may impact, among other things, the demand for our products.
We incur expenses for employee compensation and other operating expenses at our non-U.S.
locations in local currencies. The weakening of the U.S. dollar against such currencies would cause the U.S. dollar equivalent
of such expenses to increase which could have a negative impact on our reported results of operations. We use forward foreign exchange
contracts to hedge or mitigate the effect of changes in foreign exchange rates on our operating expenses denominated in certain
foreign currencies. However, this strategy might not eliminate our exposure to foreign exchange rate fluctuations and involves
costs and risks of its own, such as cash expenditures, ongoing management time and expertise, external costs to implement the strategy
and potential accounting implications. Additionally, our hedging activities may contribute to increased losses as a result of volatility
in foreign currency markets.
Our use of open source software could negatively affect our ability to sell our
software and subject us to possible litigation.
We use open source software and expect to continue to use open source software in the
future. Some open source software licenses require users who distribute open source software as part of their own software product
to publicly disclose all or part of the source code to such software product or to make available any derivative works of the open
source code on unfavorable terms or at no cost. We may face ownership claims of third parties over, or seeking to enforce the license
terms applicable to, such open source software, including by demanding the release of the open source software, derivative works
or our proprietary source code that was developed using such software. These claims could also result in litigation, require us
to purchase a costly license or require us to devote additional research and development resources to change our software, any
of which would have a negative effect on our business and results of operations. 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. Finally, we cannot assure you that
we have incorporated open source software into our own software in a manner that conforms with our current policies and procedures.
Our business is highly dependent upon our brand recognition and reputation, and
the failure to maintain or enhance our brand recognition or reputation may adversely affect our business.
We believe that enhancing the “Varonis” brand identity and maintaining our
reputation in the information technology industry is critical to our relationships with our customers and to our ability to attract
new customers. Our brand recognition and reputation is dependent upon:
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our ability to continue to offer high-quality, innovative and error- and bug-free products;
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our ability to maintain customer satisfaction with our products;
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our ability to be responsive to customer concerns and provide high quality customer support, training and professional services;
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any misuse or perceived misuse of our products;
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positive or negative publicity;
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interruptions, delays or attacks on our website; and
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litigation or regulatory-related developments.
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We may not be able to successfully promote our brand or maintain our reputation. In addition,
independent industry analysts often provide reviews of our products, as well as other products available in the market, and perception
of our product in the marketplace may be significantly influenced by these reviews. If these reviews are negative, or less positive
than reviews about other products available in the market, our brand may be adversely affected. Furthermore, negative publicity
relating to events or activities attributed to us, our employees, our channel partners or others associated with any of these parties,
may tarnish our reputation and reduce the value of our brand. Damage to our reputation and loss of brand equity may reduce demand
for our products and have an adverse effect on our business, results of operations and financial condition. Any attempts to rebuild
our reputation and restore the value of our brand may be costly and time consuming, and such efforts may not ultimately be successful.
Moreover, it may be difficult to enhance our brand and maintain our reputation in connection
with sales to channel partners. Promoting our brand requires us to make significant expenditures, and we anticipate that the expenditures
will increase as our market becomes more competitive, as we expand into new markets and geographies and as more sales are generated
to our channel partners. To the extent that these activities yield increased revenues, these revenues may not offset the increased
expenses we incur. If we do not successfully enhance our brand and maintain our reputation, our business may not grow, we may have
reduced pricing power relative to competitors with stronger brands, and we could lose customers, all of which would adversely affect
our business, operations and financial results.
Our success depends in part on maintaining and increasing our sales to customers
in the public sector.
We derive a portion of our revenues from contracts with federal, state, local and foreign
governments and government-owned or -controlled entities (such as public health care bodies, educational institutions and utilities),
which we refer to as the public sector herein. We believe that the success and growth of our business will continue to depend on
our successful procurement of public sector contracts. Selling to public sector entities can be highly competitive, expensive and
time consuming, often requiring significant upfront time and expense without any assurance that our efforts will produce any sales.
Factors that could impede our ability to maintain or increase the amount of revenues derived from public sector contracts include:
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changes in public sector fiscal or contracting policies;
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decreases in available public sector funding;
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changes in public sector programs or applicable requirements;
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the adoption of new laws or regulations or changes to existing laws or regulations;
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potential delays or changes in the public sector appropriations or other funding authorization processes;
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the requirement of contractual terms that are unfavorable to us, such as most-favored-nation pricing provisions; and
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delays in the payment of our invoices by public sector payment offices.
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Furthermore, we must comply with laws and regulations relating to public sector contracting,
which affect how we and our channel partners do business in both the United States and abroad. These laws and regulations may impose
added costs on our business, and failure to comply with these or other applicable regulations and requirements, including non-compliance
in the past, could lead to claims for damages from our channel partners, penalties, termination of contracts, and temporary suspension
or permanent debarment from public sector contracting.
The occurrence of any of the foregoing could cause public sector customers to delay or
refrain from purchasing licenses of our software in the future or otherwise have an adverse effect on our business, operations
and financial results.
We are subject to governmental export and import controls that could subject us
to liability or impair our ability to compete in international markets.
We incorporate encryption technology into certain of our products and these products
are subject to U.S. export control. We are also subject to Israeli export controls on encryption technology since our product development
initiatives are primarily conducted by our wholly-owned Israeli subsidiary. We have obtained the required licenses to export our
products outside of the United States. In addition, the current encryption means used in our products are listed in the “free
means encryption items” published by the Israeli Ministry of Defense, which means we are exempt from obtaining an encryption
control license. If the applicable U.S. or Israeli legal requirements regarding the export of encryption technology were to change
or if we change the encryption means in our products, we may need to apply for new licenses in the United States and may no longer
be able to rely on our licensing exception in Israel. There can be no assurance that we will be able to obtain the required licenses
under these circumstances. Furthermore, various other countries regulate the import of certain encryption technology, including
import permitting and licensing requirements, and have enacted laws that could limit our ability to distribute our products or
could limit our customers’ ability to implement our products in those countries.
We are also subject to U.S. and Israeli export control and economic sanctions laws, which
prohibit the shipment of certain products to embargoed or sanctioned countries, governments and persons. Our products could be
exported to these sanctioned targets by our channel partners despite the contractual undertakings they have given us and any such
export could have negative consequences, including government investigations, penalties and reputational harm. Moreover, the Trump
Administration may create further uncertainty regarding export or import regulations, economic sanctions or related legislation.
It remains unclear what specifically President Trump would or would not do with respect to the initiatives he has raised and what
support he would have to implement any such potential changes. Any change in export or import regulations, economic sanctions or
related legislation, shift in the enforcement or scope of existing regulations, or change in the countries, governments, persons
or technologies targeted by such regulations, could result in decreased use of our products by, or in our decreased ability to
export or sell our products to, existing or potential customers with international operations. Any decreased use of our products
or limitation on our ability to export or sell our products would likely adversely affect our business, financial condition and
results of operations.
False detection of security breaches or false identification of malicious sources
could adversely affect our business.
Our cyber-security products may falsely detect threats that do not actually exist. For
example, our DatAlert solution may enrich metadata collected by our products with information from external sources and third-party
data providers. If the information from these data providers is inaccurate, the potential for false positives increases. These
false positives, while typical in the industry, may affect the perceived reliability of our products and solutions and may therefore
adversely impact market acceptance of our products. If our products and solutions restrict access to important systems, files or
applications based on falsely identifying legitimate use as an attack or otherwise unauthorized, then our customers’ businesses
could be adversely affected. Any such false identification of use and subsequent restriction could result in negative publicity,
loss of customers and sales, increased costs to remedy any problem and costly litigation.
Our business in countries with a history of corruption and transactions with foreign
governments increase the risks associated with our international activities.
As we operate and sell internationally, we are subject to the FCPA 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 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.
Our ability to use our net operating loss carryforwards and other tax attributes
may be limited if we undergo an “ownership change.”
Our ability to utilize our net operating loss carryforwards (“NOLs”) and
other tax attributes could be limited if we undergo an “ownership change” within the meaning of Section 382 of
the Internal Revenue Code of 1986, as amended (the “Code”). An ownership change is generally defined as a greater than
50 percentage point increase in equity ownership by 5% stockholders in any three-year period. If an ownership change occurred as
a result of the sale of future equity issuances, we may not be able to fully realize the benefits of these NOLs. Also, the cash
tax benefit from our NOLs is dependent upon our ability to generate sufficient taxable income. Accordingly, we may be unable to
earn enough taxable income in order to fully utilize our current NOLs.
Changes in our provision for income taxes or adverse outcomes resulting from examination
of our income tax returns could adversely affect our results.
We are subject to income taxation in the United States, Israel and numerous other jurisdictions.
Determining our provision for income taxes requires significant management judgment. In addition, our provision for income taxes
could be adversely affected by many factors, including, among other things, changes to our operating structure, changes in the
amounts of earnings in jurisdictions with different statutory tax rates, changes in the valuation of deferred tax assets and liabilities
and changes in tax laws. We are subject to ongoing tax examinations in various jurisdictions. Tax authorities may disagree with
our intercompany charges, cross-jurisdictional transfer pricing or other matters and assess additional taxes. While we regularly
evaluate the likely outcomes of these examinations to determine the adequacy of our provision for income taxes, there can be no
assurance that the outcomes of such examinations will not have a material impact on our results of operations and cash flows. In
addition, we may be audited in various jurisdictions, and such jurisdictions may assess additional taxes against us. For example,
we are currently subject to a tax audit in Israel. Although we believe our tax estimates are reasonable, the final determination
of any tax audits or litigation could be materially different from our historical tax provisions and accruals, which could have
a material adverse effect on our results of operations or cash flows in the period or periods for which a determination is made.
Significant judgment is required to determine the recognition and measurement attributes
prescribed in Accounting Standards Codification, (“ASC 740-10-25”). In addition, ASC 740-10-25 applies to
all income tax positions, including the potential recovery of previously paid taxes, which if settled unfavorably could adversely
impact our provision for income taxes. Further, as a result of certain of our ongoing employment and capital investment actions
and commitments, our income in certain countries is subject to reduced tax rates. Our failure to meet these commitments could adversely
impact our provision for income taxes. In addition, we are subject to the continuous examination of our income tax returns by the
U.S. Internal Revenue Service and other tax authorities. We regularly assess the likelihood of adverse outcomes resulting from
these examinations to determine the adequacy of our provision for income taxes. There can be no assurance that the outcomes from
these continuous examinations will not have an adverse effect on our results of operations.
The enactment of legislation changing the United States taxation of international
business activities or the adoption of other tax reform policies could materially impact our financial position and results of
operations.
Changes to U.S. tax laws, including changes that may be enacted in the future, could
impact the tax treatment of our foreign earnings. In particular, a number of proposals for broad reform of the corporate tax system
in the United States are under evaluation by various legislative and administrative bodies. 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.
We conduct our operations in a number of jurisdictions worldwide and report our taxable
income based on our business operations in those jurisdictions. Our intercompany relationships are subject to transfer pricing
regulations administered by taxing authorities in various jurisdictions. The relevant taxing authorities may disagree with our
determinations as to the income and expenses attributable to specific jurisdictions. If such a disagreement were to occur, and
our position were not sustained, we could be required to pay additional taxes, interest and penalties, which could result in one-time
tax charges, higher effective tax rates, reduced cash flows and lower overall profitability of our operations.
Changes in financial accounting standards may cause adverse and unexpected revenue
fluctuations and impact our reported results of operations.
A change in accounting standards or practices could harm our operating results and may
even affect our reporting of transactions completed before the change is effective. New accounting pronouncements, such as Accounting
Standards Update 2014-09 related to revenue recognition, and varying interpretations of accounting pronouncements have occurred
and may occur in the future. Changes to existing rules or the questioning of current practices may harm our operating results or
the way we conduct our business. Additionally, the adoption of new or revised accounting principles may require that we make significant
changes to our systems process and controls.
We may require additional capital to support our business growth, and this capital
might not be available on acceptable terms, or at all.
We continue to make investments to support our business growth and may require additional
funds to respond to business challenges, including the need to develop new features or enhance our software, improve our operating
infrastructure or acquire complementary businesses and technologies. Accordingly, we may need to engage in equity or debt financing
to secure additional funds. If we raise additional funds through future issuances of equity or convertible debt securities, our
existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences
and privileges superior to those of holders of our common stock. Any debt financing that we may secure in the future could involve
restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it
more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. We may
not be able to obtain additional financing on terms favorable to us, if at all. If we are unable to obtain adequate financing on
terms satisfactory to us when we require it, our ability to continue to support our business growth and to respond to business
challenges could be significantly impaired, and our business may be adversely affected.
Our business is subject to the risks of fire, power outages, floods, earthquakes
and other catastrophic events, and to interruption by manmade problems such as terrorism.
A significant natural disaster, such as a fire, flood or an earthquake, or a significant
power outage could have a material adverse impact on our business, results of operations and financial condition. In the event
our customers’ information technology systems or our channel partners’ selling or distribution abilities are hindered
by any of these events, we may miss financial targets, such as revenues and sales targets, for a particular quarter. Further, if
a natural disaster occurs in a region from which we derive a significant portion of our revenue, customers in that region may delay
or forego purchases of our products, which may materially and adversely impact our results of operations for a particular period.
In addition, acts of terrorism could cause disruptions in our business or the business of channel partners, customers or the economy
as a whole. Given our typical concentration of sales at each quarter end, any disruption in the business of our channel partners
or customers that impacts sales at the end of our quarter could have a significant adverse impact on our quarterly results. All
of the aforementioned risks may be augmented if the disaster recovery plans for us and our channel partners prove to be inadequate.
To the extent that any of the above results in delays or cancellations of customer orders, or the delay in the manufacture, deployment
or shipment of our products, our business, financial condition and results of operations would be adversely affected.
Risks Related to our Operations in Israel
Conditions in Israel may limit our ability to develop and sell our products, which
could result in a decrease of our revenues.
Our principal research and development facility, which also houses a portion of our support
and general and administrative teams, is located in Israel. Since the establishment of the State of Israel in 1948, a number of
armed conflicts have taken place between Israel and its neighboring countries, as well as incidents of terror activities and other
hostilities, and a number of state and non-state actors have publicly committed to its destruction. Political, economic and security
conditions in Israel could directly affect our operations. We could be adversely affected by hostilities involving Israel, including
acts of terrorism or any other hostilities involving or threatening Israel, the interruption or curtailment of trade between Israel
and its trading partners, a significant increase in inflation or a significant downturn in the economic or financial condition
of Israel. Any on-going or future armed conflicts, terrorist activities, tension along the Israeli borders or with other countries
in the region, including Iran, or political instability in the region could disrupt international trading activities in Israel
and may materially and negatively affect our business and could harm our results of operations.
Certain countries, as well as certain companies and organizations, continue to participate
in a boycott of Israeli companies, companies with large Israeli operations and others doing business with Israel and Israeli companies.
The boycott, restrictive laws, policies or practices directed towards Israel, Israeli businesses or Israeli citizens could, individually
or in the aggregate, have a material adverse effect on our business in the future.
Some of our officers and employees in Israel are obligated to perform routine military
reserve duty in the Israel Defense Forces, depending on their age and position in the armed forces. Furthermore, they have been
and may in the future be called to active reserve duty at any time under emergency circumstances for extended periods of time.
Our operations could be disrupted by the absence, for a significant period, of one or more of our officers or key employees due
to military service, and any significant disruption in our operations could harm our business.
The tax benefits that are available to our Israeli subsidiary require it to continue
to meet various conditions and may be terminated or reduced in the future, which could increase its taxes.
Our Israeli subsidiary benefits from a status of a “Beneficiary Enterprise”
under the Israeli Law for the Encouragement of Capital Investments, 5719-1959, or the Investment Law. Based on an evaluation of
the relevant factors under the Investment Law, including the level of foreign (i.e., non-Israeli) investment in our company, we
have determined that the effective tax rate to be paid by our Israeli subsidiary as a “Beneficiary Enterprise” has
historically been approximately 10%. If our Israeli subsidiary does not meet the requirements for maintaining this status, for
example, if the Israeli subsidiary materially changes the nature of its business or, if the level of foreign investment in our
company decreases, it may no longer be eligible to enjoy this reduced tax rate. As a result, our Israeli subsidiary would be subject
to Israeli corporate tax at the standard rate, which, as of January 1, 2017, was set at 24%. Even if our Israeli subsidiary continues
to meet the relevant requirements, the tax benefits that the status of “Beneficiary Enterprise” provides may not be
continued in the future at their current levels or at all. If these tax benefits were reduced or eliminated, the amount of taxes
that our Israeli subsidiary would pay would likely increase, as all of our Israeli operations would consequently be subject to
corporate tax at the standard rate, which could adversely affect our results of operations. Additionally, if our Israeli subsidiary
increases its activities outside of Israel, for example, through acquisitions, these activities may not be eligible for inclusion
in Israeli tax benefit programs. The tax benefits derived from the status of “Beneficiary Enterprise” is dependent
upon the ability to generate sufficient taxable income. Accordingly, our Israeli subsidiary may be unable to earn enough taxable
income in order to fully utilize its tax benefits.
Risks Related to the Ownership of our Common Stock
Our stock price has been and will likely continue to be volatile.
The market price for our common stock has been, and is likely to continue to be,
volatile for the foreseeable future. For example, since shares of our common stock were sold in our initial public offering
(“IPO”) in March 2014 at a price of $22.00 per share, our common stock’s price on The Nasdaq Global Select
Market has ranged from $13.25 to $56.80 through August 2, 2017. On August 2, 2017, the closing price of our common
stock was $37.40. The market price of our common stock may fluctuate significantly in response to a number of factors, many
of which we cannot predict or control, including the factors listed below and other factors described in this “Risk
Factors” section:
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actual or anticipated fluctuations in our results or those of our competitors;
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the financial projections we may provide to the public, any changes in these projections or our failure to meet these projections;
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failure of securities analysts to initiate or maintain coverage of our company, changes in financial estimates by any securities
analysts who follow our company, or our failure to meet these estimates or the expectations of investors;
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ratings changes by any securities analysts who follow our company;
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announcements of new products, services or technologies, commercial relationships, acquisitions or other events by us or our
competitors;
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changes in operating performance and stock market valuations of other technology companies generally, or those in our industry
in particular;
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price and volume fluctuations in in certain categories of companies or the overall stock market, including as a result of trends
in the global economy;
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changes in accounting principles;
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sales of large blocks of our common stock, including sales by our executive officers, directors and significant stockholders;
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additions or departures of any of our key personnel;
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lawsuits threatened or filed against us;
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short sales, hedging and other derivative transactions involving our capital stock;
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general economic conditions in the United States and abroad;
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changing legal or regulatory developments in the United States and other countries; and
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other events or factors, including those resulting from war, incidents of terrorism or responses to these events.
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In addition, the stock markets have experienced extreme price and volume fluctuations
that have affected and continue to affect the market prices of equity securities of many technology companies. Stock prices of
many technology companies have fluctuated in a manner unrelated or disproportionate to the operating performance of those companies.
In the past, stockholders have instituted securities class action litigation following periods of market volatility. If we were
to become involved in securities litigation, it could subject us to substantial costs, divert resources and the attention of management
from our business and adversely affect our business, results of operations, financial condition and cash flows.
If securities or industry analysts do not publish research or reports about our
business, or publish negative reports about our business, our stock price and trading volume could decline.
The trading market for our common stock depends in part on the research and reports that
securities or industry analysts publish about us or our business, our market and our competitors. We do not have any control over
these analysts or their expectations regarding our performance on a quarterly or annual basis. If one or more of the analysts who
cover us downgrade our stock or change their opinion of our stock, our stock price would likely decline. If we fail to meet one
or more of these analysts' published expectations regarding our performance on a quarterly basis, our stock price or trading volume
could decline. If one or more of these analysts cease coverage of our company or fail to regularly publish reports on us, we could
lose visibility in the financial markets, which could cause our stock price or trading volume to decline.
Substantial future sales of shares of our common stock could cause the market price
of our common stock to decline.
Sales of a substantial number of shares of our common stock into the public market, or
the perception that these sales might occur, could depress the market price of our common stock and could impair our ability to
raise capital through the sale of additional equity securities. We are unable to predict the effect that such sales may have on
the prevailing market price of our common stock.
As of June 30, 2017, we had options and restricted stock units (“RSUs”) outstanding
that, if fully exercised, would result in the issuance of approximately 4.0 million shares of our common stock. All of the
shares of our common stock issuable upon exercise of options and vesting of RSUs have been registered for public resale under the
Securities Act. Accordingly, these shares will be able to be freely sold in the public market upon issuance as permitted by any
applicable vesting requirements.
The requirements of being a public company may strain our resources, divert management’s
attention and affect our ability to attract and retain executive management and qualified board members.
As a public company, we are subject to the reporting requirements of the Exchange Act,
the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the listing requirements of The
Nasdaq Global Select Market and other applicable securities rules and regulations. Compliance with these rules and regulations
have increased our legal and financial compliance costs, make some activities more difficult, time-consuming or costly and increase
demand on our systems and resources.
The Exchange Act requires, among other things, that we file annual, quarterly and current
reports with respect to our business and results of operations. The Sarbanes-Oxley Act requires, among other things, that we maintain
effective disclosure controls and procedures and internal control over financial reporting. In order to maintain and, if required,
improve our disclosure controls and procedures and internal control over financial reporting to meet this standard, significant
resources and management oversight is required. As a result, management’s attention may be diverted from other business concerns,
which could adversely affect our business and results of operations. We may need to hire more employees in the future or engage
outside consultants, which will increase our costs and expenses. In addition, changing laws, regulations and standards relating
to corporate governance and public disclosure are creating uncertainty for public companies, increasing legal and financial compliance
costs and making some activities more time consuming. These laws, regulations and standards are subject to varying interpretations,
in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance
is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher
costs necessitated by ongoing revisions to disclosure and governance practices.
Being a public company, these new rules and regulations have made it more expensive for
us to obtain director and officer liability insurance, and in the future we may be required to accept reduced coverage or incur
substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified
members of our board of directors, particularly to serve on our audit and compensation committees, and qualified executive officers.
As a result of disclosure of information in our filings with the SEC, our business and
financial condition have become more visible, which we believe may result in threatened or actual litigation, including by competitors
and other third parties. If such claims are successful, our business and results of operations could be adversely affected, and
even if the claims do not result in litigation or are resolved in our favor, these claims, and the time and resources necessary
to resolve them, could divert the resources of our management and adversely affect our business and results of operations.
We are an “emerging growth company” under the JOBS Act and take advantage
of certain exemptions from reporting requirements, which may make our common stock less attractive to investors.
We are an “emerging growth company” as defined in the Jumpstart Our Business
Startups Act of 2012 (the “JOBS Act”), and we have taken advantage of certain exemptions from various reporting requirements
that are applicable to “emerging growth companies,” including, but not limited to, not being required to comply with
the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive
compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory
vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.
We will remain an “emerging growth company” until
December 31, 2017, when we will be deemed to be a “large accelerated filer” as defined in the Exchange Act and, as
a result, cease to be an “emerging growth company.”
Investors may find our common stock less attractive because we currently rely on these
exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for
our common stock and our stock price may be more volatile.
We are obligated to develop and maintain proper and effective internal controls
over financial reporting. These internal controls may not be determined to be effective, which may adversely affect investor confidence
in our company and, as a result, the value of our common stock.
We are required, pursuant to Section 404 of the Sarbanes–Oxley Act, to furnish
a report by management on, among other things, the effectiveness of our internal control over financial reporting on an annual
basis. This assessment includes disclosure of any material weaknesses identified by our management in our internal control over
financial reporting. During the evaluation and testing process, if we identify one or more material weaknesses in our internal
control over financial reporting, we will be unable to assert that our internal controls are effective.
We are required to disclose changes made in our internal control and procedures on a
quarterly basis. Our independent registered public accounting firm will be required to formally attest to the effectiveness of
our internal control over financial reporting pursuant to Section 404 as of December 31, 2017 when we are no longer an “emerging
growth company.” At such time, our independent registered public accounting firm may issue a report that is adverse in the
event it is not satisfied with the level at which our controls are documented, designed or operating. Our remediation efforts may
not enable us to avoid a material weakness in the future.
If we are unable to assert that our internal control over financial reporting is effective,
or if our independent registered public accounting firm is unable to express an opinion on the effectiveness of our internal controls,
we could lose investor confidence in the accuracy and completeness of our financial reports, which would cause the price of our
common stock to decline, and we may be subject to investigation or sanctions by the SEC.
Future sales and issuances of our capital stock or rights to purchase capital stock
could result in additional dilution of the percentage ownership of our stockholders and could cause our stock price to decline.
Future sales and issuances of our capital stock or rights to purchase our capital stock
could result in substantial dilution to our existing stockholders. We may sell common stock, convertible securities and other equity
securities in one or more transactions at prices and in a manner as we may determine from time to time. If we sell any such securities
in subsequent transactions, investors may be materially diluted. New investors in such subsequent transactions could gain rights,
preferences and privileges senior to those of holders of our common stock.
We do not intend to pay dividends on our common stock, so any returns will be limited
to the value of our stock.
We have never declared or paid cash dividends on our common stock. We currently anticipate
that we will retain any future earnings and do not expect to pay any dividends in the foreseeable future. Any determination to
pay dividends in the future will be at the discretion of our board of directors and will be dependent on a number of factors, including
our financial condition, results of operations, capital requirements, general business conditions and other factors that our board
of directors may deem relevant. In addition, the loan agreement for our credit facility contains a prohibition on the payment of
cash dividends. Until such time that we pay a dividend, investors must rely on sales of their common stock after price appreciation,
which may never occur, as the only way to realize any future gains on their investments.
Anti-takeover provisions in our charter documents and under Delaware law could
make an acquisition of us, which may be beneficial to our stockholders, more difficult and may prevent attempts by our stockholders
to replace or remove our current management.
Provisions in our amended and restated certificate of incorporation and amended and restated
bylaws may delay or prevent an acquisition of us or a change in our management. These provisions include:
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authorizing “blank check” preferred stock, which could be issued by the board without stockholder approval and
may contain voting, liquidation, dividend and other rights superior to our common stock, which would increase the number of outstanding
shares and could thwart a takeover attempt;
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a classified board of directors whose members can only be dismissed for cause;
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the prohibition on actions by written consent of our stockholders;
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the limitation on who may call a special meeting of stockholders;
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the establishment of advance notice requirements for nominations for election to our board of directors or for proposing matters
that can be acted upon at stockholder meetings; and
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the requirement of at least 75% of the outstanding capital stock to amend any of the foregoing second through fifth provisions.
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In addition, because we are incorporated in Delaware, we are governed by the provisions
of Section 203 of the Delaware General Corporation Law, which limits the ability of stockholders owning in excess of 15% of
our outstanding voting stock to merge or combine with us. Although we believe these provisions collectively provide for an opportunity
to obtain greater value for stockholders by requiring potential acquirers to negotiate with our board of directors, they would
apply even if an offer rejected by our board were considered beneficial by some stockholders. In addition, these provisions may
frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for
stockholders to replace members of our board of directors, which is responsible for appointing the members of our management.