Stratasys Annual Report 2017

Plain-text annual report

Table of Contents UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, DC 20549FORM 20-F(Mark One)☐☐ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934 OR ☒☒ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2017 OR ☐☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 OR ☐☐SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934Date of event requiring this shell company report ........................................Commission file number: 001-35751STRATASYS LTD.(Exact name of Registrant as specified in its charter)Not Applicable(Translation of Registrant’s name into English)Israel(Jurisdiction of incorporation or Organization)c/o Stratasys, Inc. 1 Holtzman Street,7665 Commerce WayScience ParkEden Prairie,P.O. Box 2496Minnesota 55344Rehovot, Israel76124(Address of Principal Executive Offices)S. Scott Crump, Chairman of Executive CommitteeTel: (952) 937-3000E-mail: scott.crump@stratasys.com7665 Commerce WayEden Prairie, Minnesota 55344(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)Securities registered or to be registered pursuant to Section 12(b) of the Act.Table of ContentsTitle of each class Name of each exchange on which registeredOrdinary Shares, nominal value NIS 0.01 per shareNASDAQ Global Select MarketSecurities registered or to be registered pursuant to Section 12(g) of the Act.None(Title of Class)Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.None(Title of Class)Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annualreport:53,630,699 Ordinary Shares, NIS 0.01 nominal value, at December 31, 2017.Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐ If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of theSecurities Exchange Act of 1934. Yes ☐ No ☒Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes ☒ No ☐Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data Filerequired to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232,405 of this chapter) during the preceding 12 months (or for such shorterperiod that the registrant was required to submit and post such files). Yes ☒ No ☐Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or an emerging growth company. Seedefinition of “accelerated filer,” large accelerated filer” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):Large accelerated filer ☒ Accelerated filer ☐Non-accelerated filer ☐Emerging Growth Company ☐Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:International Financial ReportingUS GAAP ☒Standards as issuedOther ☐by the International Accounting StandardsBoard ☐If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected tofollow. Item 17 ☐ Item 18 ☐If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒ Table of ContentsTABLE OF CONTENTS PageTABLE OF CONTENTSCAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS1USE OF TRADE NAMES2CERTAIN TERMS AND CONVENTIONS2 PART IITEM 1.IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS.3ITEM 2.OFFER STATISTICS AND EXPECTED TIMETABLE.3ITEM 3.KEY INFORMATION.3ITEM 4.INFORMATION ON THE COMPANY.20ITEM 4A.UNRESOLVED STAFF COMMENTS.42ITEM 5.OPERATING AND FINANCIAL REVIEW AND PROSPECTS.42ITEM 6.DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES.63ITEM 7.MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS.79ITEM 8.FINANCIAL INFORMATION.81ITEM 9.THE OFFER AND LISTING.83ITEM 10.ADDITIONAL INFORMATION.83ITEM 11.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.95ITEM 12.DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES.95 PART IIITEM 13.DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES.95ITEM 14.MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS.95ITEM 15.CONTROLS AND PROCEDURES.96ITEM 16A.AUDIT COMMITTEE FINANCIAL EXPERT.96ITEM 16B.CODE OF ETHICS.96ITEM 16C.PRINCIPAL ACCOUNTANT FEES AND SERVICES.97ITEM 16D.EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES.97ITEM 16E.PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS.97ITEM 16F.CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT.97ITEM 16G.CORPORATE GOVERNANCE.97ITEM 16H.MINE SAFETY DISCLOSURE.98 PART IIIITEM 17.FINANCIAL STATEMENTS.98ITEM 18.FINANCIAL STATEMENTS.98ITEM 19.EXHIBITS.99SIGNATURES.100Table of ContentsCAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTSCertain information included or incorporated by reference in this annual report may be deemed to be “forward-looking statements” within the meaning ofthe Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934.Forward-looking statements are often characterized by the use of forward-looking terminology such as “may,” “will,” “expect,” “anticipate,” “estimate,”“continue,” “believe,” “should,” “intend,” “project” or other similar words, but are not the only way these statements are identified.These forward-looking statements may include, but are not limited to, statements relating to our objectives, plans and strategies, statements that containprojections of results of operations or of financial condition and all statements (other than statements of historical facts) that address activities, events ordevelopments that we intend, expect, project, believe or anticipate will or may occur in the future.Forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties. We have based these forward-lookingstatements on assumptions and assessments made by our management in light of their experience and their perception of historical trends, current conditions,expected future developments and other factors they believe to be appropriate.Important factors that could cause actual results, developments and business decisions to differ materially from those anticipated in these forward-lookingstatements include, among other things:●the extent of our success at introducing new or improved products and solutions that gain market share; ●the extent of growth of the 3D printing market generally; ●impairments of goodwill or other intangible assets in respect of companies that we acquire; ●changes in our overall strategy, including as related to any reorganization activities and our capital expenditures; ●the impact of shifts in prices or margins of the products that we sell or services we provide; ●the extent of our success at efficiently and successfully integrating the operations of various companies that we have acquired or may acquire; ●the impact of competition and new technologies; ●global market, political and economic conditions, and in the countries in which we operate in particular; ●government regulations and approvals; ●litigation and regulatory proceedings; ●infringement of our intellectual property rights by others (including for replication and sale of consumables for use in our systems), or infringement ofothers’ intellectual property rights by us; ●the extent of our success at maintaining our liquidity and financing our operations and capital needs; ●impact of tax regulations on our results of operations and financial condition; and ●any additional factors referred to in Item 3.D “Key Information - Risk Factors”, Item 4 “Information on the Company”, and Item 5 “Operating andFinancial Review and Prospects”, as well as in this annual report generally.Readers are urged to carefully review and consider the various disclosures made throughout this annual report, which are designed to advise interestedparties of the risks and factors that may affect our business, financial condition, results of operations and prospects.Any forward-looking statements in this annual report are made as of the date hereof, and we undertake no obligation to publicly update or revise anyforward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.1Table of ContentsUSE OF TRADE NAMESUnless the context otherwise indicates or requires, “Stratasys,” “Objet,” “PolyJet,” “Connex,” “J750,” “FDM,” “Fortus,” “Fortus 900mc,” “Fortus 450mc,”“Fortus 380mc,” “F123 Series,” “F370,” “Stratasys Direct Manufacturing,” “SDM,” “Solidscape,” “SolidJet,” “SCP,” “GrabCAD,” “GrabCAD Print,”“GrabCAD Community,” “Robotic Composite,” “Infinite-Build,” “MakerBot,” “Thingiverse,” “Replicator,” and all product names and trade names used byus in this annual report are our trademarks and service marks, which may be registered in certain jurisdictions. Although we have omitted the “®” and “TM”trademark designations for such marks in this annual report, all rights to such trademarks and service marks are nevertheless reserved. Furthermore, theStratasys Signet design logo is our property. This annual report contains additional trade names, trademarks and service marks of other companies. We do notintend our use or display of other companies’ tradenames, trademarks or service marks to imply a relationship with, or endorsement or sponsorship of us by,these other companies.CERTAIN TERMS AND CONVENTIONSIn this annual report, unless the context otherwise requires:●references to “Stratasys,” “our company,” “the Company,” “the combined company,” “the registrant,” “we,” “us,” and “our” refer to Stratasys Ltd.(formerly known as Objet Ltd.), and its consolidated subsidiaries; ●references to “Objet” generally refer to Objet Ltd. and its consolidated subsidiaries prior to the effective time of the Stratasys- Objet merger onDecember 1, 2012. We may also use “Objet” to refer to the line of products previously sold by Objet Ltd. and the related current, ongoing operationsthat have continued following the Stratasys-Objet merger. ●references to “Stratasys, Inc.” generally refer to Stratasys, Inc., a Delaware corporation, and its consolidated subsidiaries prior to the effective time ofthe Stratasys-Objet merger, but sometimes (as the context requires) refer to the current, ongoing operations of our Stratasys, Inc. subsidiary; ●references to the “Stratasys-Objet merger”, or the “merger”, refer to the merger consummated on December 1, 2012 whereby Stratasys, Inc., a Delawarecorporation, merged with and into an indirect, wholly-owned Delaware subsidiary of Objet Ltd. (now known as Stratasys Ltd.), an Israeli company,with Stratasys, Inc. surviving the merger and becoming an indirect, wholly-owned subsidiary of Objet (which changed its name to Stratasys Ltd. at thattime); ●references to the “Stratasys-Objet merger agreement” refer to the Agreement and Plan of Merger, dated as of April 13, 2012, as amended, by and amongStratasys, Inc.; Objet Ltd.; Seurat Holdings Inc., a Delaware corporation and an indirect, wholly- owned subsidiary of Objet (“Holdco”); and OaktreeMerger Inc., a Delaware corporation and a direct, wholly-owned subsidiary of Holdco, pursuant to which the merger was consummated; ●references to “ordinary shares”, “our shares” and similar expressions refer to our Ordinary Shares, nominal value NIS 0.01 per share; ●references to “dollars”, “U.S. dollars”, “U.S. $” and “$” are to United States Dollars; ●references to “shekels” and “NIS” are to New Israeli Shekels, the Israeli currency; ●references to the “articles” or “amended articles” are to our Amended and Restated Articles of Association, which became effective upon the closing ofthe merger, as subsequently amended; ●references to the “Companies Law” are to Israel’s Companies Law, 5759-1999, as amended; ●references to the “Securities Act” are to the Securities Act of 1933, as amended; ●references to the “Exchange Act” are to the Securities Exchange Act of 1934, as amended; ●references to “NASDAQ” are to the Nasdaq Stock Market; and ●references to the “SEC” are to the United States Securities and Exchange Commission.2Table of ContentsPART IITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS.Not applicable.ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE.Not applicable.ITEM 3. KEY INFORMATION.A. Selected Financial Data.The below historical selected consolidated statement of operations data for the years 2017, 2016, and 2015, and the selected consolidated balance sheetdata at December 31, 2017 and 2016 have been derived from our audited consolidated financial statements set forth elsewhere in this annual report. Thebelow selected consolidated statements of operations data for 2014 and 2013, and the selected consolidated balance sheet data as of December 31, 2015,2014 and 2013, have been derived from our previously reported audited consolidated financial statements, which are not included in this annual report. Theselected financial data should be read in conjunction with our consolidated financial statements and accompanying notes and “Operating and FinancialReview and Prospects” appearing in Item 5 of this annual report, and are qualified entirely by reference to such consolidated financial statements. Ourhistorical results set forth herein are not necessarily indicative of our future results.Year Ended December 31, 2017 2016 2015 2014 2013(U.S. $ in thousands, except per share data)Statement of Operations Data:Net sales$ 668,362$ 672,458$ 695,995$ 750,129$ 484,403Gross profit322,777317,306102,172362,394226,173Research and development expense, net96,23797,778122,36082,27052,310Selling, general and administrative expense255,685307,114434,619351,993202,040Goodwill impairment--942,408102,470-Change in fair value of obligations in connection with acquisitions1,378(872)(23,671)(26,150)754Operating loss(30,523)(86,713)(1,373,544)(148,189)(28,931)Net loss(40,459)(77,621)(1,373,511)(119,470)(26,907)Net loss attributable to Stratasys Ltd.(39,981)(77,219)(1,372,835)(119,420)(26,954)Net loss per basic share attributable to Stratasys Ltd.(0.75)(1.48)(26.64)(2.39)(0.64)Weighted average basic shares outstanding52,95952,33051,59250,01942,079Net loss per diluted share attributable to Stratasys Ltd.(0.75)(1.48)(26.64)(2.39)(0.68)Weighted average diluted shares outstanding52,95952,58251,59250,01942,099Balance Sheet Data:Working capital*451,614388,428374,346546,062714,404Total assets*1,379,7501,366,0491,414,3562,899,1072,782,221Equity1,132,5071,135,9981,188,8012,531,2392,499,787*We adopted a new accounting guidance which requires classification of deferred tax assets and liabilities as noncurrent on the balance sheet on aprospective basis. All deferred taxes are classified as non-current on our balance sheets commencing December 31, 2015. Prior periods were notretrospectively adjusted.B. Capitalization and Indebtedness.Not applicable.C. Reasons for the Offer and Use of Proceeds.Not applicable.3Table of ContentsD. Risk Factors.You should carefully consider the risks described below, together with all of the other information in this annual report on Form 20-F. The risksdescribed below are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterialmay also materially and adversely affect our business operations. If any of these risks actually materializes, our business, financial condition and results ofoperations could suffer and the price of our shares could decline.Risks related to our business and financial conditionWe may not be able to introduce new 3D printers, high-performance systems and consumables acceptable to customers or to improve the technology,software or consumables used in our current systems in response to changing technology and end-user needs.We derive most of our revenues from the sale of additive manufacturing systems and related consumables. The markets in which we operate are subject torapid and substantial innovation and technological change, mainly driven by technological advances and end-user requirements and preferences, as well asthe emergence of new standards and practices. Our ability to compete in these markets depends, in large part, on our success in enhancing our existingproducts and developing new additive manufacturing systems and new consumables that will address the increasingly sophisticated and varied needs ofprospective end-users, and respond to technological advances and industry standards and practices on a cost-effective and timely basis or otherwise gainmarket acceptance.Even if we successfully enhance our existing systems or create new systems, it is likely that new systems and technologies that we develop willeventually supplant our existing systems or that our competitors will create systems that will replace our systems. As a result, any of our products may berendered obsolete or uneconomical by our or others’ technological advances.Our operating results and financial condition may fluctuate.The operating results and financial condition of our company may fluctuate from quarter to quarter and year to year and are likely to continue to vary dueto a number of factors, many of which will not be within our control. If our operating results do not meet the guidance that we provide to the market place orthe expectations of securities analysts or investors, the market price of our ordinary shares will likely decline. Fluctuations in our operating results andfinancial condition may be due to a number of factors, including those listed below and those identified throughout this “Risk Factors” section:●the degree of market acceptance of our products and services; ●the mix of products and services that we sell during any period; ●long sales cycles; ●changes in our overall strategy, such as related to our cost reduction and reorganization activities and our capital expenditures; ●unforeseen liabilities or difficulties in integrating our acquisitions; ●changes in the amount that we spend to develop, acquire or license new products, consumables, technologies or businesses; ●changes in the amounts that we spend to promote our products and services; ●changes in the cost of satisfying our warranty obligations and servicing our installed base of systems; ●delays between our expenditures to develop and market new or enhanced systems and consumables and the generation of sales from those products; ●development of new competitive products and services by others; ●difficulty in predicting sales patterns and reorder rates that may result from multi-tier distribution strategy associated with new product categories suchas entry level desktop 3D printers; ●impairment charges that we may be required to record in respect of our goodwill and/or other long-lived assets; ●Potential cyber attacks against, or other breaches to, our information technologies systems; ●litigation or threats of litigation, including intellectual property claims by third parties; ●changes in accounting rules and tax laws; ●tax benefit that we may record due to partial or full release of valuation allowances against our deferred tax assets; ●the geographic distribution of our sales; ●our responses to price competition;4Table of Contents●general economic and industry conditions that affect end-user demand and end-user levels of product design and manufacturing; ●changes in dollar-shekel and dollar-Euro exchange rates that affect the value of our net assets, revenues and expenditures from and/or relating to ouractivities carried out in those currencies; and ●the level of research and development activities by our company.Due to all of the foregoing factors, and the other risks discussed in this annual report, you should not rely on quarter-over-quarter and year-over-yearcomparisons of our operating results as an indicator of our future performance.If demand for our products and services does not grow as expected, our revenues may stagnate or decline and our profitability may be adverselyaffected.The commercial marketplace for additive manufacturing, which was once dominated by conventional methods that do not involve 3D printingtechnology, has been undergoing a shift towards 3D printing. This is true with respect to prototype development, and to a growing extent, with respect todirect digital manufacturing, or DDM, as an alternative to traditional manufacturing. If the commercial marketplace does not continue to transform towardsthe broader acceptance of 3D printing and DDM as alternatives for prototype development and traditional manufacturing, or if it adopts 3D printing based ontechnologies other than the technologies that we use, we may not be able to increase or sustain current or future levels of sales of our products and relatedmaterials and services, and our results of operations may be adversely affected as a result.If additional goodwill or other intangible assets that we have recorded become impaired, we could have to take further significant charges againstearnings.As of December 31, 2017, the carrying value of all of our goodwill and other intangible assets was approximately $529.2 million compared to a carryingvalue of $563.1 million as of December 31, 2016 and $636.3 million as of December 31, 2015. As of December 31, 2014, however, that carrying value was$1.9 billion. The significant decrease in the carrying value of our goodwill and other intangible assets over the course of 2015 was primarily due toimpairment charges of $1.2 billion.Under accounting principles generally accepted in the United States of America, or GAAP, we are required to review goodwill for impairment annuallyand whenever events or changes in circumstances indicate that the carrying amount of goodwill may not be recoverable. During 2015, we determined thatcertain indicators of potential impairment existed that required interim goodwill impairment analysis. These indicators included a further significant declinein our market capitalization for a sustained period and weaker than expected operating results of our reporting units for 2015. During 2015, we also tested therecoverability of our purchased intangible assets due to certain indicators of impairment including weaker than expected operating results of our reportingunits for 2015, reorganization initiatives for our operations, lower forecasted profitability due to technological and other trends as well as the increaseduncertainty in the 3D printing environment.These tests and analyses, performed in 2015, led to non-cash goodwill impairment charges of $942.4 million and non-cash impairment charges of $278.5million to our intangible assets. For further information, please see notes 7 and 8 to our consolidated financial statements included elsewhere in this annualreport.We currently have approximately $387 million of goodwill allocated to our Stratasys-Objet reporting unit, which could be subject to impairment in thefuture, which impairment could result in further significant charges against our earnings and could have a material adverse effect on our results of operations.For further information, please see Note 7 to our consolidated financial statements included elsewhere in this annual report.Declines in the prices of our products and services, or in our volume of sales, together with our relatively inflexible cost structure, may adversely affectour financial results.Our business is subject to price competition. Such price competition may adversely affect our ability to maintain the same degree of profitability,especially during periods of decreased demand. Decreased demand also adversely impacts the volume of our systems sales. If our business is not able to offsetprice reductions resulting from these pressures, or decreased volume of sales due to contractions in the market, by improved operating efficiencies andreduced expenditures, then our operating results will be adversely affected.Certain of our operating costs are fixed and cannot readily be reduced, which diminishes the positive impact of our reorganization programs on ouroperating results. To the extent the market for our products slows, or the 3D printing market contracts, we may be faced with excess manufacturing capacityand excess related costs that cannot readily be reduced, which will adversely impact our results of operations.5Table of ContentsTo the extent that other companies are successful in developing or marketing consumables for use in our systems, our revenues and profits would likelybe adversely affected.We sell a substantial portion of the consumables used in our systems. We attempt to protect against replication of our proprietary consumables throughpatents and trade secrets and provide that warranties on those systems may be invalid if customers use non-genuine consumables that cause damage to theprinter. Other companies have developed and sold, and may continue to develop and sell, consumables that are used with our systems, which may reduce ourconsumables sales and impair our overall revenues and profitability.If our product mix shifts too far into lower margin products or our revenues mix shifts significantly towards our AM services business, our profitabilitycould be reduced.Sales of certain of our existing products have higher margins than others. For instance, our high-end systems and related consumables yield a greater grossmargin than our entry-level systems. As some of the sales of our entry-level systems may displace sales of our other systems. If sales of our entry-level desktop3D printers have the effect of reducing sales of our higher margin products, or if for any other reason, our product mix shifts too far into lower marginproducts, and we are not able to sufficiently reduce the engineering, production and other costs associated with those products or substantially increase thesales of those products, our profitability could be reduced. A similar negative impact on our gross margins could result due to a significant shift towardsrevenues generated by our AM parts service business, Stratasys Direct Manufacturing, and which are characterized by lower margins relative to our products.Until fairly recently, we experienced rapid and significant growth in our operations and intend to continue to grow over the long term, and if we cannotadequately adapt our infrastructure and properly integrate the internal or external sources of our growth in order to generate the intended benefits from it,our results of operations will suffer.Until 2015, we had experienced rapid and significant growth in our operations, and we intend to continue to grow over the long term. The continuedadaptation of our infrastructure to our growth will require, among other things, development of our financial and management controls and managementinformation systems, management of our sales channel, increased capital expenditures, the ability to attract and retain qualified management personnel andthe training of new personnel. We cannot be sure that our infrastructure, systems, procedures, business processes and managerial controls will be adequate tosupport the expected long-term growth in our operations. Any delays in, or problems associated with, implementing, or transitioning to, new or enhancedsystems, procedures, or controls to accommodate and support the requirements of our business and operations and to effectively and efficiently integrateacquired operations may adversely affect our ability to meet customer requirements, manage our product inventory, and record and report financial andmanagement information on a timely and accurate basis.Additional unforeseen difficulties and expenditures that may result from the integration of a new business or technology include:●difficulty transitioning customers and other business relationships to our company; ●problems unifying management following a transaction; ●the loss of key employees from our existing or acquired businesses; ●diversion of management’s attention to the assimilation of the technology and personnel of acquired businesses or new product or service lines; and ●difficulties in coordinating geographically disparate organizations and corporate cultures and integrating management personnel with differentbusiness backgrounds.These potential negative effects could prevent us from realizing the benefits of an acquisition transaction or other growth opportunity. In that event, ourcompetitive position, revenues, revenue growth, financial condition, results of operations and liquidity could be adversely affected, which could, in turn,adversely affect our share price and shareholder value.The markets in which we participate (especially the lower-end market) are competitive. Our failure to compete successfully could cause our revenuesand the demand for our products to decline.We compete for end-users with a wide variety of producers of systems that create models, prototypes, other 3D objects and end-use parts as well asproducers of materials and services for these systems, including both additive and subtractive manufacturing methodologies, such as metal extrusion,computer-controlled machining and manual modeling techniques. Our principal competition currently consists of other manufacturers of systems forprototype development and customized manufacturing processes, including 3D Systems Corporation, EOS GmbH, HP, Carbon and EnvisionTEC GmbH,Markforged and, with respect to our entry-level desktop 3D printers, a multitude of companies such as Ultimaker, Formlabs, XYZprinting, and others.Competition with our entry-level desktop 3D printers and our other lower-end products has intensified and is an important factor in the decrease in sales. Forour broadened AM parts and services business, our chief competitors consist of 3D Systems Corporation, Materialise, Protolabs and many other smallerservice providers. We may face additional competition in the future from other new entrants into the marketplace, including companies that may havesignificantly greater resources than we have that may become new market entrants or may enter through acquisition or strategic or marketing partnershipswith current competitors.6Table of ContentsSome of our current and potential competitors have longer operating histories and more extensive name recognition than we have and may also havegreater financial, marketing, manufacturing, distribution and other resources than we have. Current and future competitors may be able to respond morequickly to new or emerging technologies and changes in end-user demands and to devote greater resources to the development, promotion and sale of theirproducts than we can. Our current and potential competitors may develop and market new technologies that render our existing or future products obsolete,unmarketable or less competitive (whether from a price perspective or otherwise). We cannot assure you that we will be able to maintain or enhance ourcurrent competitive position or continue to compete successfully against current and future sources of competition.As part of our growth strategy, we have sought, and will continue to seek, to acquire or to make investments in other businesses, patents, technologies,products or services. Our failure to do so successfully (including, if applicable, to finance such acquisitions or investments on favorable terms and to avoidadverse financial consequences) may adversely affect our financial results.As part of our growth strategy, we expect to continue to regularly evaluate acquisitions or investments to expand our suite of products and services. Evenif we are able to identify a suitable acquisition or investment, we may not be able to consummate any such transaction if we cannot reach an agreement onfavorable terms or if we lack sufficient resources to finance the transaction on our own and cannot obtain financing at a reasonable cost or if regulatoryauthorities prevent such transaction from being consummated. If we proceed with a particular acquisition, we may have to use cash, issue new equitysecurities with dilutive effects on existing shareholders, incur indebtedness, assume contingent liabilities or amortize assets or expenses in a manner thatmight have a material adverse effect on our financial condition, results of operations or liquidity. Acquisitions will also require us to record certainacquisition-related costs and other items as current period expenses, which would have the effect of reducing our reported earnings in the period in which anacquisition is consummated. In addition, we could also face unknown liabilities or write-offs due to our acquisitions, which could result in a significantcharge to our earnings in the period in which they occur. We will also be required to record goodwill or other long-lived asset impairment charges (if any) inthe periods in which they occur, which could result in a significant charge to our earnings in any such period. Further to that risk, during the years endedDecember 31, 2017, 2016 and 2015, we recorded intangible assets impairment charges of $2.2 million, $17.9 million and $278.5 million, respectively. Inaddition, during the year ended December 31, 2015, we recorded goodwill impairment charges of $942.4 million, related to our goodwill assigned tocompanies that we have acquired. For further information on our quantitative assessment for goodwill impairment we performed in 2017, please see Note 7 toour consolidated financial statements included elsewhere in this annual report.If we are not successful in completing the integration of our constituent companies from our recent acquisitions, the benefits of these later transactionsmay not be fully realized and the market price of our ordinary shares may be negatively affected.Since the consummation of the Objet-Stratasys merger in December 2012, we have acquired: Baccio Corporation, or MakerBot, which is the direct parentcompany of MakerBot Industries, LLC, in August 2013; Solid Concepts Inc., or Solid Concepts, in July 2014; Harvest Technologies Inc., or HarvestTechnologies, in August 2014; GrabCAD in September 2014; and other companies. Further integration activities may encounter ongoing difficulties ofcoordinating our operations, which may include:●coordinating geographically separate organizations; ●coordinating sales, distribution and marketing functions, including integration and management of our constituent companies’ sales channels; ●consolidating the financial reporting systems and ERP systems of our constituent companies; ●management of a substantially larger organization, with an increased number of employees over large geographic distances; and ●addressing inconsistencies among the companies in standards, controls, procedures and policies, any of which could adversely affect our ability tomaintain relationships with suppliers, distributors, customers and employees.As a result of these and other factors, we may not successfully complete the integration of our acquired entities. Furthermore, we may not realize all of thebenefits and synergies of the acquired entities in the timeframe anticipated. It is also possible that such continuing integration and coordination arrangementscould lead to the loss of members of our senior executive team, diversion of the attention of management, or the disruption or interruption of, or the loss ofmomentum in, our ongoing business, which could adversely affect our business and financial results. The occurrence of such negative results could adverselyaffect the market price of our ordinary shares.7Table of ContentsOur operations, particularly in integrating the operations of our constituent companies, could suffer if we are unable to attract and retain keymanagement or other key employees.Our success depends upon the continued service and performance of our senior management and other key personnel. Our executive team is critical to themanagement of our business and operations, as well as to the development of our strategy. The loss of the services of any members of our senior executiveteam could delay or prevent the successful implementation of our strategy, or our commercialization of new applications for our systems or other products, orcould otherwise adversely affect our ability to manage our company effectively and carry out our business plan. Members of our senior management teammay resign at any time. High demand exists for senior management and other key personnel (including scientific, technical and sales personnel) in theadditive manufacturing, or AM, industry, and there can be no assurance that we will be able to retain our current key personnel. We experience intensecompetition for qualified personnel. While we intend to continue to provide competitive compensation packages to attract and retain key personnel, some ofour competitors for these employees have greater resources and more experience, making it difficult for us to compete successfully for key personnel. If wecannot attract and retain sufficiently qualified technical employees for our research and development and manufacturing operations, we may be unable toachieve the synergies expected from mergers and acquisitions that we may effect from time to time, or to develop and commercialize new products or newapplications for existing products. Furthermore, possible shortages of key personnel, including engineers, in the regions surrounding our Minnesota, NewYork, California, Texas, Boston or Israeli facilities could require us to pay more to hire and retain key personnel, thereby increasing our costs.Defects in new products or in enhancements to our existing products could give rise to product returns or product liability, warranty or other claimsthat could result in material expenses, diversion of management time and attention, and damage to our reputation.Our products are complex and may contain defects or experience failures or unsatisfactory performance due to any number of issues in design, fabrication,packaging, materials, and/or use within a system. These defects or errors could result in significant warranty, support and repair or replacement costs, cause usto lose market share and divert the attention of our engineering personnel from our product development efforts to find and correct the issue.This risk of product liability claims may also be greater due to the use of certain hazardous chemicals used in the manufacture of certain of our products.Those hazardous chemicals fall within three different categories (with several of the chemicals falling within multiple categories): irritants, harmful chemicalsand chemicals dangerous for the environment. In addition, we may be subject to claims that our 3D printers have been, or may be, used to create parts that arenot in compliance with legal requirements or that intellectual property posted by third parties on our Thingiverse and GrabCAD websites infringes theintellectual property rights of others.Any claim brought against us, regardless of its merit, could result in material expense, diversion of management time and attention, and damage to ourreputation, and could cause us to fail to retain existing end-users or to attract new end-users. Although we maintain product liability insurance, suchinsurance is subject to significant deductibles and there is no guarantee that such insurance will be available or adequate to protect against all such claims, orwe may elect to self-insure with respect to certain matters. Costs or payments made in connection with warranty and product liability claims and productrecalls or other claims could materially affect our financial condition and results of operations.Our AM services business, offering parts used as prototypes, benchmarks and end-use parts in general, and in the case of end-use parts, our sales tocustomers in the aerospace, medical and automotive industries, in particular, makes us more susceptible to product and other liability claims, whichcharacterize operations in those industries. Sales of our 3D printing systems to customers in the aerospace industry similarly carry with them potentialliability claims if the parts produced by those systems do not function properly. Any such claims that are not adequately covered by insurance or for whichinsurance is not available may adversely affect our results of operations and financial condition.Our digital manufacturing business, Stratasys Direct Manufacturing, produces AM parts, which are used by our customers as prototypes, benchmarks andend-use parts. In particular, we provide these additive manufacturing parts and related services to customers in the aerospace, medical and automotiveindustries. The sale of end-use parts and the provision of related services in general, and to customers in the foregoing industries in particular, exposes us topossible claims for property damage and personal injury or death, which may result from the use of these end-use parts. We may be potentially liable, insignificant amounts, if an aircraft, automotive or medical part, component, or accessory or any other aviation, automotive or medical product that we havesold, produced or repaired fails, or if an aircraft or automobile for which our subsidiaries have provided services or in which their parts are installed crashes,and the cause can be linked to those parts or cannot be determined. A similar risk arises in connection with sales of our 3D printing systems to customers inthe aerospace industry to the extent that the parts produced by those printers do not function properly and are responsible for damages. Our SDM service andour company in general carry liability insurance in amounts that we believe are adequate for their risk exposure and commensurate with industry norms.While we intend to monitor our insurance coverage as our additive manufacturing services business and our overall business continue to grow, claims mayarise in the future, and that insurance coverage may not be adequate or available to protect our consolidated company in all circumstances. Additionally, wemight not be able to maintain adequate insurance coverage for our AM services business and our overall business in the future at an acceptable cost. Anyliability claim against our AM services business or our overall business that is not covered by adequate insurance could adversely affect our consolidatedresults of operations and financial condition.8Table of ContentsIf our relationships with suppliers for our products and services, especially with single source suppliers of components of our products, were toterminate or our manufacturing arrangements were to be disrupted, our business could be interrupted.We purchase components and sub-assemblies for our systems, raw materials that are used in our consumables, and AM systems, component parts and rawmaterials for our Stratasys Direct Manufacturing services business, from third-party suppliers, some of whom may compete with us. While there are severalpotential suppliers of most of these component parts, sub-assemblies and raw materials that we use, we currently choose to use only one or a limited numberof suppliers for several of these components and materials. Furthermore, the suppliers of AM systems and materials used in our SDM parts service may refuseto sell us additional AM systems or component parts and materials for AM systems that our SDM service uses. Our reliance on a single or limited number ofvendors involves a number of risks, including:●potential shortages of some key components; ●product performance shortfalls, if traceable to particular product components, since the supplier of the faulty component cannot readily be replaced; ●discontinuation of a product or certain materials on which we rely; ●potential insolvency of these vendors; and ●reduced control over delivery schedules, manufacturing capabilities, quality and costs.In addition, we require any new supplier to become “qualified” pursuant to our internal procedures. The qualification process involves evaluations ofvarying durations, which may cause production delays if we were required to qualify a new supplier unexpectedly. We generally assemble our systems andparts based on our internal forecasts and the availability of raw materials, assemblies, components and finished goods that are supplied to us by third parties,which are subject to various lead times. If certain suppliers were to decide to discontinue production of an assembly, component or raw material that we use,the unanticipated change in the availability of supplies, or unanticipated supply limitations, could cause delays in, or loss of, sales, increased production orrelated costs and consequently reduced margins, and damage to our reputation. If we were unable to find a suitable supplier for a particular component,material or compound, we could be required to modify our existing products or the end-parts that we offer to accommodate substitute components, material orcompounds.In particular, we rely on a sole supplier, Ricoh Printing Systems America, Inc., or Ricoh, for the printer heads for our PolyJet 3D printers. Under the termsof our agreement with Ricoh, we purchase printer heads and associated electronic components, and receive a non-transferable, non-exclusive right toassemble, use and sell these purchased products under Ricoh’s patent rights and trade secrets. Due to the risk of a discontinuation of the supply of Ricohprinter heads and other key components of our products, we maintain excess inventory of those printer heads and other components. However, if our forecastsexceed actual orders, we may hold large inventories of slow-moving or unusable parts or raw materials, which could result in inventory write offs or writedowns and have an adverse effect on our cash flow, profitability and results of operations. See “Item 4. Information on the Company—Business Overview—Manufacturing and Suppliers—Inventory and Suppliers—Ricoh Agreement” for further discussion of this agreement.Discontinuation of operations at our manufacturing sites could prevent us from timely filling customer orders and could lead to unforeseen costs for us.We assemble and test the systems that we sell, and, in many cases, produce consumables for our systems, at single facilities in various locations that arespecifically dedicated to separate categories of systems and consumables. We similarly rely on a single facility for assembly of the component parts andmaterials for AM systems that our SDM service uses. Because of our reliance on all of these production facilities, a disruption at any of those facilities couldmaterially damage our ability to supply 3D printers, other systems or consumable materials to the marketplace in a timely manner. Depending on the cause ofthe disruption, we could also incur significant costs to remedy the disruption and resume product shipments. Such disruptions may be caused by, amongother factors, earthquakes, fire, flood and other natural disasters. Accordingly, any such disruption could result in a material adverse effect on our revenue,results of operations and earnings, and could also potentially damage our reputation.A loss of, or reduction in revenues from, a significant number of our resellers and our independent sales agents would impair our ability to sell ourproducts and services and could reduce our revenues and adversely impact our operating results.We rely heavily on our network of resellers and independent sales agents to sell and (in the case of resellers) to service our products for end-users in theirrespective geographic regions. These resellers and sales agents may not be as effective in selling our products or servicing our end-users as we are. Further, ifour relationships with a significant number of these resellers and sales agents were to be terminated or if a significant number of these resellers and salesagents would otherwise fail or refuse to sell our products, we may not be able to find replacements that are as qualified or as successful in a timely manner, ifat all. If these resellers and independent sales agents do not perform as anticipated or if we are unable to find qualified and successful replacements, our saleswill suffer, which would have an adverse effect on our revenues and operating results. Additionally, a default by one or more resellers that have a significantreceivables balance could have an adverse financial impact on our financial results.9Table of ContentsOur business model is predicated in part on building an end-user base that will generate a recurring stream of revenues through the sale of ourconsumables. If that recurring stream of revenues does not develop as expected, or if our business model changes as the industry evolves, our operatingresults may be adversely affected.Our business model is dependent in part on our ability to maintain and increase sales of our proprietary consumables as they generate recurring revenues.Existing and future end-users of our systems may not purchase our consumables at the same rate at which end-users currently purchase those consumables. Inaddition, our entry-level systems generally use a lower volume of consumables relative to our higher end systems. If our current and future end-users purchasea lower volume of our consumables, or if our entry level systems represent an increasing percentage of our future installed base mix uses less consumablesthan our current installed base, our recurring revenue stream relative to our total revenues would be reduced, and our operating results would be adverselyaffected.Global economic, political and social conditions may adversely impact our sales.Uncertainty with respect to the global economy, difficulties in the financial services sector and credit markets, geopolitical uncertainties and othermacroeconomic factors all affect spending behavior of potential end-users of our products and services. The uncertain prospects for economic growth in someof the regions in which we sell our products may cause end-users to delay or reduce technology purchases. We also face risks that may arise from financialdifficulties experienced by our end-users, suppliers and distributors, which may be exacerbated by continued uncertainty in the global economy, including:●reduced end-user demand for products and reduced manufacturing activity levels; ●distributors and end-users may be unable to obtain credit financing to finance purchases of our products; ●suppliers may be unable to obtain credit financing to finance purchases of sub-assemblies used to build components of products or purchases of rawmaterials to produce consumables; ●end-users or distributors may face financial difficulties or may become insolvent, which could lead to our inability to obtain payment for our products;and ●key suppliers of raw materials, finished products or components used in our products and consumables may face financial difficulties or may becomeinsolvent, which could lead to disruption in the supply of systems, consumables or spare parts to our end-users.Our existing and planned international operations currently expose us and will continue to expose us to additional market and operational risks, andfailure to manage these risks may adversely affect our business and operating results.We expect to derive a substantial percentage of our sales from international markets. We derived 40% of our sales in 2017 from countries outside of NorthAmerica. Accordingly, we face significant operational risks from doing business internationally, including:●fluctuations in foreign currency exchange rates; ●potentially longer sales and payment cycles; ●potentially greater difficulties in collecting accounts receivable; ●potentially adverse tax consequences; ●reduced protection of intellectual property rights in certain countries, particularly in Asia and South America; ●difficulties in staffing and managing foreign operations; ●laws and business practices favoring local competition; ●costs and difficulties of customizing products for foreign countries; ●compliance with a wide variety of complex foreign laws, treaties and regulations; ●tariffs, trade barriers and other regulatory or contractual limitations on our ability to sell or develop our products in certain foreign markets; and ●being subject to the laws, regulations and the court systems of many jurisdictions.Our failure to manage the market and operational risks associated with our international operations effectively could limit the future growth of ourbusiness and adversely affect our operating results.10Table of ContentsWe are subject to environmental laws due to the import and export of our products, as well as environmental, health and safety laws and regulationsrelated to our operations and the use of our systems, which could subject us to compliance costs and/or potential liability in the event of non-compliance.The export of our products internationally from our production facilities subjects us to environmental laws and regulations concerning the import andexport of chemicals and hazardous substances such as the United States Toxic Substances Control Act, or TSCA, and the Registration, Evaluation,Authorization and Restriction of Chemical Substances, or REACH. These laws and regulations require the testing and registration of some chemicals that weship along with, or that form a part of, our systems and other products. If we fail to comply with these or similar laws and regulations, we may be required tomake significant expenditures to reformulate the chemicals that we use in our products and materials or incur costs to register such chemicals to gain and/orregain compliance. Additionally, we could be subject to significant fines or other civil and criminal penalties should we not achieve such compliance.We are furthermore subject to extensive environmental, health and safety laws, regulations and permitting requirements in multiple jurisdictions due toour use of chemicals and production of waste materials as part of our operations and in connection with the operation of our systems by our customers. Theselaws, regulations and requirements (which include the Directive on Waste Electrical and Electronic Equipment of the European Union (EU) and the EUDirective on Restriction of Use of Certain Hazardous Substances) govern, among other things, the generation, use, storage, registration, handling and disposalof chemicals and waste materials, the presence of specified substances in electrical products, the emission and discharge of hazardous materials into theground, air or water, the cleanup of contaminated sites, including any contamination that results from spills due to our failure to properly dispose ofchemicals and other waste materials and the health and safety of our employees. Under these laws, regulations and requirements, we could also be subject toliability for improper disposal of chemicals and waste materials, including those resulting from the use of our systems and accompanying materials by end-users. These or future laws and regulations could potentially require the expenditure of significant amounts for compliance and/or remediation. If ouroperations fail to comply with such laws or regulations, we may be subject to fines and other civil, administrative or criminal sanctions, including therevocation of permits and licenses necessary to continue our business activities. In addition, we may be required to pay damages or civil judgments in respectof third-party claims, including those relating to personal injury (including exposure to hazardous substances that we generate, use, store, handle, transport,manufacture or dispose of), property damage or contribution claims. Some environmental laws allow for strict, joint and several liabilities for remediationcosts, regardless of fault. We may be identified as a potentially responsible party under such laws. Such developments could have a material adverse effect onour business, financial condition and results of operations.Significant disruptions of our information technology systems or breaches of our data security could adversely affect our business.A significant invasion, interruption, destruction or breakdown of our information technology, or IT, systems and/or infrastructure by persons withauthorized or unauthorized access could negatively impact our business and operations. We could also experience business interruption, information theftand/or reputational damage from cyber attacks, which may compromise our systems and lead to data leakage either internally or at our third party providers.Both data that has been inputted into our main IT platform, which covers records of transactions, financial data and other data reflected in our results ofoperations, as well as data related to our proprietary rights (such as research and development, and other intellectual property- related data), are subject tomaterial cyber security risks. Our IT systems have been, and are expected to continue to be, the target of malware and other cyber attacks. To date, we are notaware that we have experienced any loss of, or disruption to, material information as a result of any such malware or cyber attack.We have invested in advanced protective systems to reduce these risks, some of which have been installed and others that are still in the process ofinstallation. Based on information provided to us by the suppliers of our protective systems, we believe that our level of protection is in keeping with thecustomary practices of peer technology companies. We also maintain back-up files for much of our information, as a means of assuring that a breach or cyberattack does not necessarily cause the loss of that information. We furthermore review our protections and remedial measures periodically in order to ensurethat they are adequate.Despite these protective systems and remedial measures, techniques used to obtain unauthorized access are constantly changing, are becomingincreasingly more sophisticated and often are not recognized until after an exploitation of information has occurred. We may be unable to anticipate thesetechniques or implement sufficient preventative measures, and we therefore cannot assure you that our preventative measures will be successful in preventingcompromise and/or disruption of our information technology systems and related data. We furthermore cannot be certain that our remedial measures will fullymitigate the adverse financial consequences of any cyber attack or incident.Under applicable employment laws, we may not be able to enforce covenants not to compete and therefore may be unable to prevent our competitorsfrom benefiting from the expertise of some of our former employees.We generally enter into non-competition agreements with our employees. These agreements prohibit our employees from competing directly with us orworking for our competitors or clients for a limited period after they cease working for us. We may be unable to enforce these agreements under the laws ofthe jurisdictions in which our employees work and it may be difficult for us to restrict our competitors from benefiting from the expertise that our formeremployees or consultants developed while working for us. For example, Israeli courts have required employers seeking to enforce non-compete undertakingsof a former employee to demonstrate that the competitive activities of the former employee will harm one of a limited number of material interests of theemployer that have been recognized by the courts, such as the secrecy of a company’s confidential commercial information or the protection of itsintellectual property. If we cannot demonstrate that such interests will be harmed, we may be unable to prevent our competitors from benefiting from theexpertise of our former employees or consultants and our ability to remain competitive may be diminished. In addition in California, where many employeesof our SDM parts service are located, non-competition agreements with employees are generally unenforceable after termination of employment.As a public company with significant operations in several countries, we are subject to regulation and must comply with reporting and otherrequirements in a number of jurisdictions and, to the extent that regulatory authorities assert that we are not in compliance, we could be subject tosanctions which, if material, could materially and adversely affect our business.As a public company with significant operations in Israel, the United States, Europe and many other countries, we are subject to regulation and mustcomply with reporting and other requirements in a number of jurisdictions. In particular, we are subject to the rules and regulations of the SEC and FINRA,which may elect from time to time to review or investigate our operations, various aspects of our financial statements, our disclosure practices and othermatters. As such reviews progress, the regulating agencies may determine that we are and have been in compliance with applicable rules, or they maydetermine to pursue enforcement actions or other sanctions against us for alleged noncompliance. As an example, on March 3, 2016, the enforcementdivision of the U.S. Securities and Exchange Commission, or SEC, issued a subpoena to us requesting a number of documents as part of an investigation ofthe valuations and other calculations we used to assess the impairment of goodwill and/or intangible assets included in the balance sheet in our SEC filings.We cooperated with the SEC and produced documents in the summer of 2016. On September 25, 2017, the SEC notified us that it was closing itsinvestigation of our company and did not intend on recommending an enforcement action by the SEC.11Table of ContentsIn addition to U.S.-based regulations on our operations, our European activities will be subject to the new European Union General Data ProtectionRegulation, or GDPR, which will create additional compliance requirements for us. GDPR broadens the scope of personal privacy laws to protect the rights ofEuropean Union citizens and requires organizations to report on data breaches within 72 hours and be bound by more stringent rules for obtaining theconsent of individuals on how their data can be used. GDPR will become enforceable on May 25, 2018 and non-compliance may expose entities such as ourcompany to significant fines or other regulatory claims. While we have invested in, and intend to continue to invest in, reasonably necessary resources tocomply with these new standards, to the extent that we fail to adequately comply, that failure could have an adverse effect on our business, financialconditions, results of operations and cash flows.Failure to comply with the U.S. Foreign Corrupt Practices Act or other applicable anti-corruption legislation could result in fines, criminal penaltiesand an adverse effect on our business.We operate in a number of countries throughout the world, including countries known to have a reputation for corruption. We are committed to doingbusiness in accordance with applicable anti-corruption laws. We are subject, however, to the risk that our affiliated entities or our and our affiliates’respective officers, directors, employees and agents (including distributors of our products) may take action determined to be in violation of such anti-corruption laws, including the U.S. Foreign Corrupt Practices Act of 1977 and the U.K. Bribery Act of 2010, as well as trade sanctions administered by theOffice of Foreign Assets Control and the U.S. Department of Commerce. Any violation by any of these persons could result in substantial fines, sanctions,civil and/or criminal penalties, or curtailment of operations in certain jurisdictions, and might adversely affect our results of operations. In addition, actual oralleged violations could damage our reputation and ability to do business.We own a number of our manufacturing and office facilities, which may limit our ability to move those operations. If we were to move some or all ofthose operations, we could incur unforeseen charges.We own buildings in Eden Prairie, Minnesota, which we use to conduct our FDM manufacturing and assembly operations, as well as our office facility inRehovot, Israel and manufacturing facility in Kiryat Gat, Israel. Ownership of these buildings and facilities may adversely affect our ability to move some orall of those operations to other locations that may be more favorable. If we were to move any of those operations to other locations, we may have difficultyselling or leasing the property that we vacate. This risk also applies to the facilities that we lease under non-cancellable lease agreements, where we cannotfreely vacate the facilities. These limitations on our ability to move could result in an impairment charge, as occurred in 2015 in respect of some of our leasedfacilities, which negatively impacted our results of operations, and could, in future periods, once again have an adverse effect on our results of operations.Default in payment by one or more resellers or customers from which we have large account receivable balances could adversely impact our results ofoperations and financial condition.From time to time, our accounts receivable balances have been concentrated with certain resellers or customers. Default by one or more of these resellersor customers could result in a significant charge against our current reported earnings. We have reviewed our policies that govern credit and collections, andwill continue to monitor them in light of current payment status and economic conditions. In addition, we try to reduce the credit exposures of our accountsreceivable by credit limits and credit insurance for many of our customers. However, there can be no assurance that our efforts to identify potential credit riskswill be successful. Our inability to timely identify resellers and customers that are credit risks could result in defaults at a time when such resellers orcustomers have high accounts receivable balances with us. Any such default would result in a significant charge against our earnings and adversely affect ourresults of operations and financial condition.We are, and have been in the recent past, subject to litigation. Any current or future lawsuits to which we are subject may have a significant adverseeffect on our financial condition or profitability.We are currently, and have been in the recent past, subject to litigation, and could be subject to further litigation in the future. Most recently, inNovember 2017, a former employee, whose employment had been terminated by our company in 2008 and who had previously unsuccessfully filed a suitagainst our company, brought an additional proceeding against us under Section 134 of the Israeli Patent Law seeking compensation and royalties for serviceinventions he invented while he served as an employee of our company. See “Item 8. Financial Information— Legal Proceedings” for further informationconcerning this proceeding.We were furthermore recently subject to four lawsuits, styled as class actions of our shareholders, which were initiated in the United States District Courtsfor the District of Minnesota, the Southern District of New York, and the Eastern District of New York in February and March, 2015, and which named theCompany and certain of our officers as defendants. The lawsuits alleged violations of the Exchange Act in connection with allegedly false and misleadingstatements concerning our business and prospects. The plaintiffs sought damages and an award of reasonable costs and expenses, including attorneys’ fees.The cases were consolidated for all purposes. On June 30, 2016, the court granted defendants’ motion to dismiss with prejudice and entered judgment in favorof defendants. Following plaintiffs’ appeal, on July 25, 2017, the United States Court of Appeals for the Eighth Circuit entered an order and judgmentaffirming the court’s dismissal with prejudice.12Table of ContentsWhile we intend to mount vigorous defenses to the above-described proceeding under the Israeli Patent Law and any additional lawsuits brought againstus, we can provide no assurance as to the outcome of any such lawsuits, and any such actions may result in judgments against us for significant damages.Resolution of any such matters can be prolonged and costly, and the ultimate results or judgments are uncertain due to the inherent uncertainty in litigationand other proceedings. Moreover, our potential liabilities are subject to change over time due to new developments, changes in settlement strategy or theimpact of evidentiary requirements. Regardless of the outcome, litigation has resulted in the past, and may result in the future, in significant legal expensesand require significant attention and resources of management. As a result, any present or future litigation could result in losses, damages and expenses thathave a significant adverse effect on our financial condition or profitability.We rely on our management information systems for inventory management, distribution, and other key functions. If our information systems fail toadequately perform these functions, or if we experience an interruption in their operation, our business and operating results could be adversely affected.The efficient operation of our business is dependent on our management information systems. We rely on our management information systems: to,among other things, effectively manage our accounting and financial functions, including maintaining our internal controls; to manage our manufacturingand supply chain processes; and to maintain our research and development data. The failure of our management information systems to perform properlycould disrupt our business and product development, which may result in decreased sales, increased overhead costs, excess or obsolete inventory, andproduct shortages, causing our business and operating results to suffer. Although we take steps to secure our management information systems, including ourcomputer systems, intranet and internet sites, email and other telecommunications and data networks, the security measures we have implemented may not beeffective and our systems may be vulnerable to theft, loss, damage and interruption from a number of potential sources and events, including unauthorizedaccess or security breaches, natural or man-made disasters (such as floods or earthquakes), cyber-attacks, computer viruses, power loss, or other disruptiveevents. Our reputation, brand, and financial condition could be adversely affected if, as a result of a significant cyber event or otherwise, our operations aredisrupted or shut down; our confidential, proprietary information is stolen or disclosed; we incur costs or are required to pay fines in connection with stolencustomer, employee, or other confidential information; we must dedicate significant resources to system repairs or increase cyber security protection; or weotherwise incur significant litigation or other costs.Risks related to our intellectual propertyIf we are unable to obtain patent protection for our products or otherwise protect our intellectual property rights, our business could suffer.We rely on a combination of patent and trademark laws in the United States and other countries, trade secret protection, confidentiality agreements andother contractual arrangements with our employees, end-users and others to maintain our competitive position. In particular, our success depends, in part, onour ability, and the ability of our licensors, to obtain patent protection for our and their products, technologies and inventions, maintain the confidentialityof our and their trade secrets and know-how, operate without infringing upon the proprietary rights of others and prevent others from infringing upon our andtheir proprietary rights.Despite our efforts to protect our proprietary rights, it is possible that competitors or other unauthorized third parties may obtain, copy, use or disclose ourtechnologies, inventions, processes or improvements. We cannot assure you that any of our existing or future patents or other intellectual property rights willnot be challenged, invalidated or circumvented, or will otherwise provide us with meaningful protection. Our pending patent applications may not begranted, and we may not be able to obtain foreign patents or pending applications corresponding to our U.S. patents. The laws of certain countries, such asChina, may not provide the same level of patent protection and intellectual property right enforcement as in the United States, so even if we enforce ourintellectual property rights or obtain additional patents in China or elsewhere outside of the United States, effective enforcement of such rights may not beeffective. If our patents and other intellectual property do not adequately protect our technology, our competitors may be able to offer additivemanufacturing systems, consumables or other products similar to ours. Our competitors may also be able to develop similar technology independently ordesign around our patents, and we may not be able to detect the unauthorized use of our proprietary technology or take appropriate steps to prevent such use.If we attempt enforcement of our intellectual property rights, we may be (as we have been in the past) subject or party to claims, negotiations or complex,protracted litigation. Intellectual property disputes and litigation, regardless of merit, can be costly and disruptive to our business operations by divertingattention and energies of management and key technical personnel, and by increasing our costs of doing business. Any of the foregoing could adverselyaffect our operating results.13Table of ContentsWe may be subject to claims that we are infringing, misappropriating or otherwise violating the intellectual property rights of others.Our products and technology, including the technology that we license from others, may infringe, misappropriate or otherwise violate the intellectualproperty rights of third parties. Patent applications in the United States and most other countries are confidential for a period of time until they are published,and the publication of discoveries in scientific or patent literature typically lags actual discoveries by several months or more. As a result, the nature of claimscontained in unpublished patent filings around the world is unknown to us, and we cannot be certain that we were the first to conceive inventions covered byour patents or patent applications or that we were the first to file patent applications covering such inventions. Furthermore, it is not possible to know inwhich countries patent holders may choose to extend their filings under the Patent Cooperation Treaty or other mechanisms. In addition, we may be subjectto intellectual property infringement claims from individuals, vendors and other companies, including those that have acquired patents in the fields of 3Dprinting or consumable production for the sole purpose of asserting claims against us.Under the Israeli Patent Law, 5727-1967, or the Patent Law, we may also be subject to royalty claims for “service inventions” conceived by employees inthe course and as a result of or arising from their employment with us. Section 134 of the Patent Law provides that if there is no agreement between anemployer and an employee as to whether the employee is entitled to consideration for service inventions, the Israeli Compensation and Royalties Committee,or the Committee, a body constituted under the Patent Law, shall determine these issues. We believe that virtually all of our employees have executedinvention assignment agreements in which they have assigned to us their rights to potential inventions and acknowledged that they will not be entitled toadditional compensation or royalties from commercialization of inventions. We may, nevertheless, face claims demanding remuneration in consideration forassigned inventions.In addition to patent infringement and patent-related claims, we may be subject to other intellectual property claims, such as claims that we are infringingtrademarks or misappropriating trade secrets. We may also be subject to claims relating to the content on our websites, including third-party content postedon our Thingiverse.com or GrabCAD.com websites. Any intellectual property claims, regardless of the merit or resolution of such claims could cause us toincur significant costs in responding to, defending and resolving such claims, and may prohibit or otherwise impair our ability to commercialize new orexisting products. Resolution of such claims may, among other things, require us to redesign infringing technology, enter into costly settlement or licenseagreements on terms that are unfavorable to us, pay royalties to employees or former employees, or indemnify our distributors and end-users. Anyinfringement by us or our licensors of the intellectual property rights of third parties may have a material adverse effect on our business, financial conditionand results of operations.If we are unable to protect the confidentiality of our trade secrets or know-how, such proprietary information may be used by others to compete againstus, in particular in developing consumables that could be used with our printing systems in place of our proprietary consumables.We have devoted substantial resources to the development of our technology, trade secrets, know-how and other unregistered proprietary rights. While weenter into confidentiality and invention assignment agreements intended to protect such rights, such agreements can be difficult and costly to enforce or maynot provide adequate remedies if violated, and we may not have entered into such agreements with all relevant parties. Such agreements may be breached andconfidential information may be willfully or unintentionally disclosed, including by employees who may leave our company and join our competitors, or ourcompetitors or other parties may learn of the information in some other way. The disclosure to, or independent development by, a competitor of any of ourtrade secrets, know-how or other technology not protected by a patent or other intellectual property system could materially reduce or eliminate anycompetitive advantage that we may have over such competitor.This concern could manifest itself in particular with respect to our proprietary consumables that are used with our systems. Portions of our proprietaryconsumables may not be afforded patent protection. Chemical companies or other producers of raw materials used in our consumables may be able to developconsumables that are compatible to a large extent with our systems, whether independently or in contravention of our trade secret rights and relatedproprietary and contractual rights. If such consumables are made available to owners of our systems, and are purchased in place of our proprietaryconsumables, our revenues and profitability would be reduced and we could be forced to reduce prices for our proprietary consumables.As our patents expire, additional competitors using our technology could enter the market, which could offer competitive printers and consumables,require us to reduce our prices for our products and result in lost sales.Some of our patents have expired and others will expire in coming years. Upon expiration of those patents, our competitors have introduced, and arelikely to continue to introduce, products using the technology previously protected by the expired patents, which products may have lower prices than thoseof our products. To compete, we may need to reduce our prices for those products, which would adversely affect our revenues, margins and profitability.Additionally, the expiration of our patents could reduce barriers to entry into AM systems, which could result in the reduction of our sales and earningspotential.14Table of ContentsRisks related to operations in IsraelOur Israeli headquarters and manufacturing and other significant operations may be adversely affected by political, economic and military instabilityin Israel.One of our dual corporate headquarters, as well as our PolyJet system manufacturing facility, all of our PolyJet research and development facilities, one ofour two PolyJet consumables manufacturing facilities, one of our FDM manufacturing facilities, and some of our suppliers, are located in central and southernIsrael. In addition, many of our key employees, officers and directors are residents of Israel. Accordingly, political, economic and military conditions in Israelmay directly affect our business. Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and itsneighboring countries. Any hostilities involving Israel or the interruption or curtailment of trade between Israel and its trading partners could adversely affectour operations and results of operations. During the winter of 2008-2009, in November 2012 and once again in the summer of 2014, Israel has been engagedin armed conflict with Hamas, a militia group and political party that controls the Gaza Strip, and during the summer of 2006, Israel was engaged in an armedconflict with Hezbollah, a Lebanese Islamist Shiite militia group and political party. These conflicts involved missile strikes against civilian targets invarious parts of Israel, including areas where some of our manufacturing facilities are located, and negatively affected business conditions in Israel. Anyarmed conflicts, terrorist activities or political instability in the region, including those related to the unrest in Syria, could adversely affect businessconditions and could harm our results of operations and could make it more difficult for us to raise capital. Parties with whom we do business have sometimesdeclined to travel to Israel during periods of heightened unrest or tension, forcing us to make alternative arrangements when necessary in order to meet ourbusiness partners face to face. In addition, parties with whom we have agreements involving performance in Israel may claim that they are not obligated toperform their commitments under those agreements pursuant to force majeure provisions in such agreements due to the political or security situation in Israel.Furthermore, many of our male employees in Israel, including members of our senior management, are obligated to perform one month, and in some caseslonger periods, of annual military reserve duty until they reach the age of 45 (or older, for citizens who hold certain positions in the Israeli armed forcesreserves), and, in the event of a military conflict (such as the last conflict with Hamas), may be called to active duty. In response to increases in terroristactivity from time to time and as a result of the last conflict with Hamas, there have been periods of significant call-ups of military reservists, and some of ourIsraeli employees have been called up in connection with armed conflicts. It is possible that there will be similar large-scale military reserve duty call-ups inthe future. Our operations could be disrupted by the absence of a significant number of Israeli employees or of one or more of our key Israeli employees. Suchdisruption could materially adversely affect our business and operations.Our commercial insurance does not cover losses that may occur as a result of an event associated with the security situation in the Middle East. Althoughthe Israeli government is currently committed to covering the reinstatement value of direct damages that are caused by terrorist attacks or acts of war, wecannot assure you that this government coverage will be maintained, or if maintained, will be sufficient to compensate us fully for damages incurred. Anylosses or damages incurred by our Israeli operations could have a material adverse effect on our business. Any armed conflicts or political instability in theregion would likely negatively affect business conditions generally and could harm our results of operations.Your rights and responsibilities as a shareholder will be governed by Israeli law, which may differ in some respects from the rights and responsibilitiesof shareholders of U.S. companies.We are organized under Israeli law. The rights and responsibilities of the holders of our ordinary shares are governed by our amended and restated articlesof association and Israeli law. These rights and responsibilities differ in some respects from the rights and responsibilities of shareholders in typical U.S.-based corporations. In particular, a shareholder of an Israeli company has a duty to act in good faith toward the company and other shareholders and to refrainfrom abusing its power in the company, including, among other things, in voting at the general meeting of shareholders on matters such as amendments to acompany’s articles of association, increases in a company’s authorized share capital, mergers and acquisitions and interested party transactions requiringshareholder approval. In addition, a shareholder who knows that it possesses the power to determine the outcome of a shareholder vote or to appoint orprevent the appointment of a director or executive officer in the company has a duty of fairness toward the company. There is limited case law available toassist us in understanding the implications of these provisions that govern shareholders’ actions. These provisions may be interpreted to impose additionalobligations and liabilities on holders of our ordinary shares that are not typically imposed on shareholders of U.S. corporations.Provisions of Israeli law may delay, prevent or otherwise impede a merger with, or an acquisition of, our company, which could prevent a change ofcontrol, even when the terms of such a transaction are favorable to us and our shareholders.Israeli corporate law regulates mergers, requires tender offers for acquisitions of shares above specified thresholds, requires special approvals fortransactions involving directors, officers or significant shareholders and regulates other matters that may be relevant to such types of transactions. Forexample, a merger may not be consummated unless at least 50 days have passed from the date on which a merger proposal is filed by each merging companywith the Israel Registrar of Companies and at least 30 days have passed from the date on which the shareholders of both merging companies have approvedthe merger. In addition, a majority of each class of securities of the target company must approve a merger. Moreover, a tender offer for all of a company’sissued and outstanding shares can only be completed if the acquirer receives positive responses from the holders of at least 95% of the issued share capital.Completion of the tender offer also requires approval of a majority of the offerees that do not have a personal interest in the tender offer, unless, followingconsummation of the tender offer, the acquirer would hold at least 98% of the company’s outstanding shares. Furthermore, the shareholders, including thosewho indicated their acceptance of the tender offer, may, at any time within six months following the completion of the tender offer, petition an Israeli court toalter the consideration for the acquisition, unless the acquirer stipulated in its tender offer that a shareholder that accepts the offer may not seek such appraisalrights.15Table of ContentsFurthermore, Israeli tax considerations may make potential transactions unappealing to us or to our shareholders whose country of residence does nothave a tax treaty with Israel exempting such shareholders from Israeli tax. For example, Israeli tax law does not recognize tax-free share exchanges to the sameextent as U.S. tax law. With respect to mergers, Israeli tax law allows for tax deferral in certain circumstances but makes the deferral contingent on thefulfillment of a number of conditions, including a holding period of two years from the date of the transaction during which sales and dispositions of sharesof the participating companies are subject to certain restrictions.Moreover, with respect to certain share swap transactions, the tax deferral is limited in time, and when such time expires, the tax becomes payable even ifno disposition of the shares has occurred.These and other similar provisions could delay, prevent or impede an acquisition of our company or our merger with another company, even if such anacquisition or merger would be beneficial to us or to our shareholders.Exchange rate fluctuations between the U.S. dollar and the New Israeli Shekel, the Euro, the Yen and other non-U.S. currencies may negatively affectthe earnings of our operations.We report our financial results and most of our revenues are recorded in U.S. dollars. However, substantially all of the manufacturing, research anddevelopment expenses of our Israeli operations, as well as a portion of the cost of revenues, selling and marketing, and general and administrative expenses ofour Israeli operations, are incurred in New Israeli Shekels. As a result, we are exposed to exchange rate risks that may adversely affect our financial results. Ifthe New Israeli Shekel appreciates against the U.S. dollar or if the value of the New Israeli Shekel declines against the U.S. dollar at a time when the rate ofinflation in the cost of Israeli goods and services exceeds the rate of decline in the relative value of the New Israeli Shekel, then the U.S. dollar cost of ouroperations in Israel would increase and our results of operations would be adversely affected Our Israeli operations also could be adversely affected if we areunable to effectively hedge against currency fluctuations in the future. We cannot predict any future trends in the rate of inflation or deflation in Israel or therate of appreciation or devaluation of the New Israeli Shekel against the U.S. dollar. The Israeli annual rate of inflation (deflation) amounted to 0.4%, (0.2%),and (1.0%) for the years ended December 31, 2017, 2016 and 2015, respectively. The annual appreciation (devaluation) of the New Israeli Shekel in relationto the U.S. dollar amounted to 9.8%, 1.5% and (0.3%) for the years ended December 31, 2017, 2016 and 2015, respectively.We also have substantial revenues and expenses that are denominated in non-US currencies other than the New Israeli Shekel, particularly the Euro.Therefore, our operating results and cash flows are also subject to fluctuations due to changes in the relative values of the U.S. dollar and those foreigncurrencies. These fluctuations could negatively affect our operating results and could cause our revenues and net income or loss to vary from quarter toquarter. Furthermore, to the extent that our revenues increase in regions such as Asia Pacific, where our sales are denominated in U.S. dollars, a strengtheningof the dollar against other currencies could make our products less competitive in those foreign markets and collection of receivables more difficult.From time to time we engage in currency hedging activities. These measures, however, may not adequately protect us from material adverse effects due tothe impact of inflation in Israel or from fluctuations in the relative values of the U.S. dollar and other foreign currencies in which we transact business, andmay result in a financial loss. For further information, please see “Item 11. Quantitative And Qualitative Disclosures About Market Risk” in this annualreport.Calculating our income tax rate is complex and subject to uncertainty. We currently receive Israeli government tax benefits in respect of our Israelioperations. If we do not meet several conditions for receipt of those benefits, or if the Israeli government otherwise decides to eliminate those benefits, theymay be terminated or reduced, which would impact our income tax rate and increase our costs.The computation of income taxes is complex because it is based on the laws of numerous taxing jurisdictions and requires significant judgment on theapplication of complicated rules governing accounting for tax provisions under GAAP. Income taxes for interim quarters are based on a forecast of oureffective tax rate for the year, which includes forward-looking financial projections. Such financial projections are based on numerous assumptions,including the expectations of profit and loss by jurisdiction. It is difficult to accurately forecast various items that make up the projections, and such itemsmay be treated as discrete accounting. Examples of items that could cause variability in our income tax rate include our mix of income by jurisdiction,changes in our uncertain tax positions, the application of transfer pricing rules, and tax audits. Future events, such as changes in our business and the tax lawin the jurisdictions where we do business, could also affect our rate.One important assumption that goes into calculation of our tax rate is the tax benefit that we receive in respect of some of our operations in Israel, referredto as “Approved Enterprise” and “Beneficiary Enterprise”, under the 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 (that is, non-Israeli) investment in our company, wehave estimated that our effective tax rate to be paid with respect to all Israeli operations under these benefit programs is 7% to 12%, based on the currentbalance of activity between our Rehovot, Israel and Kiryat Gat, Israel facilities and the available level of benefits under the law. If we do not meet therequirements for maintaining these benefits, they may be reduced or cancelled and the relevant operations would be subject to Israeli corporate tax at thestandard rate, which in 2018 and onwards is set at 23% (the corporate tax rate was 25% and 24% in 2016 and 2017, respectively). In addition to being subjectto the standard corporate tax rate, we would be required to refund any tax benefits that we have already received as adjusted by the Israeli consumer priceindex, plus interest or other monetary penalties. Even if we continue to meet the relevant requirements, the tax benefits that our current “ApprovedEnterprise” and “Beneficiary Enterprise” receive may not be continued in the future at their current levels or at all. If these tax benefits were reduced oreliminated, the amount of taxes that we pay would likely increase, as all of our operations would consequently be subject to corporate tax at the standard rate,which may cause our effective tax rate to be materially different than our estimates and could adversely affect our results of operations. Additionally, if weincrease our activities outside of Israel, for example, via acquisitions, our increased activities may not be eligible for inclusion in Israeli tax benefit programs,and that could also adversely affect our effective tax rate and our results of operations.16Table of ContentsThe Israeli government may furthermore independently determine to reduce, phase out or eliminate entirely the benefit programs under the InvestmentLaw, regardless of whether we then qualify for benefits under those programs at the time, which would also adversely affect our effective tax rate and ourresults of operations.Certain Israeli governmental grants that we received for certain of our research and development activities in Israel may restrict our ability to transfermanufacturing operations or technology outside of Israel without obtaining a pre-approval from the relevant authorities and, in certain circumstances,payment of significant amounts to the authorities.Our Israeli-based research and development efforts were and are financed in part, through grants that we received from the National TechnologicalInnovation Authority, or the Authority (formerly operating as Office of the Chief Scientist of the Ministry of Economy of the State of Israel, or the OCS).Through 2006, Objet received grants from the OCS of approximately $1.5 million, which it repaid in its entirety (including interest thereon) by the end of2007. More recently, we have received additional funding from the Authority of approximately $5.5 million, in the aggregate (as of December 31, 2017),under several R&D programs to support certain research and development projects in Israel. Such funding is not subject to royalty obligations on our part.We must comply with the requirements of the Israeli Encouragement of Research, Development and Technological Innovation Law, 5744-1984, or theInnovation Law (formerly known as the Encouragement of Industrial Research and Development Law, 5744-1984, or the Research Law), and relatedregulations, with respect to those current and past grants.When a company develops know-how, technology or products using grants provided by the Authority, the terms of these grants and the Innovation Lawrestrict the transfer of such know-how, and the transfer of manufacturing or manufacturing rights of such products, technologies or know-how outside ofIsrael. Even after the repayment of such grants in full, we will remain subject to the restrictions set forth under the Innovation Law, including:●Transfer of know-how outside of Israel. Any transfer of the know-how that was developed with the funding of the Authority, outside of Israel, requiresprior approval of the Authority, and the payment of a redemption fee. ●Local manufacturing obligation. The terms of the grants under the Innovation Law require that the manufacturing of products resulting fromAuthority-funded programs be carried out in Israel, unless a prior written approval of the Authority is obtained (except for a transfer of up to 10% ofthe production rights, for which a notification to the Authority is sufficient). ●Certain reporting obligations. We, as any recipient of a grant or a benefit under the Innovation Law, are required to file reports on the progress ofactivities for which the grant was provided as well as on our revenues from know-how and products funded by the Authority. In addition, we arerequired to notify the Authority of certain events detailed in the Innovation Law.Therefore, if aspects of our technologies are deemed to have been developed with OCS funding, the discretionary approval of an OCS committee wouldbe required for any transfer to third parties outside of Israel of know-how or manufacturing or manufacturing rights related to those aspects of suchtechnologies. We may not receive those approvals. Furthermore, the OCS may impose certain conditions on any arrangement under which it permits us totransfer technology or development out of Israel.The transfer of OCS-supported technology or know-how outside of Israel may involve the payment of significant amounts, depending upon the value ofthe transferred technology or know-how, the amount of OCS support, the time of completion of the OCS-supported research project and other factors.Furthermore, the consideration available to our shareholders in a transaction involving the transfer outside of Israel of technology or know-how developedwith OCS funding (such as a merger or similar transaction) may be reduced by any amounts that we are required to pay to the OCS.We received grants from the OCS prior to an extensive amendment to the Research Law that came into effect as of January 1, 2016, or the Amendment,which may also affect the terms of existing grants. The Amendment provides for an interim transition period (which has not yet expired), after which time ourgrants will be subject to terms of the Amendment. Under the Research Law, as amended by the Amendment, the Authority is provided with a power to modifythe terms of existing grants. Such changes, if introduced by the Authority in the future, may impact the terms governing our grants.It may be difficult to enforce a U.S. judgment against us and our officers and directors in Israel or the United States, or to serve process on our officersand directors.We are organized in Israel. Most of our officers and most of our directors (as of December 31, 2017) reside outside of the United States, and a majority ofour assets are located outside of the United States. Therefore, a judgment obtained against us or any of our executive officers and directors in the UnitedStates, including one based on the civil liability provisions of the U.S. federal securities laws, may not be collectible in the United States and may not beenforced by an Israeli court. It also may be difficult for you to effect service of process on these persons in the United States or to assert U.S. securities lawclaims in original actions instituted in Israel.17Table of ContentsRisks related to an investment in our ordinary sharesThe market price of our ordinary shares may be subject to fluctuation, regardless of our operating results and financial condition. As a result, ourshareholders could incur substantial losses.The market price of our ordinary shares since the Stratasys-Objet merger has been subject to substantial fluctuation. From the start of 2015 through theearly part of 2018 (through February 16, 2018), our ordinary shares have traded with closing prices that have ranged from $15.24 to $81.05. The price of ourordinary shares may continue to be subject to substantial fluctuation regardless of our operating results or financial condition due to a number of factors,including:●whether we achieve the perceived benefits of the mergers or acquisitions that we consummate as rapidly or to the extent anticipated by financial orindustry analysts; ●whether the effects on our business and prospects of the mergers or acquisitions that we consummate are consistent with the expectations of financialor industry analysts; ●variations in our and our competitors’ results of operations and financial condition; ●market acceptance of our products; ●the mix of products that we sell, and related services that we provide, during any period; ●changes in earnings estimates or recommendations by securities analysts; ●development of new competitive systems and services by others; ●our announcements of technological innovations or new products; ●delays between our expenditures to develop and market new or enhanced systems and consumables and the generation of sales from those products; ●developments concerning intellectual property rights; ●changes in the amount that we spend to develop, acquire or license new products, technologies or businesses; ●changes in our expenditures to promote our products and services; ●changes in the cost of satisfying our warranty obligations and servicing our installed base of systems; ●success or failure of research and development projects of the combined company or its competitors; ●the general tendency towards volatility in the market prices of shares of technology companies; and ●general market conditions and other factors, including factors unrelated to our operating performance.These factors and any corresponding price fluctuations may materially and adversely affect the market price of our ordinary shares and result insubstantial losses being incurred by our shareholders.Market prices for securities of technology companies historically have been very volatile. The market for these securities has from time to timeexperienced significant price and volume fluctuations for reasons unrelated to the operating performance of any one company. In the past, following periodsof market volatility, public company shareholders have often instituted securities class action litigation. Such securities litigation could result in substantialcosts and divert the resources and attention of our management from our business.Raising additional capital by issuing securities may cause dilution to our shareholders, and may furthermore be difficult in the current marketenvironment.We may need or desire to raise substantial capital in the future. Our future capital requirements will depend on many factors, including, among others:●the extent to which we acquire or invest in businesses, products or technologies and other strategic relationships; ●our degree of success in capturing a larger portion of additive manufacturing demand; ●the costs of establishing or acquiring sales, marketing and distribution capabilities for our products; ●the costs of preparing, filing and prosecuting patent applications, maintaining and enforcing our issued patents and defending intellectual property-related claims; and●the costs of financing unanticipated working capital requirements and responding to competitive pressures.18Table of ContentsIf we raise funds by issuing equity or convertible debt securities, it will reduce the percentage ownership of our then-existing shareholders, and theholders of such new securities may have rights, preferences or privileges senior to those possessed by our then-existing shareholders.The current market price for our ordinary shares, which has declined significantly since its all-time high in periods following the Stratasys-Objet merger,also adversely impacts our ability to raise funds in the capital markets.We do not anticipate paying any cash dividends in the foreseeable future. Therefore, if our share price does not appreciate, our shareholders may notrecognize a return, and could potentially suffer a loss, on their investment in our ordinary shares.We intend to retain all available funds and any future earnings to fund the development and growth of our business. As a result, capital appreciation, ifany, of our ordinary shares will be investors’ sole source of a return on their investment for the foreseeable future.Even if we decide to pay dividends on our ordinary shares, we may be restricted from doing so or payment of such dividends may have adverseconsequences for our company.Under the Companies Law, dividends may only be paid out of our profits and other surplus funds (as defined in the Companies Law) as of the end of themost recent year or as accrued over a period of the most recent two years, whichever amount is greater, provided that there is no reasonable concern thatpayment of a dividend will prevent us from satisfying our existing and foreseeable obligations as they become due. In the event that we do not meet the profitand surplus funds criteria, we can seek the approval of an Israeli court in order to distribute a dividend. The court may approve our request if it is convincedthat there is no reasonable concern that the payment of a dividend will prevent us from satisfying our existing and foreseeable obligations as they becomedue. Due to the acquisition method of accounting utilized for the Stratasys-Objet merger and the MakerBot transaction under GAAP, pursuant to which wewere deemed to have acquired Objet’s assets, we have incurred and will continue to incur significant annual amounts of depreciation and amortizationexpense in respect of those assets (see note 2 to our consolidated financial statements appearing in this annual report for more information on the method ofaccounting for the MakerBot transaction). We are also subject to the risk of impairment charges from time to time to our acquired assets, as occurred in 2015,when we incurred over $1.2 billion in impairment charges. These significant annual expenses under GAAP have reduced, and may continue to reduce oreliminate, our profits and surplus funds as determined under the Companies Law, and, hence, may restrict our ability to pay dividends (absent courtapproval).In general, the payment of dividends may also be subject to Israeli withholding taxes. In addition, because we receive certain benefits under the Israelilaw relating to “Approved Enterprise” and “Beneficiary Enterprise”, our payment of dividends (out of tax-exempt income) may subject us to certain Israelitaxes to which we would not otherwise be subject. See “Risks related to our operations in Israel—The government tax benefits that we currently receiverequire us to meet several conditions and may be terminated or reduced in the future, which would increase our costs.”We are a foreign private issuer under the rules and regulations of the SEC and are therefore exempt from a number of rules under the Exchange Actand are permitted to file less information with the SEC than a domestic U.S. reporting company, which will reduce the level and amount of disclosure thatyou receive.As a foreign private issuer under the Exchange Act, we are exempt from certain rules under the Exchange Act, including the proxy rules, which imposecertain disclosure and procedural requirements for proxy solicitations. Moreover, we are not required to file periodic reports and financial statements with theSEC as frequently or as promptly as domestic U.S. companies with securities registered under the Exchange Act; and are not required to comply withRegulation FD, which imposes certain restrictions on the selective disclosure of material information. In addition, our officers, directors and principalshareholders are exempt from the reporting and “short-swing” profit recovery provisions of Section 16 of the Exchange Act and the rules under the ExchangeAct with respect to their purchases and sales of our ordinary shares. Accordingly, you receive less information about our company and trading in our sharesby our affiliates than you would receive about a domestic U.S. company, and are afforded less protection under the U.S. federal securities laws than youwould be afforded in holding securities of a domestic U.S. company.As a foreign private issuer, we are also permitted, and have begun, to follow certain home country corporate governance practices instead of thoseotherwise required under the Listing Rules of the NASDAQ Stock Market for domestic U.S. issuers. We have informed NASDAQ that we follow home countrypractice in Israel with regard to, among other things, director nomination procedure and approval of compensation of officers. In addition, we have opted tofollow home country law instead of the Listing Rules of the NASDAQ Stock Market that require that a listed company obtain shareholder approval for certaindilutive events, such as the establishment or amendment of certain equity-based compensation plans, an issuance that will result in a change of control of thecompany, certain transactions other than a public offering involving issuances of a 20% or greater interest in the company, and certain acquisitions of thestock or assets of another company. Following our home country governance practices as opposed to the requirements that would otherwise apply to a UnitedStates company listed on The NASDAQ Global Select Market may provide our shareholders with less protection than they would have as shareholders of adomestic U.S. company.19Table of ContentsOur status as a foreign private issuer is subject to an annual review and test, and will be tested again as of June 30, 2018 (the last business day of oursecond fiscal quarter of 2018). If we lose our status as a foreign private issuer, we will no longer be exempt from such rules. Among other things, beginning onJanuary 1, 2019, we would be required to file periodic reports and financial statements on a periodic basis (including both an annual report in respect of 2018and quarterly reports in respect of each of the quarters of 2019) as if we were a company incorporated in the U.S., which, among other things, could result inincreased compliance and reporting costs to us.If we are unable to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, as they apply to a foreignprivate issuer, or if our internal controls over financial reporting are not effective, the reliability of our financial statements may be questioned and ourshare price may suffer.We are subject to the requirements of Section 404 of the Sarbanes-Oxley Act, or Section 404, which requires a company that is subject to the reportingrequirements of the U.S. securities laws to conduct a comprehensive evaluation of its and its subsidiaries’ internal controls over financial reporting. Tocomply with this statute, we are required to document and test our internal control procedures, and our management is required to assess and issue a reportconcerning our internal controls over financial reporting, in each case on an annual basis. In addition, our independent registered public accounting firm isrequired to issue an opinion on the effectiveness on our internal control over financial reporting pursuant to Section 404.We have prepared for compliance with Section 404 by strengthening, assessing and testing our system of internal controls to provide the basis for ourmanagement’s report. The continuous process of strengthening our internal controls and complying with Section 404 is complicated and time-consuming. Ifour business continues to grow internationally, our internal controls will become more complex and will require significantly more resources and attention toensure that they remain effective overall. Over the course of testing our internal controls, our management may identify material weaknesses, which may notbe remedied in a timely manner on an ongoing basis. If our management cannot favorably assess the effectiveness of our internal controls over financialreporting, or if our independent registered public accounting firm identifies material weaknesses in our internal controls, investor confidence in our financialresults may weaken, and our share price may suffer.If we are classified as a passive foreign investment company, or PFIC, our U.S. shareholders may suffer adverse tax consequences.Generally, if for any taxable year, after applying certain look-through rules, 75% or more of our gross income is passive income, or at least 50% of thevalue of our assets are held for the production of, or produce, passive income, we may be characterized as a PFIC for U.S. federal income tax purposes. Passiveincome for this purpose generally includes, among other things, certain dividends, interest, royalties, rents and gains from commodities and securitiestransactions and from the sale or exchange of property that gives rise to passive income. If we are a PFIC, gain realized by a U.S. shareholder on the sale of ourordinary shares may be taxed as ordinary income (rather than as capital gain income), and an interest charge added to the tax. Rules similar to thoseapplicable to the taxation of gains realized on the disposition of our stock would apply to distributions exceeding certain thresholds.Although we do not believe that we were a PFIC in 2017, we cannot assure you that the IRS will agree with that conclusion or that we will not become aPFIC in 2018 or in a subsequent year. The tests for determining PFIC status are applied annually, and it is difficult to make accurate predictions of our futureincome and the future value of our assets. U.S. shareholders should consult with their own U.S. tax advisors with respect to the U.S. tax consequences ofinvesting in our ordinary shares. For a discussion of how we might be characterized as a PFIC and related tax consequences, please see Item 10.E, “AdditionalInformation—Taxation—U.S. Federal Income Tax Considerations—Tax Consequences if We Are a Passive Foreign Investment Company”.ITEM 4. INFORMATION ON THE COMPANY.A. History and Development of the CompanyOur legal and commercial name is Stratasys Ltd., and we are the product of the 2012 merger of two leading additive manufacturing companies, Stratasys,Inc. and Objet Ltd. Stratasys, Inc. was incorporated in Delaware in 1989, and Objet Ltd. was incorporated in Israel in 1998, under the name Objet GeometriesLtd., which was changed in 2011 to Objet Ltd. On December 1, 2012, the two companies completed the Stratasys-Objet merger, pursuant to which Stratasys,Inc. became an indirect, wholly-owned subsidiary of Objet Ltd., and Objet Ltd. changed its name to Stratasys Ltd. Also, as part of that transaction, theordinary shares of Stratasys Ltd. were listed on the NASDAQ Global Select Market under the trading symbol “SSYS”, in place of the listing of the commonstock of Stratasys, Inc., which had also traded under that symbol. On August 15, 2013 we acquired Cooperation Technology Corporation, or MakerBot,which was the direct parent company of MakerBot Industries, LLC, a leader in desktop 3D printing, and which owned and operated Thingiverse.com, awebsite dedicated to the sharing of user-created digital design files. The business of MakerBot (including Thingiverse.com) is now operated by a subsidiaryof our company. In July 2014 and August 2014, we completed the acquisitions of Solid Concepts and Harvest Technologies, respectively, two leadingproviders of additive manufacturing services. Following those last two acquisitions, in 2015, we introduced our branded Stratasys Direct Manufacturing, orSDM, service, which significantly broadened and increased our production and offering of AM parts, which are used by our customers as prototypes,benchmarks and end-use parts.20Table of ContentsWe have dual headquarters. Our registered office and one of our two principal places of business is located at 1 Holtzman Street, Science Park, P.O. Box2496, Rehovot 76124, Israel, and our telephone number at that office is (+972)-74-745-4314. Our other principal place of business is located at 7665Commerce Way, Eden Prairie, Minnesota, and our telephone number there is (952) 937-3000. Our agent in the United States is S. Scott Crump, our Chairmanof the Executive Committee, whose address is c/o Stratasys Inc. at the address of our Eden Prairie, Minnesota headquarters. Our World Wide Web address iswww.stratasys.com. The information contained on that web site (or on our other web sites, including www.objet.com) is not a part of this annual report. As anIsraeli company, we operate under the provisions of Israel’s Companies Law, 5759-1999.In 2017, 2016 and 2015, our capital expenditures amounted to $23.8 million, $47.1, million and $87.0 million, respectively, of which $22.3 million,$45.1 million and $84.3 million, respectively, was principally related to the purchase (or construction) of property, plant and equipment.During 2017 and 2016, our principal property and equipment investment was the construction of our new facility at our new property in Rehovot, Israel,which we own, and where we moved our Israeli headquarters during January 2017. This new facility, towards which we paid $9.8 and $18.2 million during2017 and 2016, respectively, also houses research and development facilities. As of December 31, 2017, we had invested an aggregate of $68.2 million in ournew facility in Israel and its related equipment.During 2015, we made other purchases of property and equipment, mainly for facilities expansion, manufacturing equipment and informationtechnology, primarily for our facilities in the United States, Israel and Germany.B. Business overviewWe are a leading global provider of applied additive technology solutions for industries including aerospace, automotive, healthcare, consumer productsand education. For nearly 30 years, we have focused on customers’ business requirements and have sought to create new value for our customers across theirproduct lifecycle processes, from design prototypes to manufacturing tools and final production parts. That customer-centric focus is reflected in ourinnovation, which is exemplified by our 1,200 granted and pending additive technology patents to date. We operate a 3D printing ecosystem of solutionsand expertise, comprised of advanced materials; software with voxel level control; precise, repeatable and reliable fused deposition modeling (FDM) andPolyJet 3D printers; application-based services; on-demand parts and key partnerships. We strive to ensure that our solutions are integrated seamlessly intoeach customer’s evolving workflow. Our applications are industry-specific and geared towards accelerating business processes, optimizing value chains anddriving business performance improvements. Our customers range from individuals and smaller businesses to large, global enterprises, and we include anumber of Fortune 100 companies among our customers.We believe that the range of 3D printing consumable materials that we offer, consisting of 57 FDM cartridge-based materials, 35 PolyJet cartridge-basedmaterials, 158 non-color digital materials, and over 360,000 color variations, is the widest in the industry. Our services offerings include Stratasys DirectManufacturing printed parts service as well as our professional services.3D printing, which is also referred to as additive manufacturing, is transforming prototype development manufacturing processes and is displacing (or, incertain cases, complementing) certain segments of traditional, or subtractive, manufacturing methodologies such as metal extrusion, computer-controlledmachining and manual modeling techniques. With respect to product design and prototype development, 3D printing significantly improves the designprocess, reduces the time required for product development and facilitates creativity, while keeping most or all of the design process in-house. 3D printingalso enables the direct manufacture of parts that are subsequently incorporated into a user’s end product. In addition, manufacturers are increasingly using 3Dprinting systems to produce manufacturing tools such as jigs and fixtures, that aid in their production and assembly processes. While 3D printing hashistorically been focused on design applications, 3D printing is beginning to show signs of adoption for manufacturing applications.We offer a broad range of systems, consumables and services for 3D printing and additive manufacturing. Our wide range of solutions, based on ourproprietary 3D printing technologies and materials, enhance the ability of designers, engineers and manufacturers to:●visualize and communicate product ideas and designs; ●verify the form, fit and function of prototypes; ●manufacture tools, jigs, fixtures, casts and injection molds used in the process of manufacturing end-products; ●manufacture customized and short-run end-products more efficiently and with greater agility; and ●produce objects that could not otherwise be manufactured through subtractive manufacturing methodologies.21Table of ContentsThe primary focus of our 3D printing solutions has been for use in prototyping, tooling and manufacturing, and within the vertical markets of automotive,aerospace, medical, dental, jewelry and education. Our portfolio offers a variety of performance options for our customers, depending on their desiredapplication, as well as on the nature and size of the designs, prototypes or end-products they seek to produce. Our wide range of systems allows us to offer ourcustomers systems at a number of different price points, depending on the features that our customers desire.We benefit from recurring revenues from the sale of resin and plastic consumables and related services. We provide products and services to our globalcustomer base throughout our offices in North America and internationally, including: Baden-Baden, Germany; Shanghai, China; and Tokyo, Japan, as wellas through our worldwide network of approximately 200 agents and resellers. Additionally, through our MakerBot subsidiary, we deploy an online saleschannel. We have approximately 2,300 employees and hold more than 1,200 granted patents or pending patent applications worldwide.Industry overviewHistorically, prototype development and customized manufacturing have been performed by traditional methods using metal extrusion, computer-controlled machining, and manual modeling techniques, in which blocks of material are carved or milled into specific objects. These subtractivemanufacturing methodologies have numerous limitations. They often require specialist technicians and can be time- and labor-intensive. The time intensityof traditional modeling can leave little room for design error or subsequent redesign without meaningfully impacting a product’s time-to-market anddevelopment cost. As a result, prototypes have traditionally been created only at selected milestones late in the design process, which prevents designersfrom truly visualizing and verifying the design of an object in the preliminary design stage. The inability to iterate a design rapidly hinders collaborationamong design team members and other stakeholders and reduces the ability to optimize a design, as time-to-market and optimization become necessary trade-offs in the design process.3D printing addresses the inherent limitations of traditional modeling technologies through its combination of functionality, quality, ease of use, speedand cost. 3D printing can be significantly more efficient and effective than traditional model-making techniques for use across the design process, fromconcept modeling and design review and validation, to fit and function prototyping, pattern making and tooling, to direct manufacturing of repeatable, cost-effective parts, short-run parts and customized end products. Introducing 3D modeling earlier in the design process to evaluate fit, form and function canresult in faster time-to-market and lower product development costs.For customized manufacturing, 3D printers eliminate the need for complex manufacturing set-ups and reduce the cost and lead-time associated withconventional tooling. DDM involves the use of 3D production systems for the direct manufacture of parts that are subsequently incorporated into the user’send product or manufacturing process. DDM is particularly attractive in applications that require short-run or low-volume parts or rapid turn-around, and forwhich tooling would not be appropriate due to small volumes. DDM also enables the production of objects that have been topologically designed, ordesigned on the basis of a computerized determination of where to place the key components of the object and how to connect them, a process that isgenerally unavailable using conventional subtractive manufacturing methodologies.The first commercial 3D printers were introduced in the early 1990s, and since the early 2000s, 3D printing technology has evolved significantly in termsof price, variety and quality of materials, accuracy, ability to create complex objects, ease of use and suitability for office environments. 3D printing isalready replacing traditional prototype development methodologies across various industries such as architecture, automotive, aerospace and defense,electronics, medical, footwear, toys, educational institutions, government and entertainment, underscoring its potential suitability for an even broader rangeof industries. Additionally, 3D printing has created new applications for model-making in certain new market categories, such as: education, whereinstitutions are increasingly incorporating 3D printing into their engineering and design course programs; dental and orthodontic applications, where 3Dprinted models are being used as replacements for traditional stone models, implants and surgical guides and for crowns and bridges for casting; and jewelry,where 3D printers are being used to produce custom-designed pieces of jewelry. Furthermore, 3D printing is being used in many industries for the directdigital manufacturing of end-use parts.Desktop 3D printer usage has shown rapid growth, with the introduction and adoption of affordable entry-level 3D printers and increased availability andcontent. These entry-level desktop printers have increased market adoption by professional designers and education institutes. We expect that the adoptionof 3D printing will continue to increase in the future, in terms of design applications, on the one hand, and DDM applications, on the other. We believe thatthe expansion of the market will be spurred by increased proliferation of 3D content and 3D authoring tools (3D computer-aided-design, or CAD, and othersimplified 3D authoring tools), as well as increased availability of 3D scanners. We also believe that increased adoption of 3D printing will be facilitated bycontinued improvements in 3D printing technology and greater affordability of entry-level systems. We are active in facilitating the growth of the 3Dprinting market by bringing intuitive, design-to-3D print solutions to the market. We also believe that the increasing adoption of 3D printing inmanufacturing processes serves as an important source of growth in the 3D printing industry.22Table of ContentsStratasys solutionsRange of solutionsWe provide an integrated solutions offering for different vertical markets focusing on aerospace, automotive, healthcare and education that includescompatible products and services that are designed for our customers’ use cases and effectively solve their specific applicative needs. Our solutions consist ofa broad range of 3D printing systems, consumables, software, paid parts, and strategic consulting and professional services.Our solutions allow our end-users to print 3D models and parts that enhance their ability to visualize, verify and communicate product designs, therebyimproving the design, development and validation processes and reducing time-to-market. Our systems create visual aids for concept modeling andfunctional prototyping to test fit, form and function, permitting rapid evaluation of product designs. Using presentation models developed with our systems,designers and engineers can typically conduct design reviews and identify potential design flaws earlier in the process and make improvements beforeincurring significant costs due to re-tooling and rework, allowing them to optimize a design rapidly and cost-effectively.Our systems also aid in the communication of ideas otherwise communicated in abstract or 2D media. For example, a model produced with our systemsmay be used as a sales tool, as a model or part display or simply for use in conducting a focus group. It may also be used for collaboration in the productdesign and manufacturing cycles at multiple locations more quickly, enabling visualization, touch and feel, which can be critical to the product evaluationor sales process.Our solutions also empower our end-users to quickly and efficiently manufacture parts that are subsequently incorporated into the user’s manufacturingprocesses and improve its effectiveness. For instance, our solutions enable the production of manufacturing tools such as jigs, fixtures, casts and injectionmolds that aid in the production and assembly process.Additive Manufacturing of end-use-parts, using our solutions, is also particularly attractive in applications that require short-run or low-volume parts thatrequire rapid turn-around, and for which tooling would not be cost-efficient due to small volumes, such as various applications in the aerospace, automotive,medical, dental and jewelry industries. Our solutions also enable the production of objects that generally could not otherwise be manufactured throughsubtractive manufacturing methodologies.Our solutions offering is characterized by the following distinguishing qualities:●material properties of printed objects, such as heat resistance, toughness, brittleness, elongation-to-break, color and flexibility; ●quality of printed objects measured by, among other things, resolution, accuracy and surface quality; ●multiple production-grade modeling materials; ●reliability of printing systems; ●speed of printing, including a one-step automated modeling process; ●customer service; ●ability to be used in an office environment; ●ease of use; and ●automatic, hands-free support removal.Range of technologies and differentiating factorsOur solutions are driven by our proprietary technologies, brought together through the combination of our constituent companies, each of which was aleader in the 3D printing industry. We hold more than 1,200 granted or pending patents internationally, and our 3D printing systems utilize our patentedFDM® and inkjet-based PolyJet™ technologies to enable the production of prototypes, tools used for production and manufactured goods directly from 3DCAD files or other 3D content. We believe that our broad range of product and service offerings is a function of our 3D printing technology leadership.A key attribute of our FDM® 3D printing technology is its ability to use a variety of production grade thermoplastic building materials that featuresurface resolution, chemical and heat resistance, color, and mechanical properties necessary for production of functional prototypes and parts for a variety ofindustries with specific demands and requirements. Use of these materials also enables the production of highly durable end parts as well as objects withsoluble cores for the manufacture of hollow parts, the manufacture of which were previously dependent on slower and more expensive subtractivemanufacturing technologies.We believe that this technology is differentiated by a number of factors that make it appropriate for 3D printing and additive manufacturing. These factorsinclude:●the ability to use FDM® systems in an office environment due to the absence of hazardous emissions; ●the relative absence of post-production processing; ●minimal material waste;23Table of Contents●better processing and build repeatability; ●ease of use, with minimal system set up requirements; ●no need for costly replacement lasers and laser parts; and ●a high degree of precision and reliability.We believe that our inkjet-based 3D printing technology is primarily differentiated from other competing technologies in its ability to scale and deliverhigh-resolution and multi-material, full-color 3D printing. Our easy-to-use, PolyJet™ 3D printers create high-resolution, smooth surface finish models thathave the look, feel and functionality of the final designed product. We offer a wide variety of office-friendly resin consumables, including rigid and flexible(rubber-like) materials and bio-compatible materials for medical applications. Using our PolyJet™ digital materials technology, our solutions also offer theonly 3D printing systems that deposit multiple materials simultaneously. This enables users, in a single build process, to print parts and assemblies made ofmultiple materials that each retain their distinct mechanical and physical properties. For example, users can print objects with both rigid and flexible portionsin a single build, or mix different base colors in order to achieve desired color tone. The PolyJet™ technology also enables on-demand mixing of a widevariety of resins to create a wide range of pre-defined digital materials, which are composite materials with modified physical or mechanical and colorproperties that result from the combination of multiple materials. The wide range of colors in which objects can be printed (over 1,500, as noted below) isanother one of the key differentiating attributes for our 3D printers.Our PolyJet inkjet-based 3D printing technology is also currently distinguished by its ability to offer a wide variety of materials including multi-materialprinting within a single part, in an office environment system.We believe that the range of 3D printing consumable materials that we offer, consisting of 57 FDM cartridge-based materials, 35 PolyJet cartridge-basedmaterials, 158 non-color digital materials, and over 360,000 color variations, is the widest in the industry.CustomersWe have a diverse set of customers worldwide, with no single customer or group of affiliated customers nor any individual sales agent or group ofaffiliated sales agents accounting for more than 10% of our sales in 2017, 2016 or 2015. Our solutions are used across a wide array of applications in a varietyof different industries.Our competitive strengthsWe believe that the following are our key competitive strengths:●Differentiated product offerings with superior model quality. Our portfolio of 3D printing systems is differentiated through a combination ofsuperior printing qualities, accuracy, print speed, the ability to print a range of materials with varying levels of strength, chemical and heat resistance,color and mechanical properties, the ability to print multiple materials simultaneously and suitability for office environments. Our offering spans thespectrum from entry-level desktop printers to high-end solutions for complex operations. Our FDM-based systems enable highly precise printing ofengineering and high-performance thermoplastic materials, enabling a wide range of manufacturing applications with little or no post-productionprocessing. Our PolyJet inkjet-based systems jet ultra-thin layers of material and enables voxel level control of the deposited materials, part realism(multi materials and colors), high accuracy and resolution and smooth finish to printed models. For use with these systems we offer a wide variety ofoffice-friendly resin consumables, including rigid, flexible (rubber-like), transparent and color materials. We believe that we offer the only printingsystem that utilizes the simultaneous jetting of up to six materials to enable end-users to print models with rigid, flexible and color materials, invirtually unlimited combinations, in a single build. ●Integrated solutions offering/ecosystem. We provide an integrated solutions offering that includes compatible products and services that aredesigned to meet the full gamut of our clients’ needs in an efficient manner, consisting of a broad range of systems, consumables and services,including: ●3D printers ●Materials ●Professional services ●Parts on demand ●Vertical applications ●Strategic consulting ●Partnerships and alliances ●Engineering product data management ●Enhanced collaboration among industry professionals, via our GrabCAD Community, which provides engineers and designers a resource for CADmodels and helps them communicate ideas and share designs.24Table of Contents●Proprietary technology platforms with multidisciplinary technological expertise. We believe that our proprietary 3D FDM and 3D inkjet-basedPolyJet printing engines offer end users the versatility and differentiated features necessary for a wide variety of current and potential applications. Wecombine our proprietary hardware platforms, featuring widely-deployed inkjet printer heads or easy-to-use extrusion heads with integrated softwareand a wide range of proprietary materials to develop and produce leading 3D printing systems. This allows us to offer a spectrum of 3D printers andprinting systems of varying features, capacities and price points, and to migrate the advanced features of our high-end products to our entry-levelproducts with greater efficiency. Our 3D printing solutions integrate innovations in a wide range of scientific disciplines, such as physics, chemistry,and mechanical and electrical engineering, as well as software development. We have made significant investments in developing and integratingtechnologies into our hardware platform, software and proprietary consumables. We believe that we have a strong base of technology know-how. Ourpatent portfolio consists of more than 1,200 granted or pending patents internationally. We believe that we have a culture of innovation, and weexpect to continue to enhance our solutions both to further drive market adoption of 3D printing and to broaden our market reach. ●Leading Direct Manufacturing Business. Our Stratasys Direct Manufacturing service business is one of the largest and leading AM parts serviceproviders globally. This unit’s knowledge of and experience in AM, including materials and systems knowhow, and AM end-use parts production isexpected to enhance our DDM offering suite. This unit offers a wide array of underlying printing technologies and materials. Furthermore, StratasysDirect Manufacturing enables us to offer a broader solution to our customers, catering to more of their 3D printing needs, whether by supply of 3Dprinters or of 3D printed parts. We believe this offering creates better customer intimacy and a competitive advantage for Stratasys. ●Large and growing installed base. Our differentiated offerings have led to a large and growing installed base. The significant installed base hasresulted in greater distribution reach and enhanced opportunities for cross selling, given the significantly broadened and complementary productofferings. It furthermore presents us with an opportunity to generate recurring revenues from sales of consumables to the installed base. ●Leading position in desktop 3D printing. Our MakerBot Desktop 3D printers provide accessible desktop 3D printers and materials and leadingcontent creation and sharing solutions. We believe that the desktop 3D printing category is poised for future growth driven by broader adoption of 3Dprinting and an increase the in number of applications where 3D printing is used. We believe our installed base, brand awareness and portfolio ofsolutions in this category positions us to capitalize on the continued growth of this category. ●Diverse, global customer base. We have a broad customer base, ranging from global market leading brands to small businesses and professionals andindividuals. Our end-users include companies across a wide range of industries and applications, including automotive, aerospace, architecture,consumer products, educational institutions, defense, medical analysis, medical systems, electronics, and heavy equipment. ●Extensive global reach. With approximately 200 channel partners around the world, we are well positioned to leverage the extensive geographicreach of our marketing and sales organization to serve customers and grow awareness of 3D printing for RP and DDM. In addition, through ourMakerBot subsidiary we deploy an online sales channel. ●Increased accessibility and ease of use for customers. Our newly launched GrabCAD Print software provides easy and accessible 3D printingworkflow. Some of our 3D printing systems may be accessed through Solidworks, PTC and Adobe computerized design solutions, which enable wideradoption of our 3D printing solutions by designers and manufacturers in a simplified and more accessible manner. We are collaborating with theabove and other leading Computer Aided Design and Product Lifecycle Management solution providers to further enable greater ease of use across thedesign to production work-flow.Our growth strategyThe key elements of our strategy for growth include the following:●Identifying new vertical applications for our proprietary 3D printing technologies. We believe that the proliferation of 3D content, advancementsin AM technology platforms and the introduction of improved materials will continue to drive growth in 3D printing. We intend to invest in theidentification of new applications (especially DDM applications) for which our proprietary printing technologies and materials are appropriate. Inaddition, we seek relevant niche applications where AM can provide substantial value, and develop a comprehensive solution to address theseopportunities. We also intend to encourage existing and potential customers to identify new applications in part by increasing awareness of thefeatures of our technology and product offerings. ●Increasing adoption of AM manufacturing solutions. We believe that the adoption of 3D printing for tooling and manufacturing applications can beaccelerated through working intimately with our customers and the 3D printing ecosystem, to reduce the complexity of using our solutions. We areinvesting in developing professional services capabilities to enhance our customers’ ability to use our solutions. In addition, we collaborate withstrategic partners in our ecosystem to streamline the integration of 3D printing solutions into the business processes of our customers.25Table of Contents●Leveraging our global reach to expand the customer base and further penetrate existing customers. We have a network of approximately 200resellers and selling agents around the world and various online channels. We intend to reach new customers and increase sales to existing customersby providing access to new solutions that address customers’ specific needs. These solutions include those offered by our Stratasys DirectManufacturing service. As part of this strategy we intend to grow awareness of 3D printing solutions for RP and DDM and to develop industry specificsales channels as part of our effort to commercialize a broader range of new DDM applications. Additionally, we expect to significantly expand ouronline presence and leverage our sales channel to the broader public. ●Driving further adoption through desktop systems. We expect to drive market adoption through increased sales of our desktop systems. Thesesystems are expected to penetrate a broad and largely untapped addressable market, targeting small design teams within large organizations, small andmedium-sized businesses, educational institutes and individuals. We expect to leverage our growing Thingiverse community to accelerate adoption.We expect to incorporate certain additional features of our high-end series of printers into our entry-level series over time. ●Maintaining and extending our technology lead. Our multidisciplinary technological leadership, as evidenced by our more than 1,200 granted orpending patents internationally, underpins our proprietary hardware, integrated software and range of 3D printing materials. We will seek to extendour technological capabilities by continuing to invest in our R&D efforts, which focus on enhancing our 3D PolyJet and FDM printing technologiesas well as developing new innovative solutions for 3D printing. In addition, we will continue developing consumables that offer an even broader arrayof physical, mechanical and aesthetic properties, thereby broadening user applications. We believe that by enhancing our AM technologicalcapabilities and by developing and introducing new materials for our 3D printing and production systems, we will be able to increase both the size of,and our share of, the 3D printing marketplace. ●Continuing servicing our installed base. Today our company has the largest AM solutions installed base in the industry. We consider the relationshipwith our customers to be a valuable asset, as reflected in our customer satisfaction surveys. We plan to continue nurturing these relationships toenhance the intimacy with our customers, which will allow us to address their needs better through innovative and holistic prototyping andmanufacturing solutions of printers and materials, AM printed parts service and advanced professional services. ●Integrated solutions offering. Due in major part to a series of acquisitions, we have in place an offering of solutions that includes a complete gamut ofcompatible systems, consumables and services (parts on-demand, professional and expert consulting services) that are designed to meet our clients’needs in an integrated, complete manner. We intend to leverage that as a basis for generating additional sales and revenues from existing customersand attracting new customers. ●Expert services – We intend to help companies to increase their adoption of 3D printing by helping them to identify new applications for ourtechnology and by developing robust business cases for investment by them in our technology. ●Enhanced collaboration. Our GrabCAD Community, which fosters collaboration among engineers and designers and helps them to communicateideas and share designs, enhances the likelihood that we can draw from these new collaborations and enhance awareness, and, as a result, sales, of ourintegrated solutions. ●Growing through partnerships, investments and complementary acquisitions. We may selectively pursue partnerships, which may include equityinvestments and/or acquisitions, to accelerate our growth strategy, and expand our product offerings, go-to-market and overall growth and marketpenetration.Products and servicesOur productsWe offer a dedicated range of products for applications such as rapid prototyping (RP), tooling, as well as manufacturing parts. Our products include 3Dprinting systems, consumable materials, software and services.Collectively, this portfolio of products offers a broad range of performance options for users, depending on their desired application, as well as on thenature and size of the designs, prototypes or final parts they seek to produce. Our products are available at a variety of different price points and includeentry-level desktop 3D printers, a range of systems for RP, and large production systems for additive manufacturing. We also offer a range of 3D printingmaterials (as described under “Consumable materials” below). The performance of our different systems varies in terms of capabilities, which are related to thefollowing features:●print speed; ●resolution; ●materials;26Table of Contents●resin cartridge capacity / filament spool size; ●maximum model (or tray) size; and ●duty cycle, or the number of parts that a printer can produce over a given period of time without requiring maintenance.Our systems also integrate our software and are supported by services that we provide to our customers, both directly and through our reseller channel.Printing systemsOur 3D printing systems, which are based on our proprietary FDM and PolyJet technologies, are described below:We offer a series of printing systems suitable for RP, from design validation, visualization and communication to form, fit and functional performancetesting. These systems are targeted at work groups and offer a variety of products that provide customers with a broad range of choices of features such asprinting capacity, production speed and price. The Objet systems offer high accuracy and print quality using a variety of PolyJet materials. The new F123Series product line allows users to create parts in PLA, ABS plus, ASA and PC-ABS materials. These materials enable production of parts with the strengthrequired for true form, fit and functional testing. The F123 Series printers are designed to enable ease of use and ease of maintenance and offers an easy-to-useyet functionality-rich user experience by using the GrabCAD Print software.We also offer printing systems typically used for Additive Manufacturing – production tooling and end parts applications - and high performancePrototyping applications.Our FDM technology based systems produce durable, production-grade thermoplastic heated parts suitable for RP manufacturing, tooling and end-usedparts use cases.Our PolyJet technology based high-end printing systems offer the ability to print multiple materials including color printing in a single part build.Our MakerBot Replicator series represents our desktop 3D printers, compact, and professional-grade 3D printers. Our desktop and compact 3D printers areaffordable, and designed for easy, desktop use and are typically used by individuals operating alone or within an enterprise. Our larger, professional 3Dprinter has a large build volume ideal for industrial prototypes, models and products.Consumable materialsWe sell a broad range of 3D printing materials, consisting of 57 FDM cartridge-based materials, 35 PolyJet cartridge-based materials, 158 non-colordigital materials, and over 360,000 color variations, for use in our 3D printers and production systems. The sale of these materials provides us with a recurringrevenue stream from users of our 3D printers and production systems.The materials we sell are described below:FDM-based materialsThe modeling and support filament used in the FDM-based 3D printers and production systems features a wide variety of production grade thermoplasticmaterials. We continue to develop filament modeling materials that meet our customers’ needs for increased speed, strength, accuracy, surface resolution,chemical and heat resistance, color, and mechanical properties. These materials are processed into our proprietary filament form, which is then utilized by ourFDM systems. Our spool-based system has proven to be a significant advantage for our products, because it allows the user to quickly change material bysimply mounting the lightweight spool and feeding the desired filament into the FDM devices that are office friendly. Currently, we have a variety of buildmaterials in multiple colors commercially available for use with our FDM technology.Each material has specific characteristics that make it appropriate for various applications. The ability to use different materials allows the user to matchthe material to the end use application, whether it is a pattern for tooling, a concept model, a functional prototype, a manufacturing tool, or a DDM end usepart.Our FDM-based printing materials are also environmentally friendly, as the packaging in which they are sold is returned to us for re-use after the contentsare consumed.Resin-based materialsOur resin consumables, which consist of our PolyJet family of proprietary acrylic-based photopolymer materials as well as our other inkjet-based systems,enable users of those products to create highly accurate, finely detailed 3D models and parts for a wide range of prototype development and customizedmanufacturing applications. The wide variety of resins within the PolyJet family is characterized by transparent, colored, or opaque visual properties andflexible, rigid or other physical properties. Support materials that are used together with the model materials enable the 3D printing of models with a widearray of complex geometries. Our resin-based materials are produced in-house and are specially designed for our printing systems.27Table of ContentsWe have invested significant research and development efforts in optimizing our PolyJet materials for use with inkjet technology. These efforts arereflected in the properties of these materials, which enable them to be packaged, stored, combined and readily cured upon printing. Our PolyJet materials arepackaged in cartridges for safe handling and are suitable for use in office environments. The polymerized materials can also be machined, drilled, chrome-plated or painted in most cases.SoftwareWe offer downloadable and cloud-based professional 3D printing workflow software as well as suites of software with our various 3D printing systems;each is designed to make the process of creating high-quality, highly detailed and accurate models more efficient. Our software supports commonly used 3Dfile formats and converts three-dimensional CAD databases into the appropriate code to operate our 3D printing systems. Our software also provides a widerange of features, including automatic support generation, part scaling, positioning and nesting, as well as geometric editing capabilities.Our different software suites are specifically designed for our different 3D printing systems and their applications. Accordingly, certain software focuseson increasing build speed and improving the design engineer’s control and efficiency over the entire build process. Other software suites offer simple “click& build” preparation and print tray editing, and provide easy, accurate job timing estimation and full job control, including queue management. Similarly,we offer software that allows users to make adjustments to 3D printing parameters.Jobs enter the queue either according to our software parameters configured by the system administrator, or in chronological order. The queue is thereforeeasily managed, as each user has access to his or her jobs and the administrator can set and adjust parameters and access permissions. In configurations ofmultiple printing systems on the network, each user automatically receives the parameters of the selected system, such as tray size, loaded materials, andqueue status, helping ensure easy, error-free tray setup.Online CommunityThingiverse.comThingiverse is our online community for sharing downloadable, digital 3D designs. The Thingiverse platform enables users to share and customize theirdigital designs. We believe that Thingiverse is the largest repository of free 3D printable content available to consumers. Thingiverse includes approximatelyone million public designs available for downloading. We have had more than two million uploads and more than 250 million downloads of designs via thisplatform.GrabCAD CommunityWe operate the GrabCAD Community for mechanical engineers and designers, where members can upload and download free CAD models, download ourGrabCAD Print and Workbench software, post and answer mechanical engineering questions, and participate in design challenges. This community had morethan 4.3 million members and more than 2.5 million CAD files available for free download at the end of 2017. The GrabCAD Community provides engineersand designers a resource for CAD models helping them communicate ideas and share designs.Our servicesSupport services and warrantyCustomer supportOur customer support department provides on-site system installation, basic and advanced operation training, a full range of maintenance and repairservices and remote technical support to users of our products. We provide support to our customers directly and through our resellers, ensuring that supportand parts may be readily obtained worldwide. We also offer training to our customers, particularly on our high-performance systems. Our support networkconsists of the following:●Stratasys-certified engineers providing worldwide, on-site installation, training and support. ●Direct support engineers through our company. ●Indirect support engineers through certified partners, including third-party service organizations or selected resellers who provide support for oursystems. ●Phone and direct on-site company support in eight languages, and resellers indirect support in local languages. ●Service logistics in key regional centers. ●Training facilities and resources in regional centers. ●Computerized management system and knowledge distribution platform to ensure high-quality support for our customers, including secure remoteaccess to a customer service database containing service history and technical documentation to aid in troubleshooting and repairing systems. ●Support, tools and up-to-date information to our direct customer and distribution channels from our product support engineering team.28Table of ContentsOur goal is to ensure maximum uptime and productivity for our AM systems. In order to do so, we regularly update the technical documentation related toour systems, offer extensive training courses for operators and promote proactive knowledge sharing designed to help users maximize the value of theirequipment and to expand the applications for which they employ our 3D printing and production systems.We offer services on a time and materials basis as well as through a number of post-warranty maintenance contracts with varying levels of support andpricing, as described below under “Extended support programs.” Customer support is represented on cross-functional product development teams within ourcompany to ensure that products are designed for serviceability and to provide our internal design and engineering departments with feedback on fieldissues. Failure analysis, corrective action, and continuation engineering efforts are driven by data collected in the field. Ongoing customer support initiativesinclude development of advanced diagnostic and troubleshooting techniques and comprehensive preventative maintenance programs, an expanded trainingand certification program for Stratasys and Stratasys partners’ technical personnel, and improved communication between the field and the factory.Basic warrantyOur printing systems are sold with warranties that range from 90 days to three years from installation, depending upon the product line and geographiclocation. Warranties are generally accompanied by on-site maintenance support. Receipt of maintenance and repair services after the warranty period issubject to the terms of our extended support programs, to the extent purchased by the end-user, as described below.Extended support programsRecognizing that our end-users have varying support needs, we offer a range of support programs that enable our end-users to continue to receivemaintenance services beyond the initial warranty period. These support programs contain varying degrees of the support services described above and arepriced accordingly.LeasingWe offer our customers the option to lease or rent 3D printers and 3D production systems. We also offer a ‘Try Before You Buy’ program, which providesbusinesses the ability to try out a 3D printer prior to deciding whether or not it’s the right fit for their company. The potential purchasers of a 3D printerreceive customer support from our company during the trial period.Expert ServicesStratasys Expert Services is an industry-leading strategy, operations and engineering consultancy focused on helping customers adopt 3D printingcapabilities.In today’s rapidly advancing 3D printing industry, customers find they desire guidance and advice on where to identify, apply and justify potential 3Dprinting investments. Expert Services fills a key value proposition for how more customers are buying by building plans before they are ready to buyequipment or parts.Expert Services delivers paid consulting projects leveraging 3D printing capabilities from strategy - driving product innovation to operational -productivity and cost improving on a factory floor. Expert Services also delivers engineering consulting and training services from application designoptimization for 3D printed parts to operators and design for additive manufacturing training. Expert Services harnesses the Stratasys expertise from strategicconsultants, application engineers, equipment, software and materials experts to provide unmatched 3D printing advisory to customers.Stratasys Direct Manufacturing paid-parts serviceStratasys Direct Manufacturing was formed on January 1, 2015 from our three AM service companies – RedEye (formerly a business unit of Stratasys, Inc.)and the acquired businesses known as Harvest Technologies and Solid Concepts – and is a provider of 3D printing and custom AM services. Stratasys DirectManufacturing offers AM capabilities encompassing a wide range of technologies allowing for plastic and metal parts for rapid prototyping and productionprocesses. Our Stratasys Direct Manufacturing paid-parts service produces prototypes and end-use parts for customers from a customer-provided CAD file.This allows the customer to benefit from our process-related knowhow, capitalize on the variety of materials and machine types available through our servicecenter, and take advantage of additional capacity using the latest in proven RP and DDM technologies and processes. Our Stratasys Direct Manufacturingbusiness operates a website service, www.stratasysdirect.com, which enables our customers to obtain quotes and order parts around the clock, seven days aweek. Stratasys Direct Manufacturing also provides companies with access to an Expert Services team, which helps companies to identify and evaluate newapplications for 3D printing.29Table of ContentsRecent Key Portfolio Additions & InnovationsTo further strengthen our leadership position and following our strategy to deepen the focus on additive manufacturing, tooling and rapid prototyping forspecific vertical markets, we have announced a variety of recent innovations across multiple applications for various key vertical markets, such asautomotive, aerospace, consumer products and healthcare.The Stratasys F123 Series – Smarter Prototyping for WorkgroupsIn February 2017, we introduced the F123 Series, a new comprehensive rapid prototyping solution that answers the specific needs of professionaldesigners and engineers in the workgroup and office setting. For the first time, the F123 Series enables end-to-end rapid prototyping for every stage of theprototyping process: Rapid, economically-effective concept verification models in PLA material and fast-draft mode; advanced design validation prototypesusing a 0.005 in. slice resolution and soluble support for unmatched precision, repeatability and aesthetics. Functional performance testing is enabled with awide range of functional FDM materials including ABS, ASA, and PC-ABS.Utilizing over 30 patented inventions selected from the entire Stratasys FDM range together with several new patents pending, the F123 Series systemsoffer wide-ranging engineering and interface usability enhancements to answer the needs of design workgroups: Engineering grade quality prototypingresults - but easy enough for anyone to learn and operate. Professional levels of productivity - but quiet and unobtrusive enough to work in the officeenvironment. The system incorporates GrabCAD Print software that enables printing straight from native CAD files, as well as the ability to manage jobs inreal-time and from remote. The F123 Series systems come in a range of three versatile platform sizes.Stratasys J 750 first true color 3D printerIn April 2016, we introduced what we believe to be an industry-first with our market-disruptive 3D printer, the J750. The new solution breaks restrictivetechnology barriers, enabling customers for the first time to mix-and-match full color gradients alongside a wide range of materials to achieve one-stoprealism without post-processing. This, together with the system's superior versatility, makes the J750 printer a choice 3D printing solution for productdesigners, engineers and manufacturers, as well as service bureaus.As the premier addition to the Objet Connex multi-color, multi-material series of 3D printers, the Stratasys J 750 3D printer allows customers to choosefrom more than 360,000 different color shades plus multiple material properties - ranging from rigid to flexible and opaque to transparent. Prototypes caninclude a vast array of colors, materials and material properties in the same part, speeding production of realistic models, prototypes and parts for virtuallyany application need - as well as delivering incomparable 3D printing versatility to produce tooling, molds, jigs and fixtures and more.Next Generation Production line enhancement for Fortus 900mcThe Stratasys Fortus 900mc next Generation offers a streamlined workflow and easier job-monitoring with an internal camera and GrabCAD PrintSoftware. Standard certifications are included, eliminating the effort and cost to qualify the 3D printer for the user's production floor.New FDM Material Nylon 6Stratasys Nylon 6 combines the strength of ULTEM 9085™ with the toughness of Nylon 12. It affords a higher strength and stiffness as well as a better 3Dprinted appearance than Nylon 12. Nylon 6 is one of the most widely used thermoplastics applied in traditional manufacturing. For FDM 3D printing,Stratasys Nylon 6 is specially formulated to control the right balance between mature Nylon 6 properties and controlled shrinkage effects during the FDM 3Dprinting process.Tough PC-ABS Material Now Available on More Stratasys 3D PrintersWith its high durability and smooth matte finish, PC-ABS is a natural choice for challenging applications, such as power-tool prototyping and industrialequipment manufacturing. Owners of the F370, Fortus 380mc and 450mc 3D Printers will now have the ability to leverage PC-ABS, reducing time-to-marketand high tooling costs for low-volume and custom production builds. 3D printing in real engineering thermoplastics results in stronger parts, more confidenttesting and prototypes that mimic the material properties of the final product.30Table of ContentsEasier to Manufacture Complex Hollow Composite Parts with New Sacrificial Tooling SolutionSacrificial tooling, a process in which 3D printed molds are wrapped in composite material and then removed after part curing, enables manufacturers torapidly and cost-effectively create complex, hollow composite parts. We are improving this process with a new sacrificial tooling solution, consisting of ournew ST-130 material and new fill patterns. Together, the new material and fill patterns provide faster dissolution, rapid build speed, better autoclaveperformance and greatly improved tool quality.GrabCad PrintIn May 2016, we announced a software strategy designed to make 3D printing significantly easier, more intuitive, and highly-accessible to moreapplications and users. The approach is powered by the popular GrabCAD Software as a Service (SaaS) platform and supported by a nearly 3.5 million-professional design, engineering, manufacturing and student community members.GrabCAD Print is the first application released under this new investment underscoring the critical nature of software as an essential ingredient of oursolutions based go-to-market strategy. A cloud-based environment for job preparation, scheduling, and monitoring, GrabCAD Print also includes innovativebusiness intelligence capabilities to provide users with actionable, end-to-end print job visibility and reports.Launched in November 2016 after a five-month beta trial period, GrabCAD Print offers compatibility with a broad range of Stratasys 3D printers. Inaddition, because the GrabCAD platform is open architected, industry-leading CAD solution providers such as PTC, Dassault Systèmes’ SOLIDWORKS, andSiemens PLM Software are collaborating with us to further simplify key functions in CAD-to-3D print workflow and improve quality of 3D printed parts.Stratasys Manufacturing Aids PackageOur Manufacturing Aids Package offers assistance to manufacturers seeking to create custom manufacturing tools. The materials-and-services packageincludes 40 hours of design work from Stratasys Professional Services to help make producing the first tool easy.To create strong, lightweight tools, the kit includes canisters of thermoplastic build material and support material. Build material includes Nylon 6 - ournewest engineering-grade material - as well as PC and ASA plastic. ASA is available in a choice of ten colors. The Manufacturing Aids Package includes ournew SR-35 advanced soluble support material which offers faster dissolve time and extended bath life compared to our previous SR-30 soluble supportmaterial.Stratasys H2000In November 2017, we introduced the Stratasys H2000, which utilizes horizontal FDM 3D printing to create strong, custom parts and tooling at unlimitedlengths. From an automobile armrest to an entire aircraft interior panel, the Stratasys H2000 delivers large, lightweight thermoplastic parts with repeatablemechanical properties. It is characterized by the following innovations:●3D print custom tooling faster and bigger than ever before. ●Rapidly production of strong parts for custom OEM and on-demand aftermarket applications. ●Builds very large, custom production parts with accuracy, repeatability and speed.The Stratasys H2000 is designed to meet the advancing demands in the aerospace and automotive industries and other industries for large lightweight,thermoplastic parts with repeatable mechanical properties. It eliminates the barriers to the production of large custom parts or panels, manufacturing aids suchas large trim and drill guides and holding fixtures, and development-level or small-run layup tooling. These applications are in high demand with FDMsystems because of the combination of strong thermoplastic materials and the freedom of design that additive manufacturing offers.The Stratasys H2000 supports new production part applications for custom vehicle interior components such as personalized custom panels, decorativeelements and large environmental control system ducts with all of the advantages of FDM, but with increased size and reduced speed limitations. That samescale and speed enables production of significantly larger prototypes without the need for bonding or assembly of multiple smaller parts.31Table of ContentsNext generation manufacturing technologies: Robotic Composite 3D DemonstratorAt IMTS 2016, we previewed demonstrations of next-generation manufacturing technologies as part of our vision for additive manufacturing specificallydedicated to verticals like automotive and aerospace. The new technology demonstrations build on our industrial FDM® 3D printing expertise to respond tothe needs of customers' most challenging applications, addressing manufacturers' needs to rapidly produce strong parts ranging in size from an automobilearmrest to an entire aircraft interior panel.The Stratasys Robotic Composite 3D Demonstrator delivers true 3D printing by using an 8-axis motion system that enables precise, directional materialplacement for strength while also dramatically reducing the need for speed-hindering support strategies. This redefines how future lightweight parts will bebuilt, and provides a glimpse into how this technology could be used to accelerate the production of parts made from a wide variety of materials.We developed the Robotic Composite 3D Demonstrator integrating our core additive manufacturing technologies with industrial motion controlhardware and design-to-3D printing software capabilities provided by Siemens.New Additive Manufacturing Technology for MetalWe are developing a new technology platform that will directly address the short run needs of customers' whose requirements include the production ofpilot-series parts, small batch manufacturing during product ramp-up and end-of-life, and customized, lightweight parts. Our new, innovative Stratasysplatform was developed internally over the past several years, incorporating the Company's proprietary jetting technology. The platform was designed frominception to provide the values of additive manufacturing for short run production, offering geometric freedom of manufacture, simplified supply chains andsuperior economics through the elimination of costly tooling, while overcoming material limitations of currently available metal-based additivemanufacturing systems, and is designed for use with commonly used powder metallurgy, starting with aluminum. The platform will initially target short runmetal production applications in the aerospace, automotive, defense, industrial machining and metal foundry industries, meaningfully expanding ouraddressable markets for the long term, and providing our customers with dramatically reduced cost-per-part, improved print speeds and reduced post-processing time and effort.Marketing, sales and distributionMarketingOur marketing strategies are focused on increasing awareness and thought leadership for our product and solution areas, strengthening our leadershipbrand position in the market, and in key vertical industries such as automotive, aerospace, healthcare, education and consumer goods, accelerating andsupporting sales growth, and increasing customer loyalty and customer lifetime value. We initiate thought-leadership, public and industry analyst relationsand product launch programs as well as integrated campaigns targeted to extend and deepen the relationship with our existing customers and win newcustomers, driving demand and lead generation throughout our strategic markets in which we and our resellers and agents operate.We use a variety of inbound and outbound marketing methods to reach potential customers. Examples of inbound methods include digital marketingdemand and lead generation programs including blogs, social media, search marketing (Search Engine Optimization and Pay-Per-Click advertising), leadnurturing with webinars, white papers etc. Outbound channel examples include digital and print communication programs, public relations, direct mail and e-mail campaigns, tradeshows, thought leadership events, newsletters, industry associations and referrals. In addition, we have built and maintain on-siteproduct and technology demonstration capabilities in certain regional offices across the world.We measure and analyze the success of various marketing initiatives and strive to identify current and future customer needs. Based on our analysis, wecreate and update our product roadmaps and individual marketing plans to help optimize distribution while helping ensure a smooth process of release, ramp-up and sales of our products.Sales distribution methodsOur sales organization sells, distributes and provides follow-up support services with respect to our AM systems and related consumables, through aworldwide sales and marketing infrastructure. We generally use three methods for distribution and support: (i) sales to resellers who purchase and resell ourproducts and through whom follow-up support and maintenance services and replacement parts are provided to end-users; (ii) sales of systems that arearranged by a network of independent sales agents worldwide, pursuant to which we sell directly to end-users, pay commissions to such agents, and directlyhandle the sale of consumables and provision of follow-up support services; and (iii) direct sales of systems or services to end-users without the involvementof any intermediaries, for which all aspects of our sales and follow-up services are handled exclusively by our company. In certain instances, the sameindividual or company can serve as a reseller with respect to certain of our products while acting as an independent sales agent for other products. Ourresellers and independent sales agents are overseen by regional managers and operate on a non-exclusive basis, although we believe that most do not sellcompeting AM systems.Almost all of the reseller and independent sales agent locations that distribute our products have our AM systems available for tradeshows, productdemonstrations, and other promotional activities. Additionally, many of them enjoy a long-term presence and offer third-party 3D CAD software packages intheir respective territories, enabling them to cross-sell our systems to customers who purchase those other products.32Table of ContentsIn addition to our direct and indirect seller network, we also offer our MakerBot Replicator series and related consumables and services through ouronline and retail channels.Geographical structure of sales organizationThe primary sales organization for our 3D printers and production systems including related consumables, materials and services is divided into groupsbased on the following geographical regions: Americas; Europe and Middle East; and Asia Pacific. This structure allows us to align our sales and marketingresources with our diverse customer base. Our sales organization in each region provides sales support to the network of independent reseller and sales agentlocations throughout the particular region. We also operate sales and service centers in various locations throughout North America and internationally,including: Baden-Baden, Germany; Shanghai, China; and Tokyo, Japan.Manufacturing and suppliersManufacturingThe manufacturing process for our 3D printing and production FDM and PolyJet systems consists of assembling those systems using both off-the-shelfand customized components manufactured specifically for us, and producing and packaging the consumables products to be used by those systems. Our corecompetencies include FDM and PolyJet printing systems assembly, systems integration, software installation and resin and filament manufacturing, all ofwhich are done internally at our facilities. We currently operate on a build-to-forecast basis and obtain all parts used in the FDM and PolyJet systemsmanufacturing process from either distributors of standard electrical or mechanical parts or custom fabricators of our proprietary designs. Our manufacturersand suppliers are periodically assessed by us based on their on-time performance and quality.We purchase major component parts for our FDM and PolyJet systems from various suppliers, subcontractors and other sources, and assemble them in ourU.S. and Israeli facilities. Our production floors have been organized using demand-flow techniques, or DFT, in order to achieve efficiency, quality andbalance of our production lines. As capacity constraints arise, because of our use of DFT, we can avoid the requirements of reconfiguring our productionfloor.Computer-based Material Requirements Planning, or MRP, is used for reordering to better ensure on-time delivery of parts and raw materials. Operatorsand assemblers are trained on assembly and test procedures including Assembly Requirement Documents, which originate in engineering. In themanufacturing processes for our FDM and PolyJet systems, we employ a Quality Management System, or QMS, that meets international quality standardsincluding ISO 9001:2008 and ISO 13485:2003, which relates to medical devices. We also outsource the manufacture of main subassemblies up to fullyassembled systems ready for integration.The system assembly process for our FDM and PolyJet systems includes semi-automated functional tests of key subassemblies. Key functionalcharacteristics are verified through these tests, and the results are stored in a statistical database.Upon completion of the assembly of our 3D printing and production FDM and PolyJet systems, we perform a complete power up and final quality tests tohelp ensure the quality of those products before shipment to customers. The final quality tests must be run error-free before the FDM and PolyJet systems canbe cleared for shipment. We maintain a history log of all FDM and PolyJet products that shows revision level configuration and a complete history during themanufacturing and test process. All identified issues on the FDM and PolyJet systems during the manufacturing process are logged, tracked and used to makecontinuous production process improvements. The commonality of designs among our different FDM and PolyJet product families eases the transition tomanufacturing new designs.Our filament production uses Factory Physics® techniques to manage critical buffers of time, capacity and inventory to ensure product availability. Wealso use the “5S” method (Sort, Set-in-order, Shine, Standardize and Sustain) as part of our lean manufacturing initiatives to improve organization andefficiency.Inventory and suppliersWe maintain an inventory of parts to facilitate the timely assembly of products required by our production plan. While most components are availablefrom multiple suppliers, certain components used in our systems and consumables are only available from single or limited sources. In particular, the printerheads for our PolyJet 3D printing systems are supplied by a sole supplier, Ricoh. We consider our single and limited-source suppliers (including Ricoh) to bereliable, but the loss of one of these suppliers could result in the delay of the manufacture and delivery of the relevant components (and, ultimately, of ourproducts). This type of delay could require us to find and re-qualify the component supplied by one or more new vendors. Although we consider ourrelationships with our suppliers to be good, we continue to develop risk management plans for these critical suppliers. In order to hedge against the risk of adiscontinuation of the supply of our inkjet printer heads in particular, we maintain a reasonable supply of excess inventory of printer heads.33Table of ContentsRicoh AgreementWe purchase the printer heads for our inkjet 3D printing systems from Ricoh pursuant to an OEM Purchase and License Agreement with Ricoh, or theRicoh Agreement.Under the Ricoh Agreement, we place orders for print heads and associated electronic components, or the Ricoh Products. Together with provision ofthese items, Ricoh provides us with a non-transferable, non-exclusive right to assemble, use and sell the Ricoh Products under Ricoh’s patent rights and tradesecrets.Pricing under the Ricoh Agreement depends on the quantity of Ricoh Products that we purchase during any given month, and to the extent that wecommit to a certain annual minimum prior to an upcoming year, we receive a set, discounted price for all Ricoh Products ordered during that upcoming year.The Ricoh Agreement runs for an initial term of five years (which, as most recently renewed, began in September 2016) and automatically renews foradditional one-year periods thereafter unless either party provides the other six months’ advance written notice of termination prior to the end of the then-current term. The Ricoh Agreement may be cancelled by either party if (i) the other party substantially breaches any material provision of the agreement andhas not cured such breach within 30 days of receipt of written notice thereof, or (ii) upon the occurrence of certain bankruptcy events, and may furthermore becancelled by Ricoh if we fail to cure a breach of an undisputed payment obligation within thirty (30) days of the breach.At any time during the term of the Ricoh Agreement, Ricoh may discontinue the manufacture and supply of a print head model, so long as it provides uswith at least eighteen (18) months’ prior written notice of such discontinuance and honors all of our purchase orders for the subject print head model withinthe notice period. During the period of five years from the earlier of either the termination of the Ricoh Agreement or the date of discontinuance of themanufacture of Ricoh Products (that is, following the 18-month notice period described in the previous sentence), we are entitled to purchase additionalRicoh Products for the sole purpose of providing replacements for the installed base of Ricoh Products, including one final purchase order that we may placein the final year of such five-year period and that must be filled by Ricoh within twelve months of when it is placed.The Ricoh Agreement may not be assigned by either party without the other party’s prior written consent, which may not be unreasonably withheld.Research and developmentWe maintain an ongoing program of research and development, or R&D, to develop new systems and materials and to enhance our existing product lines,as well as to improve and expand the capabilities of our systems and related software and materials. This includes significant technology platformdevelopments for our FDM, PolyJet and SCP technologies, our AM systems, including our integrated software, and our family of proprietary acrylic-basedphotopolymer materials for PolyJet printing and family of proprietary thermoplastic materials for FDM printing. Our research aims to develop incrementaland disruptive improvements, as well as more affordable products. Our engineering development efforts also focus on customer requested enhancements, anddevelopment of new modeling processes, software and user applications. In particular, we have devoted significant time and resources to the development ofa universally compatible and user-friendly software system.Our R&D department is divided into groups based on scientific disciplines and product lines. We continue to standardize our product platforms,leveraging each new design so that it will result in multiple product offerings that are developed faster and at reduced expense.We invest a significant amount of our resources in R&D, because we believe that superior technology is a key to maintaining a leading market position.Our net R&D expenses were approximately $96.2 million, $97.8 million and $122.4 million in the years ended December 31, 2017, 2016 and 2015,respectively.Our consumable materials development and production operations for our FDM and PolyJet systems are located at our facilities in Eden Prairie, MN, andKiryat Gat, Israel. The development and production facility for our Solidscape operations are located in Merrimack, New Hampshire. We regard theconsumable materials formulation and manufacturing process as a trade secret and hold patent claims related to these products. We purchase and formulateraw materials for our consumables production from various polymer resin and thermoplastic materials suppliers with different levels of processing and value-add applied to the raw materials.Intellectual propertyWe consider our proprietary technology to be important to the development, manufacture, and sale of our products and seek to protect such technologythrough a combination of patents, trade secrets, and confidentiality agreements and other contractual arrangements with our employees, consultants,customers and others. All patents and patent applications for additive manufacturing processes and apparatuses associated with our technology were assignedto us by those inventors. The principal granted patents relate to our FDM systems, our PolyJet technologies, our 3D printing processes and our consumables,certain of which have already expired and certain of which have expiration dates ranging from 2018 to 2037.We are also a party to various licenses and other arrangements that allow us to practice and improve our technology under a broad range of patents, patentapplications and other intellectual property, including a cross-license agreement with 3D Systems Corporation under which each party licensed certainpatents of the other party, an assignment of rights to us related to UV polymer-based U.S. patents, which underlie certain technologies that compete with ours,and a patent license agreement with Cornell University providing access to certain tool changer patents.34Table of ContentsIn addition, we own certain registered trademarks and make use of a number of additional registered and unregistered trademarks, including “Stratasys,”“Objet,” “PolyJet,” “Connex,” “J750,” “Vero,” “Tango,” “FDM,” “Fortus,” “F123 Series,” “F370,” “Dimension,” “uPrint,” “Mojo,” “Insight,” “StratasysDirect Manufacturing,” “SDM,” “Solidscape,” SolidJet,” “SCP,” “GrabCAD,” “GrabCAD Print,” “GrabCAD Community,” “GrabCAD Workbench,”“MakerBot,” “Thingiverse,” “Replicator,” the Stratasys Signet logo, and “Shaping Things.”We believe that, while our patents provide us with a competitive advantage, our success depends on our marketing, business development, applicationsknow-how and ongoing research and development efforts, in addition to our rights under granted and pending patents. Accordingly, we believe that theexpiration of any single patent, or the failure of any of single patent application to result in an issued patent, would not be material to our business orfinancial position. In any event, there can be no assurance that our patents or other intellectual property rights will afford us a meaningful competitiveadvantage. Please see the risk factor related to the expiration of our patents in “Item 3.D Risk Factors—Risks related to our intellectual property.”CompetitionOur principal competitors consist of other developers of additive manufacturing systems as well as other companies that use fused deposition modelingand inkjet-based technologies to compete in additive manufacturing. A variety of additive manufacturing technologies compete with our proprietarytechnologies, including:●Stereolithography; ●Selective Laser Sintering; ●Powder Binding; ●Digital Light Projection; and ●Selective Heat Sintering.The companies that use these technologies to compete with us include, inter alia, 3D Systems Corporation, EOS GmbH, HP, Carbon, EnvisionTEC GmbHand Markforged.These technologies, which compete for additive manufacturing users, possess various competitive advantages and disadvantages relative to one anotherwithin the key categories upon which competition centers, including resolution, accuracy, surface quality, variety and properties of the materials they useand produce, capacity, speed, color, transparency, the ability to print multiple materials and others. Due to these multiple categories, end-users usually makepurchasing decisions as to which technology to choose based on the characteristics that they value most. This decision is often application specific. Thecompetitive environment that has developed is therefore intense and dynamic, as players often position their technologies to capture demand in variousverticals simultaneously.For our entry-level and lower-end systems and materials, we face competition from a variety of sources, including companies using material extrusion andVat polymerization systems, such as Ultimaker, XYZ Printing and Formlabs. The competing offerings in the lower-end categories vary based on cost, printerand part quality, support materials, speed, ease of use, software ecosystem and reliability.We are positioned to compete in our industry mainly on the following bases, which we view as competitive strengths:●material properties of printed objects, such as heat resistance, toughness, brittleness, elongation-to-break, color and flexibility; ●quality of printed objects measured by, among other things, resolution, accuracy and surface quality; ●multiple production-grade modeling materials; ●our offering of the only multi-color, multi-material 3D printing systems in the market; ●reliability of printing systems; ●speed of printing, including a one-step automated modeling process; ●ability to be used in an office environment;35Table of Contents●ease of use; ●automatic, hands-free support removal; ●high level of customer service; and ●deep application and domain knowhow and expert services.We offer a wide range of systems with varying features, capacities and price points. We believe that this enables us to compete with the other additivemanufacturing technologies for a wide range of customers with a variety of applications and goals for their additive manufacturing.We also compete with companies that use traditional prototype development and customized manufacturing technologies, and expect future competitionto arise from the development of new technologies or techniques.SeasonalityHistorically, our results of operations have been subject to seasonal factors. Stronger demand for our products has historically occurred in our fourthquarter primarily due to our customers’ capital expenditure budget cycles and our sales compensation incentive programs. Our first and third quarters havehistorically been our weakest quarters for overall unit demand. Although the first quarter has had higher volumes in recent years from the successfulintroduction of new products, it is typically a slow quarter for capital expenditures in general. The third quarter is typically when we see our largest volume ofeducational related sales, which normally qualify for special discounts as part of our long-term penetration strategy.We furthermore experience seasonality within individual fiscal quarters, as a substantial percentage of our system sales often occur within the last monthof each fiscal quarter. This trend has the potential to expose our quarterly or annual operating results to the risk of unexpected, decreased revenues in the caseof our inability to build systems, consummate sales and recognize the accompanying revenues prior to the end of a given quarter.Global operationsWe have offices in Brazil, China, Germany, Hong Kong, Israel, Japan, Korea, India, Mexico, Switzerland, the United Kingdom and the United States, andorganize our operations by geographic region, focusing upon the following key regions: the Americas; Europe and Asia Pacific. Our products are distributedin each of these regions, as well as in other parts of the world. Our customers are dispersed geographically, and we are not reliant on any single country orregion for most of our product sales and services revenues, although 60% of our 2017 sales were made in North America and our SDM printed parts servicesare based in the United States and therefore reliant on United States customers. A breakdown of our consolidated revenues by geographic markets and bycategories of operations (that is, products and services) for the years ended December 31, 2017, 2016 and 2015 is provided in “Item 5.A Operating andFinancial Review and Prospects—Operating Results.” In maintaining global operations, our business is exposed to risks inherent in such operations,including currency fluctuations, market conditions, and inflation in the primary locations in which our operating expenditures are incurred. Information oncurrency exchange risk, market risk, and inflationary risk appears elsewhere in this annual report in “Item 3.D Risk Factors” and in “Item 11. Quantitative andQualitative Disclosure About Market Risk—Foreign Currency Exchange Risk.”EmployeesThe total number of our full-time equivalent employees, and the distribution of our employees (i) geographically and (ii) within the divisions of ourcompany, in each case as of December 31, 2017, 2016 and 2015, are set forth in this annual report in “Item 6.D Directors, Senior Management and Employees—Employees”.Government regulationWe are subject to various local, state and federal laws, regulations and agencies that affect businesses generally. These include:●regulations promulgated by federal and state environmental and health agencies; ●foreign environmental regulations, as described under “Environmental matters” immediately below; ●the federal Occupational Safety and Health Administration; ●the U.S. Foreign Corrupt Practices Act; ●laws pertaining to the hiring, treatment, safety and discharge of employees; ●export control regulations for U.S. made products; and ●CE regulations for the European market.36Table of ContentsEnvironmental mattersWe are subject to various environmental, health and safety laws, regulations and permitting requirements, including (but not limited to) those governingthe emission and discharge of hazardous materials into ground, air or water; noise emissions; the generation, storage, use, management and disposal ofhazardous and other waste; the import, export and registration of chemicals; the cleanup of contaminated sites; and the health and safety of our employees.Based on information currently available to us, we do not expect environmental costs and contingencies to have a material adverse effect on our operations.The operation of our facilities, however, entails risks in these areas. Significant expenditures could be required in the future to comply with environmental orhealth and safety laws, regulations or requirements.Under such laws and regulations, we are required to obtain environmental permits from governmental authorities for certain operations. In particular, inIsrael, where we assemble our inkjet-based PolyJet 3D printing systems and manufacture our resin consumables, businesses storing or using certain hazardousmaterials, including materials necessary for our Israeli manufacturing process, are required, pursuant to the Israeli Dangerous Substances Law 5753-1993, toobtain a toxin permit from the Ministry of Environmental Protection. Our two Israeli toxin permits will remain in effect until November 2019 and February2019, respectively.In the European marketplace, amongst others, electrical and electronic equipment is required to comply with the Directive on Waste Electrical andElectronic Equipment of the European Union (EU), which aims to prevent waste by encouraging reuse and recycling, and the EU Directive on Restriction ofUse of Certain Hazardous Substances, which restricts the use of various hazardous substances in electrical and electronic products. Our products and certaincomponents of such products “put on the market” in the EU (whether or not manufactured in the EU) are subject to these directives. Additionally, we arerequired to comply with certain laws, regulations and directives, including TSCA in the United States, as well as REACH and CLP in the EU, governingchemicals. These and similar laws and regulations require, amongst others, the registration, evaluation, authorization and labeling of certain chemicals thatwe use and ship.Israeli Tax Considerations and Government ProgramsTax regulations also have a material impact on our business, particularly in Israel where we are organized and have one of our headquarters. Thefollowing is a summary of certain aspects of the current tax structure applicable to companies in Israel, with special reference to its effect on us (and ouroperations, in particular). The following also contains a discussion of the Israeli government programs benefiting us. To the extent that the discussion isbased on new tax legislation that has not been subject to judicial or administrative interpretation, we cannot assure you that the tax authorities or the courtswill accept the views expressed in this discussion. This discussion does not address all of the Israeli tax provisions that may be relevant to our Company. Fora discussion of the Israeli tax consequences related to ownership of our capital stock, please see “Israeli Taxation Considerations” in Item 10.E below.General Corporate Tax Structure in IsraelGenerally, Israeli companies are subject to corporate tax on their taxable income. In 2017, the corporate tax rate was 24% (as of 2018, the corporate taxrate is 23%). However, the effective tax rate payable by a company that derives income from an “Approved Enterprise”, a “Beneficiary Enterprise” or a“Preferred Enterprise”, as further discussed below, may be considerably lower. See “Law for the Encouragement of Capital Investments” in this Item below.Capital gains derived by an Israeli company are generally subject to the prevailing regular corporate tax rate.Besides being subject to the general corporate tax rules in Israel, we have also, from time to time, applied for and received certain grants and tax benefitsfrom, and participate in, programs sponsored by the Government of Israel, described below.Law for the Encouragement of Capital InvestmentsThe Law for the Encouragement of Capital Investments, 5719-1959, to which we refer as the Investment Law, provides certain incentives for capitalinvestments in a production facility (or other eligible assets). Generally, an investment program that is implemented in accordance with the provisions of theInvestment Law, which may be either an “Approved Enterprise”, a “Beneficiary Enterprise” or a “Preferred Enterprise”, is entitled to benefits as discussedbelow. These benefits may include cash grants from the Israeli government and tax benefits, based upon, among other things, the location of the facility inwhich the investment and manufacture activity are made. In order to qualify for these incentives, an Approved Enterprise, a Beneficiary Enterprise or aPreferred Enterprise is required to comply with the requirements of the Investment Law.The Investment Law has been amended several times over the recent years, with the three most significant changes effective as of April 1, 2005, to whichwe refer as the 2005 Amendment, as of January 1, 2011, to which we refer as the 2011 Amendment, and as of January 1, 2017, to which we refer as the 2017Amendment. Pursuant to the 2005 Amendment, tax benefits granted in accordance with the provisions of the Investment Law prior to its revision by the 2005Amendment, remain in force, but any benefits granted subsequently are subject to the provisions of the amended Investment Law. Similarly, the 2011Amendment introduced new benefits instead of the benefits granted in accordance with the provisions of the Investment Law prior to the 2011 Amendment,yet companies entitled to benefits under the Investment Law as in effect up to January 1, 2011, were entitled to choose to continue to enjoy such benefits,provided that certain conditions are met, or elect instead, irrevocably, to forego such benefits and elect for the benefits of the 2011 Amendment. The 2017Amendment introduces new benefits for Technological Enterprises, alongside the existing tax benefits.37Table of ContentsThe following discussion is a summary of the Investment Law prior to its amendments as well as the relevant changes contained in the new legislations.Tax benefits for Approved Enterprises approved before April 1, 2005.Under the Investment Law prior to the 2005 Amendment, a company that wished to receive benefits on its investment program that is implemented inaccordance with the provisions of the Investment Law, to which we refer as an “Approved Enterprise”, had to receive an approval from the Israeli Authorityfor Investments and Development of the Industry and Economy, to which we refer as the Investment Center. Each certificate of approval for an ApprovedEnterprise relates to a specific investment program in the Approved Enterprise, delineated both by the financial scope of the investment, including sources offunds, and by the physical characteristics of the facility or other assets.An Approved Enterprise may elect to forego any entitlement to the cash grants otherwise available under the Investment Law and, instead, participate inan alternative benefits program. We have chosen to receive the benefits through the alternative benefits program. Under the alternative benefits program, acompany’s undistributed income derived from an Approved Enterprise will be exempt from corporate tax for a period of between two and ten years from thefirst year of taxable income, depending on the geographic location within Israel of the Approved Enterprise, and a reduced corporate tax rate of between 10%to 25% for the remainder of the benefits period, depending on the level of foreign investment in the company in each year, as detailed below. The benefitscommence on the date in which that taxable income is first earned. The benefits period under Approved Enterprise status is limited to 12 years from the yearin which the production commenced (as determined by the Investment Center), or 14 years from the year of receipt of the approval as an Approved Enterprise,whichever ends earlier. If a company has more than one Approved Enterprise program or if only a portion of its capital investments are approved, its effectivetax rate is the result of a weighted combination of the applicable rates. The tax benefits available under any certificate of approval relate only to taxableincome attributable to the specific program and are contingent upon meeting the criteria set out in the certificate of approval. Income derived from activitythat is not integral to the activity of the Approved Enterprise will not enjoy tax benefits. Our entitlement to the above benefits is subject to fulfillment ofcertain conditions, according to the law and related regulations.A company that has an Approved Enterprise program is eligible for further tax benefits if it qualifies as a Foreign Investors’ Company, to which we refer asan FIC. An FIC eligible for benefits is essentially a company with a level of foreign investment, as defined in the Investment Law, of more than 25%. Thelevel of foreign investment is measured as the percentage of rights in the company (in terms of shares, rights to profits, voting and appointment of directors),and of combined share and loan capital, that are owned, directly or indirectly, by persons who are not residents of Israel. The determination as to whether ornot a company qualifies as a FIC is made on an annual basis according to the lowest level of foreign investment during the year. An FIC that has an ApprovedEnterprise program will be eligible for an extension of the period during which it is entitled to tax benefits under its Approved Enterprise status (so that thebenefits period may be up to ten years) and for further tax benefits if the level of foreign investment exceeds 49%. If a company that has an ApprovedEnterprise program is a wholly owned subsidiary of another company, then the percentage of foreign investments is determined based on the percentage offoreign investment in the parent company.The corporate tax rates and related levels of foreign investments with respect to an FIC that has an Approved Enterprise program are set forth in thefollowing table:CorporatePercentage of non-Israeli ownership Tax RateOver 25% but less than 49%25%49% or more but less than 74%20%74% or more but less than 90%15%90% or more10%A company that has elected to participate in the alternative benefits program and that subsequently pays a dividend out of the income derived from theportion of its facilities that have been granted Approved Enterprise status during the tax exemption period will be subject to tax in respect of the amount ofdividend distributed (grossed up to reflect such pre-tax income that it would have had to earn in order to distribute the dividend) at the corporate tax rate thatwould have been otherwise applicable if such income had not been tax-exempted under the alternative benefits program. This rate generally ranges from 10%to 25%, depending on the level of foreign investment in the company in each year, as explained above.In addition, dividends paid out of income attributed to an Approved Enterprise (or out of dividends received from a company whose income is attributedto an Approved Enterprise) are generally subject to withholding tax at the rate of 15%, or at a lower rate provided under an applicable tax treaty (subject tothe receipt in advance of a valid certificate from the Israel Tax Authority allowing for a reduced tax rate). The 15% tax rate is limited to dividends anddistributions out of income derived during the benefits period and actually paid at any time up to 12 years thereafter. After this period, the withholding tax isapplied at a rate of up to 30%, or at the lower rate under an applicable tax treaty (subject to the receipt in advance of a valid certificate from the Israel TaxAuthority allowing for a reduced tax rate). In the case of an FIC, the 12-year limitation on reduced withholding tax on dividends does not apply.38Table of ContentsThe Investment Law also provides that an Approved Enterprise is entitled to accelerated depreciation on its property and equipment that are included inan approved investment program in the first five years of using the equipment. This benefit is an incentive granted by the Israeli government regardless ofwhether the alternative benefits program is elected.The benefits available to an Approved Enterprise are subject to the continued fulfillment of conditions stipulated in the Investment Law and itsregulations and the criteria in the specific certificate of approval, as described above. If a company does not meet these conditions, it would be required torefund the amount of tax benefits, adjusted to the Israeli consumer price index and interest, or other monetary penalty.We have received the requisite approval, including a final approval, for our Approved Enterprise investment programs, in accordance with the InvestmentLaw. The above-described benefits that accompany these investment programs and our Beneficiary Enterprise investment programs (for which accompanyingbenefits are described below) have had the effect, both historically and in 2014, 2015 and 2016, of reducing our (and before the Stratasys-Objet merger,Objet’s) effective consolidated tax rates considerably lower than the statutory Israeli corporate tax rate which in 2018 and onwards is set at 23% (thecorporate tax rate was 25% and 24% in 2016 and 2017, respectively).Tax benefits under the 2005 Amendment that became effective on April 1, 2005.The 2005 Amendment applies to new investment programs and investment programs commencing after 2004, and does not apply to investment programsapproved prior to April 1, 2005. The 2005 Amendment provides that terms and benefits included in any certificate of approval that was granted before the2005 Amendment became effective (April 1, 2005) will remain subject to the provisions of the Investment Law as in effect on the date of such approval.Pursuant to the 2005 Amendment, the Investment Center will continue to grant Approved Enterprise status to qualifying investments. However, the 2005Amendment limits the scope of enterprises that may be approved by the Investment Center by setting criteria for the approval of a facility as an ApprovedEnterprise.An enterprise that qualifies under the new provisions is referred to as a “Beneficiary Enterprise”, rather than “Approved Enterprise”. The 2005Amendment provides that the approval of the Investment Center is required only for Approved Enterprises that receive cash grants. As a result, a company isno longer required to obtain the advance approval of the Investment Center in order to receive the tax benefits previously available under the alternativebenefits program. Rather, a company may claim the tax benefits offered by the Investment Law directly in its tax returns, provided that its facilities meet thecriteria for tax benefits set forth in the 2005 Amendment. A company that has a Beneficiary Enterprise may, at its discretion, approach the Israel TaxAuthority for a pre-ruling confirming that it is in compliance with the provisions of the Investment Law.Tax benefits are available under the 2005 Amendment to production facilities (or other eligible facilities) which are generally required to derive 25% ormore of their business income from export to specific markets with a population of at least 14 million in 2012 (such export criteria will further be increased inthe future by 1.4% per annum). In order to receive the tax benefits, the 2005 Amendment states that a company must make an investment which meets certainconditions set forth in the amendment for tax benefits and which exceeds a minimum amount specified in the Investment Law. Such investment entitles acompany to receive a Beneficiary Enterprise status with respect to the investment, and may be made over a period of no more than three years ending in theyear in which the company chose to have the tax benefits apply to the Beneficiary Enterprise. The benefits period under the Beneficiary Enterprise status islimited to 12 years from the year the company chose to have its tax benefits apply. Where a company requests to have the tax benefits apply to an expansionof existing facilities, only the expansion will be considered to be a Beneficiary Enterprise and the company’s effective tax rate will be the weighted averageof the applicable rates. In such case, the minimum investment required in order to qualify as a Beneficiary Enterprise must exceed a certain percentage of thevalue of the company’s production assets before the expansion.The extent of the tax benefits available under the 2005 Amendment to qualifying income of a Beneficiary Enterprise depends on, among other things, thegeographic location within Israel of the Beneficiary Enterprise. Such tax benefits include an exemption from corporate tax on undistributed income for aperiod of between two to ten years, depending on the geographic location of the Beneficiary Enterprise within Israel, and a reduced corporate tax rate ofbetween 10% to 25% for the remainder of the benefits period, depending on the level of foreign investment in the company in each year, as explained above.Dividends paid out of income attributed to a Beneficiary Enterprise will be treated similarly to payment of dividends by an Approved Enterprise underthe alternative benefits program. Therefore, dividends paid out of income attributed to a Beneficiary Enterprise (or out of dividends received from a companywhose income is attributed to a Beneficiary Enterprise) are generally subject to withholding tax at the rate of 15% or such lower rate as may be provided in anapplicable tax treaty (subject to the receipt in advance of a valid certificate from the Israel Tax Authority allowing for a reduced tax rate). The reduced rate of15% is limited to dividends and distributions out of income attributed to a Beneficiary Enterprise during the benefits period and actually paid at any time upto 12 years thereafter except with respect to an FIC, in which case the 12-year limit does not apply.Furthermore, a company qualifying for tax benefits under the 2005 Amendment, which pays a dividend out of income attributed to its BeneficiaryEnterprise during the tax exemption period, will be subject to tax in respect of the amount of the dividend distributed (grossed-up to reflect the pre-taxincome that it would have had to earn in order to distribute the dividend) at the corporate tax rate which would have otherwise been applicable.39Table of ContentsAs of December 31, 2017, we had accumulated tax-exempt income of approximately $229.4 million that is attributable to our various Approved andBeneficiary Enterprise programs. If such tax exempt income were to be distributed, it would be taxed at the reduced corporate tax rate applicable to suchincome, which would have amounted to approximately $22.9 million of tax liability as of December 31, 2017.The benefits available to a Beneficiary Enterprise are subject to the continued fulfillment of conditions stipulated in the Investment Law and itsregulations. If a company does not meet these conditions, it would be required to refund the amount of tax benefits, as adjusted by the Israeli consumer priceindex and interest, or other monetary penalty.Tax benefits under the 2011 Amendment that became effective on January 1, 2011.The 2011 Amendment canceled the availability of the benefits granted in accordance with the provisions of the Investment Law prior to 2011 and,instead, introduced new benefits for income generated by a “Preferred Company” through its Preferred Enterprise (as such terms are defined in the InvestmentLaw) as of January 1, 2011. A Preferred Company is defined as either (i) a company incorporated in Israel which is not wholly owned by a governmentalentity, or (ii) a limited partnership that: (a) was registered under the Israeli Partnerships Ordinance and; (b) all of its limited partners are companiesincorporated in Israel, but not all of them are governmental entities; which has, among other things, Preferred Enterprise status and is controlled and managedfrom Israel. Pursuant to the 2011 Amendment, a Preferred Company was entitled to a reduced corporate tax rate of 15% with respect to its preferred incomeattributed to its Preferred Enterprise in 2011 and 2012, unless the Preferred Enterprise was located in a certain development zone, in which case the rate was10%. Such corporate tax rate was reduced to 12.5% and 7%, respectively, in 2013 and was increased to 16% and 9%, respectively, in 2014 until 2016.Pursuant to the 2017 Amendment, in 2017 and thereafter, the corporate tax rate for Preferred Enterprise which is located in a certain development zone wasdecreased to 7.5%, while the reduced corporate tax rate for other development zones remains 16%. Income derived by a Preferred Company from a ‘SpecialPreferred Enterprise’ (as such term is defined in the Investment Law) would be entitled, during a benefits period of 10 years, to further reduced tax rates of 8%,or to 5% if the Special Preferred Enterprise is located in a certain development zone. As of January 1, 2017, the definition for “Special Preferred Enterprise”includes less stringent conditions.Dividends paid out of preferred income attributed to a Preferred Enterprise or to a Special Preferred Enterprise are generally subject to withholding tax atsource at the rate of 20% or such lower rate as may be provided in an applicable tax treaty (subject to the receipt in advance of a valid certificate from theIsrael Tax Authority allowing for a reduced tax rate). However, if such dividends are paid to an Israeli company, no tax is required to be withheld (although, ifsuch dividends are subsequently distributed to individuals or a non-Israeli company, withholding tax at a rate of 20% or such lower rate as may be providedin an applicable tax treaty will apply). In 2017-2019, dividends paid out of preferred income attributed to a Special Preferred Enterprise, directly to a foreignparent company, are subject to withholding tax at source at the rate of 5% (temporary provisions).The 2011 Amendment also provided transitional provisions to address companies already enjoying current benefits under the Investment Law. Thesetransitional provisions provide, among other things, that unless an irrevocable request is made to apply the provisions of the Investment Law as amended in2011 with respect to income to be derived as of January 1, 2011: (i) the terms and benefits included in any certificate of approval that was granted to anApproved Enterprise, which chose to receive grants, before the 2011 Amendment became effective, will remain subject to the provisions of the InvestmentLaw as in effect on the date of such approval, and subject to certain conditions;. (ii) the terms and benefits included in any certificate of approval that wasgranted to an Approved Enterprise, that had participated in an alternative benefits program, before the 2011 Amendment became effective will remain subjectto the provisions of the Investment Law as in effect on the date of such approval, provided that certain conditions are met; and (iii) a Beneficiary Enterprisecan elect to continue to benefit from the benefits provided to it before the 2011 Amendment came into effect, provided that certain conditions are met.We have examined the possible effect, if any, of these provisions of the 2011 Amendment on our financial statements and have decided, at this time, notto opt to apply the new benefits under the 2011 Amendment.New Tax benefits under the 2017 Amendment that became effective on January 1, 2017.The 2017 Amendment was enacted as part of the Economic Efficiency Law that was published on December 29, 2016, and was effective as of January 1,2017. The 2017 Amendment provides new tax benefits for two types of “Technology Enterprises”, as described below, and is in addition to the other existingtax beneficial programs under the Investment Law.The 2017 Amendment provides that a technology company satisfying certain conditions will qualify as a “Preferred Technology Enterprise” and willthereby enjoy a reduced corporate tax rate of 12% on income that qualifies as “Preferred Technology Income,” as defined in the Investment Law. The tax rateis further reduced to 7.5% for a Preferred Technology Enterprise located in development zone A. In addition, a Preferred Technology Company will enjoy areduced corporate tax rate of 12% on capital gain derived from the sale of certain “Benefitted Intangible Assets” (as defined in the Investment Law) to arelated foreign company if the Benefitted Intangible Assets were acquired from a foreign company on or after January 1, 2017 for at least NIS 200 million,and the sale receives prior approval from the National Authority for Technological Innovation, to which we refer as NATI.The 2017 Amendment further provides that a technology company satisfying certain conditions will qualify as a “Special Preferred TechnologyEnterprise” and will thereby enjoy a reduced corporate tax rate of 6% on “Preferred Technology Income” regardless of the company’s geographic locationwithin Israel. In addition, a Special Preferred Technology Enterprise will enjoy a reduced corporate tax rate of 6% on capital gain derived from the sale ofcertain “Benefitted Intangible Assets” to a related foreign company if the Benefitted Intangible Assets were either developed by an Israeli company oracquired from a foreign company on or after January 1, 2017, and the sale received prior approval from NATI. A Special Preferred Technology Enterprise thatacquires Benefitted Intangible Assets from a foreign company for more than NIS 500 million will be eligible for these benefits for at least ten years, subject tocertain approvals as specified in the Investment Law.40Table of ContentsDividends distributed by a Preferred Technology Enterprise or a Special Preferred Technology Enterprise, paid out of Preferred Technology Income, aregenerally subject to withholding tax at source at the rate of 20% or such lower rate as may be provided in an applicable tax treaty (subject to the receipt inadvance of a valid certificate from the Israel Tax Authority allowing for a reduced tax rate). However, if such dividends are paid to an Israeli company, no taxis required to be withheld. If such dividends are distributed to a foreign company and other conditions are met, the withholding tax rate will be 4%.We are examining the impact of the 2017 Amendment and the degree to which we will qualify as a Preferred Technology Enterprise or Special PreferredTechnology Enterprise, and the amount of Preferred Technology Income or other benefits that we may receive from the 2017 Amendment.C. Organizational Structure.Our corporate structure includes Stratasys Ltd., our Israeli parent company, and the following main active wholly-owned subsidiary entities: Stratasys,Inc., a Delaware corporation, which was formerly a publicly held company and which became our indirect, wholly-owned subsidiary as a result of theStratasys-Objet merger; Baccio Corporation (formerly known as Cooperation Technology Corporation), to which we refer as MakerBot, a Delawarecorporation which is the direct parent company of MakerBot Industries, LLC, which we acquired in August 2013; Stratasys Direct, Inc. (our parts servicebusiness unit), a California corporation; Stratasys AP Limited, a Hong Kong limited company, which together with several other subsidiaries (includingStratasys Japan Co. Ltd., our Japanese subsidiary, and Stratasys Shanghai Ltd., our Chinese subsidiary), carries out most of our operations in the Asia Pacificregion; and Stratasys GMBH, a German limited liability company, which together with other subsidiaries (including Stratasys Schweiz AG (StratasysSwitzerland Ltd.), our Swiss subsidiary) carries out our European operations. We also formed Stratasys Latin America Representacao De Equipamentos Ltd., aBrazilian subsidiary, which has commenced our Brazilian operations. Please see the list of subsidiaries appended to this annual report as Exhibit 8 for acomplete list of our subsidiaries as of the date of this annual report.D. Property, Plants and Equipment.We have dual headquarters, in Eden Prairie, Minnesota and Rehovot, Israel. Our Eden Prairie, Minnesota headquarters (near Minneapolis) comprisesexecutive offices and production facilities that encompassed, as of December 31, 2017, approximately 377,090 square feet, of which we owned 295,544square feet, in four buildings. Those buildings served the following purposes: system assembly, inventory storage, operations and sales support;manufacturing for one of our Stratasys Direct Manufacturing paid parts service locations; research and development, filament manufacturing, administrative,marketing and sales activities; and expansion of our production capacity for systems and consumables. In early 2018, we sold one of those buildings, therebyreducing our total space at our Eden Prairie headquarters to 304,616 square feet, of which 223,070 square feet is owned by us. Our Rehovot, Israelheadquarters, which we moved into at the beginning of 2017, are newly constructed facilities with approximately 230,355 square feet, situated on a propertythat we purchased in 2015. It houses our Israeli administrative headquarters, our research and development facilities and certain manufacturing activities.These facilities have replaced the majority of our previous leased facilities in Rehovot, Israel. We are currently constructing a second building at our Rehovotheadquarters, which, when occupied by us, will increase the capacity of our Rehovot facilities substantially.41Table of ContentsAs of December 31, 2017, we leased office space (except with respect to our Eden Prairie headquarters facilities and our Rehovot, Israel and Kiryat Gat,Israel facilities, where we own the property) for various purposes, as set forth in the table below. Unless otherwise stated, all of our facilities are fully utilized.Our material tangible fixed assets include, among other things, the properties listed below.Location:Primary Usage:Area (Sq. Feet)Americas: Eden Prairie, MinnesotaU.S. headquarters 377,090(1)Valencia, CaliforniaOffices and warehouses71,286Brooklyn, New YorkOffices and warehouses56,689San Diego, CaliforniaFacilities56,383River Falls, WisconsinOffice space40,998Belton, TexasOffices and warehouses40,000Merrimack, New HampshireFacilities, including manufacturing35,643Austin, TexasFactory33,178Other facilities in North America:Office space and warehouses112,379 Europe and the Middle East: Rehovot, IsraelIsraeli headquarters273,089(2)Kiryat Gat, IsraelFactory and laboratories285,070 Rheinmünster, GermanyEurope main office55,027Swiss officeOffice space205Other facilities in EMEA:Office space18,046 Asia Pacific:Hong KongAsia Pacific main office9,564Other facilities in Asia Pacific:Office space51,183(1)This square footage amount does not reflect the sale of one of our Eden Prairie, Minnesota facilities in early 2018, which reduced our space at our EdenPrairie location to 304,616 square feet. (2)This square footage constitutes the area in the first building of our new Rehovot, Israel headquarters, which we occupied during January 2017. Thesecond building of our Rehovot headquarters is currently under construction and will increase the capacity of our Rehovot facilities substantially oncewe occupy it. Please see Note 2 to our consolidated financial statements included in Item 18 of this annual report for further information.ITEM 4A. UNRESOLVED STAFF COMMENTS.None.ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS.The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidatedfinancial statements and the related notes included in this annual report. The discussion below contains forward-looking statements that are based uponour current expectations and are subject to uncertainty and changes in circumstances. Actual results may differ materially from these expectations due toinaccurate assumptions and known or unknown risks and uncertainties, including those identified in “Cautionary Note Regarding Forward-LookingStatements” and in Item 3.D “Key Information – Risk Factors”, above.A. Operating Results.OverviewWe are a leading global provider of applied additive technology solutions for industries including aerospace, automotive, healthcare, consumer productsand education. We focus on customers’ business requirements and seek to create new value for our customers across their product lifecycle processes, fromdesign prototypes to manufacturing tools and final production parts. We operate a 3D printing ecosystem of solutions and expertise, comprised of advancedmaterials; software with voxel level control; precise, repeatable and reliable fused deposition modeling (FDM) and PolyJet 3D printers; application-basedservices; on-demand parts and key partnerships. We strive to ensure that our solutions are integrated seamlessly into each customer’s evolving workflow. Ourapplications are industry-specific and geared towards accelerating business processes, optimizing value chains and driving business performanceimprovements. Our customers range from individuals and smaller businesses to large, global enterprises, and we include a number of Fortune 100 companiesamong our customers.42Table of ContentsOur 3D printers include systems ranging from entry-level desktop 3D printers to systems for rapid prototyping, or RP, and large production systems fordirect digital manufacturing, or DDM. We also develop, manufacture and sell materials for use with our systems and provide related services offerings. Weoffer a powerful range of additive manufacturing materials, including clear, rubberlike and biocompatible photopolymers, and tough high-performancethermoplastics. We believe that the range of 3D printing consumable materials that we offer, consisting of 57 FDM cartridge-based materials, 35 PolyJetcartridge-based materials, 158 non-color digital materials, and over 360,000 color variations is the widest in the industry. Our service offerings includeStratasys Direct Manufacturing, or SDM, printed parts services which offers AM capabilities encompassing a wide range of technologies allowing for plasticand metal parts for rapid prototyping and production processes, as well as related professional services.We conduct our business globally and provide products and services to our global customer base through our main operational facilities which arelocated in Israel, the United States, Germany and Hong Kong as well through our offices in China, Italy, Brazil, India, Japan and Korea. Our extensive globalreach is well-positioned through a network of approximately 200 resellers and selling agents around the world and an online channel. We haveapproximately 2,300 employees and hold more than 1,200 granted or pending additive manufacturing patents globally.Key measures of our performanceRevenuesOur consolidated revenues result primarily from sales of (i) our products, which include both our AM systems and related consumable materials, (ii)provision of related services and (iii) our direct manufacturing service. We generate revenues and deliver services principally through the following channels:●sales to resellers, who purchase and resell our products and who provide support services for our printing systems; ●sales of systems that are marketed by independent sales agents, pursuant to which we sell directly to end-users, pay commissions to such agents, anddirectly handle the sale of consumables and provision of support services; and ●sales of systems (and all related products and services) as well as our direct manufacturing solutions service that we effect and/or provide to ourcustomers directly.There is overlap among the channels as some independent sales agents for our higher-end products also serve as resellers of our other products.Product revenuesProduct revenues are influenced by a number of factors, including, among other things, (i) the adoption rate of our products, (ii) end-user product designapplication and manufacturing activity, and (iii) the capital expenditure budgets of end-users and potential end-users, all of which may be significantlyinfluenced by macroeconomic factors. Product revenues are also impacted by the mix of 3D printers that we sell. Purchases of our 3D printing and productionsystems, especially our higher-end, higher-priced systems, typically involve longer sales cycles.Product revenues also depend upon the volume of consumables that we sell. Sales of our consumable materials are linked to the number of AM systemsthat are installed and active worldwide. Sales of consumables are also driven by system usage, which is generally a function of the size of the particularsystem and the level of design and/or manufacturing activity and budget of the particular end-user. Larger systems generally use greater amounts ofconsumables due to their greater capacity and the higher levels of design and production.Services revenuesServices revenues derive from (i) maintenance and warranty; (ii) direct manufacturing paid-parts services; and (iii) other professional service contracts. Inaddition, in connection with direct sales, we generally charge separately for installation and training. Additional services revenues are generated fromservices contracts most often entered into directly with end-users subsequent to the expiration of the initial warranty period.Costs of revenuesOur costs of revenues consist of costs of products and costs of services. Costs of products consist primarily of components and subassemblies purchasedfor the manufacture of our AM systems and raw materials, such as thermoplastic and photopolymer materials, for the manufacture of our consumables, as wellas any royalties paid with respect to sales of certain of those consumables. Costs of products also include manufacturing and manufacturing-related laborcosts, indirect production costs and depreciation, as well as, amortization expense related mainly to developed technology assets acquired as part of ourbusiness combinations.43Table of ContentsOur costs of services revenues consist primarily of costs of our service personnel, material and other production costs of our direct manufacturing servicebusiness and installation costs which include engineers dedicated to on-site training and support and travel costs of these engineers. Both costs of productsand costs of services include related facilities costs.Our most significant components of cost of revenues are costs of materials used for our products, wages and related benefits costs, which togetheraccounted for approximately 87% of our total direct cost of sales. An additional significant item of our cost of revenues is the amortization expense that weprimarily incur in connection with developed technology assets acquired as part of our business combinations. These amortization expenses vary based onthe timing and type of acquisitions and estimated useful lives of the respective intangible assets. These amortization expenses were $24 million, $43 millionand $51 million for the years ended December 31, 2017, 2016 and 2015, respectively.For the year ended December 31, 2017, a hypothetical 10% rise in commodity prices for raw materials would have caused an approximate $15 millionincrease in cost of revenues in our Consolidated Statement of Income and Comprehensive Income. As to wages and related benefits, a 10% increase in wagesdue to wage inflation would cause an approximate $2 million increase in cost of revenues in our Consolidated Statement of Operations and ComprehensiveLoss. During 2017, we did not notice particular trends that changed, or were expected to change in the near future, the absolute or relative significance of thecomponents of our costs of revenues in a material manner. We also believe that inflation has not had a material effect on our operations or on our financialcondition during the three most recent fiscal years.Currently, we do not foresee a significant change in either the raw materials used for production or wage inflation that would materially impact ourbusiness. For further information, please see “Item 11. Quantitative And Qualitative Disclosures About Market Risk” in this annual report.Gross profitThe gross profit and gross margin for our products are influenced by a number of factors. The most important of these is the mix of our products sold.Specifically, the gross margins on our higher-end AM systems, as well as on our consumables, are typically higher than the gross margins on our entry-levelproducts, MakerBot desktop printers and certain models in our Design series. Accordingly, an increase in the share of revenues of our entry-level products outof total revenues could cause our profit margins to decrease. Furthermore, we believe that as our worldwide installed base of AM systems increases,subsequent sales of our proprietary consumables will also increase. We also seek to reduce our costs of revenues by improving our ability to use less costlycomponents and increasing manufacturing efficiencies in the production of our systems. In addition, we will also seek to achieve lower material costs andleverage our overall capabilities in our direct manufacturing service business.Products gross margins are also impacted by the mix of revenues generated from sales to resellers based in different geographical areas as opposed to salesthat are facilitated by independent sales agents or directly by us.Service gross margins are influenced mainly by the volume of revenues generated from our direct manufacturing service business as well as the ratio ofservice engineers to our installed base in a given geographic area.Operating expensesOur operating expenses for 2017 consist of (i) research and development expenses, (ii) selling, general and administrative expenses and (iii) changes infair value of obligations in connection with acquisitions.Research and development expensesOur research and development activities consist of projects aimed at developing new printing systems and materials and projects aimed at enhancing thecapabilities of our existing product lines, as well as significant technology platform and applications, developments for our current technologies, includingour integrated software. We also seek to develop disruptive technologies and other process improvement solutions in the additive manufacturing ecosystem.Our research and development expenses consist primarily of employee compensation and employee-related personnel expenses, materials, laboratorysupplies, costs for related software and costs for facilities. Expenditures for research, development and engineering of products are expensed as incurred. Ourresearch and development efforts are essential to our future growth and our ability to remain competitive in the AM market. We work closely with existingand potential customers, distribution channels and major resellers, who provide significant feedback for products development and innovation.We are also entitled to reimbursements from certain government funding plans. These reimbursements are recognized as a reduction of expenses as therelated cost is incurred. We are not required to pay royalties on sales of products developed using our government funding.44Table of ContentsSelling, general and administrative expensesOur selling, general and administrative expenses include employee compensation and employee-related expenses for marketing, sales and other sales-operation employees, and for managerial and administrative personnel, including executive officers, accounting, legal, information technology and humanresources. This category of expenses also covers commissions, advertising and promotions expenses, professional service fees, respective depreciation,amortization expenses related to certain intangible assets, as well as associated overhead.Commissions consist of sales-based commissions to independent sales agents and internal sales personnel. Commission rates vary, depending on thegeographic location of the agent, type of products sold, and on the achievement of certain performance targets. Our advertising and promotion expensesconsist primarily of media advertising costs, trade and consumer marketing expenses and public relations expenses which aims to strengthen our leadershipbrand position in key vertical markets.Facilities costs that are included in our selling, general and administrative expenses include a portion of the occupancy costs for our facilities in countrieswhere sales, marketing and administrative personnel are located. Professional service fees for accounting and legal services are also included in selling,general and administrative expenses.2017 Financial HighlightsSignificant business activities and financial performance in 2017 included:●Revenues decreased by $4.1 million, or 0.6%, compared to 2016. The decrease primarily reflects a decrease in systems revenues, which was partiallyoffset by an increase in consumables revenues. ●Operating expenses decreased by $50.7 million, or 12.6% compared to 2016. The decrease primarily reflects our focus on achieving greater operatingefficiencies in our selling, general and administrative expenses. ●Net loss attributable to Stratasys amounted to $40.0 million in 2017 or diluted loss per share of $0.75 compared to net loss attributable to Stratasys of$77.2 million or diluted loss per share of $1.48 in 2016. ●Continued strong cash flows provided by operating activities, which amounted to $61.9 million, flat compared to 2016.Results of OperationsWe are providing within this section a supplemental discussion that compares historical statement of operations data in accordance with accountingprinciples generally accepted in the United State of America, or GAAP, for the years ended December 31, 2017, 2016 and 2015.The following table sets forth certain financial data derived from our consolidated statements of income presented as percentages of our net sales for theperiods indicated:Year ended December 31,201720162015Net sales 100.0% 100.0% 100.0%Cost of sales51.7%52.8%85.3%Gross profit48.3%47.2%14.7%Research and development, net14.4%14.5%17.6%Selling, general and administrative38.3%45.7%62.4%Goodwill impairment0.0%0.0%135.4%Change in fair value of obligations in connection with acquisitions0.2%-0.1%-3.4%Operating loss-4.6%-12.9%-197.3%Financial income (expense), net0.2%0.1%-1.5%Loss before income taxes-4.4%-12.8%-198.8%Income taxes expense (benefit)1.4%-1.4%-1.5%Share in losses of associated company-0.3%-0.1%0.0%Net loss-6.1%-11.5%-197.3%Net loss attributable to non-controlling interests-0.1%-0.1%-0.1%Net loss attributable to Stratasys Ltd.-6.0%-11.5%-197.2%45Table of ContentsDiscussion of Results of OperationsRevenuesOur products and services revenues for the last three years, as well as the percentage change from year to year, were as follows:Year Ended December 31, % Change% Change 2017201620152017-20162016-2015U.S. $ in thousandsProducts$ 474,286$ 479,031$ 503,946 -1.0% -4.9%Services194,076193,427192,0490.3%0.7%$668,362$672,458$695,995-0.6%-3.4%Our total consolidated revenues in 2017 were $668.4 million, a decrease of $4.1 million, or 0.6%, compared to 2016. The decrease primarily reflects adecrease in products revenues, partially offset by a slight increase in services revenues, as further discussed below.Product Revenues2017 Compared to 2016Revenues derived from products (including AM systems and consumable materials) decreased by $4.7 million in 2017, or 1.0%, as compared to 2016.The decrease in products revenues was driven by a decrease in our systems revenues that was partially offset by an increase in our consumables revenues.The decrease in systems revenues reflects an increase of lower-end systems ratio within our product mix, following the launch of our F123 offering during2017, as compared to higher ratio of high-end systems within our product mix in 2016.Consumables revenues increased in 2017 by 4.1% compared to 2016. The increase in consumables revenues, was primarily due to the favorable effect ofour growing installed base of systems as well as favorable trends around the utilization of our systems.2016 Compared to 2015Revenues derived from products decreased by $24.9 million in 2016, or 4.9%, as compared to 2015. The decrease in products revenues primarily reflecteda decrease in unit volumes. Products revenues were partially offset by an increase in our sales of consumables offerings which increased by 9.8% compared to2015, which reflected our growing installed base of systems.Services Revenues2017 Compared to 2016Services revenues (including SDM, maintenance and other services) increased by $0.6 million in 2017, or 0.3%, as compared to 2016. Within servicesrevenues, customer support revenue, which includes revenue generated mainly by maintenance contracts on our systems, increased by 6.3%, reflecting ourgrowing installed base of systems and our effective support solutions suitable for end-users’ needs.2016 Compared to 2015Services revenues increased by $1.4 million in 2016, or 0.7%, as compared to 2015, reflected our growing installed base of systems and was partiallyoffset by a decrease in SDM revenues.46Table of ContentsRevenues by RegionRevenues and the percentage of net sales by region for the last three years, as well as the percentage change, were as follows: Year Ended December 31,2017 2016 2015 2017-2016 2016-2015U.S. $ in % of netU.S. $ in % of netU.S. $ in % of netthousandssalesthousandssalesthousandssalesChange in %Change in %Americas*$ 413,32661.8%$ 411,53661.2%$ 425,56961.1%0.4% -3.3%EMEA148,27922.2%137,92420.5%148,16921.3%7.5%-6.9%Asia Pacific106,75716.0%122,99818.3%122,25717.6% -13.2%0.6%$668,362 100.0%$672,458 100.0%$695,995 100.0%-0.6%-3.4%*Represent the United States, Canada and Latin America2017 Compared to 2016Revenues in the Americas region increased by $1.8 million, or 0.4% to $413.3 million in 2017 compared to $411.5 million in 2016. The increase wasdriven primarily by higher consumables revenues, partially offset by lower services revenues.Revenues in the EMEA region increased by $10.4 million, or 7.5%, to $148.3 million in 2017 compared to $137.9 million in 2016. The increase reflectshigher products and services revenues. In local currencies terms, revenues in the EMEA region during 2017 increased by 5.5% as compared to 2016.Revenues in the EMEA region were favorably impacted by approximately $2.8 million, on a constant currency basis when using prior period’s exchangerates.Revenues in the Asia Pacific region decreased by $16.2 million, or 13.2%, to $106.8 million in 2017 compared to $123.0 million in 2016. The decreasewas primarily due to lower products revenues, partially offset by slightly higher services revenues.2016 Compared to 2015Revenues in the Americas region decreased by $14.0 million, or 3.3% to $411.5 million in 2016 compared to $425.6 million in 2015.Revenues in the EMEA region decreased by $10.2 million, or 6.9%, to $137.9 million in 2016 compared to $148.2 million in 2015. The decrease wasprimarily due to lower systems revenues. In local currencies terms, net sales of the EMEA region in 2016 decreased by 5.1% as compared to 2015.Revenues in the Asia Pacific region increased by $0.7 million, or 0.6%, to $123.0 million in 2016 compared to $122.3 million in 2015.Gross ProfitGross profit for our products and services for the last three years, as well as the percentage change from year to year, was as follows:Year Ended December 31,2017 2016 20152017-20162016-2015 U.S. $ in thousands Change in % Change in %Gross profit attributable to:Products$ 255,266$ 244,378$ 37,7254.5%547.8%Services67,51172,92864,447 -7.4%13.2%$322,777$317,306$102,1721.7% 210.6%47Table of ContentsGross profit as a percentage of net sales for our products and services for the last three years, as well as the percentage change from year to year, was asfollows:Year Ended December 31, 2017 2016 2015 2017-2016 2016-2015Change in %Change in %Gross profit as a percentage of revenues from:Products 53.8% 51.0%7.5%5.5%584.2%Services34.8%37.7% 33.6% -7.7% 12.2%Total gross profit48.3%47.2%14.7%2.3%221.4%2017 Compared to 2016Gross profit attributable to products sales increased by $10.9 million, or 4.5%, to $255.3 million in 2017 compared to $244.4 million in 2016. Grossprofit attributable to products sales as a percentage of revenues increased to 53.8% in 2017 compared to 51.0% in 2016. The increase in gross profitattributable to products sales was primarily due to decrease in amortization expenses of $19.2 million mainly due to changes in the estimated useful lives ofcertain intangible assets, partially offset by an increase in our lower-end systems ratio within our product revenues mix.Gross profit attributable to services revenues decreased by $5.4 million, or 7.4%, to $67.5 million in 2017 compared to $72.9 million in 2016. Grossprofit from services as a percentage of services revenues in 2017 decreased to 34.8% compared to 37.7% in 2016. The decrease in gross profit from servicesrevenues was driven by the mix between our customer service business, and our direct manufacturing paid-parts business whose gross margin was impactedby the different technologies that make up the product mix.2016 Compared to 2015Gross profit attributable to products sales increased by $206.7 million, or 547.8%, to $244.4 million in 2016 compared to $37.7 million in 2015. Grossprofit attributable to products sales as a percentage of revenues increased to 51.0% in 2016 compared to 7.5% in 2015. The increase in gross profitattributable to products sales was primarily due to impairment charges of $191.4 million related to certain of our developed technology intangible assets thatwere recorded in 2015 compared to $1.8 million in 2016, as well as favorable changes in product mix, partially offset by lower systems revenues.Gross profit attributable to services revenues increased by $8.5 million, or 13.2%, to $72.9 million in 2016 compared to $64.4 million in 2015. Grossprofit from services as a percentage of services revenues in 2016 increased to 37.7% compared to 33.6% in 2015. The increase in gross profit from servicesprimarily reflects increased volume of our maintenance and warranty contracts as well as improved margins attributable to our cost reduction initiatives.Operating ExpensesThe amount of each type of operating expense for the last three years, as well as the percentage change between such annual periods, and total operatingexpenses as a percentage of our total sales in each such annual period, was as follows:Year Ended December 31, 2017 201620152017-20162016-2015U.S. $ in thousandsChange in %Change in %Research and development, net$ 96,237$ 97,778 $ 122,360 -1.6% -20.1%Selling, general & administrative255,685307,113434,619 -16.7%-29.3%Goodwill impairment--942,4080.0% -100.0%Change in fair value of obligations in connection with acquisitions1,378(872)(23,671) -258.1%-96.3%$353,300$404,019$1,475,716-12.6%-72.6%2017 Compared to 2016Research and development expenses, net decreased by $1.5 million, or 1.6% in 2017 compared to 2016. Research and development expense, net as apercentage of revenues were flat at 14.4% in 2017 compared to 14.5% in 2016.Our research and development expenses were impacted by timing of projects' spending and products launches, as well as a moderate decrease in payrolland stock-based compensation expenses which are the most significant component in our research and development expenses.48Table of ContentsWe invest a significant amount of our resources in research and development, because we believe that superior technology is a key to maintaining aleading market position. We maintain an ongoing program of research and development, to develop new systems and materials and to enhance our existingproduct lines. Our research aims to develop incremental and disruptive improvements, as well as more affordable products. We continue to standardize ourproduct platforms, leveraging each new design so that it will result in multiple product offerings that are developed faster and at reduced expense. Inaddition, we continue with our portfolio prioritization of our strategic projects with further focus and realignment of our resources.Selling, general and administrative expenses in 2017 decreased by $51.4 million, or 16.7%, to $255.7 million, compared to $307.1 million in 2016.Selling, general and administrative expenses in 2017 as a percentage of revenues were 38.3% as compared to 45.7% in 2016. The decrease in our selling,general and administrative expenses was primarily due to a decrease in intangible assets amortization and long-lived assets impairment expenses of $21.8million, as well as lower commissions and lower depreciation expense. In addition, the decrease in our selling, general and administrative expenses was alsodriven by certain cost-reduction efforts which reduced our facilities and information systems related expenses, as well as employees' compensation relatedexpenses (mainly resulting from reduction in global workforce).During the year ended December 31, 2017, we recorded a loss of $1.3 million, compared to a gain of $0.9 million for the year ended December 31, 2016,due to the revaluation of obligations in connection with acquisitions. The loss recorded in 2017 reflected the revaluation of the deferred payments liability inconnection with the Solid Concepts transaction which was finally settled during the third quarter of 2017. We do not expect an impact on our consolidatedstatements of operations in 2018 due to revaluation of obligations in connection with acquisitions.2016 Compared to 2015Research and development expenses, net decreased by $24.6 million, or 20.1%, in 2016 compared to 2015. Research and development expense, net as apercentage of revenues decreased to 14.5% in 2016 compared to 17.6% in 2015.The decrease was primarily due to impairment charges of $18.2 million related to certain of our in-process research and development projects that wererecorded in 2015 as well as our costs-savings initiatives which include portfolio prioritization and realignment of our projects that further focus our resources.The decrease was partially offset by increase in our GrabCad operations reflecting our increased efforts to develop our software solutions.Selling, general and administrative expenses in 2016 decreased by $127.5 million, or 29.3%, to $307.1 million, compared to $434.6 million in 2015.Selling, general and administrative expenses in 2016 as a percentage of revenues were 45.7% as compared to 62.4% in 2015. The decrease in our selling,general and administrative expenses was primarily due to higher intangible assets impairment charges recorded in 2015, as well as non-recurring post-mergerintegration expenses related to SDM formation and certain reorganization related charges that were recorded during 2015. In addition, the decrease in ourselling, general and administrative expenses was also driven by the effective implementation of our costs reduction initiatives which reduced certain of ourvariable and fixed expenses.During the year ended December 31, 2016, we recorded a gain of $0.9 million, compared to a gain of $23.7 million for the year ended December 31, 2015,due to the revaluation of obligations in connection with acquisitions. The gain recorded in 2016 reflects the revaluation of the deferred payments liability inconnection with the Solid Concepts transaction which was mainly attributable to changes in our share price.Operating LossOperating loss and operating loss as a percentage of our total net sales for the last three years, as well as the percentage change in operating loss betweenthose years, were as follows:Year Ended December 31,20172016 20152017-20162016-2015 U.S. $ in thousands Change in % Change in %Operating loss$ (30,523) $ (86,713)$ (1,373,544) -64.8% -93.7%Percentage of sales-4.6%-12.9%-197.3%49Table of Contents2017 Compared to 2016Operating loss for the year ended December 31, 2017 was $30.5 million as compared to an operating loss of $86.7 million for the year ended December31, 2016. The decrease in operating loss was primarily attributable to the decrease in our operating expenses as discussed above.2016 Compared to 2015Operating loss for the year ended December 31, 2016 was $86.7 million as compared to an operating loss of $1,373.5 million for the year ended December31, 2015. The decrease in operating loss was primarily attributable to the non-recurring, non-cash goodwill and intangible assets impairment charges of$1,220.8 million recorded in 2015 as well as other factors as discussed above.Financial income (expense), net2017 Compared to 2016Financial expense, net, which were primarily comprised of foreign currencies effects, interest income and interest expense, amounted to $1.0 million forthe year ended December 31, 2017, compared to $0.4 million for the year ended December 31, 2016.The increase in financial expense, net was primarily due to increase in interest expenses related to outstanding loan balances associated with amountsborrowed in December 2016, compared to immaterial interest expenses incurred in 2016.In addition, our financial income (expense), net was impacted by translation of foreign currencies transactions resulting from changes in the rate ofexchange between the U.S. dollar and the local currencies in the markets in which we operate (primarily the Euro). These effects were partially offset by ourderivatives and hedging activity in 2017.2016 Compared to 2015Financial income (expense), net, amounted to $0.4 million for the year ended December 31, 2016, compared to a financial expense, net of $10.3 millionfor the year ended December 31, 2015. The decrease in financial expense, net was primarily due to immaterial interest expenses incurred in 2016 compared tointerest expenses related to the outstanding debt balance borrowed under our credit facility in 2015 and additional costs related to the termination of ourrevolving credit facility during September 2015 in an amount of $2.7 million. In addition, our financial income increased due to lower foreign currencytranslation losses.Income TaxesIncome taxes and income taxes as a percentage of net income before taxes for the last three years, as well as the percentage change in income taxesbetween those years, were as follows:Year Ended December 31,2017201620152017-20162016-2015 U.S. $ in thousandsChange in %Change in %Income taxes$ 9,273 $ (9,446) $ (10,320) -198.2% -8.5%As a percent of loss before income taxes-31.5%10.9%0.7%2017 Compared to 2016We had a negative effective tax rate of 31.5% for the year ended December 31, 2017 as compared to 10.9% tax rate for the year ended December 31, 2016.Our effective tax rate is primarily impacted by the geographic mix of our earnings and losses, specifically by no tax benefit being recorded for the tax lossesof our U.S. subsidiaries for the years ended December 31, 2017 and 2016. We will continue to monitor whether the realization of our remaining deferred taxassets is more likely than not.During 2016, we recorded an income tax benefit of $6.8 million attributable to one of our foreign subsidiaries which received a favorable tax ruling fromthe tax authorities. In addition, during 2016, we adjusted our estimate of long-term tax rates in Israel. As a result, we recorded $5.2 million of income taxesbenefit against deferred tax liabilities associated with the amortization of the respective intangible assets.50Table of ContentsFor a full reconciliation of our effective tax rate to the Israeli statutory rate of 24% and for further explanation of our provision for income taxes, refer toNote 9 to our consolidated financial statements included in Item 18 of this annual report.2016 Compared to 2015Our effective tax rate for the year ended December 31, 2016 was 10.9% as compared to 0.7% tax rate for the year ended December 31, 2015.Net Loss and Net Loss Per Share Attributable to Stratasys Ltd.Net loss and net loss as a percentage of our total revenues for the last three years, as well as the percentage change in net loss between those years, were asfollows:Year Ended December 31,2017201620152017-20162016-2015 U.S. $ in thousands Change in % Change in %Net loss attributable to Stratasys Ltd.$ (39,981) $ (77,219) $ (1,372,835) -48.2% -94.4%Percentage of Sales-6.0%-11.5%-197.2%Diluted net loss per share$(0.75)$(1.48)$(26.64)-49.1%-94.4%2017 Compared to 2016Net loss attributable to Stratasys Ltd. for the year ended December 31, 2017 was $40.0 million as compared to $77.2 million for the year ended December31, 2016. The decrease in net loss attributable to Stratasys Ltd was primarily attributable to a decrease in our operating expenses, partially offset by higherincome taxes expense.Diluted loss per share for the years ended December 31, 2017 and 2016 was $0.75 and $1.48, respectively. The weighted average fully diluted share countfor the year ended December 31, 2017 was 53.0 million, compared to 52.6 million for the year ended December 31, 2016.2016 Compared to 2015Net loss attributable to Stratasys Ltd. for the year ended December 31, 2016 was $77.2 million as compared to $1,372.8 million for the year endedDecember 31, 2015. The decrease in net loss attributable to Stratasys Ltd was primarily attributable to the non-recurring, non-cash goodwill and intangibleassets impairment charges of $1,220.8 million recorded in 2015.Diluted loss per share for the years ended December 31, 2016 and 2015 was $1.48 and $26.64, respectively. The weighted average fully diluted sharecount for the year ended December 31, 2016 was 52.6 million, compared to 51.6 million for the year ended December 31, 2015.Goodwill Assessment as of December 31, 2017During the fourth quarter of 2017, we performed a quantitative assessment for goodwill impairment for our Stratasys-Objet reporting unit.Following our quantitative assessment, we concluded that the fair value of Stratasys-Objet reporting unit exceeds its carrying amount by approximately7%, with a carrying amount of goodwill assigned to this reporting unit in the amount of $387 million. When evaluating the fair value of Stratasys-Objetreporting unit we used a discounted cash flow model which utilized Level 3 measures that represent unobservable inputs into our valuation method.Key assumptions used to determine the estimated fair value include: (a) expected cash flow for 5 years following the assessment date which (includingexpected revenue growth, costs to produce, operating profit margins and estimated capital needs); (b) an estimated terminal value using a terminal yeargrowth rate of 3.1% determined based on the growth prospects of the reporting unit; and (c) a discount rate of 14.0% based on management’s best estimate ofthe after-tax weighted average cost of capital. If any of these were to vary materially from our plans, we could face impairment of goodwill allocated to thisreporting unit in the future.51Table of ContentsA hypothetical decrease in the growth rate of 1% or an increase of 1% to the discount rate would reduce the fair value of the Stratasys-Objet reporting unitby approximately $48 million and $88 million.Based on our assessment as of December 31, 2017, no goodwill was determined to be impaired.Determining the fair value of our Stratasys-Objet reporting unit requires significant judgment, including judgments about the appropriate discount rates,terminal growth rates, weighted average costs of capital and the amount and timing of projected future cash flows. We will continue to monitor the fair valueof Stratasys-Objet reporting unit and intangible assets to determine whether events and changes in circumstances such as further deterioration in the businessclimate or operating results, further significant decline in our share price, changes in management’s business strategy or downward changes of our cash flowsprojections, warrant further interim impairment testing. For further information, refer to note 7 to our consolidated financial statements included in Item 18 ofthis annual report.Non-GAAP Financial MeasuresThe following non-GAAP data, which excludes certain items as described below, are non-GAAP financial measures. Our management believes that thesenon-GAAP financial measures are useful information for investors and shareholders of our company in gauging our results of operations (x) on an ongoingbasis after excluding merger and acquisition related expense and reorganization-related charges, and (y) excluding non-cash items such as stock-basedcompensation expenses, acquired intangible assets amortization, impairment of goodwill and other long-lived assets, changes in fair value of obligations inconnection with acquisitions and the corresponding tax effect of those items. We also exclude, when applicable, non-recurring changes of non-cash valuationallowance on deferred tax assets, as well as, non-recurring significant tax charges or benefits that relate to prior periods which we do not believe are reflectiveof ongoing business and operating results. These non-GAAP adjustments either do not reflect actual cash outlays that impact our liquidity and our financialcondition or have a non-recurring impact on the statement of operations, as assessed by management. These non-GAAP financial measures are presented topermit investors to more fully understand how management assesses our performance for internal planning and forecasting purposes. The limitations of usingthese non-GAAP financial measures as performance measures are that they provide a view of our results of operations without including all items indicatedabove during a period, which may not provide a comparable view of our performance to other companies in our industry. Investors and other readers shouldconsider non-GAAP measures only as supplements to, not as substitutes for or as superior measures to, the measures of financial performance prepared inaccordance with GAAP. Reconciliation between results on a GAAP and non-GAAP basis is provided in a table below.52Table of ContentsReconciliation of GAAP and Non-GAAP Results of OperationsYear ended December 31,2017Non-GAAP2017GAAPAdjustmentsNon-GAAP(U.S. dollars and shares in thousands,except per share amounts)Gross profit (1) $ 322,777 $ 26,860 $ 349,637Operating income (loss) (1,2)(30,523)67,22636,703Net income (loss) attributable to Stratasys Ltd. (1,2,3)(39,981)64,15824,177Net income (loss) per diluted share attributable to Stratasys Ltd. (4)$(0.75)$1.20$0.45 (1) Acquired intangible assets amortization expense22,768Non-cash stock-based compensation expense2,581Impairment charges of other intangible assets646Reorganization and other related costs337Merger and acquisition related expense52826,860 (2)Acquired intangible assets amortization expense10,319Non-cash stock-based compensation expense15,141Impairment charges of intangible assets and other long-lived assets3,742Change in fair value of obligations in connection with acquisitions1,378Reorganization and other related costs5,803Merger and acquisition related expense3,98340,36667,226 (3)Corresponding tax effect(3,866)Amortization expense of associated company798$64,158 (4)Weighted average number of ordinary shares outstanding- Diluted52,95953,53653Table of ContentsYear ended December 31,2016Non-GAAP2016GAAPAdjustmentsNon-GAAP(U.S. dollars and shares in thousands,except per share amounts)Gross profit (1) $ 317,306 $ 50,334 $ 367,640Operating income (loss) (1,2)(86,713)115,72929,016Net income (loss) attributable to Stratasys Ltd. (1,2,3)(77,219)91,98914,770Net income (loss) per diluted share attributable to Stratasys Ltd. (4)$(1.48)$1.76$0.28 (1) Acquired intangible assets amortization expense41,712Non-cash stock-based compensation expense2,780Impairment charges of other intangible assets1,779Reorganization and other related costs3,846Merger and acquisition related expense21750,334 (2)Acquired intangible assets amortization expense14,901Non-cash stock-based compensation expense17,993Impairment charges of intangible assets and other long-lived assets21,774Change in fair value of obligations in connection with acquisitions(872)Reorganization and other related costs3,671Merger and acquisition related expense7,92865,395115,729 (3)Corresponding tax effect and other tax adjustments(24,233)Intangible assets amortization expense of associated company493$91,989 (4)Weighted average number of ordinary shares outstanding- Diluted52,58253,20154Table of ContentsYear ended December 31, 2015Non-GAAPGAAPAdjustmentsNon-GAAP(U.S. dollars and shares in thousands,except per share amounts)Gross profit (1) $ 102,172 $ 259,545 $ 361,717Operating income (loss) (1,2)(1,373,544)1,357,577(15,967)Net income (loss) attributable to Stratasys Ltd. (1,2,3)(1,372,835)1,382,7899,954Net income (loss) per diluted share attributable to Stratasys Ltd. (4)$(26.64)$26.83$0.19 (1) Acquired intangible assets amortization expense50,353Impairment charges of other intangible assets191,534Non-cash stock-based compensation expense5,381Reorganization and other related costs10,949Merger and acquisition related expense1,328259,545 (2)Goodwill impairment942,408Acquired intangible assets amortization expense22,436Non-cash stock-based compensation expense24,629Impairment charges of intangible assets and other long-lived assets86,937Change in fair value of obligations in connection with acquisitions(23,671)Reorganization and other related costs16,955Merger and acquisition related expense28,3381,098,0321,357,577 (3)Credit facility termination related costs2,705Corresponding tax effect and other tax adjustments22,507$1,382,789 (4)Weighted average number of ordinary shares outstanding- Diluted51,59252,82455Table of ContentsForward-looking Statements and Factors That May Affect Future Results of OperationSee “Cautionary Note Regarding Forward-Looking Statements” at the beginning of this annual report (following the table of contents).Variability of Operating ResultsOur revenues and profitability may vary in any given year, and from quarter to quarter, depending on the number and mix of products sold and theaverage selling price of the products, and are also affected by the seasonality of our business. In addition, due to competition, uncertain market acceptanceand other factors, we may be required to reduce prices for our products in the future.Our future results will be affected by a number of factors, including our ability to: increase the number of units sold; develop, introduce and deliver newproducts on a timely basis; accurately anticipate customer demand patterns; and manage future inventory levels in line with anticipated demand. Our resultsmay also be affected by competitive factors, the extent to which our cost reduction program succeeds, the availability of working capital, results of litigation,the enforcement of intellectual property rights, currency exchange rate fluctuations, commodity prices and economic conditions in the geographic areas inwhich we operate. Macro factors, such as the extent of growth of the 3D printing market generally, may also impact our operating results. There can be noassurance that our historical performance in sales, gross profit and net income (loss) will improve, or that sales, gross profit and net income (loss) in anyparticular quarter will improve over those of preceding quarters, including comparable quarters of previous years. See Item 3.D - “Risk Factors” above.Effective Corporate Tax RateSee “Israeli Tax Considerations and Government Programs — General Corporate Tax Structure in Israel” in Item 4.B above for a discussion of the generaltax structure in Israel and applicable corporate tax rates.In 2017, we derived a significant portion of our income from facilities granted Approved or Beneficiary Enterprise status, offset by losses of our U.S.subsidiaries with no tax benefit being recorded for those losses, as the near-term realization of these assets is uncertain. See “Israeli Tax Considerations andGovernment Programs — The Law for the Encouragement of Capital Investments” in Item 4.B above.In the event we have taxable income in Israel, derived from sources other than Approved or Beneficiary Enterprises, such income would be taxable at theregular Israeli corporate tax rates described above.As part of the process of preparing our consolidated financial statements, we must estimate our income taxes in each of the jurisdictions in which weoperate. This process involves estimating our actual current tax exposure together with assessing temporary differences resulting from differing treatment ofitems for tax and accounting purposes. Actual income taxes could vary from these estimates due to future changes in income tax law or results from final taxexaminations and reviews.Effects of Government Regulations and Location on our BusinessFor a discussion of the effects of Israeli governmental regulation and our location in Israel on our business, see “Israeli Tax Considerations andGovernment Programs” in Item 4.B above and the “Risks related to operations in Israel” in Item 3.D above.InflationWe believe that inflation has not had a material effect on our operations or on our financial condition during the three most recent fiscal years.Foreign Currency TransactionsSee “Foreign Currency Exchange Risk” in Item 11 below for a discussion of foreign currency transactions.56Table of ContentsB. Liquidity and Capital ResourcesA summary of our statement of cash flows for the three years ended December 31, 2017 is as follows:Year ended December 31,201720162015U.S. $ in thousandsNet loss $ (40,459) $ (77,621) $ (1,373,511)Goodwill and other long-lived assets impairment charges6,75924,9241,231,385Depreciation and amortization66,63592,877108,395Deferred income taxes2,404(10,378)(19,129)Stock-based compensation17,72220,77330,010Change in fair value of obligations in connection with acquisitions1,378(872)(23,671)Foreign currency transactions loss and other non-cash items(6,909)3,3678,629Change in working capital and other items14,3778,90315,982Net cash provided by (used in) operating activities61,90761,973(21,910)Net cash used in investing activities(28,254)(63,989)(93,102)Net cash provided by (used in) financing activities10,69825,799(67,004)Effect of exchange rate changes on cash and cash equivalents4,082(1,047)(2,533)Net change in cash and cash equivalents48,43322,736(184,549)Cash and cash equivalents, beginning of year280,328257,592442,141Cash and cash equivalents, end of year$328,761$280,328$257,592Our cash and cash equivalents balance increased to $328.8 million at December 31, 2017 compared to $280.3 million at December 31, 2016. The increasein cash and cash equivalents in 2017 was due to cash flows provided by operating activities and financing activities of $61.9 million and $10.7 million,respectively, partially offset by cash flows used in investing activities in an amount of $28.3 million.Our cash and cash equivalents balance increased to $280.3 million at December 31, 2016 compared to $257.6 million at December 31, 2015.Cash flow from operating activitiesYear ended December 31, 2017We generated $61.9 million of cash from our operating activities during 2017. The net loss of $40.5 million was adjusted primarily due to non-cash itemsincluding depreciation, amortization and impairment charges of long-lived assets in an aggregate amount of $73.4 million and stock-based compensation of$17.7 million, partially offset by foreign currency transactions gains. Changes in working capital and other items contributed $14.5 million for our cash flowprovided by operating activities. This favorable impact reflects our close monitoring of our operating working capital.Year ended December 31, 2016We generated $62.0 million of cash from our operating activities during 2016. The net loss of $77.6 million was primarily adjusted due to non-cash itemsincluding depreciation, amortization and non-cash impairment charges of long-lived assets of $117.8 million and stock-based compensation in the amount of$20.8 million, partially offset by changes in the deferred income taxes of $10.4 million. Changes in working capital and other items of $8.9 million increasedour cash flow provided by operating activities.Year ended December 31, 2015We used $21.9 million of cash for our operating activities during 2015. The net loss of $1,374 million was primarily adjusted due to non-cash impairmentcharges of goodwill and other long-lived assets of $1,231.4 million and depreciation and amortization of $108.4 million, partially offset by the changes inthe deferred income taxes of $19.1 million. Changes in working capital and other items favorably impacted our cash flow used in operating activities by$16.0 million.Cash flow from investing activitiesYear ended December 31, 2017We used $28.3 million of cash in our investing activities during 2017. Cash was primarily used to purchase property and equipment in an amount of$22.3 million as well as for certain strategic investments in unconsolidated entities.57Table of ContentsOur principal property and equipment purchases were for our new building complex under construction in Rehovot, Israel, for which we paidapproximately $9.8 million during 2017. The new facility in Rehovot, Israel, which will contain two buildings, houses our Israeli headquarters, research anddevelopment facilities and certain marketing activities. We entered the first building in January 2017. Other equipment purchases were primarily for theenhancements of our manufacturing capabilities of our facilities and other building improvements in the United States and Israel, as well as certaininvestments in our IT infrastructure.Other cash used in our investing activities included $3.6 million of cash used for certain strategic investments in unconsolidated entities.Year ended December 31, 2016We used $64.0 million of cash in our investing activities during 2016. Cash was primarily used to purchase property and equipment in an amount of$45.1 million as well as for certain strategic investments in unconsolidated entities.Our principal property and equipment purchases were for our new building complex that was under construction in Rehovot, Israel, for which we paidapproximately $18.1 million during 2016.Other cash used in our investing activities included $23.1 million of cash used for certain strategic investments in unconsolidated entities, partially offsetby $6.7 million of cash provided by net changes in short-term bank and other restricted deposits.Year ended December 31, 2015We used $93.1 million of cash in our investing activities during 2015. Cash was primarily used to purchase property and equipment in an amount of$84.3 million as well as $9.9 million of cash used for acquisitions.Our principal property and equipment purchases were for our new buildings complex that was under construction in Rehovot, Israel, for which we paidapproximately $39.1 million during 2015.Cash flow from financing activitiesYear ended December 31, 2017Net cash provided by financing activities was $10.7 million during 2017. Cash provided by financing activities was mainly attributable to proceeds fromthe Bank Loan of $10.0 million, partially offset by the Bank Loan's quarterly principal repayments of $3.7 million. In addition, cash proceeds of $5.9 millionfrom the exercises of stock options contributed to the cash provided by financing activities.Year ended December 31, 2016Net cash provided by financing activities was $25.8 million during 2016. Cash provided by financing activities was mainly attributable to proceeds fromthe Bank Loan of $26.0 million.Year ended December 31, 2015Net cash used in our financing activities was $67.0 million during 2015. Cash used in financing activities was mainly attributed to net repayment of$50.0 million in connection of the termination of our credit facility. In addition, $19.9 million of cash were used to finance our payments for obligations inconnection with acquisitions and was partially offset by proceeds of $2.9 million from the exercise of stock options.Capital resources and capital expendituresOur total current assets amounted to $614.9 million as of December 31, 2017, of which $328.8 million consisted of cash and cash equivalents. Totalcurrent liabilities amounted to $163.3 million as of December 31, 2017.Most of our cash and cash equivalents are held in banks in Israel, Switzerland and the U.S.58Table of ContentsOur credit risk of our accounts receivable is limited due to the relatively large number of customers and their wide geographic distribution. In addition,we seek to reduce the credit exposures of our accounts receivable by credit limits, credit insurance for many of our customers, ongoing credit evaluation andaccount monitoring procedures.We believe that we will have adequate cash and cash equivalents to fund our ongoing operations and that these sources of liquidity will be sufficient tosatisfy our capital expenditure and debt requirements for the next twelve months.Long-term bank loan and credit lineIn December 2016, our company entered into a secured loan agreement with Bank Hapoalim Ltd. in connection with our new office facility in Israel,which agreement we refer to as the Bank Loan Agreement. Pursuant to the Bank Loan Agreement, our company borrowed $26 million initially in December2016, which we refer to as the Bank Loan, and secured a credit line for an additional $24 million, or the Credit Line. Any loans drawn upon the Credit Linewill be under similar terms as the Bank Loan. The Bank Loan will mature in December 2023 and is payable in equal consecutive quarterly principalinstallments of principal and accrued interest. Any early repayment of the Bank Loan is subject to, within the initial three year term of the Bank Loan, amaximum 1% penalty of the amount prepaid. The repayment of the Bank Loan is secured by a first-priority lien on all of our company’s rights in the propertyof our new office facility in Israel. The Bank Loan bears interest at the rate of LIBOR plus 3.35%. The Bank Loan Agreement contains customaryrepresentations and warranties, affirmative covenants and negative covenants, which include, without limitation, restrictions on indebtedness, liens,investments, and certain dispositions with respect to the property secured by the lien. The Bank Loan Agreement also contains customary events of defaultthat entitle the lender to cause any or all of our company's indebtedness to become immediately due and payable and to foreclose on the lien, and includescustomary grace periods before certain events are deemed events of default. Borrowings under the Bank Loan Agreement are available mainly for thefinancing of our new facility in Israel. As of December 31, 2017, we had borrowed $10 million under the Credit Line.We believe that we were in compliance with all of the covenants under the Bank Loan Agreement related to the Bank Loan and Credit Line as ofDecember 31, 2017.Contractual obligationsFor information concerning our material commitments as of December 31, 2017, see Item 5.F below (“Tabular Disclosure of Contractual Obligations”).Critical Accounting Policies and EstimatesWe have prepared our consolidated financial statements and related disclosures in conformity with accounting principles generally accepted in theUnited States of America. This has required us to make estimates, judgments, and assumptions that affected the amounts we reported. Note 1 to ourconsolidated financial statements included in Item 18 of this annual report contains the significant accounting policies and methods that we used to prepareour consolidated financial statements.The accounting policies that reflect our more significant estimates, judgments and assumptions and which we believe are the most critical to aid in fullyunderstanding and evaluating our reported financial results include:●Revenue Recognition ●Income Taxes ●Contingencies ●Inventories ●Long Lived Assets ●GoodwillWe base our estimates on historical experience and on various other assumptions which we believes to be reasonable under the circumstances. Because ofthe uncertainty inherent in these matters, actual results could differ materially from the estimates we use in applying these policies.Revenue RecognitionWe derive revenue from sales of AM systems, consumables, and services. Our AM systems include software and hardware that function together toprovide the essential functionality of the tangible system. We recognizes revenue when (1) persuasive evidence of a final agreement exists, (2) delivery hasoccurred or services have been rendered, (3) the selling price is fixed or determinable, and (4) collectability is reasonably assured.59Table of ContentsRevenues from sales to resellers are generally recognized on sell-in basis, upon shipment and when title and risk of loss have been transferred to theresellers. When products and services are sold to a reseller, the reseller is responsible for the installation of the system and for other support services andtherefore considered the primary obligor in the arrangement with the end-customers. Products and services sold directly by us or marketed by independentsales agents are recognized based on the gross amount charged to the end-customer as we are considered the primary obligor in the arrangement, retainsgeneral inventory risk, establishes the price for our products and assumes the credit risk for amounts billed to our end-customers.For multiple-element arrangements we allocate revenue to all deliverables based on their relative selling prices and recognize revenue when eachelement’s revenue recognition criteria are met. In such circumstances, we use the following hierarchy to determine the selling price to be used for allocatingrevenue to deliverables: (i) vendor-specific objective evidence of fair value (“VSOE”), (ii) third-party evidence of selling price (“TPE”), and (iii) best estimateof selling price (“BESP”).Judgment is required to properly identify the accounting units of multiple element arrangements and to determine the manner in which revenue should beallocated among the units. We account for each element separately and allocate revenue based on our best estimate of the selling price (BESP).Judgment is required to properly identify the accounting units of multiple element arrangements and to determine the manner in which revenue should beallocated among the units. We account for each element separately and allocate revenue based on our best estimate of the selling price (BESP). Our processfor determining BESP considers multiple factors including: the level of support provided to customers, estimated costs to provide our support, and markettrends in the pricing for similar offerings. While changes in the allocation of the estimated sales price between the units of accounting will not affect theamount of total revenue ultimately recognized for a particular sales arrangement, any material changes in these allocations could impact the timing ofrevenue recognition, which could have a material effect on our financial condition and results of operations.We assess collectability as part of the revenue recognition process. This assessment includes a number of factors such as an evaluation of thecreditworthiness of the customer, past due amounts, past payment history, and current economic conditions. If it is determined that collectability cannot bereasonably assured, we will defer recognition of revenue until collectability is assured.We plan to adopt the Financial Accounting Standards Board's new revenue standard, ASC 606, Revenue from Contracts with Customers, beginningJanuary 1, 2018 which is not expected to change the amount and timing of revenue recognized. Refer to Note 1 to our audited financial statements includedin Item 18 of this annual report for further information.Income TaxesOur effective tax rate is impacted by the geographical mix of taxable income and loss. We record a tax provision for the anticipated tax consequences ofour reported operating results. The provision for income tax is calculated based on our assumptions as to our entitlement to various benefits under theapplicable tax laws and tax rates in the jurisdictions in which we operate. We are subject to income taxes in Israel, the U.S. and other foreign jurisdictions. Asignificant portion of our income after the Stratasys-Objet December 1, 2012 merger date is taxed in Israel. We have realized and expect to continue to realizesignificant tax savings based on the determination that some of our industrial projects that have been granted “Approved Enterprise” and “BeneficiaryEnterprise” status, which provides certain benefits, including tax exemptions for undistributed income and reduced tax rates. Income not eligible forApproved Enterprise and Beneficiary Enterprise benefits is taxed at the regular corporate rates, which were 26.5% in 2015, 25% in 2016, 24% in 2017 and23% in 2018 and thereafter. We are also a Foreign Investors Company, or FIC, as defined by the Investment Law. FICs are entitled to further reductions in thetax rate normally applicable to Approved Enterprises and Beneficiary Enterprises, depending on the level of foreign ownership. In addition, we are an“Industrial Company” as defined by the Israeli Law for the Encouragement of Industry (Taxation), 1969, and, as such, are entitled to certain tax benefits.Our entitlement to the above benefits is subject to our fulfilling the conditions stipulated by the Investment Law and regulations. Should we fail to meetsuch requirements in the future, income attributable to our Approved Enterprise and Beneficiary Enterprise programs could be subject to the statutory Israelicorporate tax rate and we could be required to refund a portion of the tax benefits already received with respect to such programs, as adjusted by the Israeliconsumer price index and interest, or other monetary penalty.Significant judgment is required in evaluating our uncertain tax positions and determining our provision for income taxes. In evaluating the exposureassociated with our various tax filing positions, we record reserves for uncertain tax positions in accordance with US GAAP, based on the technical supportfor the positions and, our past audit experience with similar situations. Although we believe our tax positions comply with applicable tax laws and we intendto defend our positions, no assurance can be given that the final tax outcome of these matters will not be different from that which is reflected in our historicalincome tax reserves and accruals. We adjust these reserves in light of changing facts and circumstances, such as the closing of a tax audit or the refinement ofan estimate. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will impact the provision forincome taxes in the period in which such determination is made. The provision for income taxes includes the impact of reserve provisions and changes toreserves that are considered appropriate, as well as the related estimated interest and penalties.60Table of ContentsDeferred taxes are determined utilizing the “asset and liability” method based on the estimated future tax effects of temporary differences between thecarrying amount and tax bases of assets and liabilities under the applicable tax laws, and on effective tax rates in effect when the deferred taxes are expectedto be settled or realized. Deferred taxes for each jurisdiction are presented as a net asset or liability, net of any valuation allowances. Significant judgmentrequired in determining any valuation allowance recorded against deferred tax assets. In assessing the need for a valuation allowance, we considered allavailable evidence, including past operating results, the most recent projections for taxable income, and prudent and feasible tax planning strategies. Wereassess our valuation allowance periodically and if future evidence allows for a partial or full release of the valuation allowance, a tax benefit will berecorded accordingly.ContingenciesWe are subject to various legal proceedings, lawsuits, government investigations and claims involving employment-related, patents, commercial,securities, and environmental matters that may arise from time to time in the ordinary course of business. The outcomes of the legal proceedings that arepending as of the date the financial statements are issued are subject to significant uncertainty. We record a liability when we believe that it is both probablethat a liability has been incurred and the amount of loss can be reasonably estimated. Significant judgment is required to determine both the probability ofhaving incurred a liability and the estimated amount of the liability. We review these matters at least quarterly and adjust these liabilities to reflect the impactof negotiations, settlements, rulings, advice of legal counsel and other updated information and events, pertaining to a particular case. As such accruals arebased on management’s judgment as to the probability of losses, accruals may materially differ from actual verdicts, settlements or other agreements madewith regards to such contingencies.InventoriesOur inventories are stated at the lower of cost or net realizable value. Cost is determined mainly using standard cost, which approximates actual cost, on afirst-in, first-out basis. Inventory costs consist of materials, direct labor and overhead. Net realizable value is determined based on estimated selling prices inthe ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. We assess periodically our inventories forobsolescence and excess balances, or when certain events or changes in circumstances occur that trigger such assessment. The net realizable value of ourinventory is based on certain factors including, but not limited to: forecasted selling prices and future demand for our products and services, historical salespatterns, technological changes, estimated service period, product end-of-life dates, alternative uses for the inventory, new products launches and othermarket conditions as applicable. If required, we reduce the carrying value of our inventories by an amount equal to the difference between its cost and the netrealizable value. Once such inventory is written down, a new lower cost basis for that inventory is established. Our provisions for inventory write-downs forobsolescence and excess balances requires us to utilize significant judgment. Although we make every effort to ensure the accuracy of the net realizablevalue of our inventories, any significant unanticipated deteriorating factor could have a material impact on the carrying value of our inventories and reportedoperating results.Long Lived AssetsOur long-lived assets, other than goodwill, comprised mainly of definite life identifiable intangible assets and property, plant and equipment. Most of ouridentifiable intangible assets were recognized as part business combinations we have executed in prior periods. Our identifiable intangible assets areprimarily comprised of developed technology, trademarks and trade names, customer relationships and patents.We review the carrying amounts of our long-lived assets for potential impairment when events or changes in circumstances indicate that the carryingamount of an asset may not be recoverable. Impairment indicators may include any significant changes in the manner of our use of the assets or the strategy ofour overall business, certain reorganization initiatives, significant negative industry or economic trends and significant decline in our share price for asustained period. In evaluating recoverability we compare the carrying amounts of the asset or assets groups with their respective estimated undiscountedfuture cash flows. If the asset or assets group are determined to be impaired, an impairment charge is recorded as the amount by which the carrying amount ofthe asset or assets group exceed their fair value.During the year ended December 31, 2017, 2016 and 2015 we recorded impairment of $6.8 million, $24.9 million and $289.0 million related to our long-lived assets.61Table of ContentsGoodwillGoodwill reflects the excess of the consideration transferred plus the fair value of any non-controlling interest in the acquiree at the acquisition date overthe fair values of the identifiable net assets acquired. Goodwill is not amortized but rather is tested for impairment annually at the reporting unit level, orwhenever events or circumstances present an indication of impairment. We apply the Financial Accounting Standards Board, or FASB, guidance of testinggoodwill for impairment. During 2015, we determined that certain indicators of potential impairment that required goodwill impairment analysis for all of ourreporting units existed. Accordingly, we performed a quantitative two-step assessment for goodwill impairment for each of our reporting units. As a result, werecorded a non-cash impairment charge of $942.4 million during 2015. The non-cash impairment charges were recorded in order to reduce the carryingamount of goodwill to its estimated fair value. No goodwill impairment was recorded during the year ended December 31, 2017 and 2016.Determining the fair value of our reporting units requires significant judgment, including judgments about the appropriate discount rates, terminal growthrates, weighted average costs of capital and the amount and timing of projected future cash flows. Projected future cash flows are based on our most recentbudget, forecasts and strategic plans as well as certain growth rate assumptions. Potential changes in our costs and operating structure, the expected timing ofutilization of synergies strategic opportunities, negative effect of exchange rate differences and overall weakness in the 3D printing marketplace, couldnegatively impact our near-term cash-flow projections and could trigger a potential impairment of our goodwill. In addition, failure to execute our strategicplans for our reporting units could negatively impact the fair value of our reporting units, and increase the risk of an additional goodwill impairment in thefuture. We will continue to monitor the fair value our Stratasys-Objet reporting unit to determine whether events and changes in circumstances such as furtherdeterioration in the business climate or operating results, further significant decline in our share price, changes in management’s business strategy ordownward changes of our cash flows projections, warrant further interim impairment testing. Refer to Note 7 to our audited financial statements included inItem 18 of this annual report for further information.On March 3, 2016, the enforcement division of the U.S. Securities and Exchange Commission issued a subpoena to us requesting a number of documentsas part of an investigation of the valuations and other calculations we used to assess the impairment of goodwill and/or intangible assets included in thebalance sheet in our SEC filings. We have cooperated with the SEC and produced documents in the summer of 2016. On September 25, 2017, the SECnotified us that it was closing its investigation of our company and did not intend on recommending an enforcement action by the SEC.C. Research and Development, Patents and Licenses, Etc.For a discussion of our research and development policies, see “Research and Development” and “Regulation— Israeli Tax Considerations andGovernment Programs – Law for the Encouragement of Capital Investments” in Item 4.B above and the “Risks related to operations in Israel” in Item 3.Dabove.D. Trend Information.For trend information, see the Risk Factors described in Item 3.D above, the “Overview” and “Operating Results” sections of this Item 5 - “Operating andFinancial Review and Prospects” and Item 4 - “Information on the Company” above.E. Off-Balance Sheet Arrangements.Except for standard operating leases, we have not engaged in any off-balance sheet arrangements, such as the use of unconsolidated subsidiaries,structured finance, special purpose entities or variable interest entities.We do not believe that our off-balance sheet arrangements and commitments have or are reasonably likely to have a current or future effect on ourfinancial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that ismaterial to investors.F. Tabular Disclosure of Contractual Obligations.The following table summarizes our material known contractual obligations and commitments as of December 31, 2017 that we expect to requiresignificant cash outlays in future periods:Payments Due by Period Less Than 1-3 3-5 More ThanTotal1 YearYearsYears5 YearsU.S. $ in thousandsOperating lease obligations29,2739,24312,7416,492797Purchase obligations59,29359,293---Long-term debt (including estimated interest)37,5296,64612,52811,5096,846 $ 126,095$ 75,182$ 25,269$ 18,001$ 7,64362Table of ContentsThe total amount of unrecognized tax benefits for uncertain tax positions was $27.3 million as of December 31, 2017. Payment of these obligationswould result from settlements with taxing authorities. Due to the difficulty in determining the timing of resolution of audits, these obligations are notincluded in the above table.ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES.A. Directors and Senior Management.The following table lists the names and ages of our current directors, as well as the names, ages and positions of the current members of our seniormanagement, as of the filing date of this annual report:Name Age PositionElchanan Jaglom76Chairman of the Board of DirectorsS. Scott Crump64Chairman of the Executive Committee and Chief Innovation OfficerIlan Levin52Chief Executive Officer and DirectorEdward J. Fierko76DirectorVictor Leventhal73DirectorJohn J. McEleney55DirectorDov Ofer63DirectorZiva Patir67DirectorDavid Reis57Vice Chairman of the Board of Directors and Executive DirectorYair Seroussi62DirectorLilach Payorski44Chief Financial OfficerElchanan Jaglom has served as Chairman of the Board of Directors since February 2015. From the Stratasys-Objet merger until February 2015, Mr.Jaglom served as the Chairman of the Executive Committee of our company. Prior to the Stratasys-Objet merger, he served as Chairman of Object’s board ofdirectors from 2001 until the Stratasys-Objet merger. Mr. Jaglom also served as the Chairman of Diamond Capital Management Ltd., the investment managerof the Diamond Group of investment funds, until January 2, 2014. In parallel to his involvement with these entities, Mr. Jaglom has been involved ininvestment management of funds, private equity and venture capital investment since the early 1980s, focusing primarily on early-stage technologycompanies. He is currently a member of the Board of Trustees of the Tel Aviv Museum of Art and the Ben Gurion University of the Negev. He holds abachelor’s degree in economics and statistics from the Hebrew University in Jerusalem and an M.B.A. from New York University.S. Scott Crump has served as Chairman of the Executive Committee of the Board of Directors since February 2015 and as our Chief Innovation Officersince February 2013. Mr. Crump previously served as Chairman of the Board of Directors from the Stratasys-Objet merger until February 2015, as ChiefExecutive Officer, President, Treasurer and a director of Stratasys, Inc. from its inception in 1988 until the Stratasys-Objet merger, and as Chief FinancialOfficer of Stratasys from February 1990 to May 1997. Mr. Crump was, with Lisa H. Crump, his wife, a co-founder of Stratasys, Inc., and he is the inventor ofour FDM technology. During the period from 1982 to 1988, Mr. Crump was a co-founder and Vice President of Sales of IDEA, Inc., which later changed itsname to SI Technologies, Inc., a leading manufacturer of force, load and pressure transducers. Mr. Crump continued to be a director and shareholder of thatcompany until its sale to Vishay Intertechnologies, Inc. (NYSE: VSH) in April 2005. Mr. Crump holds a B.S. in mechanical engineering from WashingtonState University.Ilan Levin has served as our Chief Executive Officer since July 1, 2016 and as a director of our company since 2000. Mr. Levin was appointed as Presidentand Vice Chairman of the Objet board in February 2011, in which position he remained until the Stratasys-Objet merger. He has been involved in venturecapital and private equity investment activity since 1997, acting as a member of the board of directors and as an advisor for a wide variety of technology-related companies, as well as a director for Vision Sigma Ltd. (TLV: VISN:IT). From 2003 through 2009, he served as Chief Executive Officer of CellGuideLtd. He holds a B.A.Sc. from the University of Toronto and an LL.B. from Tel Aviv University.Edward J. Fierko, who has served as a director of our company since the Stratasys-Objet merger, also served in that capacity for Stratasys, Inc. fromFebruary 2002 until the merger. Since May 2003, Mr. Fierko has been President of EJF Associates, a consulting firm. From March 2003 to May 2003, Mr.Fierko was Vice President of GE Osmonics, Inc., a manufacturer of reverse osmosis water filtration devices. From November 1999 through February 2003, heserved as President and Chief Operating Officer of Osmonics, and from November 1998 to September 1999 he served as Executive Vice President ofOsmonics. From September 1987 to August 1998, Mr. Fierko was President and CEO of Ecowater International, a holding company with operating companiesin the water, waste and special process treatment industry. Prior to that, Mr. Fierko held several management positions over a 23-year career at GeneralElectric Company (NYSE: GE). He holds a B.S. in Accounting from La Salle University.63Table of ContentsVictor Leventhal has served as a director of our company (until May 2016, as an external director) since the closing of the Stratasys-Objet merger onDecember 1, 2012. Mr. Leventhal has served as a consultant to SolidWorks Corporation, a 3D CAD software company, since 2006. From 2001 to 2006, hewas a Group Executive for Dassault Systemes S.A. (NASDAQ: DASTY), the parent company of SolidWorks, where he served on the Global ManagementCommittee. From 1995 to 2001, Mr. Leventhal was the Chief Operating Officer of SolidWorks, where he was responsible for growing the business from itsinception. From 1990 to 1995, Mr. Leventhal was the Chief Executive Officer of CAD Solutions, LLC, a leading reseller of 2D and 3D CAD products, whichhe helped grow from a $5 million company to a $32 million company. From 1985 to 1990, he held numerous executive positions, including serving as theExecutive Vice President of Computerland, the largest computer retailer at the time, where he was responsible for franchise development, major account sales,marketing, training, purchasing and vendor relations. Prior to that time, he held various administrative, operations, marketing and financial positions at IBMfor 18 years. He has also served on the boards of directors of Solido, a 3D printing company, Graphisoft, an architectural software company, and 3D Express, astartup company in the rapid prototyping industry. Mr. Leventhal received a B.B.A. from the University of Texas.John J. McEleney, who has served as a director of our company since the Stratasys-Objet merger, served as a director of Stratasys, Inc. from 2007 until theStratasys-Objet merger. He is the Chief Executive Officer of Onshape Inc. a venture backed start-up company focused on applying modern computing to the3D product design market. Prior to Onshape he was the Chief Executive of Cloud Switch, which was acquired by Verizon. He served as a director ofSolidWorks Corporation, a wholly owned subsidiary of Dassault Systemes S.A. (NASDAQ: DASTY), from June 2000 to May 2008, and also served as itsChief Executive Officer from 2001 until June 2007. Mr. McEleney joined SolidWorks in 1996, serving in several capacities, including Chief OperatingOfficer and Vice President, Americas Sales. Prior to joining SolidWorks, Mr. McEleney held several key management positions at CAD software pioneerComputervision and at defense contractor Raytheon. Mr. McEleney also serves as a director of Newforma, a privately held software company. He holds a B.S.in Mechanical Engineering from the University of Rochester, an M.S. in Manufacturing Engineering from Boston University and an M.B.A. fromNortheastern University.Dov Ofer has served as our director since July 2017. Mr. Ofer serves as the Chief Executive Officer of Lumenis Computerized Systems Ltd. From 2007 to2013, Mr. Ofer served as Chief Executive Officer of Lumenis Ltd. (NASDAQ: LMNS), a medical laser device company. From 2005 to 2007, he served asCorporate Vice President and General Manager of HP Scitex (formerly a subsidiary of Scailex Corporation Ltd. (TASE: SCIX)), a producer of large formatprinting equipment. From 2002 to 2005, Mr. Ofer served as President and Chief Executive Officer of Scitex Vision Ltd. Prior to joining Scitex, Mr. Ofer heldvarious managerial positions in the emerging Israeli high tech sector and participated in different mergers and acquisitions within the industry. Currently, Mr.Ofer serves as chairman of Hanita Coatings RCA Ltd., chairman of Plastopil Hazorea Company Ltd. (TASE: PPIL), vice chairman of Scodix Ltd. and directorof Kornit Digital Ltd. and Orbix Medical Ltd. He holds a B.A. in Economics from the Hebrew University in Israel as well as an M.B.A. from the University ofCalifornia Berkeley in California.Ziva Patir has served as our director since June 2013, when she was elected as an unclassified director pursuant to an amendment to our amended articlesthat was adopted in June 2013. Ms Patir serves on the board of directors of Babylon, a public company active in online advertisement, venture capitalinvestments and financial investments. She also serves on the board of directors of Netz Hotels, an investing and financing real-estate company. Until latelyshe served on the board of directors of ELTA Systems Ltd, an Israeli provider of defense products and services and of UTS, the Israeli AVIS car rental licensee.Since February 2014, she also serves as a member of the board of Lahav at Tel-Aviv University, the leading provider of executive education in Israel, aposition that she has held since 2003. Ms. Patir served as the Vice President of Standards, Policy and Sustainability for Better Place, an infrastructureelectrical vehicles company providing technology design and service for switchable battery cars, a position that she held from 2008 until May 2013. From2008 to 2010, she served as Chair of the Board of the Road Safety Authority (RSA) in Israel. From 1996 to 2008, Ms. Patir held the position of DirectorGeneral of the Standard Institution of Israel (SII). From 2004 to 2008, Ms. Patir served as Vice President of the International Organization for Standardization(ISO), as well as chair of the Technical Management Board, leading overall management of ISO technical work. ISO is the world's largest developer andpublisher of international standards. From 1998 to 2000, Ms. Patir was a member of the International Electrotechnical Commission Council Board. Ms. Patiris a Certified Quality Engineer and holds a B.Sc. in Chemistry from Tel-Aviv University and a M.Sc. in Chemistry/Polymer Science from the WeizmannInstitute of Science.David Reis has served as our director since June 2013. He also served as a director of Objet from 2003 until the closing of the Stratasys-Objet merger. Mr.Reis served as our (and, prior to the Stratasys-Objet merger, as Objet’s) Chief Executive Officer from March 2009 until June 30, 2016. Previously, he served asChief Executive Officer and President of NUR Macroprinters Ltd. (NURMF.PK), a wide format printer manufacturer that was acquired by HP, from February2006 to March 2008. Prior to joining NUR, Mr. Reis served as the Chief Executive Officer and President of ImageID, an automatic identification and datacapture solution provider, and of Scitex Vision (NASDAQ & TASE: SCIX), a developer and manufacturer of wide-format printers. Mr. Reis holds a B.A. inEconomics and Management from the Technion-Israel Institute of Technology and an M.B.A. from the University of Denver.64Table of ContentsYair Seroussi has served as our director since July 2017. Mr. Seroussi has served as an Independent Director at DSP Group, Inc. (NASDAQ: DSPG) sinceFebruary 2002. He serves as a Member of the Advisory Team at SkyFund, a leading mid-market Israeli private equity fund. He is a member of the Board ofGovernors of the Hebrew University, and Chairman of the Eli Hurvitz Strategic Management Institute at the Tel Aviv University. Mr. Seroussi served aschairman of the board of Bank Hapoalim from 2009 through 2016. Mr. Seroussi also served as the president of the Israeli Bank Association for four years. Heserved as a board member and as chairman of the audit committee of Bank HaPoalim from 1997 through 2002. Mr. Seroussi was the founder and head orMorgan Stanley Israel for 16 years. He was the founder and chairman of the Mustang Mezzanine Fund. He served as the chairman of the InvestmentCommittee of Mivtachim, Israel’s largest pension fund, and was a member of various investments committees of private equity funds. Mr. Seroussi served as adirector of Israel Corp and Frutarom Industries. Mr. Seroussi also served for over a decade in Israel’s Ministry of Finance, where he held several seniorpositions. Between the years 1988-199, he served as Head of the Office of the Ministry of Finance in the U.S. and Head of the Commodities Division in NY.In 1991-1992, Mr. Seroussi was a member of the team that created the Yozma Program that initiated the Venture Capital industry in Israel. He holds aBachelor’s degree in Economics and Political Science from the Hebrew University.Lilach Payorski has served as our Chief Financial Officer since January 1, 2017. She joined Stratasys Ltd. in January 2013 and thereafter served as ourVice President, Corporate Finance, until August 2015, and as our Senior Vice President, Corporate Finance, from August 2015 through December 31, 2016.Prior to joining our company, from December 2009 to December 2012, Ms. Payorski served as Head of Finance at PMC-Sierra, a company operating in theSemiconductors industry, which was subsequently acquired by Microsemi Corporation. Prior to that time, she served as Compliance Controller at CheckPoint Software Technologies Ltd. (NASDAQ: CHKP), an IT security company, from 2005 to 2009, and in a finance leadership role at Wind River Systems(NASDAQ: WIND), a software company, which was subsequently acquired by Intel Corporation, from 2003 to 2005. Earlier in her career, she served as a CPAwith Ernst & Young LLP both in Israel and later in Palo Alto, CA. Ms. Payorski earned a Bachelor of Arts in Accounting and Economics from the Tel AvivUniversity.Arrangements for Election of Directors and Members of Management; Family RelationshipsThere are no arrangements or understandings pursuant to which any of our directors or members of senior management were selected for their roles. Thereare also no family relationships among any directors or members of our senior management.B. Compensation.The following table presents all compensation that we paid, or accrued, during the year ended December 31, 2017 to all persons who served as a directoror as a member of senior management of our company at any time during the year. The table does not include any amounts that we paid to reimburse any ofthese persons for costs incurred in providing us with services during that period. Salaries, Fees, Bonuses Pension,Commissions, andRetirementRelated Benefits Paidand Other Similaror Accrued(1)Benefits AccruedAll directors and members of senior management as a group, (2)$ 2,087,042(3)$151,999____________________(1) Does not include the value attributable to stock option grants. For a discussion of stock option grants to our directors and members of seniormanagement, see below. (2)Comprised of the current directors and senior management members listed in the table under “Directors and Senior Management” in Item 6.A above, aswell as Haim Shani, who served as a director for part of 2017 but whose term expired and was not nominated for reelection at our 2017 annual generalmeeting of shareholders. (3)This compensation amount for the year ended December 31, 2017 excludes an aggregate of $0.1 million of bonuses that were paid in 2017 in respectof services that had been performed during the previous year.Pursuant to the Companies Law, the fees payable to our directors and our chief executive officer require approval by (i) the compensation committee ofour board, (ii) the board of directors and (iii) our shareholders (in that order). Please see “Compensation Policy and Committee” in Item 6.C (“BoardPractices”) below for further information regarding the requirements under the Companies Law in connection with the compensation of directors.65Table of ContentsDirector CompensationThe following table sets forth the directors’ fees, salary or other compensation (excluding value attributable to stock option grants and excludingreimbursement for reasonable expenses incurred in connection with services) that are payable to each of our current directors:Name of Director AnnualFee/Salary(1) Per Meeting Fee(In Person/Telephonic/ Written Consent)Elchanan Jaglom$ 420,000(2)-S. Scott Crump$286,889(3)-Ilan Levin$436,560(4)-Edward J. Fierko$50,000$1,500/ $375/$325Victor Leventhal$50,000$1,500/ $375/$325John J. McEleney$50,000$1,500/ $375/$325Ziva Patir$50,000(5)$1,500/ $375/$325David Reis$232,800(6)-Dov Ofer$50,000$1,500/ $375/$325Yair Seroussi$50,000$1,500/ $375/$325____________________(1) The amounts reflected in the “Annual Fee/Salary” column do not include per-meeting fees payable to those directors for whom the above table lists permeeting fees in the right-hand column of the table. The above table does not include an annual fee of US$2,500 for service on each committee of ourboard of directors on which any of the above directors serves (as described under Item 6.C below). (2)Constitutes salary payable in respect of the consulting and director services provided by an entity affiliated with Mr. Jaglom. Does not include Israelivalue added tax, or VAT, that is due on the salary payable to Mr. Jaglom. (3)Constitutes the aggregate salary payable to Mr. Crump for all of the services that he provides to our company, including in respect of his roles asChairman of the Executive Committee and Chief Innovation Officer of our company. (4)Approximately NIS1,548,000. This amount constitutes the aggregate base salary payable to Mr. Levin his services as Chief Executive Officer andmember of the board of the Company. This amount excludes other benefits that are provided for by Israeli law or that are customary for seniorexecutives in Israel, including our contribution of amounts equal to 5%, 8.33%, 2.5%, and 7.5% of Mr. Levin’s gross monthly salary towards certainpension, severance, disability and tax-advantaged savings funds, and Mr. Levin’s right to use (and all related fixed and variable costs in respect of) aleased car that we provide to him. This amount also does not include VAT that is due on the salary payable to Mr. Levin. In the event of thetermination of Mr. Levin’s employment (by either Mr. Levin or our Company), he will be entitled to six months’ notice, during which time he willreceive his monthly base salary (other than in the event of termination by our company for cause). At our 2017 annual general meeting of shareholders,our shareholders approved a bonus of $100,000 for Mr. Levin in respect of the 2016 year, as well as a one-time grant of options to purchase 200,000ordinary shares of our company pursuant to our 2012 Omnibus Equity Incentive Plan. (5)Does not include VAT that is due on the fees payable to Ms. Patir. (6)This constitutes the amount (not including VAT, which is due on fees payable to Mr. Reis) for Mr. Reis’ services as a board member, including in hisrole as Vice Chairman of the Board. In addition to this amount (which was approved by our shareholders), our shareholders also approved annual cashcompensation for Mr. Reis of NIS 324,000 (approximately $91,368) for his services as our Executive Director, plus other benefits that are provided forby Israeli law or that are customary for senior executives in Israel, including the right to use (and all related fixed and variable costs in respect of) aleased car.Director/Officer Equity CompensationGrants to directors who are also senior management membersDuring the year ended December 31, 2017, we granted stock options to purchase an aggregate of 300,000 of our ordinary shares to members of our seniormanagement who also serve as our directors, Messrs. Levin (200,000 ordinary shares) and Crump. (100,000 ordinary shares). Those option grants are subjectto the following terms:Exercise Price: $19.96 per ordinary share (constituting the fair market value of our ordinary shares, as determined based on the average closing price of theordinary shares on the trading days during the 30-day period following the date of the approval of the grants by the compensation committee of our board ofdirectors on March 6, 2017).Grant Date: April 6, 2017 (the day following the foregoing 30-day period utilized for determining the exercise price, as described above).Vesting Schedule: Subject to Mr. Levin’s and Mr. Crump’s respective continued employment as our Chief Executive Officer and Chief Innovation Officer,respectively, the options will vest over the course of a four-year period, commencing on July 1, 2016 and June 21, 2017, respectively, with 25% of the grantvesting on the first anniversary of the vesting commencement date, followed by quarterly vesting thereafter of 6.25% of the grant at the end of each quarter ofcontinuous employment over the following 12 quarters.66Table of ContentsExercise Period: The options will remain exercisable for a period of 10 years from the grant date.Grants to independent/non-employee directorsAt our 2016 annual general meeting of shareholders, our shareholders approved the following equity package for each of our independent and non-executive directors, which package was approved once again at our 2017 annual general meeting of shareholders for Messrs. Ofer and Seroussi specifically,who were initially elected as directors at that 2017 meeting:Initial grant: Initial grant of options to purchase 10,000 ordinary shares of our company.Exercise Price: Equal to the fair market value of the average of the closing prices of an ordinary share of our company on the trading days during the 30-day period following the date of the approval of a grant by our shareholders.Vesting Schedule: The options shall vest equally on a monthly basis until the earlier of (i) the first anniversary of the grant date and subject to continuousservice of the applicable independent director, or (ii) at the end of the term of the applicable independent director at the next annual general meeting of theshareholders of our company after the grant at which such director’s directorship may be extended or terminated (which we refer to as the Full Vesting Date),provided that all such options shall be fully vested at the Full Vesting Date.Automatic Additional Grants: Automatic additional grants shall be approved at the commencement of the term of each independent director, such thatan additional 10,000 options shall be granted to each such continuing director on the first and second anniversaries of the commencement of such director’sterm, contingent on the continued service of such director. Such additional grants shall have an exercise price equal to the fair market value of the average ofthe closing prices of an ordinary share of our company on the trading days during the 30-day period following the first and second anniversaries,respectively, of the commencement of such director’s term, and shall vest in the same manner as specified under “Vesting Schedule” above.For a description of the terms of our stock option and share incentive plans, see “Share Ownership - Stock Option and Share Incentive Plans” in Item 6.Ebelow.Office Holder CompensationThe table below outlines the compensation actually paid to our five most highly compensated senior office holders during or with respect to the yearended December 31, 2017, in the disclosure format of Regulation 21 of the Israeli Securities Regulations (Periodic and Immediate Reports), 1970. We refer tothe five individuals for whom disclosure is provided herein as our “Covered Executives.”For purposes of the table and the summary below, and in accordance with the above mentioned securities regulations, “compensation” includes basesalary, bonuses, equity-based compensation, retirement or termination payments, benefits and perquisites such as car, phone and social benefits and anyundertaking to provide such compensation.Summary Compensation TableInformation Regarding the Covered Executive(1)TotalCompensation,ExcludingName and PrincipalBaseVariableBenefit andEquity-BasedEquity-BasedTotalPosition(2) Salary Compensation(3) Perquisites(4) Other Compensation Compensation(5) CompensationIlan Levin,$ 447,110$ 440,340(6)$ 25,813$-$ 913,264$ 943,288$ 1,856,552Chief Executive Officer Joe Allison,$280,000$92,400$50,680$ 1,201,285$ 1,624,365$76,7551,701,120CEO of SDM Nadav Goshen,CEO of MakerBot$538,000$135,000$43,935$—$716,935$526,072$1,243,007 Scott Crump,Chief Innovation Officer$262,854$178,741(6)$24,035—$465,629$690,554$1,156,183 Dan Yalon, EVP Products $ 288,000 $ 183,142 $ 107,171 $ — $ 578,313 $ 491,664 $ 1,069,977____________________67Table of Contents(1) All amounts reported in the table are in terms of cost to the Company, as recorded in our financial statements. (2)All current executive officers listed in the table are full-time employees or consultants of our company. Cash compensation amounts denominated incurrencies other than the U.S. dollar were converted into U.S. dollars at the average conversion rate for 2017. (3)Amounts reported in this column refer to commission, incentive and the maximum contractual bonus payments potentially payable for 2017. (4)Amounts reported in this column include benefits and perquisites, including those mandated by applicable law. Such benefits and perquisites mayinclude, to the extent applicable to the Covered Executive, payments, contributions and/or allocations for savings funds, pension, severance, vacation,car or car allowance, medical insurances and benefits, risk insurances (e.g., life, disability, accident), convalescence pay, payments for social security,tax gross-up payments and other benefits and perquisites consistent with our guidelines. (5)Amounts reported in this column represent the expense recorded in our financial statements for the year ended December 31, 2017 with respect toequity-based compensation. Equity-based compensation is determined based on the awards' fair value on their grant date. Assumptions and keyvariables used in the calculation of such amounts are described in Note 11 to our audited consolidated financial statements, which are included in Item18 of this annual report. (6)This amount represents a potential bonus in respect of 2017 that is subject to approval by our shareholders.Members of our senior management are eligible for bonuses each year. The bonuses are payable upon meeting objectives and targets that are set annuallyby our Chief Executive Officer and approved by our compensation committee and our board of directors, in that order. These same corporate bodies also setthe bonus targets for our Chief Executive Officer. In accordance with a December 2012 amendment to the Companies Law, we have adopted a compensationpolicy that governs the compensation of our directors and senior management and which has been approved by (i) the compensation committee of our board,(ii) the board of directors and (iii) our shareholders (in that order). Please see “Compensation Policy and Committee” in Item 6.C (“Board Practices”) belowfor further information.C. Board Practices.Board of DirectorsUnder the Companies Law, the management of our business is vested in our board of directors. Our board of directors may exercise all powers and maytake all actions that are not specifically granted to our shareholders or to management. Our board of directors serves as the primary corporate bodyresponsible for risk management for our company, including cybersecurity risks, and periodically consults with the management of our company to obtainupdates concerning, and internally discusses, the most material risks currently facing our company, and how those risks are being mitigated. Our executiveofficers are responsible for our day-to-day management and have individual responsibilities established by our board of directors. Our Chief ExecutiveOfficer is appointed by, and serves at the discretion of, our board of directors, subject to the employment agreement that we have entered into with him. Allother executive officers are also appointed by our board of directors, subject to the terms of any applicable employment agreements that we may enter intowith them.Under our amended articles, our board of directors must consist of at least seven and not more than 11 directors, including, to the extent applicable, atleast two external directors required to be elected under the Companies Law.In May 2016, we elected to be governed by a newly-adopted exemption under the Companies Law regulations that exempts us from appointing externaldirectors and from complying with the Companies Law requirements related to the composition of the audit committee and compensation committee of ourboard of directors. Our eligibility for that exemption is conditioned upon: (i) the continued listing of our ordinary shares on the NASDAQ Stock Market (orone of a few select other non-Israeli stock exchanges); (ii) there not being a controlling shareholder (generally understood to be a 25% or greater shareholder)of our company under the Companies Law; and (iii) our compliance with the NASDAQ Listing Rules requirements as to the composition of (a) our board ofdirectors—which requires that we maintain a majority of independent directors (as defined under the NASDAQ Listing Rules) on our board of directors and(b) the audit and compensation committees of our board of directors (which require that such committees consist solely of independent directors (at leastthree and two members, respectively), as described under the NASDAQ Listing Rules). At the time that it determined to exempt our company from theexternal director requirement, our board affirmatively determined that we meet the conditions for exemption from the external director requirement, includingthat a majority of the members of our board, along with each of the members of the audit and compensation committees of the board, are independent underthe NASDAQ Listing Rules.As a result of our election to be exempt from the external director requirement under the Companies Law, each of our directors is elected annually, at ourannual general meeting of shareholders. The vote required for the election of each director is a majority of the voting power represented at the meeting andvoting on the election proposal. Following certain changes to our board of directors based on the election at our 2017 annual general meeting of shareholdersthat took place in July 2017, the current members of our board consist of the Chairman— Elchanan Jaglom, the Chairman of the Executive Committee—S.Scott Crump, Ilan Levin (our Chief Executive Officer), Edward J. Fierko, Victor Leventhal, John J. McEleney, Dov Ofer, Ziva Patir, David Reis (an ExecutiveDirector and Vice Chairman of the Board) and Yair Seroussi. For more information, please see “Election of Directors” in Item 10.B (“Memorandum andArticles of Association”) below.68Table of ContentsOur board of directors may appoint directors to fill vacancies on the board, for a term of office equal to the remaining period of the term of office of thedirector(s) whose office(s) have been vacated.In accordance with the exemption available to foreign private issuers under the NASDAQ Listing Rules, we do not follow the requirements of theNASDAQ rules with regard to the process of nominating directors. Instead, we follow Israeli law and practice, in accordance with which our board of directors(based on the recommendation of the executive committee thereof) is authorized to recommend to our shareholders director nominees for election. Under theCompanies Law and our amended articles, nominations for directors may also be made by any shareholder holding at least one percent (1%) of ouroutstanding voting power. However, any such shareholder may make such a nomination only if a written notice of such shareholder’s intent to make suchnomination (together with certain documentation required under the Companies Law) has been delivered to our registered Israeli office within seven daysafter we publish notice of our upcoming annual general meeting (or within 14 days after we publish a preliminary notification of an upcoming annual generalmeeting).In addition to its role in making director nominations, under the Companies Law, our board of directors must determine the minimum number of directorswho are required to have accounting and financial expertise. Under applicable regulations, a director with accounting and financial expertise is a directorwho, by reason of his or her education, professional experience and skill, has a high level of proficiency in and understanding of business accounting mattersand financial statements. See “—External Directors” in this Item 6.C below. He or she must be able to thoroughly comprehend the financial statements of thecompany and initiate debate regarding the manner in which financial information is presented. In determining the number of directors required to have suchexpertise, our board of directors must consider, among other things, the type and size of our company and the scope and complexity of its operations. Ourboard of directors has determined that our company requires one director with such expertise.External DirectorsUnder the Companies Law, the boards of directors of companies whose shares are publicly traded, including companies with shares traded in the UnitedStates, are generally required to include at least two members who qualify as external directors.Our election to exempt our company from compliance with the external director requirement can be reversed at any time by our board of directors, inwhich case we would need to hold a shareholder meeting to once again appoint external directors, whose election would be for a three-year term. The electionof each external director would require a majority vote of the shares present and voting at a shareholders meeting, provided that either:●the majority voted in favor of election includes a majority of the shares held by non-controlling shareholders who do not have a personal interest inthe election of the external director (other than a personal interest not deriving from a relationship with a controlling shareholder) that are voted at themeeting, excluding abstentions, which we refer to as a disinterested majority; or ●the total number of shares held by non-controlling, disinterested shareholders (as described in the previous bullet-point) voted against the election ofthe director does not exceed two percent (2%) of the aggregate voting rights in the company.The term “controlling shareholder” is defined in the Companies Law as a shareholder with the ability to direct the activities of the company, other thanby virtue of being an office holder. A shareholder is presumed to be a controlling shareholder if the shareholder holds 50% or more of the voting rights in acompany or has the right to appoint the majority of the directors of the company or its general manager.For further information concerning the Companies Law provisions related to external directors, please see “Item 6. Directors, Senior Management andEmployees—C. Board Practices—Board of Directors—External Directors” in our annual report on Form 20-F for the year ended December 31, 2015, whichwe filed with the SEC on March 21, 2016.Board CommitteesAudit CommitteeUnder the Companies Law, the board of directors of a public company must appoint an audit committee. The audit committee must consist of at leastthree directors. To the extent a company is required to appoint external directors, this committee must include all of the external directors, one of whom mustserve as chairman of the committee. There are additional requirements as to the composition of the audit committee under the Companies Law. However,when we elected to exempt our company from the external director requirement, we concurrently elected to exempt our company from all of suchrequirements (which exemption is conditioned on our fulfillment of all NASDAQ listing requirements related to the composition of the audit committee).The members of our audit committee consist of Victor Leventhal, Yair Seroussi and Edward J. Fierko. Mr. Fierko serves as chairman of the committee. Ourboard of directors has determined that each of Messrs. Leventhal, Seroussi and Fierko meets the independence requirements set forth in the Listing Rules ofthe NASDAQ Stock Market and in Rule 10A-3 under the Exchange Act.69Table of ContentsOur board of directors has determined that Mr. Fierko qualifies as an audit committee financial expert, as defined under Item 16A of the SEC’s Form 20-F,and has the requisite financial sophistication set forth in the NASDAQ rules and regulations.Our board of directors has adopted an audit committee charter that sets forth the responsibilities of the audit committee consistent with the rules of theSEC and the Listing Rules of the NASDAQ Stock Market, as well as the requirements for such committee under the Companies Law, including the following:●oversight of our independent registered public accounting firm and recommending the engagement, compensation or termination of engagement ofour independent registered public accounting firm to the board of directors in accordance with Israeli law; ●recommending the engagement or termination of the person filling the office of our internal auditor; and ●recommending the terms of audit and non-audit services provided by the independent registered public accounting firm for pre-approval by our boardof directors.Our audit committee provides assistance to our board of directors in fulfilling its legal and fiduciary obligations in matters involving our accounting,auditing, financial reporting, internal control and legal compliance functions by pre-approving the services performed by our independent accountants andreviewing their reports regarding our accounting practices and systems of internal control over financial reporting. Our audit committee also oversees theaudit efforts of our independent accountants and takes those actions that it deems necessary to satisfy itself that the accountants are independent ofmanagement.Under the Companies Law, our audit committee is responsible for (i) determining whether there are deficiencies in the business management practices ofour company, including in consultation with our internal auditor or the independent auditor, and making recommendations to the board of directors toimprove such practices, (ii) determining whether to approve certain related party transactions (including transactions in which an office holder has a personalinterest and whether such transaction is extraordinary) (see “—Approval of related party transactions under Israeli Law” below in this Item 6.C), (iii)determining standards and policies for determining whether a transaction with a controlling shareholder or a transaction in which a controlling shareholderhas a personal interest is deemed insignificant or not and the approval requirements (including, potentially, the approval of the audit committee) fortransactions that are not insignificant including the types of transactions that are not insignificant, (iv) where the board of directors approves the workingplan of the internal auditor, to examine such working plan before its submission to the board and propose amendments thereto, (v) examining our internalcontrols and internal auditor’s performance, including whether the internal auditor has sufficient resources and tools to dispose of its responsibilities, (vi)examining the scope of our auditor’s work and compensation and submitting a recommendation with respect thereto to our board of directors or shareholders,depending on which of them is considering the appointment of our auditor and (vii) establishing procedures for the handling of employees’ complaints as tothe management of our business and the protection to be provided to such employees. Our audit committee may not approve an action or a related partytransaction, or take any other action required under the Companies Law, unless at the time of approval a majority of the committee’s members are present,which majority consists of unaffiliated directors including at least one external director.Executive CommitteeUpon the closing of the Stratasys-Objet merger, our board of directors appointed an executive committee. The roles of this committee are (i) to oversee theimplementation of the business strategy of our company, subject to board approval for matters outside of the ordinary course of business (as is required underthe Companies Law), and (ii) to exercise such other duties as the board may resolve from time to time. The members of the executive committee consist ofMessrs. S. Scott Crump, who serves as chairman of the executive committee, Elchanan Jaglom, John McEleney and Ilan Levin.Compensation Committee and Compensation PolicyUnder a December 2012 amendment to the Companies Law, we have appointed a compensation committee and established a policy regarding the termsof engagement of office holders, or a compensation policy. Such compensation policy was set by our board, after considering the recommendations of ournewly-appointed compensation committee, and was approved by our shareholders in September 2013. In February 2015, following approval by ourcompensation committee and board, our shareholders approved an amended and restated version of our compensation policy at an extraordinary generalmeeting of shareholders.The compensation policy serves as the basis for decisions concerning the financial terms of employment or engagement of our office holders, includingexculpation, insurance, indemnification or any monetary payment or obligation of payment in respect of employment or engagement. The compensationpolicy also relates to certain factors, including advancement of our objectives, our business and our long-term strategy, and creation of appropriate incentivesfor executives. It also considers, among other things, our risk management, size and the nature of our operations. The compensation policy furthermoreconsiders the following additional factors:●the knowledge, skills, expertise and accomplishments of the relevant director or executive; ●the director’s or executive’s roles and responsibilities and prior compensation agreements with him or her;70Table of Contents●the relationship between the terms offered and the average compensation of the other employees of our company, including those (if any) employedthrough manpower companies; ●the impact of disparities in salary upon work relationships in our company; ●the possibility of reducing variable compensation at the discretion of the board of directors; and the possibility of setting a limit on the exercise valueof non-cash variable compensation; and ●as to severance compensation, the period of service of the director or executive, the terms of his or her compensation during such service period, ourcompany’s performance during that period of service, the person’s contribution towards our company’s achievement of its goals and the maximizationof its profits, and the circumstances under which the person is leaving our company.The compensation policy also includes the following principles:●the link between variable compensation and long-term performance and measurable criteria; ●the relationship between variable and fixed compensation, and the ceiling for the value of variable compensation; ●the conditions under which a director or executive would be required to repay compensation paid to him or her if it was later shown that the data uponwhich such compensation was based was inaccurate and was required to be restated in our financial statements; and ●the minimum holding or vesting period for variable, equity-based compensation.The compensation policy must also consider appropriate incentives from a long-term perspective and maximum limits for severance compensation.Under the December 2012 amendment to the Companies Law, our compensation committee is responsible for recommending the compensation policy toour board of directors for its approval (and subsequent approval by our shareholders) and is charged with duties related to the compensation policy and to thecompensation of our office holders as well as functions related to approval of the terms of engagement of office holders, including:●recommending whether our compensation policy should continue in effect, if the then-current policy has a term of greater than three (3) years(approval of the continuation of an existing compensation policy for a company such as ours must in any case occur every three years); ●recommending to our board periodic updates to the compensation policy; ●assessing implementation of the compensation policy; and ●determining whether the compensation terms of the chief executive officer of our company need not be brought to approval of the shareholders (underspecial circumstances).As to the composition of the compensation committee, under the Companies Law, if a company is required to appoint external directors, the committeemust consist of at least three (3) members, including all of the external directors, one of whom must serve as chairman of the committee. There are additionalrequirements as to the composition of the audit committee under the Companies Law. However, when we elected to exempt our company from the externaldirector requirement, we concurrently elected to exempt our company from all of such requirements (including the three-member minimum). Our exemptionunder the Companies Law is conditioned on our fulfillment of all NASDAQ listing requirements related to the composition of the compensation committee.The compensation committee is subject to the same Companies Law restrictions as the audit committee as to who may not be present during committeedeliberations (as described under “—Approval of Related Party Transactions Under Israeli Law—Fiduciary Duties of Directors and Executive Officers—Disclosure of Personal Interests of an Office Holder” below).The NASDAQ Listing Rules also require that the compensation of the chief executive officer and all other executive officers of our company bedetermined, or be recommended to the board for determination, either by a majority of the independent directors, or by a compensation committee consistingsolely of independent directors (subject to a minimum of two committee members).We appointed our compensation committee in mid-2013. The committee currently consists of Victor Leventhal, Ziva Patir and John McEleney. VictorLeventhal serves as chairman of the committee. Our board of directors has determined that each of Messrs. Leventhal and McEleney, and Ms. Patir, meets theindependence requirements set forth in the Listing Rules of the NASDAQ Stock Market and in Rule 10C-1 under the Exchange Act.Nominating committeeOur board of directors does not currently have a nominating committee, as director nominations are made in accordance with the terms of our articles, asdescribed in “—Board of Directors” above. We rely upon the exemption available to foreign private issuers under the Listing Rules of the NASDAQ StockMarket from the NASDAQ listing requirements related to independent director oversight of nominations to our board of directors and the adoption of aformal written charter or board resolution addressing the nominations process. Also see Item 16.G “Corporate Governance” below.71Table of ContentsInternal AuditorUnder the Companies Law, the board of directors of an Israeli public company must appoint an internal auditor recommended by the audit committee andnominated by the board of directors. An internal auditor may not be:●a person (or a relative of a person) who holds more than 5% of the company’s outstanding shares or voting rights; ●a person (or a relative of a person) who has the power to appoint a director or the general manager of the company; ●an office holder (including a director) of the company (or a relative thereof); or ●a member of the company’s independent accounting firm, or anyone on his or her behalf.The role of the internal auditor is to examine, among other things, our compliance with applicable law and orderly business procedures. Moshe Cohen ofChaikin Cohen Rubin & Co. has served as our internal auditor since his appointment effective upon the Stratasys-Objet merger.Approval of Related Party Transactions Under Israeli LawFiduciary Duties of Directors and Executive OfficersThe Companies Law codifies the fiduciary duties that office holders owe to a company. Each person listed in the table under Item 6.A “Directors andSenior Management” is an office holder under the Companies Law.An office holder’s fiduciary duties consist of a duty of care and a duty of loyalty. The duty of care requires an office holder to act with the level of carewith which a reasonable office holder in the same position would have acted under the same circumstances. The duty of loyalty requires that an office holderact in good faith and in the best interests of the company. The duty of care includes a duty to use reasonable means to obtain:●information on the advisability of a given action brought for his or her approval or performed by virtue of his or her position; and ●all other important information pertaining to these actions.The duty of loyalty requires an office holder to act in good faith and for the benefit of the company, and includes a duty to:●refrain from any conflict of interest between the performance of his or her duties to the company and his or her other duties or personal affairs; ●refrain from any activity that is competitive with the company; ●refrain from exploiting any business opportunity of the company to receive a personal gain for himself or herself or others; and ●disclose to the company any information or documents relating to the company’s affairs which the office holder received as a result of his or herposition as an office holder.Disclosure of Personal Interests of an Office HolderThe Companies Law requires that an office holder promptly disclose to the board of directors any personal interest that he or she may have and all relatedmaterial information known to him or her and any documents concerning any existing or proposed transaction with the company. An interested officeholder’s disclosure must be made promptly and in any event no later than the first meeting of the board of directors at which the transaction is considered. A“personal interest” includes an interest of any person in an act or transaction of a company, including a personal interest of one’s relative or of a corporatebody in which such person or a relative of such person is a 5% or greater shareholder, director or general manager or in which he or she has the right toappoint at least one director or the general manager, but excluding a personal interest stemming from one’s ownership of shares in the company. A personalinterest furthermore includes the personal interest of a person for whom the office holder holds a voting proxy or the interest of the office holder with respectto his or her vote on behalf of the shareholder for whom he or she holds a proxy even if such shareholder itself has no personal interest in the approval of thematter. An office holder is not, however, obliged to disclose a personal interest if it derives solely from the personal interest of his or her relative in atransaction that is not considered an extraordinary transaction. Under the Companies Law, an “extraordinary transaction” is defined as any of the following:●a transaction other than in the ordinary course of business; ●a transaction that is not on market terms; or ●a transaction that may have a material impact on a company’s profitability, assets or liabilities.72Table of ContentsIf it is determined that an office holder has a personal interest in a transaction, approval by the board of directors is required for the transaction, unless thecompany’s articles of association provide for a different method of approval. Further, so long as an office holder has disclosed his or her personal interest in atransaction, the board of directors may approve an action by the office holder that would otherwise be deemed a breach of duty of loyalty. However, acompany may not approve a transaction or action that is adverse to the company’s interest or that is not performed by the office holder in good faith.Approval first by the company’s audit committee and subsequently by the board of directors is required for an extraordinary transaction with an office holder.Compensation of, or an undertaking to indemnify or insure, an office holder, requires approval by the compensation committee, the board of directors and, incertain cases (for directors, the chief executive officer, and any executive officer whose compensation terms do not conform to the then-existingcompensation policy) the shareholders, in that order. Compensation of an individual office holder, including the chief executive officer (but excluding adirector), that does not conform to the company’s compensation policy may be adopted under special circumstances despite failure to obtain shareholderapproval if, following the relevant shareholder vote, the compensation committee followed by the board once again approves the compensation, based onrenewed and specific analysis of relevant factors.Generally, a person who has a personal interest in a matter which is considered at a meeting of the board of directors, the audit committee or compensationcommittee may not be present at such a meeting or vote on that matter unless a majority of the board, audit committee or compensation committee (asappropriate) has a personal interest in the matter, or unless the chairman of the board, audit committee or compensation committee (as appropriate) determinesthat he or she should be present in order to present the transaction that is subject to approval. If a majority of the members of the board, audit committee orcompensation committee has a personal interest in the approval of a transaction, then all directors may participate in discussions of the board of directors,audit committee or compensation committee on such transaction and the voting on approval thereof, but shareholder approval is also required for suchtransaction.Disclosure of Personal Interests of Controlling ShareholdersPursuant to Israeli law, the disclosure requirements regarding personal interests that apply to directors and executive officers also apply to a controllingshareholder of a public company. In the context of a transaction involving a shareholder of the company, a controlling shareholder also includes anyshareholder who holds 25% or more of the voting rights if no other shareholder holds more than 50% of the voting rights. Two or more shareholders with apersonal interest in the approval of the same transaction are deemed to be a single shareholder and may be deemed a controlling shareholder for the purposeof approving such transaction. Extraordinary transactions with a controlling shareholder or in which a controlling shareholder has a personal interest, or atransaction with a controlling shareholder or his or her relative, directly or indirectly, require the approval of the audit committee, the board of directors andthe shareholders of the company, in that order. In addition, the shareholder approval must fulfill one of the following requirements:●a disinterested majority; or ●the votes of shareholders who have no personal interest in the transaction and who are present and voting, in person, by proxy or by voting deed at themeeting, and who vote against the transaction may not represent more than two percent (2%) of the voting rights of the company.To the extent that any such transaction with a controlling shareholder is for a period extending beyond three years, approval is required once every threeyears, unless the audit committee determines that the duration of the transaction is reasonable given the circumstances related thereto.The engagement of a controlling shareholder as an office holder or employee requires the same approvals as are described immediately above, except thatthe approval of the compensation committee, rather than the audit committee, is required.Shareholder DutiesPursuant to the Companies Law, a shareholder has a duty to act in good faith and in a customary manner toward the company and other shareholders andto refrain from abusing his or her power in the company, including, among other things, in voting at the general meeting of shareholders and at classshareholder meetings with respect to the following matters:●an amendment to the company’s articles of association; ●an increase of the company’s authorized share capital; ●a merger; or ●the approval of interested party transactions and acts of office holders that require shareholder approval.In addition, a shareholder also has a general duty to refrain from discriminating against other shareholders.In addition, certain shareholders have a duty of fairness toward the company. These shareholders include any controlling shareholder, any shareholderwho knows that it has the power to determine the outcome of a shareholder vote or a shareholder class vote and any shareholder who has the power to appointor to prevent the appointment of an office holder of the company or other power towards the company. The Companies Law does not define the substance ofthis duty of fairness, except to state that the remedies generally available upon a breach of contract will also apply in the event of a breach of the duty to actwith fairness.73Table of ContentsExculpation, Insurance and Indemnification of Directors and OfficersUnder the Companies Law, a company may not exculpate an office holder from liability for a breach of the duty of loyalty. An Israeli company mayexculpate an office holder in advance from liability to the company, in whole or in part, for damages caused to the company as a result of a breach of duty ofcare but only if a provision authorizing such exculpation is inserted in its articles of association. Our amended articles include such a provision. Thecompany may not exculpate in advance a director from liability arising out of a prohibited dividend or distribution to shareholders.Under the Companies Law, a company may indemnify an office holder in respect of the following liabilities and expenses incurred for acts performed byhim or her as an office holder, either in advance of an event or following an event, provided its articles of association include a provision authorizing suchindemnification:●financial liability incurred by or imposed on him or her in favor of another person pursuant to a judgment, including a settlement or arbitrator’s awardapproved by a court. However, if an undertaking to indemnify an office holder with respect to such liability is provided in advance, then such anundertaking must be limited to events which, in the opinion of the board of directors, can be foreseen based on the company’s activities when theundertaking to indemnify is given, and to an amount or according to criteria determined by the board of directors as reasonable under thecircumstances, and such undertaking shall detail the abovementioned foreseen events and amount or criteria; ●reasonable litigation expenses, including attorneys’ fees, incurred by the office holder as a result of an investigation or proceeding instituted againsthim or her by an authority authorized to conduct such investigation or proceeding, provided that (i) no indictment was filed against such office holderas a result of such investigation or proceeding; and (ii) no financial liability was imposed upon him or her as a substitute for the criminal proceedingas a result of such investigation or proceeding or, if such financial liability was imposed, it was imposed with respect to an offense that does notrequire proof of criminal intent; and ●reasonable litigation expenses, including attorneys’ fees, incurred by the office holder or imposed by a court in proceedings instituted against him orher by the company, on its behalf, or by a third party, or in connection with criminal proceedings in which the office holder was acquitted, or as aresult of a conviction for an offense that does not require proof of criminal intent.Under the Companies Law, a company may insure an office holder against the following liabilities incurred for acts performed by him or her as an officeholder if and to the extent provided in the company’s articles of association:●a breach of the duty of loyalty to the company, provided that the office holder acted in good faith and had a reasonable basis to believe that the actwould not harm the company; ●a breach of duty of care to the company or to a third party, to the extent such a breach arises out of the negligent conduct of the office holder; and ●a financial liability imposed on the office holder in favor of a third party.Under the Companies Law, a company may not indemnify, exculpate or insure an office holder against any of the following:●a breach of fiduciary duty, except for indemnification and insurance for a breach of the duty of loyalty to the company to the extent that the officeholder acted in good faith and had a reasonable basis to believe that the act would not prejudice the company; ●a breach of duty of care committed intentionally or recklessly, excluding a breach arising out of the negligent conduct of the office holder; ●an act or omission committed with intent to derive illegal personal benefit; or ●a fine or forfeit levied against the office holder.Under the Companies Law, exculpation, indemnification and insurance of office holders must be approved by our compensation committee and our boardof directors and, with respect to directors or controlling shareholders, their relatives and third parties in which such controlling shareholders have a personalinterest, also by the shareholders. See “—Approval of Related Party Transactions Under Israeli Law—Fiduciary Duties of Directors and Executive Officers”above in this Item 6.C.Our amended articles permit us to exculpate, indemnify and insure our office holders to the fullest extent permitted or to be permitted by the CompaniesLaw.74Table of ContentsWe have obtained directors and officers liability insurance for the benefit of our office holders and intend to continue to maintain such coverage and payall premiums thereunder to the fullest extent permitted by the Companies Law. In addition, we have entered into agreements with each of our office holdersundertaking to indemnify them to the fullest extent permitted by Israeli law. Furthermore, until the sixth anniversary of the effective time of the Stratasys-Objet merger, we are covering the directors and officers of Stratasys, Inc. and its subsidiaries with respect to acts or omissions occurring prior to the effectivetime of the merger. The limits, terms and conditions of this coverage are at least as favorable as the limits, terms and conditions in the policy that Stratasys,Inc. maintained up to the effective time of the Stratasys-Objet merger.Directors’ Service ContractsFor a description of service contracts that we have entered into with our directors that provide for benefits upon termination of employment or otherservice, please see Item 7.B, “Related Party Transactions— Employment and Consulting Agreements with Directors and Executive Officers” below.D. EmployeesThe number of our full-time equivalent employees, and the distribution of employees (i) geographically and (ii) within the divisions of our company, ineach case as of December 31, 2017, 2016 and 2015 are set forth in the two tables below.Number of full-time equivalent employeesby region as of December 31,Region 2017 2016 2015Americas*1,3871,6301,800Israel514473493Europe200176209Asia Pacific165190219Total2,2662,4692,721 Number of full-time equivalent employeesby function as of December 31,Division201720162015Operations and support836788929Research and development398551543Customer service285316288Sales and marketing331441558General and administrative416373403Total2,2662,4692,721____________________* Includes employees in Latin America.During the years covered by the above tables, we did not employ a significant number of temporary employees.The moderate decrease in the size of our workforce in each of 2017 and 2016 relative to the previous year was due to our implementation of operationalefficiencies, which included elimination of excess employees in certain divisions of our company.While none of our employees is party to a collective bargaining agreement, certain provisions of the collective bargaining agreements between theHistadrut (General Federation of Labor in Israel) and the Coordination Bureau of Economic Organizations (including the Industrialists’ Associations) areapplicable to our employees in Israel by order of the Israel Ministry of Labor. These provisions primarily concern the length of the workday, minimum dailywages for professional workers, pension fund benefits for all employees, insurance for work-related accidents, procedures for dismissing employees,determination of severance pay and other conditions of employment. We generally provide our employees with benefits and working conditions beyond therequired minimums.We have never experienced any employment-related work stoppages. We believe that our relationship with our employees is good.The employees of our subsidiaries are subject to local labor laws and regulations that vary from country to country.75Table of ContentsE. Share Ownership.The following table lists, as of February 14, 2018, the number of our ordinary shares owned, and stock options held, by each of the directors and membersof our senior management who served as such during the year (including for part of the year) ended December 31, 2017:Shares of Stratasys(1)Stratasys stock options(2)Percent ofNumber held(4)Number ofoutstandingExercisesharessharesNotpricebeneficiallybeneficiallyExercisableexercisableperExpirationNameowned(3)owned(3)within 60 dayswithin 60 dayssharedateElchanan JaglomSee table inChairman of the BoardItem 7. A“MajorShareholders” below. S. Scott Crump381,324(5)*18,000—$ 46.87June 18, 2018Chairman of the Executive Committee100,000$82.15June 21, 2023 —100,000$19.96April 6, 2027 Ilan Levin209,257*87,500112,500$19.96April 6, 2027Chief Executive Officer and Director Edward J. Fierko118,041(6)*18,000—$46.87June 18, 2018Director22,000—$82.15June 21, 2023 20,6251,375$103.30August 8, 2020 10,000—$21.44June 4, 2026 6,6663,334$23.41July 18, 2027 Victor Leventhal33,845*19,179—$74.95December 1, 2022Director5,000—$21.44June 4, 2026 6,6663,334$23.41July 18, 2027 John J. McEleney64,591*10,800—$46.87June 18, 2018Director16,500—$82.15June 21, 2023 20,6251,375$103.30August 8, 2020 10,000—$21.44June 4, 2026 6,6663,334$23.41July 18, 2027 Dov Ofer(7)*Director Ziva Patir46,248*29,582—$82.15June 21, 2023Director10,000—$21.44June 4, 2026 6,6663,334$23.41July 18, 2027 David Reis43,684*——Vice Chairman of the Board and Executive Director Yair Seroussi(7)*Director Haim Shani(7) (8)*Director Lilach Payorski(7)*Chief Financial Officer____________________*Constitutes less than 1% of our outstanding shares.76Table of Contents(1)All of our shares (including shares held by directors and members of senior management) have identical voting rights. (2)For a description of Stratasys’ stock option plans, please see “Stock Option and Share Incentive Plans” in this Item below. All options granted under suchplans have been granted without payment of any cash consideration therefor by the grantees thereof. (3)In accordance with Rule 13d-3 under the Exchange Act, the number of shares and the percentages shown for individual persons or groups include anyordinary shares underlying stock options held by such person or group that were exercisable within 60 days of February 14, 2018 and that are alsoreflected in the column titled “Stratasys stock options — Number held — Exercisable within 60 days.” Further in keeping with such Rule 13d-3, thecomputation of percentage ownership is based upon 53,644,037 ordinary shares outstanding at February 14, 2018, plus such number of ordinary sharesas such person (but not any other person or group) had the right to receive upon the exercise of stock options within 60 days thereof. (4)Each stock option is exercisable for one ordinary share. (5)Includes 176,294 ordinary shares owned of record by Mr. Crump’s wife. (6)Includes 20,375 ordinary shares held by Mr. Fierko’s wife. (7)Because each of Messrs. Ofer, Seroussi and Shani, and Ms. Payorski, beneficially owns less than 1% of our outstanding ordinary shares and his or herbeneficial ownership has not previously been disclosed to our shareholders or otherwise made public, it is being omitted from this annual report pursuantto an allowance provided by the SEC’s Form 20-F. (8)Mr. Shani served as a director until our 2017 annual general meeting of shareholders in July 2017, and elected not to be nominated for re-election at thatmeeting.Stock Option and Share Incentive PlansThe following sets forth certain information with respect to our current stock option and share incentive plan. The following description is only asummary of the plan and is qualified in its entirety by reference to the full text of the plan, which serves as an exhibit to this annual report.Upon the expiration of our stock option and share incentive plan, no further grants may be made thereunder, although any existing awards will continuein full force in accordance with the terms under which they were granted.2012 Omnibus Equity Incentive PlanOur 2012 Omnibus Equity Incentive Plan, which became effective at the effective time of the Stratasys-Objet merger, provides for the grant of options,restricted shares, restricted share units and other share-based awards to our and our subsidiaries’ respective directors, employees, officers, consultants, andadvisors and to any other person whose services are considered valuable to our company or any of our affiliates. Following the approval of the 2012 Plan bythe Israeli tax authorities, we have only granted options or other equity incentive awards under the 2012 Plan. All previously-granted options and awardsunder our Amended and Restated 2004 Omnibus Stock Option and Restricted Stock Incentive Plan have expired. Under the 2012 Plan, there were 2,500,000ordinary shares originally reserved for issuance, none of which was granted prior to the effectiveness of the merger. Upon the adoption of an amendment tothe 2012 Plan at our extraordinary general meeting of shareholders in February 2013, the reserved pool under the plan consisted of 4,000,000 shares, whichwas to be automatically increased annually on January 1 (beginning on January 1, 2014) by a number of ordinary shares equal to the lower of (i) 500,000shares, subject to adjustment due to certain changes as provided under the 2012 Plan, and (ii) a number of shares determined by our board of directors, if sodetermined prior to the January 1 on which the increase will occur. Pursuant to that provision, on each of January 1, 2015, 2016, 2017 and 2018, the pool ofshares under the 2012 Plan was automatically increased by 500,000 shares, to 5,000,000 shares, 5,500,000, 6,000,000 and 6,500,000 shares total,respectively.The 2012 Plan is administered by our board of directors or by a committee designated by the board, which determines, subject to Israeli law, the granteesof awards and the terms of the grant, including, exercise prices, vesting schedules, acceleration of vesting and the other matters necessary in theadministration of the 2012 Plan. The 2012 Plan enables our company to issue awards under various tax regimes including, without limitation, pursuant toSections 102 and 3(9) of the Tax Ordinance and Section 422 of U.S. Internal Revenue Code of 1986, to which we refer as the Code.Section 102 of the Tax Ordinance allows employees, directors and officers who are not controlling shareholders and are considered Israeli residents toreceive favorable tax treatment for compensation in the form of shares or options. Our Israeli non-employee service providers and controlling shareholdersmay only be granted options under Section 3(9) of the Tax Ordinance, which does not provide for similar tax benefits. Section 102 of the Tax Ordinanceincludes two alternatives for tax treatment involving the issuance of options or shares to a trustee for the benefit of the grantees and also includes anadditional alternative for the issuance of options or shares directly to the grantee. Section 102(b)(2) of the Tax Ordinance, the most favorable tax treatment forgrantees, permits the issuance to a trustee under the “capital gains track.” However, under this track we will not be allowed to deduct an expense with respectto the issuance of the options or shares. Options granted under the 2012 Plan to U.S. residents may qualify as “incentive stock options” within the meaning ofSection 422 of the Code. The exercise price for “incentive stock options” must not be less than the fair market value on the date on which an option isgranted, or 110% of the fair market value if the option holder holds more than 10% of our share capital.77Table of ContentsUnder the 2012 Plan, we are expected to grant options to our employees, directors and officers who are not controlling shareholders and are consideredIsraeli residents, under the capital gains track. In order to comply with the terms of the capital gains track, all options granted under the 2012 Plan pursuantand subject to the provisions of Section 102 of the Tax Ordinance, as well as the ordinary shares to be issued upon exercise of these options and other sharesreceived subsequently following any realization of rights with respect to such options, such as share dividends and share splits, must be granted to a trusteefor the benefit of the relevant employee, director or officer and should be held by the trustee for at least two years after the date of the grant.Awards under the 2012 Plan may be granted until September 16, 2022, ten years from the date on which the 2012 Plan was approved by our shareholders.Options granted under the 2012 Plan generally vest over four years commencing on the date of grant such that 25% vest after one year and an additional6.25% vest at the end of each subsequent three-month period thereafter for 36 months. Options, other than certain incentive share options, that are notexercised within ten years from the grant date expire, unless otherwise determined by the board or its designated committee, as applicable. Incentive shareoptions granted to a person holding more than 10% of the combined company’s voting power expire within five years from the date of the grant. In case oftermination for reasons of death, disability, or retirement, the grantee or his legal successor may exercise options that have vested prior to termination withina period of one year from the date of disability or death, or within three months following retirement. If we terminate a grantee’s employment or service forcause, all of the grantee’s vested and unvested options will expire on the date of termination. If a grantee’s employment or service is terminated for any otherreason, the grantee may exercise his or her vested options within 90 days of the date of termination. Any expired or unvested options return to the pool forreissuance.In the event of a merger or consolidation of our company, or a sale of all, or substantially all, of our shares or assets or other transaction having a similareffect, then without the consent of the option holder, the board or its designated committee, as applicable, may but is not required to (i) cause anyoutstanding award to be assumed or an equivalent award to be substituted by such successor corporation or (ii) in case the successor corporation refuses toassume or substitute the award (a) provide the grantee with the option to exercise the award as to all or part of the shares or (b) cancel the options againstpayment in cash in an amount determined by the board or the committee as fair in the circumstances. Notwithstanding the foregoing, the board or itsdesignated committee may upon such event amend or terminate the terms of any award, including conferring the right to purchase any other security or assetthat the board shall deem, in good faith, appropriate.Expired PlansAmended and Restated 2004 Omnibus Stock Option and Restricted Stock Incentive PlanOur Amended and Restated 2004 Omnibus Stock Option and Restricted Stock Incentive Plan, or the 2004 Plan, which was adopted by our board ofdirectors on August 15, 2004 and amended and restated by the board of directors on July 9, 2007 and again on May 30, 2011, has expired, and alloutstanding awards under the 2004 Plan have also since expired.Stratasys, Inc. PlansPursuant to the Stratasys-Objet merger agreement, upon the consummation of the Stratasys-Objet merger, each option exercisable for one share ofStratasys, Inc. common stock converted into an option to purchase one ordinary share of Stratasys Ltd. Furthermore, we assumed the obligations of Stratasys,Inc. related to the issuance of shares underlying those options under its then-existing option plans, consisting of the Stratasys, Inc. 1998 Incentive StockOption Plan, Stratasys, Inc. 2000 Incentive Stock Option Plan, Stratasys, Inc. 2002 Long-Term Performance and Incentive Plan, and Stratasys, Inc. 2008Long-Term Performance and Incentive Plan, which we refer to collectively as the Stratasys, Inc. plans. Each option so assumed pursuant to the Stratasys-Objetmerger agreement remains governed by the terms and conditions of the relevant grant instrument as well as the Stratasys Inc. plan under which it was granted(with appropriate changes to reflect Stratasys Ltd. as the company whose shares are issuable upon exercise of the option). As of December 31, 2017, a total of130,500 ordinary shares were issuable upon exercise of options that were vested and exercisable under the Stratasys, Inc. plans.The following table presents certain option data information for the above-described stock option and share incentive plans as at February 14, 2018:TotalWeightedOrdinaryAverageSharesAggregateAggregateExerciseReservedNumber ofNumber ofPrice offorAwardsShares AvailableAwardsOutstandingPlan Grants Granted out of Reserve for Future Grants Outstanding Options2012 Plan6,500,0004,090,3612,409,6393,200,453$ 30.90Stratasys, Inc. Plans——None130,500$46.87Totals6,500,0004,090,3612,409,6393,330,953$31.5378Table of ContentsOn December 3, 2012, we filed a registration statement on Form S-8 to register the issuance of ordinary shares in respect of then-outstanding options todirectors, officers, employees and eligible consultants under the 2004 Plan and the Stratasys, Inc. plans. On September 3, 2013, we filed a registrationstatement on Form S-8 to register the issuance of ordinary shares underlying options granted or to be granted under the 2012 Plan.ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS.A. Major ShareholdersOwnership by Major ShareholdersThe following table presents the beneficial ownership of our ordinary shares by each person who is known by us to be the beneficial owner of 5% or moreof our outstanding ordinary shares (to whom we refer as our major shareholders), based on the most recent beneficial ownership reports filed with the SEC bysuch persons on or before February 14, 2018. The data presented is based on information provided to us, or disclosed in public filings with the SEC, by themajor shareholders.Beneficial ownership of shares is determined under rules of the SEC and generally includes any shares for which a person exercises sole or shared votingor investment power, or for which a person has or shares the right to receive the economic benefit of ownership of the shares. The table below includes thenumber of shares underlying options that are exercisable within 60 days after February 14, 2018. Shares issuable upon the exercise of such options aredeemed to be outstanding for the purpose of computing the ownership percentage of the person, entity or group holding such options, but are not deemed tobe outstanding for the purpose of computing the ownership percentage of any other person, entity or group. The ownership percentages reflected below arebased on 53,644,037 ordinary shares outstanding as of February 14, 2018.Except where otherwise indicated, and except pursuant to community property laws, we believe, based on information furnished by such owners, that thebeneficial owners of the shares listed below have sole investment and voting power with respect to, and the sole right to receive the economic benefit ofownership of, such shares. The shareholders listed below do not have any different voting rights from any of our other shareholders. We know of noarrangements that would, at a subsequent date, result in a change of control of our company.OptionsTotalOrdinaryExercisableBeneficialPercentageBeneficial Owner Shares within 60 Days Ownership OwnershipElchanan Jaglom2,955,625 (1)—2,875,1255.5%ArrowMark Colorado Holdings LLC4,285,964 (2)—4,285,9648.0%PRIMECAP Management Company6,291,000 (3)—6,291,00011.7%Fisher Investments3,065,498 (4)—3,065,4985.7%____________________(1)Represents shares beneficially owned as of December 31, 2017, as indicated in the amended statement of beneficial ownership on Schedule 13G/A filedby Elchanan Jaglom on February 14, 2018. Consists of (i) 2,434,787 ordinary shares held by Samson Capital, LLC, with respect to which Mr. Jaglommay be deemed to share beneficial ownership, and (ii) 520,838 ordinary shares held by Hancock LLC, a California limited liability company of which99.9% of the membership interests are held by a company of which Mr. Jaglom is a director. Mr. Jaglom is party to an agreement with respect to theordinary shares held by Samson Capital, LLC that provides him with the right to independently make decisions as to voting and disposition of 969,138of those ordinary shares, without having to consult with any other person. Mr. Jaglom disclaims beneficial ownership of the ordinary shares held by eachof Samson Capital, LLC and Hancock LLC except to the extent of his pecuniary interest therein. (2)Represents shares beneficially owned as of December 31, 2017, as indicated in a statement of beneficial ownership on Schedule 13G filed by thisshareholder on February 9, 2018. (3)Represents shares beneficially owned as of March 31, 2017, as indicated in the amended statement of beneficial ownership on Schedule 13G/A filed byPRIMECAP Management Company on April 6, 2017. As indicated in that amended statement, PRIMECAP Management Company possesses soledispositive power with respect to all such 6,291,000 ordinary shares, but sole voting power with respect to only 5,941,000 of such ordinary shares. (4)Represents shares beneficially owned as of December 31, 2017, as indicated in the amended statement of beneficial ownership on Schedule 13G filed byFisher Investments on January 24, 2018. As indicated in that statement, Fisher Investments possesses sole dispositive power with respect to all such3,065,498 ordinary shares, but sole voting power with respect to only 1,414,892 of such ordinary shares.Changes in Percentage Ownership by Major ShareholdersIn 2015, the percentage ownership of Samson Capital, LLC, Roy J. Zuckerberg and Elchanan Jaglom increased, due to market purchases of additionalordinary shares by Samson Capital, LLC (which increased the percentage ownership of all three of those shareholders). In 2016, the percentage ownership ofthose shareholders declined, due to sales by Samson Capital, LLC and Hancock LLC (and Samson Capital LLC ceased to be a 5% or greater shareholder as aresult). In 2017, Roy J. Zuckerberg ceased to be a 5% or greater shareholder (due to sales of ordinary shares by Samson Capital LLC and a reduction in Mr.Zuckerberg’s ownership interest in Hancock LLC to 0.01% such that ordinary shares held by Hancock LLC are no longer deemed beneficially owned by Mr.Zuckerberg). At the same time, in 2017, the number of ordinary shares held by Elchanan Jaglom increased, due to purchases by Hancock LLC.79Table of ContentsThe percentage ownership of those shareholders changed during the years 2015, 2016 and 2017 as follows: (i) Samson Capital, LLC—from 4.8% up to5.2%, back down to 4.8%, and further down to 4.5%, respectively; (ii) Roy J. Zuckerberg—from 5.9% up to 6.2%, back down to 5.5%, and further down to4.5%, respectively; and (iii) Elchanan Jaglom—from 5.8% up to 6.2%, back down to 5.5%, and remained at 5.5%, respectively.During 2015, Morgan Stanley, Baillie Gifford & Co. and Edgewood Management LLC ceased to be major shareholders, as their percentage ownershipdropped to 1.5%, 4.6% and 0%, respectively. During 2015, a new major shareholder, PRIMECAP Management Company, acquired 6.3% of our outstandingordinary shares, during 2016, its percentage ownership increased, to 9.5%, and during 2017, its percentage ownership further rose to 11.7%.T. Row Price Associates, Inc. acquired over 5% of our outstanding ordinary shares in 2015 (5.3%), but then ceased to be a major shareholder during 2016,dropping to 1.6% as of the end of 2016. Fisher Investments became a 5% or greater shareholder for the first time as of the end of 2016, having acquired 5.9%,and then decreased to 5.7% in 2017. ArrowMark Colorado Holdings LLC became a 5% or greater shareholder of ours for the first time as of the end of 2017,having acquired 8.0%.Record HoldersBased upon a review of the information provided to us by our transfer agent, as of February 14, 2018, there were 76 holders of record of our shares, ofwhich 51 record holders holding approximately 99.99% of our outstanding ordinary shares, had registered addresses in the United States. These numbers arenot representative of the number of beneficial holders of our shares nor is it representative of where such beneficial holders reside, since many of these shareswere held of record by brokers or other nominees. As of the said date, CEDE & Co, the nominee company of the Depository Trust Company (with a registeredaddress in the United States), held of record approximately 99% of our outstanding ordinary shares on behalf of hundreds firms of brokers and banks in theUnited States, who in turn held such shares on behalf of several thousand clients and customers.B. Related Party Transactions.Except as described below or elsewhere in this annual report, since January 1, 2017, we have had no transaction or loan, nor do we have any presentlyproposed transaction or loan, involving any related party described in Item 7.B of Form 20-F promulgated by the SEC.Indemnification AgreementsOur amended articles permit us to exculpate, indemnify and insure each of our directors and office holders to the fullest extent permitted by theCompanies Law. Effective upon the effective time of the merger, we entered into indemnification agreements with each of our current directors and otheroffice holders, under which we undertook to indemnify them to the fullest extent permitted by Israeli law, including with respect to liabilities resulting fromthe merger to the extent that these liabilities are not covered by insurance. We also put into place Directors and Officers liability insurance for each of ourdirectors and other office holders upon the effectiveness of the Stratasys-Objet merger.Employment and Consulting Agreements with Directors and Executive OfficersEmployment agreement with Ilan LevinPursuant to an employment agreement between the Company and Ilan Levin, our Chief Executive Officer, dated June 27, 2011, and amended as ofJanuary 1, 2017 (based on our shareholders' approval, received following the approval of our compensation committee and board, at our 2017 annual generalmeeting of shareholders, which took place on July 18, 2017. Mr. Levin receives a gross monthly salary of NIS 129,000 (approximately US$36,380). Thatamount does not include our company’s contribution of amounts equal to 5%, 8.33%, 2.5%, and 7.5% of Mr. Levin’s gross monthly salary towards certainpension, severance, disability and tax-advantaged savings funds (known as a manager’s insurance policy, severance compensation fund, disability insurance,and a study fund, respectively). The foregoing amount also does not include the right to use, and all related fixed and variable costs in respect of, a leased carthat we provide for Mr. Levin.The employment engagement is terminable by either party upon six months’ prior written notice, and contains customary provisions regardingnoncompetition, confidentiality of information and assignment of inventions. During the notice period for termination, Mr. Levin will receive his monthlybase salary (other than in the event of termination by our company for cause).Mr. Levin was granted a one-time option grant to purchase 200,000 ordinary shares pursuant to the 2012 Plan, at an exercise price of $19.96 per ordinaryshare. The grant vests over the course of a four-year period commencing on July 1, 2016 (the first day of Mr. Levin’s employment as our Chief ExecutiveOfficer, or CEO), with 25% of the grant vesting on the first anniversary of Mr. Levin’s continuous employment as CEO, followed by quarterly vestingthereafter of 6.25% of the grant at the end of each quarter of continuous employment as CEO over the following 12 quarters. The grant is otherwise subject tothe terms of the 2012 Plan.80Table of ContentsConsulting arrangement with an entity affiliated with Elchanan JaglomAn entity affiliated with Elchanan Jaglom, the Chairman of the board of directors, has provided consulting and director services to us pursuant to an oralarrangement that was approved by our board of directors and shareholders. The monthly amount payable to that entity under this arrangement is $35,000,plus VAT, currently. The consulting arrangement, which is not recorded in a written agreement, has no set term and may be terminated by either party at willupon written notice.C. Interests of Experts and Counsel.Not required.ITEM 8. FINANCIAL INFORMATION.A. Consolidated Statements and Other Financial Information.The consolidated financial statements and other financial information for our company required by SEC are included in this annual report beginning onpage F-1.Export SalesThe following table presents total export sales by Stratasys, Ltd for each of the fiscal years indicated (in thousands):201720162015Total Export Sales* $ 260,645 $ 269,449 $ 280,021as a percentage of Total Sales39.0%40.1%40.2%____________________*Export sales, as presented, are defined as sales to customers located outside of North America and Israel (where our dual headquarters are located).Legal ProceedingsWe are a party to various legal proceedings incident to our business. Based upon the status of such cases, as determined with the advice of counsel, wehave recorded provisions in our financial statements for amounts (if any) judged to be both quantifiable and probable to be paid. Except as noted below,there are no legal proceedings pending or threatened against us that we believe may have a significant effect on our financial condition or profitability.Claims Related to Company EquityOn March 4, 2013, five current or former minority shareholders and former directors of our company filed two lawsuits against our company in an Israelicentral district court. The lawsuits demand that we amend the capitalization table of our company such that certain shares previously issued to Objetshareholders named as defendants would be recognized as being owned by the plaintiffs with a consequent reduction of the share ownership of the nameddefendants. The lawsuits also name as defendants Elchanan Jaglom, the Chairman of the board of directors, David Reis, our Chief Executive Officer, variousshareholders of ours who were also shareholders of Objet, and, in one of the lawsuits, Ilan Levin, one of our directors. The lawsuits allege in particular that aseries of investments in Objet during 2002 and 2003 was effected at a price per share that was below fair market value, thereby illegally diluting thoseshareholders that did not participate in the investments. The plaintiffs also allege that a portion of the amount invested in those transactions was actuallyinvested by an investor who was already a shareholder of Objet and allegedly acting in concert with Mr. Jaglom, and that the interest of these twoshareholders in these transactions was not properly disclosed to the minority shareholders at the time. The lawsuits furthermore claim that we effectivelyengaged in backdating the issuance of certain shares, in that shares that Objet reported as having been issued in 2006 and 2007 were actually issued at asubsequent date—as late as 2009.We filed our statement of defense in response to these claims in May 2013, denying the claims. In 2015, the court dismissed the lawsuit of one of theformer directors due to lack of cause. In February 2017, the parties reached an agreement pursuant to which all claims were settled at no material cost to ourcompany. Notice of the settlement was provided to the court with a motion for the dismissal of the suits.Securities Law Class ActionsOn February 5, 2015, a lawsuit styled as a class action was commenced in the United States District Courts for the District of Minnesota, naming theCompany and certain of our officers and directors as defendants. Similar actions were filed on February 9 and 20, 2015, and on March 25, 2015, in theSouthern District of New York, the Eastern District of New York, and the District of Minnesota, respectively. The lawsuits allege violations of the ExchangeAct in connection with allegedly false and misleading statements concerning our business and prospects. The plaintiffs seek damages and awards ofreasonable costs and expenses, including attorneys’ fees. On April 15, 2015, the cases were consolidated for all purposes, and on April 24, 2015, the courtentered an order appointing lead plaintiffs and approving their selection of lead counsel for the putative class. On July 1, 2015, the lead plaintiffs filed theirconsolidated complaint. On August 31, 2015, the defendants moved to dismiss the consolidated complaint for failure to state a claim. The Court heard themotion on December 11, 2015. On June 30, 2016, the Court granted defendants’ motion to dismiss with prejudice and entered judgment in favor ofdefendants. On July 29, 2016, lead plaintiffs filed a notice of appeal to the United States Court of Appeals for the Eighth Circuit from the Court’s judgment.Following plaintiffs’ appeal, on July 25, 2017, the United States Court of Appeals for the Eighth Circuit entered an order and judgment affirming the court’sdismissal with prejudice.81Table of ContentsPatent Law-Based ClaimOn November 23, 2017, a former employee, whose employment had been terminated by our company in 2008 and who had previously unsuccessfullyfiled a suit against our company, brought an additional proceeding against us under Section 134 of the Israeli Patent Law seeking compensation and royaltiesfor service inventions he invented while he served as an employee of our company. In this new proceeding, the former employee claims to be entitled toreceive royalties in an amount equal to: (a) 20% of the benefits, revenues and /or savings generated by our company in the past and in the future, includingthe rise in the value of our company, as determined in the merger with Stratasys Inc., which took place in December 2012; (b) 20% of the gross profitgenerated by our company in the past and 9% of the gross profit produced and that will be produced by our company; (c) 20% of the gross profit generatedby our company in the past and the relative share of the former Objet entity of our company in the total gross profit produced and that will be produced byour company; or (d) 20% of the value of the service inventions at issue. The former employee further sought an order of accounts. Our company rejects theclaims that serve as a basis for the proceeding and intends to defend against them vigorously.Dividend PolicyWe have never paid cash dividends on our ordinary shares and do not anticipate that we will pay any cash dividends on our ordinary shares in theforeseeable future.We intend to retain our earnings to finance the development of our business. Any future dividend policy will be determined by our board of directorsbased upon conditions then existing, including our earnings, financial condition, tax position and capital requirements, as well as such economic and otherconditions as our board of directors may deem relevant. Pursuant to our articles of association, dividends may be declared by our board of directors.Dividends must be paid out of our profits and other surplus funds, as defined in the Companies Law, as of the end of the most recent year or as accrued over aperiod of the most recent two years, whichever amount is greater, provided that there is no reasonable concern that payment of a dividend will prevent usfrom satisfying our existing and foreseeable obligations as they become due. In addition, because we have received certain benefits under Israeli law relatingto Approved Enterprises and Beneficiary Enterprises, our payment of dividends (out of tax-exempt income) may subject us to certain Israeli taxes to which wewould not otherwise be subject. We are also restricted under our credit agreement with Bank of America from paying dividends. Please see the risk factorscaptioned “We do not anticipate paying any cash dividends in the foreseeable future. Therefore, if our share price does not appreciate, our shareholders maynot recognize a return, and could potentially suffer a loss, on their investment in our ordinary shares,” and “Even if we decide to pay dividends on ourordinary shares, we may be restricted from doing so or payment of such dividends may have adverse consequences for our company” in Item 3.D “RiskFactors—Risks related to an investment in our ordinary shares” above.For a discussion of the applicable rates of withholding tax on dividends paid out of income derived from an Approved Enterprise or a BeneficiaryEnterprise, see “Israeli Tax Considerations and Government Programs — The Law for the Encouragement of Capital Investments” in Item 4.B above.B. Significant Changes.Other than as otherwise described in this annual report, no significant change has occurred in our operations since the date of our consolidated financialstatements included in this annual report.82Table of ContentsITEM 9. THE OFFER AND LISTING.A. Listing Details.Since December 3, 2012 (the first trading day after the effective time of the merger), our ordinary shares have traded (and, prior to that time, Stratasys, Inc.common stock was traded) on the NASDAQ Global Select Market under the trading symbol “SSYS.” The following table sets forth the high and low closingsale prices of our ordinary shares for the fiscal periods indicated below, as reported on the NASDAQ Global Select Market.Price Range High LowFiscal Period:(U.S. $)(U.S. $)Six most recent months:February 2018 (through February 16, 2018)21.3619.46January 201823.3020.74December 201722.4519.96November 201722.7020.12October 201724.5320.82September 201724.0622.41August 201724.3420.95Two most recent full financial years and subsequent periods, by quarter:Fiscal Year Ending December 31, 2018January 1, 2018 - February 16, 2018 only23.3019.46Fiscal Year Ended December 31, 2017October 1, 2017 - December 31, 201724.5319.96July 1, 2017 - September 30, 201725.1120.95April 1, 2017- June 30, 201730.6619.91January 1, 2017 - March 31, 201721.9717.77Fiscal Year Ended December 31, 2016October 1, 2016 - December 31, 201624.3316.54July 1, 2016 - September 30, 201624.0919.36April 1, 2016 - June 30, 201629.3519.74January 1, 2016 - March 31, 201627.8215.24Five most recent full financial years201730.6617.77201629.3515.24201581.0522.582014136.4678.642013134.7062.50Our ordinary shares, par value NIS 0.01 per share, are registered on the books of our transfer agent, Continental Stock Transfer & Trust Company. Thereare no transfer restrictions apart from the requirement that any transfers comply with applicable securities laws and the rules of the NASDAQ Stock Market orany other securities exchange on which our ordinary shares may be listed in the future.ITEM 10. ADDITIONAL INFORMATION.A. Share Capital.Not applicableB. Memorandum and Articles of Association.Purposes and Objects of the CompanyWe are a public company registered under Israel’s Companies Law as Stratasys Ltd., registration number 51-260769-8. Under our memorandum ofassociation, our purpose includes every lawful purpose.Powers of DirectorsUnder the provisions of the Companies Law and our amended articles, the management of the business of the Company is vested in our board of directors,which may exercise all such powers and do all such acts and things as the Company is authorized to exercise and do. For certain approval requirements,disclosure obligations and limitation on participation of members of our board in board meetings, see “Fiduciary Duties of Officer Holders — Approval ofSpecified Related Party Transactions with Office Holders Under Israeli Law” in Item 6.C – “Board Practices” above, and the remainder of this Item 10.Bbelow.The authority of our directors to enter into borrowing arrangements on our behalf is not limited, except to the same degree as any other transaction intowhich we may enter.Our amended articles do not impose any mandatory retirement or age-limit requirements on our directors, and our directors are not required to own sharesin our company in order to qualify to serve as directors.83Table of ContentsRights Attached to SharesOur authorized share capital consists of 180,000,000 ordinary shares of a nominal value of NIS 0.01 each. All outstanding ordinary shares are validlyissued, fully paid and non-assessable.The rights attached to the ordinary shares are as follows:Dividend Rights. Our board of directors may, in its discretion, declare that a dividend be paid pro rata to the holders of ordinary shares. Dividends must bepaid out of our profits and other surplus funds, as defined in the Companies Law, as of the end of the most recent year or as accrued over a period of two years,whichever is greater, provided that there is no reasonable concern that payment of a dividend will prevent us from satisfying our existing and foreseeableobligations as they become due. Under the Companies Law, the declaration of a dividend does not require the approval of the shareholders of a companyunless the company’s articles of association provide otherwise. Our amended articles provide that our board of directors may declare and distribute dividendswithout the approval of the shareholders.Rights to Share in the Company’s Profits. Our shareholders have the right to share in our profits distributed as a dividend or via any other permitteddistribution. See “Rights Attached to Shares — Dividend Rights”, in this Item 10.B above.Rights to Share in Surplus in the Event of Liquidation. In the event of our liquidation, after satisfaction of liabilities to creditors, our assets will bedistributed to the holders of ordinary shares in proportion to the nominal value of their holdings. This right may be affected by the grant of preferentialdividend or distribution rights to the holders of a class of shares with preferential rights that may be authorized in the future.Limited Liability. Our company is a limited liability company, and therefore, each shareholder’s liability for our obligations is limited to the payment ofthe nominal value of the shares held by such shareholder, subject to the provisions of the Companies Law.Limitations on Any Existing or Prospective Major Shareholder. See “Board Practices - Approval of Specified Related Party Transactions with OfficeHolders Under Israeli Law” in Item 6.C above.Voting Rights. Holders of our ordinary shares have one vote for each ordinary share held on all matters submitted to a vote of shareholders. Shareholdersmay vote at a shareholders’ meeting either in person or by proxy. Such voting rights may be affected by the grant of any special voting rights to the holdersof a class of shares with preferential rights that may be authorized in the future. There are currently no preferred shares outstanding.The Companies Law imposes certain duties on our shareholders. A shareholder, in exercising his or her rights and performing his or her obligations to ourother shareholders and us, must act in good faith and in an acceptable manner, and avoid abusing his or her powers. This duty is required when voting atgeneral meetings on matters such as changes to our articles of association, increases to our registered capital, mergers and related party transactions. Ashareholder also has a general duty to refrain from depriving any other shareholder of his or her rights as a shareholder. In addition, any controllingshareholder, any shareholder who knows that his or her vote can determine the outcome of a shareholder vote and any shareholder who, under our amendedarticles, can appoint or prevent the appointment of an office holder, is required to act fairly towards our company. The Companies Law does not specificallydefine the duty of fairness, but provides that the remedies generally available upon a breach of contract will apply also in the event of a breach of the duty toact with fairness. There is no binding case law that addresses this subject directly. Any voting agreement among shareholders is also subject to these duties.Election of DirectorsDirectors of our company, other than external directors (to the extent that we elect, or are required, to have them once again in the future), are elected eachyear at our annual general meeting of shareholders by a vote of the holders of a majority of the voting power represented at the meeting. See “Item 6.C BoardPractices—Board of Directors” above. Our ordinary shares do not have cumulative voting rights for this purpose. As a result, holders of our ordinary sharesthat represent more than 50% of the voting power represented at a shareholders’ meeting at which a quorum is present will have the power to elect any or allof our directors whose positions are being filled at that meeting, subject to the special approval requirements for external directors described under “BoardPractices—External Directors” in Item 6.C above.In addition, pursuant to the Companies Law and our amended articles, any shareholder holding at least one percent (1%) of our outstanding voting powermay make nominations for directors only if a written notice of such shareholder’s intent to make such nomination (together with certain documentationrequired under the Companies Law) has been delivered to our registered Israeli office within seven days after we publish notice of our upcoming annualgeneral meeting (or within 14 days after we publish a preliminary notification of an upcoming annual general meeting).Annual and Extraordinary MeetingsOur board of directors must convene an annual general meeting of shareholders at least once every calendar year, within fifteen months of the last annualgeneral meeting.84Table of ContentsAll meetings other than the annual general meeting of shareholders are referred to as extraordinary general meetings. Our board of directors may callextraordinary general meetings whenever it sees fit, at such time and place, within or outside of Israel, as it may determine. In addition, the Companies Lawand our amended articles provide that our board of directors will be required to convene an extraordinary general meeting upon the written request of (i) anytwo of our directors or one-quarter of our board of directors or (ii) one or more shareholders holding, in the aggregate, either (a) 5% of our outstanding issuedshares and 1% of our outstanding voting power or (b) 5% of our outstanding voting power. The chairman of the board of directors presides at each of ourgeneral meetings. The chairman of the board of directors will not be entitled to vote at a general meeting in his capacity as chairman.Subject to the provisions of the Companies Law and the regulations promulgated thereunder, shareholders that will be entitled to participate and vote atgeneral meetings are the shareholders of record on a date decided by our board of directors, which may be between four and 40 days prior to the date of themeeting. Furthermore, the Companies Law and our amended articles require that resolutions regarding the following matters must be passed at a generalmeeting of our shareholders:●amendments to the amended articles; ●appointment or termination of our auditors; ●appointment of directors and appointment and dismissal of external directors; ●approval of acts and transactions involving related parties, as defined by the Companies Law or pursuant to our amended articles; ●director compensation; ●increases or reductions of our authorized share capital; ●a merger; and ●the exercise of our board of directors’ powers by a general meeting, if the board of directors is unable to exercise its powers and the exercise of any ofits powers is required for our proper management.NoticesThe Companies Law and the amended articles require that a notice of any annual general meeting or extraordinary general meeting be published andprovided to shareholders at least 21 days prior to the meeting, and if the agenda of the meeting includes the appointment or removal of directors, the approvalof transactions with office holders or interested or related parties, or an approval of a merger, notice must be published at least 35 days prior to the meeting.QuorumThe quorum required for a general meeting of our shareholders consists of at least two shareholders present in person, by proxy or written ballot who holdor represent between them at least twenty-five percent (25%) of the total outstanding voting rights. A meeting adjourned for lack of a quorum generally isadjourned to the same day in the following week at the same time and place, or to a later time/date if so specified in the summons or notice of the meeting. Atthe reconvened meeting, if the original meeting was convened upon requisition under the Companies Law, the required quorum consists of one or moreshareholders, present in person or by proxy, and holding the number of shares required for making such requisition, and, in any other reconvened meeting,the quorum that is required is any two shareholders present in person or by proxy (regardless of how many shares they hold).Adoption of ResolutionsOur amended articles provide that all resolutions of our shareholders require the approval of a majority of the voting power present and voting at ageneral meeting, unless otherwise required by the Companies Law or by the amended articles. Under the Companies Law and the amended articles,shareholders are not permitted to take action via written consent in lieu of a meeting. Under the Companies Law, each of (i) the approval of an extraordinarytransaction with a controlling shareholder and (ii) the terms of employment or other engagement of the controlling shareholder of the company or suchcontrolling shareholder’s relative (even if not extraordinary) require, in addition to approval by the compensation committee (in the case of terms ofemployment) or audit committee (in the case of some other engagement) and the board of directors, approval by a special majority of the shareholders thatfulfills one of the following requirements:●a disinterested majority; or ●the votes of shareholders who have no personal interest in the transaction and who are present and voting, in person, by proxy or by voting deed at themeeting, and who vote against the transaction may not represent more than two percent (2%) of the voting rights of the company.Under our amended articles, if the share capital is divided into classes, the alteration of the rights, privileges, preferences or obligations of any class ofshare capital requires approval by a simple majority of the class so affected (or such other percentage of the relevant class that may be set forth in thegoverning documents relevant to such class), in addition to the ordinary majority vote of all classes of shares voting together as a single class at a generalmeeting, as required under the Companies Law.85Table of ContentsFurther exceptions to the simple majority vote requirement are a resolution for the voluntary winding up, or an approval of a scheme of arrangement orreorganization, of the company pursuant to Section 350 of the Companies Law, which requires the approval of holders of 75% of the voting rightsrepresented at the meeting, in person, by proxy or by voting deed and voting on the resolution.Israeli law provides that a shareholder of a public company may vote in a meeting and in a class meeting by means of a voting deed in which theshareholder indicates how he or she votes on resolutions relating to the following matters:●appointment or removal of directors; ●approval of transactions with office holders or interested or related parties; ●approval of a merger or any other matter in respect of which there is a provision in the articles of association providing that decisions of the generalmeeting may also be passed by voting deed; ●approval of an arrangement or reorganization of the company pursuant to Section 350 of the Israeli Companies Law; and ●other matters which may be prescribed by Israel’s Minister of Justice.The provision allowing the vote by voting deed does not apply if, to the best knowledge of the company at the time of calling the general shareholders’meeting, a controlling shareholder will hold on the record date for such shareholders’ meeting, voting power sufficient to determine the outcome of the vote.Changing Rights Attached to SharesThe rights attached to any class of shares, such as voting, liquidation and dividend rights, may be amended by adoption of a resolution by the holders of amajority of the shares of that class present at a separate class meeting, or otherwise in accordance with the rights attached to such class of shares, as set forth inour amended articles.Limitations on the Rights to Own Securities in Our CompanyNeither our memorandum of association nor our amended articles, nor the laws of the State of Israel, restrict in any way the ownership or voting of sharesby non-residents, except with respect to citizens of countries that are in a state of war with Israel.Provisions Restricting Change in Control of Our CompanyFull Tender OfferA person wishing to acquire shares of a public Israeli company and who could as a result hold over 90% of the target company’s issued and outstandingshare capital or voting rights is required by the Companies Law to make a tender offer to all of the company’s shareholders for the purchase of all of theissued and outstanding shares of the company. A person wishing to acquire shares of a public Israeli company and who could as a result hold over 90% of theissued and outstanding share capital or voting rights of a certain class of shares is required to make a tender offer to all of the shareholders who hold shares ofthe relevant class for the purchase of all of the issued and outstanding shares of that class. If the shareholders who do not accept the offer hold less than 5% ofthe issued and outstanding share capital and voting rights of the company or of the applicable class, all of the shares that the acquirer offered to purchase willbe transferred to the acquirer by operation of law (provided that a majority of the offerees that do not have a personal interest in such tender offer shall haveapproved it, which condition shall not apply if, following consummation of the tender offer, the acquirer would hold at least 98% of all of the company’soutstanding shares and voting rights (or shares and voting rights of the relevant class)). However, shareholders may, at any time within six months followingthe completion of the tender offer, petition the court to alter the consideration for the acquisition. Even shareholders who indicated their acceptance of thetender offer may so petition the court, unless the acquirer stipulated that a shareholder that accepts the offer may not seek appraisal rights). If the shareholderswho did not accept the tender offer hold 5% or more of the issued and outstanding share capital or voting rights of the company or of the applicable class, theacquirer may not acquire shares of the company that will increase its holdings to more than 90% of the company’s issued and outstanding share capital orvoting rights or 90% of the shares or voting rights of the applicable class, from shareholders who accepted the tender offer.Special Tender OfferThe Companies Law provides that an acquisition of shares of a public Israeli company must be made by means of a special tender offer if as a result of theacquisition the purchaser could become a holder of 25% or more of the voting rights in the company, unless one of the exemptions in the Companies Law (asdescribed below) is met. This rule does not apply if there is already another holder of at least 25% of the voting rights in the company. Similarly, theCompanies Law provides that an acquisition of shares in a public company must be made by means of a tender offer if as a result of the acquisition thepurchaser could become a holder of more than 45% of the voting rights in the company, if there is no other shareholder of the company who holds more than45% of the voting rights in the company, unless one of the exemptions in the Companies Law is met.A special tender offer must be extended to all shareholders of a company but the offeror is not required to purchase shares representing more than 5% ofthe voting power attached to the company’s outstanding shares, regardless of how many shares are tendered by shareholders. A special tender offer may beconsummated only if (i) at least 5% of the voting power attached to the company’s outstanding shares will be acquired by the offeror and (ii) the number ofshares tendered in the offer exceeds the number of shares whose holders objected to the offer.86Table of ContentsIf a special tender offer is accepted, then the purchaser or any person or entity controlling it or under common control with the purchaser or suchcontrolling person or entity may not make a subsequent tender offer for the purchase of shares of the target company and may not enter into a merger with thetarget company for a period of one year from the date of the offer, unless the purchaser or such person or entity undertook to effect such an offer or merger inthe initial special tender offer.MergerThe Companies Law permits merger transactions if approved by each party’s board of directors and, unless certain requirements described under theCompanies Law are met, by a majority vote of each party’s shares, and, in the case of the target company, a majority vote of each class of its shares, voted onthe proposed merger at a shareholders meeting called with at least 35 days’ prior notice.For purposes of the shareholder vote, unless a court rules otherwise, the merger will not be deemed approved if a majority of the votes of sharesrepresented at the shareholders’ meeting that are held by parties other than the other party to the merger, or by any person (or group of persons acting inconcert) who holds (or hold, as the case may be) 25% or more of the voting rights or the right to appoint 25% or more of the directors of the other party, voteagainst the merger. If, however, the merger involves a merger with a company’s own controlling shareholder or if the controlling shareholder has a personalinterest in the merger, then the merger is instead subject to the same special majority approval that governs all extraordinary transactions with controllingshareholders (as described above in this annual report under “Item 6.C Board Practices—Approval of Related Party Transactions Under Israeli Law—Disclosure of Personal Interests of Controlling Shareholders”).If the transaction would have been approved by the shareholders of a merging company but for the separate approval of each class or the exclusion of thevotes of certain shareholders as provided above, a court may still approve the merger upon the request of holders of at least 25% of the voting rights of acompany, if the court holds that the merger is fair and reasonable, taking into account the value of the parties to the merger and the consideration offered tothe shareholders of the company that have petitioned the court to approve the merger.Upon the request of a creditor of either party to the proposed merger, the court may delay or prevent the merger if it concludes that there exists areasonable concern that, as a result of the merger, the surviving company will be unable to satisfy the obligations of any of the parties to the merger, and mayfurther give instructions to secure the rights of creditors.In addition, a merger may not be consummated unless at least 50 days have passed from the date on which a proposal for approval of the merger was filedby each party with the Israeli Registrar of Companies and at least 30 days have passed from the date on which the merger was approved by the shareholders ofeach party.Anti-Takeover Measures Under Israeli LawThe Companies Law allows us to create and issue shares having rights different from those attached to our ordinary shares, including shares providingcertain preferred rights, distributions or other matters and shares having preemptive rights. Currently, no preferred shares are authorized under our amendedarticles. In the future, if we do authorize, create and issue a specific class of preferred shares, such class of shares, depending on the specific rights that may beattached to it, may have the ability to frustrate or prevent a takeover or otherwise prevent our shareholders from realizing a potential premium over the marketvalue of their ordinary shares. The authorization and designation of a class of preferred shares will require an amendment to our amended articles, whichrequires the prior approval of the holders of a majority of the voting power present and voting at a general meeting. The convening of the meeting, theshareholders entitled to participate in such meeting, and the majority vote required to be obtained at such a meeting will be subject to the requirements setforth in the Companies Law as described above in this Item 10.B under “Memorandum and Articles of Association—Rights Attached to Shares—VotingRights.”The foregoing description includes only a summary of certain provisions of the Companies Law and our memorandum of association and articles and isqualified in its entirety by reference to the full text of such documents, which are exhibits to this annual report.C. Material Contracts.We have not entered into any material contract within the two years prior to the date of this annual report, other than contracts entered into in the ordinarycourse of business, or as otherwise described herein in Item 4.A—“History and Development of the Company”, Item 4.B—“Business Overview”, Item 5.B—“Operating and Financial Review and Prospects—Liquidity and Capital Resources”, Item 6.C – “Board Practices—Director Service Contracts” and Item7.B - “Related Party Transactions”.D. Exchange Controls.There are currently no Israeli currency control restrictions on payments of dividends or other distributions with respect to our ordinary shares or theproceeds from the sale of ordinary shares, except for the obligation of Israeli residents to file reports with the Bank of Israel regarding certain transactions.However, legislation remains in effect pursuant to which currency controls can be imposed by administrative action at any time.87Table of ContentsThe ownership or voting of our ordinary shares by non-residents of Israel, except with respect to citizens of countries that are in a state of war with Israel,is not restricted in any way by our memorandum of association or amended articles or by the laws of the State of Israel.E. Taxation.The following is a short summary of certain provisions of the tax environment to which shareholders may be subject. This summary is based on thecurrent provisions of tax law. To the extent that the discussion is based on new tax legislation that has not been subject to judicial or administrativeinterpretation, we cannot assure you that the views expressed in the discussion will be accepted by the appropriate tax authorities or the courts.The summary does not address all of the tax consequences that may be relevant to all purchasers of our ordinary shares in light of each purchaser’sparticular circumstances and specific tax treatment. For example, the summary below does not address the tax treatment of residents of Israel and traders insecurities who are subject to specific tax regimes. As individual circumstances may differ, holders of our ordinary shares should consult their own taxadviser as to the United States, Israeli or other tax consequences of the purchase, ownership and disposition of ordinary shares. The following is notintended, and should not be construed, as legal or professional tax advice and is not exhaustive of all possible tax considerations. Each individual shouldconsult his or her own tax or legal adviser.Israeli Taxation ConsiderationsIsraeli law generally imposes a capital gains tax on the sale of any capital assets by residents of Israel, as defined for Israeli tax purposes, and on the sale ofassets located in Israel, including shares of Israeli companies, by both residents and non-residents of Israel unless a specific exemption is available or unless atax treaty between Israel and the seller’s country of residence provides otherwise. The Tax Ordinance distinguishes between “Real Capital Gain” and“Inflationary Surplus”. The Inflationary Surplus is a portion of the total capital gain which is equivalent to the increase of the relevant asset’s purchase pricewhich is attributable to the increase in the Israeli consumer price index or, in certain circumstances, a foreign currency exchange rate, between the date ofpurchase and the date of sale. The Real Capital Gain is the excess of the total capital gain over the Inflationary Surplus.Israeli resident individualsCapital GainAs of January 1, 2006, the tax rate applicable to Real Capital Gain derived by Israeli individuals from the sale of shares which had been purchased on orafter January 1, 2003, whether or not listed on a stock exchange, is 20%, unless such shareholder claims a deduction for interest and linkage differencesexpenses in connection with the purchase and holding of such shares, in which case the gain will generally be taxed at a rate of 25%. Additionally, if suchshareholder is considered a “Significant Shareholder” (i.e., a person who holds, directly or indirectly, alone or together with another person who collaborateswith such person on a permanent basis, 10% or more of any of the company’s “means of control” (including, among other things, the right to receive profitsof the company, voting rights, the right to receive the company’s liquidation proceeds and the right to appoint a director)) at the time of sale or at any timeduring the preceding 12-month period, such gain will be taxed at the rate of 25%. Individual shareholders dealing in securities in Israel are taxed at theirmarginal tax rates applicable to business income (up to 47% in 2017) unless the benefiting provisions of an applicable treaty applies.Notwithstanding the foregoing, pursuant to the Law for Change in the Tax Burden (Legislative Amendments) (Taxes), 2011, the capital gain tax rateapplicable to individuals was raised from 20% to 25% from 2012 and onwards (or from 25% to 30% if the selling individual shareholder is a SignificantShareholder at any time during the 12-month period preceding the sale and\or claims a deduction for interest and linkage differences expenses in connectionwith the purchase and holding of such shares). With respect to assets (not shares that are listed on a stock exchange) purchased on or after January 1, 2003, theportion of the gain generated from the date of acquisition until December 31, 2011 will be subject to the previous capital gains tax rates (20% or 25%) andthe portion of the gain generated from January 1, 2012 until the date of sale will be subject to the new tax rates (25% or 30%).Dividend IncomeIsraeli residents who are individuals are generally subject to Israeli income tax for dividends paid on our ordinary shares (other than bonus shares or sharedividends) at 25%, or 30% if the recipient of such dividend is a Significant Shareholder, at the time of distribution or at any time during the preceding 12-month period. However, dividends distributed from taxable income accrued during the benefits period of an Approved Enterprise or Beneficiary Enterpriseare subject to withholding tax at the rate of 15% (and 20% with respect to Preferred Enterprise), if the dividend is distributed during the tax benefits periodunder the Investment Law or within 12 years after such period. An average rate will be set in case the dividend is distributed from mixed types of income(regular and Approved/ Beneficiary/ Preferred income).88Table of ContentsIsraeli resident corporationsCapital GainUnder current Israeli tax legislation, the tax rate applicable to Real Capital Gain derived by Israeli resident corporations from the sale of shares of anIsraeli company is the general corporate tax rate. As described in “Israeli Tax Considerations and Government Programs — General Corporate Tax Structure”in Item 4.B above, the corporate tax rate was 26.5% and 25% in 2015 and 2016, respectively, in 2017 the corporate tax rate was 24%, and from 2018 andonwards the corporate tax rate is 23%.Dividend IncomeGenerally, Israeli resident corporations are exempt from Israeli corporate tax on the receipt of dividends paid on shares of Israeli resident corporations.However, dividends distributed from taxable income accrued during the benefits period of an Approved Enterprise or Beneficiary Enterprise are subject towithholding tax at the rate of 15%, if the dividend is distributed during the tax benefits period under the Investment Law or within 12 years after that period.Non-Israeli ResidentsCapital GainIsraeli capital gains tax is imposed on the disposal of capital assets by a non-Israeli resident if such assets are either (i) located in Israel; (ii) shares or rightsto shares in an Israeli resident company, or (iii) represent, directly or indirectly, rights to assets located in Israel, unless a tax treaty between Israel and theseller’s country of residence provides otherwise. As mentioned above, Real Capital Gain is generally subject to tax at the corporate tax rate (26.5% in 2015,25% in 2016, 24% in 2017 and 23% in 2018 and thereafter), if generated by a company, or at the rate of 25% (for any asset other than shares that are listed ona stock exchange - 20% with respect to the portion of the gain generated up to December 31, 2011) or 30% (for any asset other than shares that are listed on astock exchange - 25% with respect to the portion of the gain generated up to December 31, 2011), if generated by an individual who is SignificantShareholder at the time of sale or at any time during the preceding 12-month period (or claims a deduction for interest and linkage differences expenses inconnection with the purchase and holding of such shares) from the sale of assets purchased on or after January 1, 2003. Individual and corporate shareholdersdealing in securities in Israel are taxed at the tax rates applicable to business income (a corporate tax rate for a corporation and a marginal tax rate of up to47% for an individual in 2017) unless contrary provisions in a relevant tax treaty applies.Notwithstanding the foregoing, shareholders who are non-Israeli residents (individuals and corporations) should generally exempt from Israeli capitalgains tax on any gains derived from the sale, exchange or disposition of shares publicly traded on the Tel Aviv Stock Exchange or on a recognized stockexchange outside of Israel, provided, among other things, that (i) such gains are not generated through a permanent establishment of the non-Israeli residentin Israel; (ii) the shares were purchased after being listed on a recognized stock exchange and (iii) with respect to shares listed on a recognized stockexchange outside of Israel, such shareholders are not subject to the Israeli Income Tax Law (Inflationary Adjustments) 5745-1985. However, non-Israelicorporations will not be entitled to the foregoing exemptions if Israeli residents (a) have a controlling interest of more than 25% in such non-Israelicorporation, or (b) are the beneficiaries of or are entitled to 25% or more of the revenues or profits of such non-Israeli corporation, whether directly orindirectly. Such exemption is not applicable to a person whose gains from selling or otherwise disposing of the shares are deemed to be business income.In addition, a sale of shares may be exempt from Israeli capital gains tax under the provisions of an applicable tax treaty. For example, under the U.S.-Israel Tax Treaty, to which we refer as the U.S.-Israel Treaty, the sale, exchange or disposition of shares of an Israeli company by a shareholder who is a U.S.resident (for purposes of the U.S.-Israel Treaty) holding the shares as a capital asset is exempt from Israeli capital gains tax unless either (i) the shareholderholds, directly or indirectly, shares representing 10% or more of the voting rights during any part of the 12-month period preceding such sale, exchange ordisposition, (ii) the shareholder, if an individual, has been present in Israel for a period or periods of 183 days or more in the aggregate during the applicabletaxable year; or (iii) the capital gains arising from such sale are attributable to a permanent establishment of the shareholder which is maintained in Israel. Inany such case, the sale, exchange or disposition of such shares would be subject to Israeli tax, to the extent applicable; however, under the U.S.-Israel Treaty,a U.S. resident would be permitted to claim a credit for the Israeli tax against the U.S. federal income tax imposed with respect to the sale, exchange ordisposition, subject to the limitations in U.S. laws applicable to foreign tax credits. The U.S.-Israel Treaty does not provide such credit against any U.S. stateor local taxes.In some instances where our shareholders may be liable for Israeli tax on the sale of their Ordinary Shares, the payment of the consideration may besubject to the withholding of Israeli tax at source. Shareholders may be required to demonstrate that they are exempt from tax on their capital gains in order toavoid withholding at source at the time of sale. Specifically, in transactions involving a sale of all of the shares of an Israeli resident company, in the form of amerger or otherwise, the Israel Tax Authority may require from shareholders who are not liable for Israeli tax to sign declarations in forms specified by thisauthority or obtain a specific exemption from the Israel Tax Authority to confirm their status as non Israeli resident, and, in the absence of such declarationsor exemptions, may require the purchaser of the shares to withhold taxes at source.89Table of ContentsDividend IncomeNon-Israeli residents (whether individuals or corporations) are generally subject to Israeli income tax on the receipt of dividends paid on ordinary sharesat the rate of 25% or 30% (if the dividend recipient is a Significant Shareholder at the time of distribution or at any time during the preceding 12-monthperiod) or 15% if the dividend is distributed from income attributed to our Approved Enterprise or Beneficiary Enterprise (and 20% with respect to PreferredEnterprise). Such dividends are generally subject to Israeli withholding tax at a rate of 25% so long as the shares are registered with a nominee company(whether the recipient is a Significant Shareholder or not) and 15% if the dividend is distributed from income attributed to an Approved Enterprise or aBeneficiary Enterprise (and 20% if the dividend is distributed from income attributed to a Preferred Enterprise), unless a reduced rate is provided under anapplicable tax treaty (subject to the receipt in advance of a valid certificate from the Israel Tax Authority allowing for a reduced tax rate). For example, underthe U.S.-Israel Treaty, the maximum rate of tax withheld at source in Israel on dividends paid to a holder of our ordinary shares who is a U.S. resident (forpurposes of the U.S.-Israel Treaty) is 25%. However, generally, the maximum rate of withholding tax on dividends, not generated by our Approved Enterpriseor Beneficiary Enterprise, that are paid to a U.S. corporation holding at least 10% or more of our outstanding voting capital from the start of the tax yearpreceding the distribution of the dividend through (and including) the distribution of the dividend, is 12.5%, provided that no more than 25% of our grossincome for such preceding year consists of certain types of dividends and interest. Notwithstanding the foregoing, dividends distributed from incomeattributed to an Approved Enterprise or Beneficiary Enterprise are subject to a withholding tax rate of 15% for such U.S. corporation shareholder, providedthat the condition related to our gross income for the previous year (as set forth in the previous sentence) is met. If the dividend is attributable partly toincome derived from an Approved Enterprise, a Beneficiary Enterprise or Preferred Enterprise, and partly to other sources of income, the withholding rate willbe a blended rate reflecting the relative portions of the two types of income. U.S. residents who are subject to Israeli withholding tax on a dividend may beentitled to a credit or deduction for United States federal income tax purposes in the amount of the taxes withheld, subject to detailed rules contained in theCode.A non-Israeli resident who receives dividends from which tax was withheld is generally exempt from the obligation to file tax returns in Israel with respectto such income, provided that (i) such income was not generated from business conducted in Israel by the taxpayer, and (ii) the taxpayer has no other taxablesources of income in Israel with respect to which a tax return is required to be filed.Excess TaxIndividuals who are subject to tax in Israel are also subject to an additional tax at a rate of 3% on annual income exceeding NIS 640,000 for 2017 whichamount is linked to the annual change in the Israeli consumer price index, including, but not limited to, dividends, interest and capital gain.U.S. Federal Income Tax ConsiderationsSubject to the limitations described in the following paragraphs, the discussion below describes the material U.S. federal income tax consequences to abeneficial owner of our ordinary shares, referred to in this discussion as a U.S. holder that is:●an individual who is a citizen or resident of the United States for U.S. federal income tax purposes; ●a corporation (or other entity treated as a corporation for U.S. federal income tax purposes) created or organized in the United States or under the law ofthe United States or of any state or the District of Columbia; ●an estate, the income of which is includible in gross income for U.S. federal income tax purposes regardless of its source; or ●a trust, if a court within the United States is able to exercise primary supervision over the administration of the trust and one or more United Statespersons have the authority to control all substantial decisions of the trust, or the trust has a valid election in effect under applicable Treasuryregulations to be treated as a United States person.This summary is not a comprehensive description of all of the tax considerations that may be relevant to each person’s decision to purchase, hold ordispose of ordinary shares. This summary considers only U.S. holders that hold ordinary shares as capital assets.This discussion is based on current provisions of the U.S. Internal Revenue Code of 1986, to which we refer as the Code, current and proposed Treasuryregulations, and administrative and judicial decisions as of the date of this annual report, all of which are subject to change, possibly on a retroactive basis.This discussion does not address all aspects of U.S. federal income taxation that may be relevant to any particular shareholder based on the shareholder’sindividual circumstances. In particular, this discussion does not address the potential application of the alternative minimum tax or the U.S. federal incometax consequences to U.S. holders that are subject to special treatment, including U.S. holders that:●are broker dealers or insurance companies; ●have elected mark-to-market accounting; ●are tax-exempt organizations;90Table of Contents●are financial institutions or financial services entities; ●are partnerships or other entities treated as partnerships for U.S. federal income tax purposes or partners thereof or members therein; ●hold ordinary shares as part of a straddle, hedge, conversion or other integrated transaction with other investments; ●own directly, indirectly or by attribution at least 10% of our voting power; or ●have a functional currency that is not the U.S. dollar.In addition, this discussion does not address any aspect of state, local or non-U.S. tax laws, or the possible application of the U.S. federal estate or gift taxor any state inheritance, estate or gift tax.Material aspects of U.S. federal income tax law relevant to a holder other than a U.S. holder, referred to in this discussion as a non-U.S. holder, are alsodiscussed below.Each prospective investor is advised to consult his or her own tax adviser for the specific tax consequences to that investor of purchasing, holding ordisposing of our ordinary shares.Taxation of Dividends Paid on Ordinary SharesSubject to the discussion below under “Tax Consequences if We Are a Passive Foreign Investment Company,” a U.S. holder will be required to include ingross income as ordinary income the gross amount of any distribution paid on ordinary shares, including any Israeli taxes withheld from the amount paid, onthe date the distribution is actually or constructively received, to the extent the distribution is paid out of our current or accumulated earnings and profits asdetermined for U.S. federal income tax purposes.” In addition, under the Patient Protection and Affordable Care Act, higher income taxpayers must pay anadditional 3.8 percent tax on net investment income to the extent certain threshold amounts of income are exceeded. See “Tax on Net Investment Income” inthis Item below.Dividends that are received by U.S. holders that are individuals, estates or trusts generally will be taxed at the rate applicable to long-term capital gains (amaximum rate of 15% or 20%, in case of taxpayers with annual taxable income which exceeds certain thresholds), provided those dividends meet therequirements of “qualified dividend income.” Dividends that fail to meet these requirements, and dividends taxable to corporate U.S. holders, are taxed atordinary income rates. No dividend received by a U.S. holder will be a qualified dividend (1) if the U.S. holder held the ordinary share with respect to whichthe dividend was paid for less than 61 days during the 121-day period beginning on the date that is 60 days before the ex-dividend date with respect to thedividend, excluding for this purpose, under the rules of Code Section 246(c), any period during which the U.S. holder has an option to sell, is under acontractual obligation to sell, has made and not closed a short sale of, is the grantor of a deep-in-the-money or otherwise nonqualified option to buy, or hasotherwise diminished its risk of loss by holding other positions with respect to, the ordinary share (or substantially identical securities); or (2) to the extentthat the U.S. holder is under an obligation (pursuant to a short sale or otherwise) to make related payments with respect to positions in property substantiallysimilar or related to the ordinary share with respect to which the dividend is paid. If we were to be a “passive foreign investment company” (as that term isdefined in the Code) for any year, dividends paid on our ordinary shares in that year or in the year following that year would not be qualified dividends. Inaddition, a non-corporate U.S. holder will be able to take a qualified dividend into account in determining its deductible investment interest (which isgenerally limited to its net investment income) only if it elects to do so, in which case the dividend will be taxed at ordinary income rates. Corporate holderswill not be allowed a deduction for dividends received in respect of our ordinary shares.Dividends on our ordinary shares will be foreign source passive income (or in some cases, general category income) for U.S. foreign tax credit purposes.Distributions in excess of earnings and profits will be applied against and will reduce, on a share-by-share basis, the U.S. holder’s basis in the ordinary sharesand, to the extent in excess of that basis, will be treated as gain from the sale or exchange of ordinary shares.The amount of a distribution paid to a U.S. holder in a foreign currency will be the U.S. dollar value of the foreign currency calculated by reference to thespot exchange rate on the day the U.S. holder receives the distribution. A U.S. holder that receives a foreign currency distribution and converts the foreigncurrency into U.S. dollars after receipt will have foreign exchange gain or loss based on any appreciation or depreciation in the value of the foreign currencyagainst the U.S. dollar, which will generally be U.S. source ordinary income or loss.U.S. holders will have the option of claiming the amount of any Israeli income taxes withheld at source either as a deduction from gross income or as adollar-for-dollar credit against their U.S. federal income tax liability. Individuals who do not claim itemized deductions, but instead utilize the standarddeduction, may not claim a deduction for the amount of the Israeli income taxes withheld, but the amount may be claimed as a credit against the individual’sU.S. federal income tax liability. The amount of foreign income taxes that may be claimed as a credit in any year is generally subject to complex limitationsand restrictions, which must be determined on an individual basis by each shareholder. Those limitations include the provisions described in the followingparagraphs, as well as rules that limit foreign tax credits allowable for a class of income to the U.S. federal income taxes otherwise payable on the net incomein that class.91Table of ContentsA U.S. holder will be denied a foreign tax credit for Israeli income tax withheld from dividends received on our ordinary shares:●if the U.S. holder has not held the ordinary shares for at least 16 days of the 30-day period beginning on the date that is 15 days before the ex-dividenddate; or ●to the extent that the U.S. holder is under an obligation to make related payments on substantially similar or related property.Any days during which a U.S. holder has substantially diminished its risk of loss on the ordinary shares are not counted toward meeting the 16-dayholding period required by the statute. A foreign tax credit for the Israeli tax can be deferred if the U.S. holder enters into certain types of arrangements todefer inclusion of the related dividend in income for tax purposes.Taxation of the Disposition of Ordinary SharesSubject to the discussion below under “Tax Consequences if We Are a Passive Foreign Investment Company,” upon the sale, exchange or other taxabledisposition of our ordinary shares, a U.S. holder will recognize capital gain or loss in an amount equal to the difference between the U.S. holder’s basis in theordinary shares, which is usually the cost to the U.S. holder of the shares, and the amount realized on the disposition. Capital gain from the sale, exchange orother disposition of ordinary shares held more than one year is long-term capital gain and is eligible for a reduced rate of taxation in the case of non-corporatetaxpayers. Gain or loss recognized by a U.S. holder on the sale, exchange or other disposition of ordinary shares generally will be treated as U.S. sourceincome or loss for U.S. foreign tax credit purposes. The deductibility of capital losses is subject to limitations.A U.S. holder that uses the cash method of accounting calculates the U.S. dollar value of foreign currency proceeds received on a sale as of the date onwhich the U.S. holder receives the foreign currency. However, a U.S. holder that uses an accrual method of accounting is required to calculate the value of theproceeds of the sale as of the date of sale and may therefore realize foreign currency gain or loss on a subsequent disposition of the foreign currency based onany subsequent appreciation or depreciation in the value of the foreign currency against the U.S. dollar. That gain or loss will generally be U.S. sourceordinary income or loss.Tax Consequences if We Are a Passive Foreign Investment CompanyWe will be a passive foreign investment company, to which we refer as a PFIC, if 75% or more of our gross income in a taxable year, including our pro ratashare of the gross income of any corporation in which we are considered to own 25% or more of the shares by value (subject to certain exceptions in the caseof a U.S. corporation), is passive income. Alternatively, we will be considered to be a PFIC if at least 50% of our assets in a taxable year, ordinarilydetermined based on the quarter-end average fair market value of our assets over the taxable year and including the pro rata share of the assets of anycorporation in which we are considered to own 25% or more of the shares by value (subject to certain exceptions in the case of a U.S. corporation), produce orare held for the production of passive income.If we were a PFIC, and a U.S. holder did not make, as described below, a timely election either to treat us as a qualified electing fund or, if the election isavailable, to mark our shares to market, any excess distributions we pay to a U.S. holder would be taxed in a special way. Excess distributions are amountspaid on shares in a PFIC in any taxable year that exceed 125% of the average distributions paid on those shares in the shorter of:●the three previous years; and ●the U.S. holder’s holding period for ordinary shares before the present taxable year.Excess distributions must be allocated ratably to each day that a U.S. holder has held our ordinary shares. A U.S. holder would then be required to includeamounts allocated to the current taxable year and each prior year in which we were not a PFIC (but not before our first taxable year beginning after December31, 1986) in its gross income as ordinary income for the current year. Further, a U.S. holder would be required to pay tax on amounts allocated to each priortaxable year in which we were a PFIC at the highest rate in effect for that year on ordinary income, and the tax for each such year would be subject to aninterest charge at the rate applicable to deficiencies for income tax.The entire amount of gain that is realized or treated as realized by a U.S. holder upon the sale or other disposition of ordinary shares (generally whether ornot the disposition is a taxable transaction) will also be treated as an excess distribution and will be subject to tax as described in the preceding paragraph.In some circumstances a U.S. holder’s tax basis in our ordinary shares that were inherited from a deceased person who was a U.S. holder would not equalthe fair market value of those ordinary shares as of the date of the deceased person’s death but would instead be equal to the deceased’s basis, if lower.The special PFIC rules described above will not apply to a U.S. holder if that U.S. holder makes an election to treat us as a qualified electing fund, towhich we refer as a QEF, in the first taxable year in which the U.S. holder owns ordinary shares, provided we comply with specified reporting requirements.Instead, a U.S. holder who has made such a QEF election is required for each taxable year in which we are a PFIC to include in income a pro rata share of ourordinary earnings as ordinary income and a pro rata share of our net capital gain as long-term capital gain, subject to a separate election to defer payment ofthe related tax. If deferred, the taxes will be subject to an interest charge. We would supply U.S. holders with the information needed to report income andgain under a QEF election if we were classified as a PFIC.92Table of ContentsThe QEF election is made on a shareholder-by-shareholder basis and can be revoked only with the consent of the Internal Revenue Service, to which werefer as the IRS. A shareholder makes a QEF election by attaching a completed IRS Form 8621, including the PFIC annual information statement, to a timelyfiled U.S. federal income tax return and by filing a copy of the form with the IRS Service Center in Ogden, UT 84201-0201. Even if a QEF election is notmade, a United States person who is a shareholder in a PFIC must file every year a completed IRS Form 8621 or other form as may be prescribed by the IRSpursuant to legislation requiring annual reports with respect to PFICs.A U.S. holder of PFIC shares that are publicly traded may elect to mark the stock to market annually, recognizing as ordinary income or loss each year anamount equal to the difference as of the close of the taxable year between the fair market value of the PFIC shares and the U.S. holder’s adjusted tax basis inthe PFIC shares. Losses would be allowed only to the extent of net mark-to-market gain previously included in income by the U.S. holder under the electionfor prior taxable years. If the mark-to-market election were made, then the rules described above (other than the rules for excess distributions, which wouldapply to the first year the election is made if we were a PFIC in a prior year and a QEF election were not made for the first year we were a PFIC) would notapply for periods covered by the election.Although we do not believe that we were a PFIC in 2017, we cannot assure you that the IRS will agree with that conclusion or that we will not become aPFIC in 2018 or in a subsequent year. The tests for determining PFIC status are applied annually, and it is difficult to make accurate predictions of futureincome and assets, which are relevant to this determination. U.S. holders who hold ordinary shares during a period when we are a PFIC will be subject to theserules, even if we cease to be a PFIC in later years, subject to specified exceptions for U.S. holders who made a QEF election in the first year they held ourordinary shares and we were a PFIC or if in a later year they made any of certain elections to purge the PFIC taint of our ordinary shares, which electionsgenerally require the payment of tax. U.S. holders are urged to consult their tax advisers about the PFIC rules, including QEF and mark-to-market elections.Tax on Net Investment IncomeA U.S. holder that is an individual or estate, or a trust that does not fall into a special class of trusts that is exempt from the tax, will be subject to a 3.8%tax on the lesser of (1) the U.S. holder’s “net investment income” for the relevant taxable year and (2) the excess of the U.S. holder’s modified adjusted grossincome for the taxable year over a certain threshold (which in the case of individuals will be between $125,000 and $250,000, depending on the individual’scircumstances). A U.S. holder’s net investment income generally will include its dividends on our ordinary shares and net gains from dispositions of ourordinary shares, unless those dividends or gains are derived in the ordinary course of the conduct of trade or business (other than trade or business thatconsists of certain passive or trading activities). Net investment income, however, may be reduced by deductions properly allocable to that income. A U.S.holder that is an individual, estate or trust is urged to consult its tax adviser regarding the applicability of the Medicare tax to its income and gains in respectof its investment in our ordinary shares.Tax Consequences for Non-U.S. Holders of Ordinary SharesExcept as described in “Information Reporting and Backup Withholding” below, a non-U.S. holder of ordinary shares will not be subject to U.S. federalincome or withholding tax on the payment of dividends on, and the proceeds from the disposition of, ordinary shares, unless:●the income is effectively connected with the conduct by the non-U.S. holder of a trade or business in the United States and, in the case of a resident ofa country that has an income treaty with the United States, the income is attributable to a U.S. permanent establishment, or, in the case of anindividual, a fixed place of business in the United States; ●the non-U.S. holder is an individual who holds the ordinary shares as a capital asset and is present in the United States for 183 days or more in thetaxable year of the disposition and does not qualify for an exemption; or ●the non-U.S. holder is subject to tax under the provisions of U.S. tax law applicable to U.S. expatriates.A non-U.S. holder is a beneficial owner of our ordinary shares that is (1) a nonresident alien as to the United States for U.S. federal income tax purposes;(2) a corporation created or organized in or under the law of a country, or any of its political subdivisions, other than the United States; or (3) an estate or trustthat is not a U.S. holder.Information Reporting and Backup WithholdingU.S. holders generally are subject to information reporting requirements for dividends paid in the United States on ordinary shares. Dividends paid in theUnited States to a U.S. holder on ordinary shares are subject to backup withholding at a rate of 28% (24% for years after 2017) unless the U.S. holder providesIRS Form W-9 or establishes an exemption. U.S. holders generally are subject to information reporting and backup withholding at a rate of 28% (24% foryears after 2017) on proceeds paid from the disposition of ordinary shares unless the U.S. holder provides IRS Form W-9 or establishes an exemption.93Table of ContentsThe Foreign Account Tax Compliance Act, or FATCA, was enacted during 2014. FATCA generally requires foreign financial institutions (FFIs) toidentify U.S. account holders and report them to the IRS or pay a 30% withholding tax. Nonfinancial foreign entities (or NFFEs) are required to report theirsubstantial U.S. owners to withholding agents or pay a 30% withholding tax. FATCA’s objective is to prevent tax evasion by requiring the disclosure ofaccount holder information to the IRS. Because Stratasys is a publicly traded company that is not a financial institution, FATCA has less impact than therules discussed above that are still in effect for withholding tax purposes.A non-U.S. holder who effects the sale of his ordinary shares by or through a U.S. office of a broker is subject to both information reporting and backupwithholding tax on the payment of the proceeds unless he certifies, under penalties of perjury, that he is not a U.S. person or otherwise establishes anexemption. If a non-U.S. holder sells his ordinary shares through a non-U.S. office of a non-U.S. broker and the sales proceeds are paid to the holder outsidethe United States, then information reporting and backup withholding generally will not apply to that payment. However, information reportingrequirements, but not backup withholding, will apply to a payment of sales proceeds, even if that payment is made to a non-U.S. holder outside the UnitedStates, if the holder sells his ordinary shares through a non-U.S. office of a broker that is a U.S. person or has some other contacts with the United States. Thoseinformation reporting requirements will not apply, however, if the broker has documentary evidence in its records that the holder is a non-U.S. person andcertain other conditions are met, or the holder otherwise establishes an exemption.Backup withholding is not an additional tax. Rather, the amount of any backup withholding will be allowed as a credit against a U.S. or non-U.S. holder’sU.S. federal income tax liability, and a taxpayer generally may obtain a refund of any amounts withheld under the backup withholding rules that exceed thetaxpayer’s U.S. federal income tax liability by filing a refund claim with the IRS, provided in each case that required information is furnished to the IRS.Information Reporting by Certain U.S. HoldersU.S. citizens and individuals taxable as resident aliens of the United States that own “specified foreign financial assets” with an aggregate value in ataxable year in excess of certain thresholds (as determined under Treasury regulations) and that are required to file a U.S. federal income tax return generallywill be required to file an information report with respect to those assets with their tax returns. IRS Form 8938 has been issued for that purpose. “Specifiedforeign financial assets” include any financial accounts maintained by foreign financial institutions, foreign stocks held directly, and interests in foreignestates, foreign pension plans or foreign deferred compensation plans. Under those rules, our ordinary shares, whether owned directly or through a financialinstitution, estate or pension or deferred compensation plan, would be “specified foreign financial assets.” Under Treasury regulations, the reportingobligation applies to certain U.S. entities that hold, directly or indirectly, specified foreign financial assets. Penalties can apply if there is a failure to satisfythis reporting obligation. A U.S. holder is urged to consult his tax adviser regarding his reporting obligation.F. Dividends and Paying Agents.Not applicable.G. Statement by Experts.Not applicable.H. Documents on Display.We are subject to the informational requirements of the Exchange Act. In accordance with these requirements, we are required to file reports and otherinformation with the SEC. You may read and copy these materials, including this annual report and the accompanying exhibits and reports and otherinformation that we have previously filed, at the public reference facilities maintained by the SEC at 100 F Street, N.E., Washington, D.C. 20549. You mayobtain information on the operation of the public reference room by calling 1(800)-SEC-0330. The SEC maintains an Internet Site at http://www.sec.gov thatcontains reports and other information that we file electronically. The reports and other information filed by us with the SEC are also available at ourwebsites, www.stratasys.com and www.objet.com. The web addresses of the SEC and our company have been included as inactive textual references only.Information on those websites is not part of this annual report. In addition, documents referred to in this annual report may be inspected at the offices of theNASDAQ Global Select Market, 1735 K Street, N.W., Washington, D.C. You can also obtain copies of reports and other information that we fileelectronically, without charge, by requesting them in writing or by telephone from our company at the following address:Stratasys Ltd.c/o Stratasys, Inc.9600 West 76thEden Prairie, Minnesota 55344Attention: Yonah Lloyd, Vice President of Investor RelationsTel: (952) 937-300094Table of ContentsAs a foreign private issuer, we are exempt from the rules under the Exchange Act prescribing the furnishing and content of proxy statements, and ourofficers, directors and principal shareholders are exempt from the reporting and “short-swing” profit recovery provisions contained in Section 16 of theExchange Act. In addition, we are not required under the Exchange Act to file periodic reports and financial statements with the SEC as frequently or aspromptly as United States companies whose securities are registered under the Exchange Act.I. Subsidiary Information.Not Applicable.ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.Market risk is the risk of loss related to changes in market prices, including interest rates and foreign exchange rates, of financial instruments that mayadversely impact our consolidated balance sheets, statements of operations or cash flows.Foreign Currency Exchange RiskDue to our international operations, currency exchange rates impact our financial performance.The majority of our balance sheet exposure relates to foreign currency assets and liabilities in entities which their functional currency is Euro. Our netEuro balance sheet exposure as of December 31, 2017 was approximately $103.0 million.Our total revenues amounted to $668.4 million in 2017, of which approximately 17.3% were denominated in Euros. During 2017, our Euro-denominatedrevenues exceeded our Euro-denominated expenses. Conversely, our expenses denominated in shekels are higher than our expected shekel-denominatedrevenues. For those currencies which do not have a sufficient natural hedge within our operations (such as offsetting revenues and expenses recorded in agiven currency, or some other hedge), we may choose to hedge in order to reduce the impact of currency fluctuations on our operating results. In 2017, weentered into hedging transactions to reduce our potential currency exposure related to the U.S. dollar against each of the Euro and the New Israeli Shekel. Ourforeign exchange forward contracts in effect as of December 31, 2017 were for the conversion of $48.1 million into Euro and $16.4 million into NIS.The net effect of these risks stemming from currency exchange rate fluctuations on our operating results can be quantified as follows:(i) A change of 10% in the value of the Euro relative to the U.S. dollar in the year ended December 31, 2017 would have resulted in a change in the U.S.dollar reporting value of our consolidated operating income of $6.9 million for that year, mainly due to revenues earned in Euros.(ii) A change of 10% in the value of the shekel relative to the dollar in the year ended December 31, 2017 would have resulted in a change in the dollar-reported value of our consolidated operating income of $9.9 million, mainly due to shekel-recorded expenses.We will continue to monitor exposure to currency fluctuations. Instruments that may be used to protect us against future risks may include foreigncurrency forward and swap contracts. These instruments may be used to selectively manage risks, but there can be no assurance that we will be fully protectedagainst material foreign currency fluctuations. We do not use derivative financial instruments for speculative or trading purposes.Interest Rate RiskOur cash and cash equivalents are held primarily in bank deposits with maturities of less than 90 days, and our short-term bank deposits have maturities ofmore than 90 days. Both are subject to limited interest rate risk, with an average interest rate of 1.30%. In addition, the outstanding balance of our Bank Loanas of December 31, 2017 was $32.3 million and bear an average interest rate of 4.52%. An immediate 10% change in interest rates would not have a materialeffect on our financial condition or results of operations.ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES.Not Applicable.PART IIITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES.NoneITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS.None95Table of ContentsITEM 15. CONTROLS AND PROCEDURES.(a) Disclosure Controls and Procedures.We carried out an evaluation under the supervision and with the participation of our management, including our chief executive officer and chieffinancial officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), as ofDecember 31, 2017, the end of the period covered by this annual report. We maintain disclosure controls and procedures designed to ensure that theinformation required to be disclosed by us in filings and submissions under the Exchange Act, is recorded, processed, summarized, and reported within thetime periods specified by the SEC’s rules and forms, and that information required to be disclosed by us in reports that we file or submit under the ExchangeAct is accumulated and communicated to management, including our chief executive officer and chief financial officer, as appropriate to allow timelydecisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, our management recognizes that any controlsand procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and our managementnecessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on such evaluation, our chiefexecutive officer and chief financial officer have concluded that our disclosure controls and procedures were effective as of December 31, 2017.(b) Management’s Annual Report on Internal Control Over Financial Reporting.Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control system wasdesigned to provide reasonable assurance to our management and board of directors regarding the reliability of financial reporting and the preparation andfair presentation of its published consolidated financial statements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluationof effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2017. In making our assessment, ourmanagement used the criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of theTreadway Commission (COSO). Based on such assessment, management has concluded that, as of December 31, 2017, our internal control over financialreporting is effective based on those criteria.Kesselman & Kesselman, an independent registered public accounting firm in Israel and a member of PricewaterhouseCoopers International Limited, towhich we refer as PwC, which audited the financial statements included in this annual report containing the disclosure required by this Item 15 has issued anattestation report regarding the effectiveness of our internal control over financial reporting.(c) Attestation Report of Registered Public Accounting Firm.PwC’s attestation report regarding the effectiveness of our internal control over financial reporting is included in “Item 18—Financial Statements” onpage F-3 of this annual report, which attestation report is incorporated by reference in this Item 15(c).(d) Changes in Internal Control over Financial Reporting.Based on the evaluation conducted by our management, with the participation of our chief executive officer and chief financial officer, pursuant to Rules13a-15(d) and 15d-15(d) promulgated under the Exchange Act, our management (including such officers) have concluded that there were no changes in ourinternal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the periodcovered by this annual report that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT.Our board of directors has determined that Mr. Edward J. Fierko, who serves on the audit committee of our board of directors, meets the requirements of an“audit committee financial expert”, as defined in Item 407(d)(5) of SEC Regulation S-K and Item 16A of SEC Form 20-F and is an independent director, asdefined in Rule 5600(a)(2) of the NASDAQ Listing Rules.ITEM 16B. CODE OF ETHICS.We have adopted a Code of Business Conduct and Ethics, which we to which we refer as the code of ethics, that applies to all directors, officers, andemployees of our company and its subsidiaries, including our principal executive officer, principal financial officer, principal accounting officer or controllerand other persons performing similar functions for us. A copy of the code of ethics has been posted on our Internet website,http://investors.stratasys.com/governance.cfm and is incorporated herein by reference. The foregoing website has been provided as an inactive textualreference only, and the content of that website is not a part of this annual report.The code of ethics, as it appears at the above website, constitutes an amended and restated version that was adopted by our board of directors in 2017. Theamended and restated version reflects modernizing revisions designed to make the code of ethics more “user friendly” for our directors, officers, andemployees, in keeping with best practices for public companies of our size. The amended version does not alter the code of ethics’ treatment of any of theelements of the code of ethics definition enumerated in Item 16B(b) of Form 20-F as applicable to our principal executive officer, principal financial officer,principal accounting officer or controller.96Table of ContentsITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES.The following table sets forth, for the years ended December 31, 2016 and 2017, the fees billed to us and our subsidiaries by our principal accountant. (1)Year endedDecember 31,20172016Audit fees (2) $ 907,500 $ 1,265,897Tax fees (3)131,205206,043All other fees (4)11,30017,800Total$ 1,050,005$1,489,740____________________(1)Comprised by fees billed by Kesselman & Kesselman, a member firm of PricewaterhouseCoopers International Limited, an independent registered publicaccounting firm, or Kesselman & Kesselman (which served as our principal accountant with respect to the years ended December 31, 2016 and 2017). (2)Audit fees consist of fees for professional services rendered by our principal accountant in connection with the audit of our consolidated annual financialstatements and services that would normally be provided by our principal accountant in connection with statutory and regulatory filings orengagements. (3)Tax fees are fees for services rendered by our principal accountant in connection with tax compliance, tax planning and tax advice. (4)All other fees are fees for other consulting services (if any) rendered by our principal accountant to us.ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES.None.ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS.None.ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT.Not applicable.ITEM 16G. CORPORATE GOVERNANCE.The NASDAQ Global Select Market requires companies with securities listed thereon to comply with its corporate governance standards. As a foreignprivate issuer, we are not required to comply with all of the rules that apply to listed domestic U.S. companies. Pursuant to NASDAQ Listing Rule 5615(a)(3),we have notified NASDAQ that with respect to the corporate governance practices described below, we will instead follow Israeli law and practice andaccordingly will not follow the NASDAQ Listing Rules. Except for the differences described below, we do not believe there are any significant differencesbetween our corporate governance practices and those that apply to a U.S. domestic issuer under the NASDAQ Global Select Market corporate governancerules.●Quorum for Shareholder Meetings: As permitted under the Companies Law, under a recent amendment adopted to our amended and restated articles ofassociation, the quorum required for an ordinary meeting of shareholders consists of at least two shareholders present in person, by proxy or by othervoting instrument, who hold at least 25% of the voting power of our shares (and in an adjourned meeting, with some exceptions, two shareholders,regardless of the voting power associated with their shares), instead of 33 1/3% of the issued share capital required under the NASDAQ Listing Rules. ●Executive Sessions of Independent Directors: Under the Companies Law, our independent directors (as defined under the NASDAQ Listing Rules) donot need to meet regularly in sessions at which only they are present, as is required of U.S. domestic issuers under NASDAQ Listing Rule 5605(b)(2). ●Independent Director Oversight of Nominations: Under Israeli law, there is no requirement to have an independent nominating committee or theindependent directors of a company select (or recommend for selection) director nominees, as is required under NASDAQ Listing Rule 5605(e) for aU.S. domestic issuer. Our board of directors (based on the recommendation of the executive committee thereof) handles this process, as is permitted byour amended articles and the Companies Law. We also need not adopt a formal board resolution or charter addressing the director nominations processand such related matters as may be required under the U.S. federal securities laws, as NASDAQ requires for a U.S. issuer.97Table of Contents●Shareholder Approval: Pursuant to Israeli law, we seek shareholder approval for all corporate actions requiring such approval under the requirementsof the Companies Law, which are different from, or in addition to, the requirements for seeking shareholder approval under NASDAQ Listing Rule5635. See “Item 6. Directors, Senior Management and Employees—C. Board Practices — Fiduciary Duties of Office Holders” in this annual report fora description of the some of the transactions requiring shareholder approval under the Companies Law. ●Distribution of Annual and Interim Reports: As opposed to NASDAQ Listing Rule 5250(d), which requires listed issuers to make annual and quarterlyreports available to shareholders in one of a number of specific manners, Israeli law does not require us to distribute such reports directly toshareholders, and the generally accepted business practice in Israel is not to distribute such reports to shareholders but to make such reports availablethrough a public website. In addition, we will make our annual report containing audited financial statements available to our shareholders at ouroffices (in addition to a public website). We reserve the right to limit our mailing of such report to shareholders to an upon-request basis.ITEM 16H. MINE SAFETY DISCLOSURE.Not applicable.PART IIIITEM 17. FINANCIAL STATEMENTS.We have elected to provide financial statements and related information pursuant to Item 18.ITEM 18. FINANCIAL STATEMENTSThe consolidated financial statements and the related notes required by this Item are included in this annual report beginning on page F-1.Index to Consolidated Financial Statements PageReport of Independent Registered Public Accounting FirmF-2Consolidated Balance Sheets at December 31, 2017 and 2016F-4Consolidated Statements of Operations and Comprehensive Loss for the Years Ended December 31, 2017, 2016 and 2015F-5Consolidated Statements of Changes in Equity for the Years Ended December 31, 2017, 2016 and 2015F-6Consolidated Statements of Cash Flows for the Years Ended December 31, 2017, 2016 and 2015F-7 to F-8Notes to the Consolidated Financial StatementsF-9 to F-41Index to Financial Statement ScheduleSchedule II-Valuation and Qualifying Accounts and ReservesS-198Table of ContentsSTRATASYS LTD.CONSOLIDATED FINANCIAL STATEMENTSDECEMBER 31, 2017CONTENTSReport of Independent Registered Public Accounting Firm F-2 Consolidated Financial StatementsConsolidated Balance SheetsF-4Consolidated Statements of Operations and Comprehensive LossF-5Consolidated Statements of Changes in EquityF-6Consolidated Statements of Cash FlowsF-7 to F-8Notes to Consolidated Financial StatementsF-9 to F-41Schedule II - Valuation and Qualifying Accounts and ReservesS-1F-1Table of Contents Report of Independent Registered Public Accounting FirmTo the shareholders of Stratasys Ltd.Opinions on the Financial Statements and Internal Control over Financial ReportingWe have audited the accompanying consolidated balance sheets of Stratasys Ltd. and its subsidiaries as of December 31, 2017 and 2016, and the relatedconsolidated statements of operations and comprehensive loss, of changes in equity and of cash flows for each of the three years in the period endedDecember 31, 2017, including the related notes and schedule of valuation, qualifying accounts and reserves for each of the three years in the period endedDecember 31, 2017 appearing under Item 18 (collectively referred to as the “consolidated financial statements”). We also have audited the Company'sinternal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued bythe Committee of Sponsoring Organizations of the Treadway Commission (COSO).In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as ofDecember 31, 2017 and 2016, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2017 inconformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all materialrespects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control -Integrated Framework(2013) issued by the COSO.Basis for OpinionsThe Company's management and board of directors are responsible for these consolidated financial statements, for maintaining effective internal control overfinancial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management's Annual Report onInternal Control over Financial Reporting appearing under Item 15(b). Our responsibility is to express opinions on the Company’s consolidated financialstatements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the PublicCompany Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with theU.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonableassurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internalcontrol over financial reporting was maintained in all material respects.Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financialstatements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis,evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles usedand significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internalcontrol over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weaknessexists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performingsuch other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.Definition and Limitations of Internal Control over Financial ReportingA company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal controlover financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are beingmade only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.F-2Table of ContentsBecause of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliancewith the policies or procedures may deteriorate./s/ Kesselman & KesselmanCertified Public Accountants (Isr.)A member firm of PricewaterhouseCoopers International LimitedTel-Aviv, IsraelFebruary 28, 2018We have served as the Company’s auditor since 2012.F-3Table of ContentsSTRATASYS LTD.CONSOLIDATED FINANCIAL STATEMENTSConsolidated Balance Sheets(in thousands, except share data) December 31, 2017 2016ASSETS Current assetsCash and cash equivalents$328,761$280,328Accounts receivable, net132,671120,411Inventories115,717117,521Net investment in sales-type leases7,20811,717Prepaid expenses7,6967,571Other current assets22,85815,491Total current assets614,911553,039Non-current assetsNet investment in sales-type leases - long-term4,43912,126Property, plant and equipment, net199,951208,415Goodwill387,108385,629Other intangible assets, net142,122177,458Other non-current assets31,21929,382Total non-current assets764,839813,010Total assets$ 1,379,750$ 1,366,049 LIABILITIES AND EQUITY Current liabilitiesAccounts payable$39,849$40,933Current portion of long-term debt5,1433,714Accrued expenses and other current liabilities30,04132,207Accrued compensation and related benefits35,35634,186Obligations in connection with acquisitions-3,619Deferred revenues52,90849,952Total current liabilities163,297164,611Non-current liabilitiesLong-term debt27,14322,286Deferred tax liabilities7,0695,952Deferred revenues - long-term15,20012,922Other non-current liabilities32,89922,251Total non-current liabilities82,31163,411Total liabilities$245,608$228,022Commitments and contingencies (see note 10)Redeemable non-controlling interests1,6352,029EquityOrdinary shares, NIS 0.01 nominal value, authorized 180,000 thousands shares; 53,631 thousands shares and52,639 thousands shares issued and outstanding at December 31, 2017 and 2016, respectively145142Additional paid-in capital2,663,2742,633,129Accumulated other comprehensive loss(7,023)(13,479)Accumulated deficit(1,523,906)(1,483,925)Equity attributable to Stratasys Ltd.1,132,4901,135,867Non-controlling interests17131Total equity1,132,5071,135,998Total liabilities and equity$1,379,750$1,366,049The accompanying notes are an integral part of these consolidated financial statements.F-4Table of ContentsSTRATASYS LTD.CONSOLIDATED FINANCIAL STATEMENTS Consolidated Statements of Operations and Comprehensive Loss(in thousands, except share and per share data)Years Ended December 31, 2017 2016 2015Net salesProducts$ 474,286$ 479,031$ 503,946Services194,076193,427192,049 668,362672,458695,995Cost of salesProducts219,020234,653466,221Services126,565120,499127,602 345,585355,152593,823Gross profit322,777317,306102,172Operating expensesResearch and development, net96,23797,778122,360Selling, general and administrative255,685307,113434,619Goodwill impairment--942,408Change in fair value of obligations in connection with acquisitions1,378(872)(23,671) 353,300404,0191,475,716Operating loss(30,523)(86,713)(1,373,544)Financial income (expense), net1,047354(10,287)Loss before income taxes(29,476)(86,359)(1,383,831)Income taxes expense (benefit)9,273(9,446)(10,320)Share in losses of associated companies(1,710)(708)-Net loss(40,459)(77,621)(1,373,511)Net loss attributable to non-controlling interests(478)(402)(676)Net loss attributable to Stratasys Ltd.$(39,981)$(77,219)$(1,372,835) Net loss per ordinary share attributable to Stratasys Ltd.Basic$(0.75)$(1.48)$(26.64)Diluted$(0.75)$(1.48)$(26.64) Weighted average ordinary shares outstandingBasic52,95952,33051,592Diluted52,95952,58251,592 Comprehensive LossNet loss$(40,459)$(77,621)$(1,373,511)Other comprehensive income (loss), net of tax:Foreign currency translation adjustments6,102(2,788)(8,263)Unrealized gains on derivatives designated as cash flow hedge354831,136Other comprehensive loss, net of tax6,456(2,705)(7,127)Comprehensive loss(34,003)(80,326)(1,380,638)Less: Comprehensive loss attributable to non-controlling interests(478)(402)(676)Comprehensive loss attributable to Stratasys Ltd.$(33,525)$(79,924)$(1,379,962)The accompanying notes are an integral part of these consolidated financial statements.F-5Table of ContentsSTRATASYS LTD.CONSOLIDATED FINANCIAL STATEMENTS Consolidated Statements of Changes in Equity(in thousands)Years Ended December 31, 2017, 2016, and 2015 RetainedAccumulated Ordinary SharesAdditionalEarningsOtherEquityNumber ofPaid-In (accumulated Comprehensive attributable to Non-controlling Total shares Par Value Capitaldeficit)LossStratasys Ltd.InterestsEquity Balances, January 1, 201550,923$ 139$ 2,568,149$ (33,871)$ (3,647)$ 2,530,770$ 469$ 2,531,239Issuance of shares in connection with stock-basedcompensation plans260*2,871--2,871-2,871Stock-based compensation--30,010--30,010-30,010Tax deficit from stock-based compensation plans--(1,706)--(1,706)-(1,706)Issuance of shares for settlements of obligations inconnection with acquisitions and other relateditems89928,433--8,435-8,435Adjustment to redemption value of redeemablenon-controlling interests--(1,800)--(1,800)-(1,800)Comprehensive loss---(1,372,835)(7,127)(1,379,962)(286)(1,380,248)Balance as of December 31, 201552,082$141$2,605,957$(1,406,706)$(10,774)$1,188,618$183$1,188,801Issuance of shares in connection with stock-basedcompensation plans30111,185--1,186-1,186Stock-based compensation--20,773--20,773-20,773Issuance of shares for settlements of obligations inconnection with acquisitions and other relateditems256*5,214--5,214-5,214Comprehensive loss---(77,219)(2,705)(79,924)(52)(79,976)Balance as of December 31, 201652,639$142$2,633,129$(1,483,925)$(13,479)$1,135,867$131$1,135,998Issuance of shares in connection with stock-basedcompensation plans74326,557--6,5596,559Stock-based compensation--17,722--17,72217,722Issuance of shares for settlements of obligations inconnection with acquisitions and other relateditems24915,866--5,8675,867Reduction of non-controlling interests upondivestment(30)(30)Comprehensive loss---(39,981)6,456(33,525)(84)(33,609)Balance as of December 31, 201753,631$145$2,663,274$(1,523,906)$(7,023)$1,132,490$17$1,132,507*Represents an amount less than 0.5 thousandThe accompanying notes are an integral part of these consolidated financial statements.F-6Table of ContentsSTRATASYS LTD.CONSOLIDATED FINANCIAL STATEMENTS Consolidated Statements of Cash Flows(in thousands)Years ended December 31, 2017 2016 2015Cash flows from operating activitiesNet loss$ (40,459)$ (77,621)$ (1,373,511)Adjustments to reconcile net loss to net cash provided by operating activities:Goodwill impairment--942,408Impairment of other long-lived assets6,75924,924288,977Depreciation and amortization66,63592,877108,395Stock-based compensation17,72220,77330,010Foreign currency transaction loss(10,429)2,1478,612Deferred income taxes2,404(10,378)(19,129)Change in fair value of obligations in connection with acquisitions1,378(872)(23,671)Other non-cash items3,5201,22017 Change in cash attributable to changes in operating assets and liabilities, net of the impact ofacquisitions:Accounts receivable, net(7,581)2,00925,075Inventories2,174642(12,408)Net investment in sales-type leases12,1965,646(6,497)Other current assets and prepaid expenses(3,665)39511,262Other non-current assets(802)933(439)Accounts payable(1,206)1,969(1,937)Other current liabilities(1,114)(6,330)(7,464)Deferred revenues3,4213,38010,141Other non-current liabilities10,954259(1,751)Net cash provided by (used in) operating activities61,90761,973(21,910) Cash flows from investing activitiesPurchase of property and equipment(22,308)(45,125)(84,299)Proceeds from maturities of bank deposits and restricted deposits-73,836191,741Investment in bank deposits and restricted deposits(477)(67,177)(187,264)Cash paid for acquisitions, net of cash acquired--(9,905)Investment in unconsolidated entities(3,568)(23,064)(250)Purchase of intangible assets(1,540)(2,002)(2,747)Other investing activities(361)(457)(378)Net cash used in investing activities(28,254)(63,989)(93,102) Cash flows from financing activitiesProceeds from long-term debt10,00026,000-Repayment of long-term debt(3,714)--Proceeds from short-term debt--125,000Payment of obligations in connection with acquisitions(1,476)(1,386)(19,875)Repayment of short-term debt - - (175,000)Proceeds from exercise of stock options5,8881,1852,871Net cash provided by (used in) financing activities10,69825,799(67,004) Effect of exchange rate changes on cash and cash equivalents4,082(1,047)(2,533) Net change in cash and cash equivalents48,43322,736(184,549)Cash and cash equivalents, beginning of year280,328257,592442,141 Cash and cash equivalents, end of year$328,761$280,328$257,592The accompanying notes are an integral part of these consolidated financial statements.F-7Table of ContentsSTRATASYS LTD.CONSOLIDATED FINANCIAL STATEMENTS Consolidated Statements of Cash Flows(in thousands)Years ended December 31, 2017 2016 2015Supplemental disclosure of cash flow informationCash paid for income taxes, net of tax refunds$ 1,247$ 5,278$ 13,487Cash paid for interest1,140-1,514Transfer of inventory to fixed assets4,8445,0858,886Transfer of fixed assets to inventory1,1881,0683,661The accompanying notes are an integral part of these consolidated financial statements.F-8Table of ContentsSTRATASYS LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSNote 1. Nature of Operations and Summary of Significant Accounting Policiesa. Nature of OperationsStratasys Ltd. (collectively with its subsidiaries, the “Company”) is global provider of applied additive technology solutions for a broad range ofindustries. The Company focuses on customers’ business requirements and seeks to create new value for its customers across their product lifecycle processes,from design prototypes to manufacturing tools and final production parts. The Company operates a 3D printing ecosystem of solutions and expertise,comprised of: 3D printers ranging from entry-level desktop 3D printers to systems for rapid prototyping (“RP”) and large production systems for direct digitalmanufacturing (“DDM”) based on precise fused deposition modeling (“FDM”) and PolyJet technologies; advanced materials for the use with its 3D printers;software with voxel level control; application-based services; on-demand parts; and key partnerships.The Company has one operating segment, which generates revenues via the sale of its 3D printing systems, related services and consumables and byproviding additive manufacturing ("AM") solutions. The Company operates mainly through offices in Israel, the United States, Germany, Hong Kong andJapan. Entity-wide disclosures on net sales and property, plant and equipment are presented in note 13.b. Summary of Significant Accounting PoliciesBasis of PresentationThe consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“USGAAP”).Principles of ConsolidationThe accompanying consolidated financial statements include the accounts of Stratasys Ltd., its majority-owned subsidiaries and a Variable Interest Entity(“VIE”) in which the Company is considered the primary beneficiary. All intercompany accounts and transactions, including profits from intercompany salesnot yet realized outside the Company, have been eliminated in consolidation.Functional Currency and Foreign Currency TransactionsA major part of the Company’s operations are carried out by Stratasys Ltd. in Israel and its subsidiaries in the United States. The functional currency ofthese entities is the U.S. dollar (“dollar” or “$”). The functional currency of other subsidiaries is generally their local currency. The financial statements ofthose subsidiaries are included in the consolidated financial statements, based on translation into U.S. dollars. The effects of foreign currency translationadjustments are included in the Company’s shareholders’ equity as a component of accumulated other comprehensive loss in the accompanying consolidatedbalance sheets. Related periodic movements are summarized as a line item in the Company’s consolidated statements of comprehensive loss. Gains and lossesarising from foreign currency remeasurements of monetary balances denominated in non-functional currencies are reflected in financial income (expense), netin the consolidated statements of operations and comprehensive loss.Use of EstimatesThe preparation of financial statements in conformity with U.S. GAAP requires management to make estimates using assumptions that affect the reportedamounts of assets and liabilities and related disclosures at the date of the financial statements and the reported amounts of expenses during the reportingperiod. Actual results could differ from those estimates, and such differences may have a material impact on the Company’s financial statements. Asapplicable to these consolidated financial statements, the most significant estimates relate to revenue recognition, inventories, long-lived assets, goodwill,uncertain tax positions and contingent liabilities.Fair Value MeasurementsFair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participantsat the measurement date. A hierarchy has been established for inputs used in measuring fair value that maximizes the use of observable inputs and minimizesthe use of unobservable inputs by requiring that the most observable inputs be used when available.F-9Table of ContentsSTRATASYS LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSObservable inputs are inputs that are developed using market data, such as publicly available information about actual events or transactions, and thatreflect the assumptions that market participants would use when pricing the asset or liability. Unobservable inputs are inputs for which market data are notavailable and that are developed using the best information available about the assumptions that market participants would use when pricing the asset orliability. The fair value hierarchy categorizes into three levels. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilitiesthat the reporting entity can access at the measurement date. Level 2 inputs include inputs other than quoted prices included within Level 1 that areobservable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs for the asset or liability. The fair value hierarchy givesthe highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1 inputs) and the lowest priority to unobservableinputs (Level 3 inputs). Categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.Cash and Cash EquivalentsAll highly liquid investments, which include short-term bank deposits that are not restricted as to withdrawal or use, with maturities of ninety days or lesswhen acquired, are considered to be cash equivalents.Accounts Receivable and Net investment in Sales-Type LeasesAccounts receivable and net investment in sales-type leases are presented in the Company’s consolidated balance sheets net of allowance for doubtfulaccounts. The Company estimates the collectability of its accounts receivable balances and adjusts its allowance for doubtful accounts accordingly. TheCompany carries its investment in sales-type leases based on discounting the minimum lease payments by the interest rate implicit in the lease and less anallowance for doubtful accounts (see also note 5).On a periodic basis, the Company evaluates its accounts receivable and its investment in sales-type leases and establishes an allowance for doubtfulaccounts based on past write-offs and collections, current credit conditions and the age of the balances. The Company evaluates a number of factors to assesscollectability, including an evaluation of the creditworthiness of the specific customer, past due amounts, payment history, and current economic conditions.Allowance for doubtful accounts due to the Company’s accounts receivable amounted to $1,160 thousand and $843 thousand as of December 31, 2017and 2016, respectively. Allowance for doubtful accounts due to the Company’s investment in sales-type leases amounted to $1,575 thousand and $844thousand as of December 31, 2017 and 2016, respectively. Changes in the allowance for doubtful accounts are recognized in selling, general andadministrative expenses. Accounts receivable are written-off against the allowance for doubtful accounts when management deems the accounts are no longercollectible.Derivative Instruments and Hedge AccountingThe Company is exposed to global market risks and to the risk that its earnings, cash flows and equity could be adversely impacted by fluctuations inforeign exchange rates. As part of the Company’s risk management strategy, it uses foreign currency exchange forward contracts to hedge against certainforeign currency exposures. The Company does not enter into derivative transactions for trading purposes. The Company recognizes these derivativeinstruments as either assets or liabilities in the consolidated balance sheets at their fair value. Derivatives in a gain position are reported in other current assetsin the consolidated balance sheets and derivatives in a loss position are recorded in accrued expenses and other current liabilities in the consolidated balancesheets, on a gross basis.On the date that the Company enters into a derivative contract, it designates the derivative for accounting purposes, as either a hedging instrument whichqualifies for hedge accounting or as a non-hedging instrument which does not qualify for hedge accounting. In order to qualify for hedge accounting, theCompany formally documents at the inception of each hedging relationship the hedging instrument, the hedged item, the risk management objective andstrategy for undertaking each hedging relationship, and the method used to assess hedge effectiveness.F-10Table of ContentsSTRATASYS LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSFor each hedging instrument that hedges the exposure to variability in expected future cash flows and that is designated and effective as a cash flowhedge, the effective portion of the unrealized gain or loss on the derivative instrument is reported as a component of accumulated other comprehensive lossin the Company’s shareholders’ equity and is reclassified into earnings in the same period and in the same line item in which the hedged transaction affectsearnings. The ineffective portion of the gain or loss on the derivative instrument, if any, is recognized in financial income (expense), net. The cash flowsassociated with these derivatives are reported in the consolidated statements of cash flows consistently with the classification of cash flows from theunderlying hedged items that these derivatives are hedging.For non-hedging instruments, the Company records the changes in fair value of derivative instruments in financial income (expense), net in theconsolidated statements of operations and comprehensive loss. The cash flows associated with these derivatives are reported in the consolidated statements ofcash flows consistently with the classification of cash flows from the underlying hedged items that these derivatives are hedging. Refer to Note 12 for furtherinformation regarding the Company’s derivative and hedging activities.InventoriesInventories are stated at the lower of cost or net realizable value. Cost is determined mainly using standard cost, which approximates actual cost, on afirst-in, first-out basis. Inventory costs consist of materials, direct labor and overhead. Net realizable value is determined based on estimated selling prices inthe ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The Company periodically assesses inventoryfor obsolescence and excess balances and reduces the carrying value by an amount equal to the difference between its cost and the net realizable value. Thenet realizable value is primarily estimated based on future demand forecasts, as well as, historical sales trends, product life cycle status and productdevelopment plans. The Company provided inventory write-downs for obsolescence and excess inventories in the amounts of $6.3 million and $7.7 millionas of December 31, 2017 and 2016, respectively.Property, Plant and EquipmentProperty, plant and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over theestimated useful lives of the assets, or in the case of leasehold improvements, the shorter of the lease term (including any renewal periods, if appropriate) orthe estimated useful life of the asset. Repairs and maintenance are charged to expense as incurred, while betterments and improvements that extend the usefullife or add functionality of property, plant and equipment are capitalized.Depreciation is computed primarily over the following periods:Useful Lifein YearsMachinery and equipment5 - 10Buildings25 - 40Buildings improvements5 - 10Computer equipment and software3 - 5Office equipment, furniture and fixtures5 - 14The Company reviews the carrying amounts of property, plant and equipment for potential impairment when events or changes in circumstances indicatethat the carrying amount of an asset may not be recoverable. In evaluating recoverability, the Company groups assets and liabilities at the lowest level suchthat the identifiable cash flows relating to the group are largely independent of the cash flows of other assets and liabilities. The Company then compares thecarrying amounts of the assets or asset groups with the related estimated undiscounted future cash flows. In the event impairment exists, an impairment chargeis recorded at the amount by which the carrying amount of the asset or asset group exceeds the fair value. In addition, the remaining depreciation period forthe impaired asset would be reassessed and, if necessary, revised.F-11Table of ContentsSTRATASYS LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSGoodwillGoodwill reflects the excess of the consideration transferred plus the fair value of any non-controlling interest in the acquiree at the business combinationdate over the fair values of the identifiable net assets acquired. Goodwill is not amortized but rather is tested for impairment annually at the reporting unitlevel, or whenever events or circumstances present an indication of impairment. Goodwill is an asset representing the future economic benefits arising fromother assets acquired in a business combination that are not individually identified and separately recognized. The Company allocates goodwill to itsreporting units based on the reporting unit expected to benefit from the business combination.The primary items that generate goodwill include the value of the synergies between the acquired companies and the Company and the acquiredassembled workforce, neither of which qualifies for recognition as an intangible asset.Goodwill is tested for impairment on an annual basis in the fourth quarter and whenever indicators of potential impairment requires an interim goodwillimpairment analysis. The Company may first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit isless than its carrying amount. If the Company performs a qualitative assessment and concludes that it is more likely than not that the fair value of a reportingunit exceeds its carrying value, goodwill is not considered impaired and the two-step impairment test is not required. However, if the Company concludesotherwise, it is then required to perform a quantitative assessment for goodwill impairment.The Company has early adopted a new guidance which simplifies the test for goodwill impairment. Under the new guidance, the Company performs itsquantitative goodwill impairment test by comparing the fair value of its reporting unit with its carrying value. If the reporting unit’s carrying value isdetermined to be greater than its fair value, an impairment charge is recognized for the amount by which the carrying value exceeds the reporting unit's fairvalue. If the fair value of the reporting unit is determined to be greater than its carrying amount, the applicable goodwill is not impaired and no further testingis required.The evaluation of goodwill impairment requires the Company to make assumptions about future cash flows of the reporting unit being evaluated thatinclude, among others, growth in revenues, margins realized, level of operating expenses and cost of capital. These assumptions require significant judgmentand actual results may differ from assumed and estimated amounts.During the year ended December 31, 2015 the Company recorded impairment charges of $942.4 million in order to reduce the carrying amount ofgoodwill to its implied fair value. There was no impairment of goodwill in either 2016 or 2017. For further details refer to note 7.Other Intangible AssetsIntangible assets and their useful lives are as follows:Weighted AverageUseful Life (in Years)Developed technology6Patents10Trademarks and trade names9Customer relationships7Capitalized software development costs5Definite life intangible assets are amortized using the straight-line method over their estimated period of useful life. Amortization of acquired developedtechnology is recorded in cost of sales. Amortization of trade name and customer relationships is recorded under selling, general and administrative expenses.F-12Table of ContentsSTRATASYS LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSFor definite life intangible assets, the Company reviews the carrying amounts for potential impairment when events or changes in circumstances indicatethat the carrying amount of an asset may not be recoverable. In evaluating recoverability, the Company groups assets and liabilities at the lowest level suchthat the identifiable cash flows relating to the group are largely independent of the cash flows of other assets and liabilities. The Company then compares thecarrying amounts of the asset or assets groups with their respective estimated undiscounted future cash flows. If the definite life intangible asset or assetsgroup are determined to be impaired, an impairment charge is recorded at the amount by which the carrying amount of the asset or assets group exceeds theirfair value.Fair value is determined by using an applicable discounted cash flow model. In addition, the remaining amortization period for the impaired asset wouldbe reassessed and, if necessary, revised. During the years ended December 31, 2017, 2016 and 2015 the Company recorded impairment charges of $2.2million, $16.9 million and $260.3 million, respectively, related to its definite life intangible assets. Refer to Note 8 for further information.Non-Marketable Equity InvestmentsThe Company’s investments in non-marketable equity securities in which it has the ability to exercise significant influence, but does not control throughvariable interests or voting interests, are accounted for under the equity method of accounting and presented as other non-current assets in the Company’sconsolidated balance sheets. Under the equity method, the Company recognizes its proportionate share of the comprehensive income or loss of the investee.The Company’s share of income and losses from equity method investments is included in share in losses of associated company. The Company adds the costof acquiring the additional interest in an unconsolidated equity investment that was not accounted for under the equity method as of the date the equityinvestment becomes qualified for equity method accounting.Other non-marketable equity securities in which the Company does not have a controlling interest or significant influence are recorded at cost andpresented as other non-current assets in the Company’s consolidated balance sheets.The Company reviews its unconsolidated non-marketable equity investments for possible impairment, which generally involves an analysis of the factsand changes in circumstances influencing the investments. There was no impairment of unconsolidated non-marketable equity investments during the yearsended December 31, 2017, 2016 and 2015.Contingent LiabilitiesThe Company is subject to various legal proceedings that arise from time to time in the ordinary course of business. The outcomes of the legalproceedings that are pending as of the date the financial statements are issued are subject to significant uncertainty. In assessing loss contingencies related tolegal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the Company’s management evaluates theperceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought. Suchassessment inherently involves an exercise of judgment. If the assessment of a contingency indicates that it is probable that loss would be incurred and theamount of the liability can be reasonably estimated, then the Company would record an accrued expense in the Company’s financial statements based on itsbest estimate. Loss contingencies considered to be remote by management are generally not disclosed unless material. The respective legal fees are expensedas incurred.Revenue RecognitionThe Company derives revenue from sales of AM systems, consumables, and services. The Company’s AM systems include software and hardware thatfunction together to provide the essential functionality of the tangible system. The Company recognizes revenue when (1) persuasive evidence of a finalagreement exists, (2) delivery has occurred or services have been rendered, (3) the selling price is fixed or determinable, and (4) collectability is reasonablyassured.Revenues from sales to resellers are generally recognized on sell-in basis, upon shipment and when title and risk of loss have been transferred to theresellers. When products and services are sold to a reseller, the reseller is responsible for the installation of the system and for other support services andtherefore considered the primary obligor in the arrangement with the end-customers. Products and services sold directly by the Company or marketed byindependent sales agents are recognized based on the gross amount charged to the end-customer as the Company is considered the primary obligor in thearrangement, retains general inventory risk, establishes the price for its products and assumes the credit risk for amounts billed to its end-customers.F-13Table of ContentsSTRATASYS LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSRevenue from sales-type leases may include systems, other products and maintenance contracts. The Company recognizes revenue from sales-type leasesbased on the net present value of future minimum lease payments. Product revenue from sales-type leases is generally recognized at the time of shipment. Theportion of lease agreements related to maintenance contracts is deferred and recognized ratably over the coverage period. Revenue from operating leases isrecognized ratably over the lease period.For multiple-element arrangements the Company allocates revenue to all deliverables based on their relative selling prices and recognizes revenue wheneach element’s revenue recognition criteria are met. In such circumstances, the Company uses the following hierarchy to determine the selling price to beused for allocating revenue to deliverables: (i) vendor-specific objective evidence of fair value (“VSOE”), (ii) third-party evidence of selling price (“TPE”),and (iii) best estimate of selling price (“BESP”).VSOE exists only when the Company sells the deliverable separately and is established based on the price charged in such stand-alone transactions.BESP reflects the Company’s best estimates of the price at which the Company would have sold the product regularly on a stand-alone basis.Most service revenue is derived from the Company’s direct manufacturing printed parts services and sales of maintenance contracts. The Company’sdirect manufacturing service revenue is recognized upon shipment of the parts, based on the terms of the sales arrangement.The Company provides customers with maintenance under a warranty agreement and defers a portion of the revenue from the related printer at the time ofthe sale based on the relative selling price of those services. After the initial warranty period, the Company offers customers optional maintenance contractsranging generally from one to three years. Deferred maintenance revenue is recognized ratably, on a straight-line basis, over the period of the service.Deferred revenues are derived mainly from these prepaid maintenance agreements. The Company classifies the portion of deferred revenue not expected to beearned in the subsequent 12 months as long-term. The changes in deferred revenues relating to warranty commitments were as follows:December 31, December 31,20172016(U.S. $ in thousands)Balance at beginning of year17,55514,100Revenue deferred in the period18,45422,309Revenue recognized in the period (16,791) (18,854)Balance at end of year$19,218$17,555The Company assesses collectability as part of the revenue recognition process. This assessment includes a number of factors such as an evaluation of thecreditworthiness of the customer, past due amounts, past payment history, and current economic conditions. If it is determined that collectability cannot bereasonably assured, the Company will defer recognition of revenue until collectability is assured.Sales and Value Added TaxesTaxes collected from customers and remitted to governmental authorities are recorded on a net basis (excluded from revenues) in the Company’sconsolidated statements of operations and comprehensive loss.AdvertisingAdvertising costs are expensed as incurred and were approximately $14.2 million, $19.4 million and $23.5 million, for the years ended December 31,2017, 2016 and 2015, respectively.Shipping and handling costsShipping and handling costs are classified as cost of revenues.F-14Table of ContentsSTRATASYS LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSResearch and Development CostsResearch and development costs consist primarily of employee compensation expenses, materials, laboratory supplies, costs for related software, andcosts for facilities and equipment. Expenditures for research and development are expensed as incurred. Government reimbursements and other participationsfor development of approved projects are recognized as a reduction of expenses as the related costs are incurred. The Company is not required to payroyalties on sales of products developed using its government funding.Income TaxesThe Company and its subsidiaries are subject to income taxes in the jurisdictions in which they operate. The Company’s provision for income taxes isbased on income tax rates in the tax jurisdictions where it operates, permanent differences between financial reporting and tax reporting, and available creditsand incentives.Deferred taxes are determined utilizing the “asset and liability” method based on the estimated future tax effects of temporary differences between thecarrying amount and tax bases of assets and liabilities under the applicable tax laws, and on effective tax rates in effect when the deferred taxes are expectedto be settled or realized. Deferred taxes for each jurisdiction are presented as a non-current net asset or liability, net of any valuation allowances.Deferred taxes have not been provided on the following items:1)Taxes that would apply in the event of disposal of investments in first-tier foreign subsidiaries, as it is generally the Company’s intention to holdthese investments, not to realize them. 2) Dividends distributable from the income of foreign companies as the Company does not expect these companies to distribute dividends in theforeseeable future. If these dividends were to be paid, the Company would have to pay additional taxes at a rate of up to 25% on the distribution,and the amount would be recorded as an income tax expense in the period the dividend is declared. 3)Amounts of tax-exempt income generated from the Company’s current Approved Enterprises (see note 9c), as the Company intends to permanentlyreinvest these profits and does not intend to distribute dividends from such income. If these dividends were to be paid, the Company would have topay additional taxes at a rate up to 10% on the distribution, and the amount would be recorded as an income tax expense in the period the dividendis declared.Valuation AllowancesValuation allowances are provided unless it is more likely than not that all or a portion of the deferred tax asset will be realized. In the determination ofthe appropriate valuation allowances, the Company considers future reversals of existing taxable temporary differences, the most recent projections of futurebusiness results, prior earnings history, carryback and carry forward and prudent tax strategies that may enhance the likelihood of realization of a deferred taxasset. Assessments for the realization of deferred tax assets made at a given balance sheet date are subject to change in the future, particularly if earnings of asubsidiary are significantly higher or lower than expected, or if the Company takes operational or tax positions that could impact the future taxable earningsof a subsidiary.Uncertain Tax PositionsIn accordance with the FASB guidance, the Company takes a two-step approach to recognizing and measuring uncertain tax positions. The first step is toevaluate the tax position for recognition by determining whether the weight of available evidence indicates that it is more likely than not that, on anevaluation of the technical merits, the position will be sustained on audit, including resolution of related appeals or litigation processes, if any.The second step is performed only if the tax position meets the more-likely-than-not recognition threshold and is to measure the tax benefit as the largestamount which is more than 50% likely of being realized upon ultimate settlement. The Company reevaluates these tax positions quarterly and makesadjustments as required. The liabilities relating to uncertain tax positions are classified as current in the consolidated balance sheets to the extent theCompany anticipates making payments within one year. The Company classifies interest and penalties recognized in the financial statements relating touncertain tax positions under the provision for income taxes.F-15Table of ContentsSTRATASYS LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSThe Company presents unrecognized tax benefits as a reduction to deferred tax asset where a net operating loss, a similar tax loss, or a tax creditcarryforward that are available, under the tax law of the applicable jurisdiction, to offset any additional income taxes that would result from the settlement ofa tax position.Stock-Based CompensationThe Company measures and recognizes compensation expense for its equity classified stock-based awards, including stock-based option awards andrestricted stock units (“RSUs”) under the Stratasys Ltd. 2012 Omnibus Equity Incentive Plan (the “2012 Plan”) based on estimated fair values on the grantdate. The Company calculates the fair value of stock-based option awards on the date of grant using the Black-Scholes option pricing model. The option-pricing model requires a number of assumptions, of which the most significant are the expected share price volatility and the expected option term. Thecomputation of expected volatility is based on historical volatility of the Company’s shares. The expected option term is calculated using the simplifiedmethod, as the Company concludes that its historical share option exercise experience does not provide a reasonable basis to estimate its expected optionterm. The interest rate for periods within the expected term of the award is based on the U.S. Treasury yield curve in effect at the time of grant. The Company’sexpected dividend rate is zero since the Company does not currently pay cash dividends on its shares and does not anticipate doing so in the foreseeablefuture. Each of the above factors requires the Company to use judgment and make estimates in determining the percentages and time periods used for thecalculation. If the Company were to use different percentages or time periods, the fair value of stock-based option awards could be materially different. Stock-based compensation expense for RSUs is measured based on the fair value of the Company’s ordinary shares on the date of grant. The Company recognizesstock-based compensation cost for option awards and RSUs on a straight-line basis over the employee’s requisite service period (primarily a four-year period).Earnings per ShareBasic earnings per share is computed by dividing net income (loss) attributable to ordinary shareholders of Stratasys Ltd., including adjustment ofredeemable non-controlling interest to its redemption amount, by the weighted average number of ordinary shares (including fully vested RSUs) outstandingfor the reporting periods.In computing the Company’s diluted earnings per share, the numerator used in the basic earnings per share computation is adjusted for the dilutive effect,if any, of the Company’s deferred payments liability revaluation to its fair value, as it would have been settled in shares that would result from the assumedissuance of potential ordinary shares. The denominator for diluted earnings per share is a computation of the weighted-average number of ordinary shares andthe potential dilutive ordinary shares outstanding during the period. Potential dilutive shares outstanding include the dilutive effect of in-the-money optionsand unvested RSUs using the treasury stock method, as well as presumed share settlement of the Company’s deferred payments liability and other retentionsettlements in connection with certain prior acquisitions.F-16Table of ContentsSTRATASYS LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSRestructuringThe Company may incur restructuring charges in connection with certain initiatives designed to adjust the Company's cost and operating structure,improve efficiencies across the Company and to better align with the Company’s long-term strategic initiatives and overall market conditions. Restructuringcharges include employee severance and associated termination costs related to the reduction of workforce, costs related to facilities closures, impairmentcharges of long-lived assets and contract termination costs. Restructuring charges for employees’ termination costs are recognized when the required actionsto execute the restructuring initiative were performed and the initiatives are probable and costs are estimable. Restructuring charges for facilities and contractterminations are recognized when the Company ceased using the rights conveyed by the contract. Significant judgments and estimates are involved inestimating the impact of restructuring plans on the Company’s consolidated financial statements. Actual results may differ from these estimates.Business CombinationsFor transactions in which a set of assets is acquired to disposed, the Company has early adopted a new guidance which provides a new framework thatassist in evaluating whether a set of assets should be accounted for as an acquisition of a business or a group of assets. Under the new guidance, the Companyfirst determines whether substantially all of the fair value of a set of assets acquired is concentrated in a single identifiable asset or a group of similaridentifiable assets. If this criteria is met, the set of assets is not considered a business. If this criteria is not met, the Company then evaluates whether the set ofassets include at least one substantive process that together significantly contribute to the ability to create outputs in order to meet the requirement to bedeemed as s business.If the Company has determined that a transaction should be accounted for as a business combination, it allocates the fair value of considerationtransferred in the business combination to the assets acquired, liabilities assumed, and non-controlling interests in the acquired business based on their fairvalues at the acquisition date. Acquisition-related expenses and restructuring costs are recognized separately from the business combination and areexpensed as incurred. The excess of the fair value of the consideration transferred plus the fair value of any non-controlling interest in the acquiree over thefair value of the assets acquired, liabilities assumed in the acquired business is recorded as goodwill. The fair value of the consideration transferred mayinclude a combination of cash, equity securities, earn out payments and deferred payments. The allocation of the consideration transferred in certain casesmay be subject to revision based on the final determination of fair values during the measurement period, which may be up to one year from the acquisitiondate. The cumulative impact of revisions during the measurement period is recognized in the reporting period in which the revisions are identified. TheCompany includes the results of operations of the businesses that it has acquired in its consolidated results prospectively from the respective date ofacquisition.The Company records obligations in connection with its business combinations at fair value on the acquisition date. Each reporting period thereafter, theCompany revalues earn-out payments and certain deferred payments which are classified as liabilities in the consolidated balance sheets and records thechanges in their fair value in the consolidated statements of operations and comprehensive loss. Cash payments to settle the Company’s obligations inconnection with its business combination are classified as cash flows used in financing activities up to the amount of the original obligations and Paymentsmade in excess of the amount of the original obligations are classified as cash flows used in operating activities in the Company's consolidated statements ofcash flows.Changes in the fair value of the obligations in connection with its business combinations can result from adjustments to the discount rates and theCompany’s shares price. These fair value measurements represent Level 3 measurements, as they are based on significant inputs not observable in the market.Significant judgment is required in determining the assumptions utilized as of the acquisition date and for each subsequent measurement period. Actualresults may differ from these estimates.Accordingly, changes in the assumptions described above could have an impact on the Company’s consolidated results of operations.Redeemable Non-controlling InterestsNon-controlling interests with embedded redemption features, such as put options, whose settlement is not at the Company’s discretion, are consideredredeemable non-controlling interests. Redeemable non-controlling interests are considered to be temporary equity and are therefore presented as a mezzaninesection between liabilities and equity on the Company’s consolidated balance sheets. Redeemable non-controlling interests are measured at the greater of theinitial carrying amount adjusted for the non-controlling interest’s share of comprehensive income or loss or its redemption value. Adjustments of redeemablenon-controlling interest to its redemption value are recorded through additional paid-in capital.F-17Table of ContentsSTRATASYS LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSConcentration of Credit RiskFinancial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents, tradereceivables, investment in sales-type leases and foreign currency exchange forward contracts. Most of the Company’s cash and cash equivalents are investedin U.S. dollar instruments with major banks in the U.S., Israel and Europe. Management believes that the credit risk with respect to the financial institutionsthat hold the Company’s cash and cash equivalents is low.Concentration of credit risk with respect to accounts receivable is limited due to the relatively large number of customers and their wide geographicdistribution. In addition, the Company seeks to mitigate its credit exposures to its accounts receivable by credit limits, credit insurance, ongoing creditevaluation and account monitoring procedures.ReclassificationsCertain reclassifications have been made to the prior years’ financial statements to conform to the current year presentation. These reclassifications had nonet effect on previously reported results of operations.Recently issued accounting pronouncementsIn August 2017, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update (“ASU”) which expands the activities thatmay be eligible to qualify for hedge accounting, simplifies the rules for reporting hedging transactions and better portray the economic results of riskmanagement activities in the financial statements. It also amends certain presentation and disclosure requirements and eases certain hedge effectivenessassessment requirements. The new guidance is effective for fiscal year beginning after December 15, 2018, including interim periods within those fiscal years.Early adoption is permitted. The Company is currently evaluating the impact of the adoption of the new guidance on its consolidated financial statements.In February 2017, the FASB issued an ASU which applies to the derecognition of nonfinancial assets and in substance nonfinancial assets tononcustomers, including partial sales, unless other specific guidance applies. The new ASU will not apply to the derecognition of businesses or financialassets, or to contracts with customers. According to the new ASU, when an entity transfers its controlling interest in a nonfinancial asset, but retains a non-controlling ownership interest, the entity will measure the retained interest at fair value. This will result in gain or loss recognition upon the sale of acontrolling interest in a nonfinancial asset. As a result of these changes, the same accounting treatment will be applied to a transfer of a nonfinancial asset inexchange for the non-controlling ownership interest in another entity or other consideration. Current guidance generally prohibits gain recognition on theretained interest. The ASU is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reportingperiod. The Company is currently evaluating the impact of the adoption of the new guidance on its consolidated financial statements.In November 2016, the FASB issued an ASU which requires entities to include amounts generally described as restricted cash and restricted cashequivalents in cash and cash equivalents when reconciling beginning-of-period and end-of-period total amounts shown on the statement of cash flows. TheASU is effective for annual reporting periods (including interim periods within those annual reporting periods) beginning after December 15, 2017. Earlyadoption is permitted. The Company does not expect the adoption of this ASU will have a material impact on its consolidated financial statements.In October 2016, the FASB issued an ASU which eliminates the exception for an intra-entity transfer of an asset other than inventory. This ASU requiresthat the income tax consequences of an intra-entity asset transfer other than inventory are recognized at the time of the transfer, rather than when thetransferred asset is sold to a third party or otherwise recovered through use. The ASU is effective for annual reporting periods (including interim periodswithin those annual reporting periods) beginning after December 15, 2017. Early adoption is permitted as of the beginning of an annual reporting period (asof the first interim period if an entity issues interim financial statements). The new guidance requires adoption on a modified retrospective basis through acumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The Company is currently evaluating the impact ofthe adoption of this guidance on its consolidated financial statements.In March 2016, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update (“ASU”) which simplifies certain aspects ofthe accounting for share-based payments, including, among other items, accounting for income taxes and allowing an entity-wide accounting policy electionto either estimate the number of awards that are expected to vest or account for forfeitures as they occur, rather than to account for them based on an estimateof expected forfeitures. This ASU became effective for the Company on January 1, 2017. Upon the adoption of this ASU, the Company recorded acumulative-effect adjustment to its deferred tax asset related to its net operating losses of approximately $5 million as of January 1, 2017 offset with anincrease to its valuation allowance with respect to previously unrecognized excess tax benefits. Under the new ASU, excess tax benefits or deficienciesrelated to stock option exercises and restricted stock unit vesting are recognized in the statement of operations. The adoption of this ASU does not have amaterial impact on the Company’s results of operations as excess tax benefits generated from the vesting of share-based awards will be recognized in theconsolidated statements of operations, but offset with consideration of the valuation allowance in the Company’s US operations. In addition, upon theadoption of this ASU, the Company has elected as an accounting policy to record forfeitures as they occur, using a modified retrospective transition method.The total cumulative-effect adjustment to retained earnings as of January 1, 2017 was immaterial. Prior periods have not been restated.F-18Table of ContentsSTRATASYS LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSIn February 2016, the FASB issued a new ASU which revises lease accounting guidance. Under the new guidance, lessees will be required to recognize aright-of-use asset and a lease liability for all leases, other than leases that meet the definition of a short-term lease. The liability and the right-of-use assetarising from the lease will be measured as the present value of the lease payments. In addition, this guidance requires disclosure of key information aboutleasing arrangements to increase transparency and comparability among organizations. The new standard is effective for fiscal year beginning after December15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The new standard must be adopted using a modified retrospectivetransition approach, with certain practical expedients. While the Company is currently evaluating the impact of the adoption of the new lease accountingguidance on its consolidated financial statements, the Company expects that the adoption of the new guidance may materially affect the amounts of totalassets and total liabilities reported in its consolidated financial statements upon adoption.In January 2016, the FASB issued an ASU which changes to the current measurement model primarily affects all equity investments in unconsolidatedentities (other than those accounted for using the equity method of accounting), financial liabilities under the fair value option, and the presentation anddisclosure requirements for financial instruments. Under the new ASU equity investments in unconsolidated entities (other than those accounted for using theequity method of accounting) with readily determinable fair values will generally be measured at fair value through earnings. Equity investments that do nothave readily determinable fair values may be measured at fair value or at cost minus impairment, if any, plus or minus changes resulting from observable pricechanges in orderly transactions for the identical or a similar investment of the same issuer. The new guidance is effective for fiscal year beginning afterDecember 15, 2017, including interim periods within those fiscal years. The new guidance requires adoption on a modified retrospective basis through acumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption with other amendments related specifically to equitysecurities without readily determinable fair values applied prospectively. The Company is currently evaluating the impact of the adoption of this guidanceon its consolidated financial statements.In May 2014, and in following related amendments, the FASB issued a new comprehensive revenue recognition guidance on revenue from contracts withcustomers (hereinafter “the Standard”) that will supersede the current revenue recognition guidance. The Standard provides a unified model to determinewhen and how revenue is recognized. The core principle of the Standard is that an entity should recognize revenue to depict the transfer of promised goods orservices to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. TheStandard is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. This Standardmay be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized in retained earnings as of the date ofadoption. The Company has developed a project plan to analyze the potential impact the Standard will have on its consolidated financial statements andrelated disclosures as well as its business processes, systems and controls. This includes reviewing revenue contracts across all revenue streams andevaluating potential differences that would result from applying the requirements under the Standard. The Company will adopt the Standard using themodified retrospective approach in the first quarter of fiscal 2018. The Company has completed its evaluation of the Standard and does not expect a materialchange in its pattern of revenue recognition. In addition, the Standard requires the deferral and amortization of “incremental” costs incurred to obtain acontract. The primary contract acquisition cost for the Company are sales commissions. Under current GAAP, the Company expenses sales commissions asincurred while under the Standard such costs will be classified as a contract asset and amortized over a period that approximates the timing of revenuerecognition on the underlying contracts. The Standard also allows entities to apply certain practical expedients at their discretion. Accordingly, the Companyelected the practical expedient to analyze the contract acquisition cost only on uncompleted contracts. The Company will record an asset on the openingbalance sheet at January 1, 2018 which is not material to the Company's consolidated financial statements.From time to time, new accounting pronouncements are issued by FASB that are adopted by the Company as of the specified effective date. Unlessotherwise discussed, the Company believes that recently issued standards, which are not yet effective, will not have a material impact on the Company’sconsolidated financial statements upon adoption.F-19Table of ContentsSTRATASYS LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSNote 2. Acquisitions and Other Significant Business ActivitiesInvestment in associated companyIn June 2016, the Company made an additional investment in the equity interests of LPW Technology Ltd ("LPW") which offers AM solutions. TheCompany increased its interest in LPW from 10% to approximately 40% and has the ability to exercise significant influence over LPW and thereforeaccounts for this investment under the equity method of accounting. This investment is presented under other non-current assets in the Company’sconsolidated balance sheets.Borrowing AgreementIn December 2016, the Company entered into a secured loan agreement with Bank Hapoalim Ltd (the “Bank Loan”). Pursuant to the Bank Loan, theCompany borrowed $26 million initially and secured a credit line with similar terms for an additional $24 million (the “Credit Line”). The Bank Loan willmature in December 2023 and is payable in equal consecutive quarterly principal installments of principal and accrued interest. The repayment of the BankLoan was secured by a first priority lien in the name of the lender on all of the Company’s rights to its new headquarters property in Rehovot, Israel and itcontains certain subjective acceleration clauses. The Bank Loan bears interest at the rate of LIBOR plus 3.35%. During December 2017, the Companyborrowed $10 million under the Credit Line.Future annual principal payments under the Company’s Bank Loan as of December 31, 2017 are as follows:Loan principal amountYear ending December 31,(U.S. $ in thousands)2018$5,14320195,14320205,14320215,14320225,143Thereafter6,571$32,286Transaction in ChinaOn February 10, 2015, the Company acquired, in consideration for cash, certain assets and assumed certain liabilities of Intelligent CAD/CAMTechnology Ltd., a Hong Kong company. This acquisition was aimed to enable the Company to expand its operations in the Chinese market.Financial information giving effect to this business combination has not been provided, as the acquisition is not material.New Facility in IsraelIn April 2015, the Company purchased the rights to land and a new building complex under construction in Rehovot, Israel (the “Rehovot Campus”). Thenew Rehovot Campus includes approximately 26,300 square meters (approximately 283,900 square feet) of two buildings complex and additional buildingrights for approximately 21,800 square meters (approximately 235,400 square feet). The new Rehovot Campus houses the Company’s Israeli headquarters,research and development facilities and certain marketing activities. The Company entered into the first building of its new Rehovot Campus during January,2017. The second building of the Rehovot Campus is currently under construction. As of December 31, 2017 the Company had invested in the new RehovotCampus and its related equipment approximately $68.2 million.F-20Table of ContentsSTRATASYS LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSRestructuring planIn April 2015, the Company initiated certain restructuring actions that were intended to focus efforts on adjusting its cost and operating structure to betteralign with the market environment, improving and iterating products, developing new 3D printing solutions and expanding its presence in the market. Theserestructuring actions included a reduction in the Company’s global workforce, consolidation of certain facilities, closing of three retail stores and otheractions designed to streamline the Company’s operations and better position itself for market penetration.During 2015 the Company incurred restructuring charges of $26.2 million, including $10.4 million charges related to workforce reductions and $15.8million charges related to facilities consolidation (primarily MakerBot’s facilities), impairments of associated long-lived assets and other related costs. $9.9million, $1.5 million and $14.8 million of these restructuring charges were included in cost of sales, research and development, net and selling, general andadministrative expenses, respectively. Payments for one-time termination benefits in connection with these initiatives were substantially completed in 2016.During 2016 the Company incurred charges of $6.6 million in connection with these initiatives.RTC Rapid Technologies TransactionOn July 1, 2015 the Company acquired, in consideration for cash, 100% of the outstanding shares of RTC Rapid Technologies GmbH (“RTC”), which is akey channel partner in Germany. This acquisition was aimed to strengthen the Company’s presence in Germany, Switzerland and Austria, and enable theCompany to offer full suite of Stratasys 3D printing solutions and services to the installed base of RTC.Financial information giving effect to this business combination has not been provided as the acquisition is not material.Termination of Credit FacilityIn September 2015, the Company terminated its $250 million five-year revolving credit facility under the credit agreement, dated November 7, 2013,with Bank of America, N.A., or BofA, as administrative agent and swing line lender, and the other lenders party thereto (the “Revolving Credit Facility”). Inconnection with the termination of the Revolving Credit Facility, the Company repaid all of its outstanding short-term debt thereunder, in an amount ofapproximately $175 million. That payment was made from the Company’s available cash balances. As a result of the termination of its short-term debt underthe Revolving Credit Facility, the Company recorded additional financial expense of $2.7 million which included write-off of unamortized deferred issuancecosts and fees paid for certain creditors and other third parties.F-21Table of ContentsSTRATASYS LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSNote 3. Fair Value MeasurementThe following tables summarize the Company’s financial assets and liabilities that are carried at fair value on a recurring basis, by fair value hierarchy, inits consolidated balance sheets:December 31, 2017(U.S. $ in thousands) Level 2 Level 3 TotalAssets:Foreign exchange forward contracts not designated as hedging instruments$ 90$ -$ 90Foreign exchange forward contracts designated as hedging instruments263-263 Liabilities:Foreign exchange forward contracts not designated as hedging instruments(921)-(921) $(568)$-$(568) December 31, 2016(U.S. $ in thousands)Level 2Level 3TotalAssets:Foreign exchange forward contracts not designated as hedging instruments$1,440$-$1,440Foreign exchange forward contracts designated as hedging instruments37-37 Liabilities:Foreign exchange forward contracts not designated as hedging instruments(48)-(48)Foreign exchange forward contracts designated as hedging instruments(61)-(61)Obligations in connection with acquisitions-(2,619)(2,619)$1,368$(2,619)$(1,251)The Company’s foreign exchange forward contracts are classified as Level 2, as they are not actively traded and are valued using pricing models that useobservable market inputs, including interest rate curves and both forward and spot prices for currencies (Level 2 inputs).Other financial instruments consist mainly of cash and cash equivalents, current and non-current receivables, net investment in sales-type leases, bankloan, accounts payable and other current liabilities. The fair value of these financial instruments approximates their carrying values.The following table is a reconciliation of the change for those financial liabilities where fair value measurements are estimated utilizing Level 3 inputs,which consist of obligations in connection with acquisitions: 2017 2016(U.S. $ in thousands)Fair value as of January 1,$ 2,619$ 6,991Settlements(3,997)(3,500)Change in fair value recognized in earnings1,378(872)Fair value as of December 31,$-$2,619F-22Table of ContentsSTRATASYS LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSThe Company’s obligations in connection with acquisitions were estimated utilizing Level 3 inputs, were related to the deferred payments for theCompany’s acquisition of Solid Concepts Inc. (the “Solid Concepts transaction”). As part of the Solid Concepts transaction, which was completed in July2014, the Company was obligated to pay additional deferred payments in three separate annual installments after the Solid Concepts transaction date(“deferred payments”). Subject to certain requirements for cash payments, the Company retained the discretion to settle the deferred payments in its shares,cash or any combination of the two. The deferred payments were also subject to certain adjustments based on the Company’s share price. During the thirdquarter of 2017, the Company issued 149,327 ordinary shares valued at $3.5 million and paid cash of $0.5 million to settle the final, third annual installmentof the deferred payments. During the third quarter of 2016, the Company issued 152,633 ordinary shares valued at $3.1 million and paid cash of $0.4 millionto settle the second annual installment of the deferred payments. During the third quarter of 2015, the Company issued 118,789 ordinary shares valued at$4.1 million and paid cash of $0.9 million to settle the first annual installment of the deferred payments.The deferred payments were classified as liabilities and were measured at fair value in the Company’s consolidated balance sheets. The fair value of thedeferred payments was determined based on the closing market price of the Company’s ordinary shares on the Solid Concepts transaction date, adjusted toreflect a discount for lack of marketability for the applicable periods. The discount for lack of marketability was calculated based on the historical volatilityof the Company’s share price and thus represents a Level 3 measurement within the fair value hierarchy. The fair-value revaluations of the deferred paymentsare presented under change in fair value of obligations in connection with acquisitions in the Company’s consolidated statements of operations andcomprehensive loss. During the years ended December 31, 2016 and 2015, the Company recorded a gain of $0.9 million and $23.7 million, respectively, dueto the fair-value revaluation of the deferred payments which included approximately unrealized gains of $0.7 million and $17.5 million, respectively, andrealized gains of $0.1 million and $6.2 million, respectively.Note 4. InventoriesInventories, net consisted of the following:December 31,December 31, 2017 2016(U.S. $ in thousands)Finished goods$63,234$62,728Work-in-process2,2712,389Raw materials50,21252,404$115,717$117,521Note 5. Net Investment in Sales-type LeasesThe Company’s net investment in sales-type leases consisted of the following:December 31,December 31, 2017 2016(U.S. $ in thousands)Future minimum lease payments receivable$ 13,748$ 25,910Less allowance for doubtful accounts(1,575)(844)Net future minimum lease payment receivable12,17325,066Less unearned interest income(526)(1,223)Net investment in sales-type leases$11,647$23,843F-23Table of ContentsSTRATASYS LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSFuture minimum lease payments due from customers under sales-type leases as of December 31, 2017 were as follows:U.S . $ in thousandsYear ending December 31,2018$9,17020193,13020201,2182021230$13,748The interest income for sales-type leases is recorded in financial income (expense), net and amounted to approximately $0.7 million, $1.0 million and$1.0 million for the years ended December 31, 2017, 2016 and 2015, respectively.Note 6. Property, Plant and EquipmentProperty, plant and equipment, net consisted of the following:December 31,December 31, 2017 2016(U.S. $ in thousands)Machinery and equipment$ 133,656$ 128,187Buildings and improvements131,993121,970Computer equipment and software48,23748,917Office equipment, furniture and fixtures17,89316,393Land19,23419,591351,013335,058Accumulated depreciation(155,147)(131,327)195,866203,731Construction work in progress4,0854,684$199,951$208,415Depreciation expenses were $31.6 million, $33.8 million and $33.4 million in the years ended December 31, 2017, 2016 and 2015, respectively.Note 7. GoodwillChanges in the carrying amount of the Company’s goodwill for the years ended December 31, 2017 and 2016 were as follows: 2017 2016(U.S. $ in millions)Goodwill as of January 1,$ 385.6$ 383.9Translation differences1.51.7Goodwill as of December 31,$387.1$385.6F-24Table of ContentsSTRATASYS LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSGoodwill impairment charges for the year ended December 31, 2017During the fourth quarter of 2017, the Company performed a quantitative assessment for goodwill impairment for its Stratasys-Objet reporting unit.Following its quantitative assessment, the Company concluded that the fair value of Stratasys-Objet reporting unit exceeded its carrying amount byapproximately 7%, with a carrying amount of goodwill assigned to this reporting unit in the amount of $387 million.When evaluating the fair value of Stratasys-Objet reporting unit the Company used a discounted cash flow model which utilized Level 3 measures thatrepresent unobservable inputs into our valuation method. Key assumptions used to determine the estimated fair value include: (a) expected cash flow for 5years following the assessment date which (including expected revenue growth, costs to produce, operating profit margins and estimated capital needs); (b)an estimated terminal value using a terminal year growth rate of 3.1% determined based on the growth prospects of the reporting unit; and (c) a discount rateof 14.0% based on management’s best estimate of the after-tax weighted average cost of capital. If any of these were to vary materially from our plans, wecould face impairment of goodwill allocated to this reporting unit in the future.A hypothetical decrease in the growth rate of 1% or an increase of 1% to the discount rate would have reduced the fair value of Stratasys-Objet reportingunit by approximately $48 million and $88 million, respectively.Based on the Company’s assessment as of December 31, 2017, no goodwill was determined to be impaired.Determining the fair value of Stratasys-Objet reporting unit requires significant judgment, including judgments about the appropriate discount rates,terminal growth rates, weighted average costs of capital and the amount and timing of projected future cash flows. The Company will continue to monitor thefair value of its Stratasys-Objet reporting unit to determine whether events and changes in circumstances such as further deterioration in the business climateor operating results, further significant decline in our share price, changes in management’s business strategy or downward changes of our cash flowsprojections, warrant further interim impairment testing.Goodwill impairment charges for the year ended December 31, 2016During the fourth quarter of 2016, the Company performed a quantitative assessment for goodwill impairment for its Stratasys-Objet reporting unit.Following its quantitative assessment, the Company concluded that the fair value of Stratasys-Objet reporting unit exceeded its carrying amount byapproximately 5%, with a carrying amount of goodwill assigned to this reporting unit in the amount of $386 million.Based on the Company’s assessment as of December 31, 2016, no goodwill was determined to be impaired.F-25Table of ContentsSTRATASYS LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSGoodwill impairment charges for the year ended December 31, 2015During 2015, the Company determined that certain indicators of potential impairment existed that required interim goodwill impairment analysis.Accordingly, the Company performed a quantitative two-step assessment for goodwill impairment for each of its reporting units as described below.During the first quarter of 2015, the Company performed a quantitative assessment for goodwill impairment for its MakerBot reporting unit. TheCompany updated its Makerbot reporting unit cash flow projections and related assumptions based on the indicators mentioned above and performed thetwo-step goodwill impairment test. As a result of the two-step goodwill impairment test, the carrying amount of goodwill assigned to the MakerBot reportingunit exceeded its implied fair value and the Company recorded a non-tax deductible impairment charge of $150.4 million, in order to reduce the carryingamount of goodwill to its implied fair value.During the third quarter of 2015, the Company determined that additional indicators of potential impairment existed that required an interim goodwillimpairment analysis for all of its reporting units.Accordingly, the Company updated its cash flow projections and related assumptions for each of its reporting units and performed a two-step goodwillimpairment test which was completed during the fourth quarter of 2015. The impairment analysis performed as part of the step two of the goodwillimpairment test determined that the carrying amount of goodwill assigned exceeded its implied fair value for each of the Company’s reporting units.Therefore, the Company recorded impairment charges in a total amount of $792.0 million in order to reduce the carrying amount of goodwill to its impliedfair value for each of its reporting units.As of December 31, 2015, the remaining goodwill balance of $384 million was assigned to the Stratasys-Objet reporting unit and there was no remaininggoodwill balance assigned to the Company’s other reporting units.Note 8. Other Intangible AssetsOther intangible assets consisted of the following:December 31, 2017December 31, 2016Carrying Amount,NetCarrying Amount,NetNet ofAccumulatedBookNet ofAccumulatedBookImpairmentAmortizationValueImpairmentAmortizationValueU.S. $ in thousandsDeveloped technology $304,601 $(220,420) $84,181 $304,766 $(198,632) $106,134Patents19,708(14,279)5,42919,009(12,257)6,752Trademarks and trade names27,248(18,245)9,00327,819(16,849)10,970Customer relationships106,203(63,435)42,768106,571(54,258)52,313Capitalized software development costs19,541(18,800)74119,540(18,251)1,289$ 477,301$ (335,179)$ 142,122$ 477,705$ (300,247)$ 177,458During 2017, the Company recorded impairment charges of $2.2 million related to certain of its intangible assets.Other intangible assets impairment charges for the year ended December 31, 2016During 2016, the Company assessed the recoverability of certain of its definite-life intangibles assets based on their projected undiscounted future cashflows expected to result from each intangible asset. Based on the results of the recoverability assessment, the Company determined that the carrying values ofcertain of its intangible assets exceeds their undiscounted cash flows projections and therefore were not recoverable. For those unrecoverable intangibleassets that considered to be impaired, the Company recorded impairment charges of $16.9 million during 2016, in order to reduce the carrying amount ofthose intangible assets to their estimated fair value. Impairment charges of $1.8 million related to developed technology intangible assets were classified ascosts of sales, and $15.1 million related to customer relationships, trade names, capitalized software development costs and patents were classified as selling,general and administrative expenses.F-26Table of ContentsSTRATASYS LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSIn addition, the Company recorded $1 million impairment charge for the full carrying value of its IPR&D project.Other intangible assets impairment charges for the year ended December 31, 2015Prior to conducting the quantitative assessments for goodwill impairment of its reporting units during 2015, the Company tested the recoverability of itsreporting units' long-lived assets, including its purchased intangible assets.The Company assessed the recoverability of its definite-life intangibles assets based on their projected undiscounted future cash flows expected to resultfrom each intangible asset. Based on the results of the recoverability assessment, the Company determined that the carrying values of certain of its intangibleassets exceeds their undiscounted cash flows projections and therefore were not recoverable. For those unrecoverable intangible assets that considered to beimpaired, the Company recorded impairment charges of $260.3 million during 2015, in order to reduce the carrying amount of those intangible assets to theirestimated fair value. Impairment charges of $191.2 million related to developed technology intangible assets were classified as costs of sales, and $68.8million related to customer relationships, trade names and non-compete agreements intangible assets were classified as selling, general and administrativeexpenses.In addition, the Company reviewed for impairment its indefinite-life intangible assets, which consists of IPR&D projects. Based on the results of theimpairment assessment, the Company determined that the carrying value of certain of its IPR&D projects exceeded their fair value. Accordingly, theCompany recorded impairment charges of $18.2 million, related to its in-process research and development projects, which were classified as research anddevelopment expenses, in order to reduce the carrying amount of those intangible assets to their estimated fair value.Amortization expenseAmortization expense relating to intangible assets for the years ended December 31, 2017, 2016 and 2015, was approximately $35.0 million, $59.0million and $75.0 million, respectively. The decrease in amortization expense in 2017 was primarily due to change in the estimated useful lives of certainintangibles assets, which reduced the Company's amortization expense by $20.5 million and resulted in a decrease of $18.3 million in the Company's net lossand a decrease of $0.35 in the Company's basic and diluted loss per share. The decrease in amortization expense in 2016 was primarily due impairmentcharges recorded in 2015, as mentioned above.As of December 31, 2017, estimated future amortization expense relating to definite life intangible assets for each of the next five years and thereafterwere as follows: Estimated amortizationexpenseYear ending December 31,(U.S. $ in thousands)2018$32,523201932,190202031,852202131,281202210,553Thereafter3,723Total$142,122F-27Table of ContentsSTRATASYS LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSNote 9. Income Taxesa. Deferred Tax Assets and LiabilitiesThe components of the Company’s deferred tax assets and liabilities as of December 31, 2017 and 2016 were as follows:December 31, December 31,20172016 (U.S. $ in thousands)Deferred tax assetsTax losses carry forwards$ 114,107$ 139,914Inventory related2,58412,124Intangibles assets23,14338,379Provision for employee related obligations1,4633,568Stock-based compensation expense4,8876,040Deferred revenue2,0363,211Property, plant and equipment9241,140Allowance for doubtful accounts646645Foreign currency losses421587Research and development credit carry forwards11,2889,998Other items1,3831,560Gross deferred tax assets162,882217,166Valuation allowance(152,062)(201,376)Total deferred tax assets$10,820$15,790 Deferred tax liabilitiesIntangibles assets$(13,658)$(17,053)Property, plant and equipment(3,581)(2,662)Total deferred tax liabilities$(17,239)$(19,715)Net deferred tax liabilities$(6,419)$(3,925)The Company’s deferred tax assets and liabilities are classified in the consolidated balance sheets as follows:December 31,December 31,20172016(U.S. $ in thousands)Deferred tax assets (under "Other non-current assets")$650 $2,027Deferred tax liabilities7,0695,952Net deferred tax liabilities$ (6,419)$ (3,925)F-28Table of ContentsSTRATASYS LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSAs of December 31, 2017 and 2016 the Company had a tax net operating losses carry-forward of approximately $486 million and $381 million,respectively, related to its U.S. subsidiaries. The tax net operating losses carry-forward resulted in deferred tax assets of approximately $114 million and $140million, as of December 31, 2017 and 2016, respectively. As a result of losses incurred by its U.S. subsidiaries in the last few years, and since the near-termrealization of these assets is uncertain, the Company provided a full valuation allowance for its deferred tax assets related to its U.S. subsidiaries that are notexpected to be realized.Significant judgment is required in determining any valuation allowance recorded against deferred tax assets. In assessing the need for a valuationallowance, the Company considered all available evidence, including past operating results, the most recent projections for taxable income, and prudent andfeasible tax planning strategies. The Company reassess its valuation allowance periodically and if future evidence allows for a partial or full release of thevaluation allowance, a tax benefit will be recorded accordingly.Included in the net deferred tax liability are net operating loss and credit carryovers of $125.5 million which expire in years ending from December 31,2022 through December 31, 2037. The net decrease in the net deferred tax liability from 2016 to 2017 is driven by the US federal tax rate reduction discussedimmediately below.On December 22, 2017, the Tax Cuts and Jobs Act (the“Act”) was enacted into law. The new legislation represents fundamental and dramaticmodifications to the U.S. tax system. The Act contains several key tax provisions that will impact the Company's U.S. subsidiaries, including the reduction ofthe maximum U.S. federal corporate income tax rate from 35% to 21%, effective January 1, 2018. Other significant changes under the Act include, amongothers, a one-time repatriation tax on accumulated foreign earnings, a limitation of net operating loss deduction to 80% of taxable income, and indefinitecarryover of post-2017 net operating losses. The Act also repeals the corporate alternative minimum tax for tax years beginning after December 31, 2017.Losses generated prior to January 1, 2018 will still be subject to the 20-year carryforward limitation and the alternative minimum tax. Other potential impactsdue to the Act include the repeal of the domestic manufacturing deduction, modification of taxation of controlled foreign corporations, a base erosion anti-abuse tax, modification of interest expense limitation rules, modification of limitation on deductibility of excessive executive compensation, and taxation ofglobal intangible low-taxed income.U.S. GAAP requires that the impact of tax legislation be recognized in the period in which the law was enacted. Due to the net operating losses discussedabove, the Company revalued its valuation allowance and deferred tax assets at the statutory 21% rate that will be in effect in 2018 and forward. TheCompany has made reasonable estimates of the effects on its deferred tax balances. The provisional impact of this rate change was recorded in the fourthquarter of 2017 and there was a reduction of $65.6 million in the valuation allowance, offset by a reduction of $65.6 million in the deferred tax assets. TheAct had no impact on the valuation allowance assessment of the U.S. subsidiaries.Because of the complexity of the new intangible income rules, Global Intangible Low-Taxed Income (GILTI) and Foreign Derived Intangible Income(FDII) tax rules, the Company continues to evaluate these provisions of the Act and the application of ASC 740, Income Taxes. Under U.S. GAAP, theCompany is allowed to make an accounting policy choice of either (1) treating taxes due or receivable on future U.S. inclusions/deductions in taxableincome related to GILTI and FDII as a current-period expense/benefit when incurred (the “period cost method”) or (2) factoring such amounts into theCompany's measurement of its deferred taxes (the “deferred method”). The Company's selection of an accounting policy with respect to the new GILTI/FDIItax rules will depend, in part, on analyzing its global income to determine whether it expects to have future U.S. inclusions or deductions in taxable incomerelated to GILTI/FDII and, if so, what the impact is expected to be. Whether the Company expects to have future U.S. inclusions or deductions in taxableincome related to GILTI/FDII depends not only on the Company's current structure and estimated future results of global operations, but also its intent andability to modify its structure. The Company is currently in the process of analyzing its structure and, as a result, is not yet able to reasonably estimate theeffect of these provisions of the Act. Therefore, the Company has not made any adjustments related to potential GILTI or FDII tax impact in its financialstatements and has not made a policy decision regarding whether to record deferred tax on GILTI/FDII.The tax impacts discussed above represent provisional amounts and the Company's current best estimates. The SEC issued SAB 118 which providesguidance on the accounting for the tax effects of the Act. In accordance with this guidance, any material adjustments recorded to the provisional amounts willbe disclosed in a 2018 reporting period by the fourth quarter of 2018. The provisional amounts incorporate assumptions made based upon the Company'scurrent interpretation of the Act and may change as the Company reviews the interpretations and assumptions, receives implementation guidance from theInternal Revenue Service, and assesses any actions it may take based on the Act.The Company believes that all future profits of its subsidiaries will be indefinitely reinvested or that there is no expectation to distribute any taxabledividends from these subsidiaries. The determination of the amount of the unrecognized deferred tax liability related to the undistributed earnings isestimated as a non-material amount.F-29Table of ContentsSTRATASYS LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSb. Provision for Income TaxesLoss before income taxes for the years ended December 31, 2017, 2016 and 2015 was as follows:201720162015 (U.S. $ in thousands)Domestic$(98) $(11,783) $(635,721)Foreign(29,378)(74,576)(748,110)$ (29,476)$ (86,359)$ (1,383,831)The components of income taxes for the years ended December 31, 2017, 2016 and 2015 were as follows: 2017 2016 2015(U.S. $ in thousands)CurrentDomestic$10,574$6,242$4,564Foreign1,248(5,310)8,304 11,82293212,868 DeferredDomestic(4,497)(9,851)(18,607)Foreign1,948(527)(4,581)(2,549) (10,378)(23,188)Total income taxes$9,273$(9,446)$ (10,320)A reconciliation of the statutory income tax rate and the effective tax rate for the years ended December 31, 2017, 2016 and 2015 is set forth below: 2017 2016 2015Statutory tax rate24.0%25.0%26.5%Approved and Privileged enterprise benefits15.77.0(0.4)Goodwill impairment--(15.3) Revaluation of obligations in connection with acquisitions--0.2US Tax Act enactment(222.5)--Stock compensation expense(5.3)(2.4)(0.4)Tax contingencies(30.8)(4.7)(0.3)Non-deductible acquisition expenses(0.6)(0.2)(0.1)Earning taxed under foreign law43.334.41.4Valuation Allowance144.4(57.0)(11.0)Changes to the prior year’s tax assessment(1.2)7.9-Other1.50.90.1Effective income tax rate(31.5)%10.9%0.7%For the year ended December 31, 2017, the above rate reconciliation table reflects the Company’s valuation allowance on its US deferred tax assets, theimpact of the US Tax Act due to revaluation of its net operating losses, and changes to uncertain tax positions, offset by the mix of foreign taxable incomeand loss and an income tax benefit attributable to one of the Company’s foreign subsidiaries that received a favorable tax ruling from the tax authorities in2016.F-30Table of ContentsSTRATASYS LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSUncertain tax positionsSignificant judgment is required in evaluating the Company’s tax positions and determining its provision for income taxes. During the ordinary course ofbusiness, there are many transactions and calculations for which the ultimate tax determination is uncertain. The Company establishes reserves for tax-relateduncertainties based on estimates of whether, and the extent to which, additional taxes will be due. These reserves are established when the Company believesthat certain positions might be challenged despite its belief that its tax return positions are fully supportable. The Company adjusts these reserves in light ofchanging facts and circumstances, such as the outcome of a tax audit or changes in the tax law. The provision for income taxes includes the impact of reserveprovisions and changes to reserves that are considered appropriate.As of December 31, 2017, 2016 and 2015, the Company had unrecognized tax benefits of $27.3 million, $18.0 million, and $13.9 million, respectively. Ifrecognized, these benefits would favorably impact the effective tax rate. A reconciliation of the beginning and ending balance of unrecognized tax benefits isas follows: 2017 2016 2015(U.S. $ in thousands)Balance at beginning of year18,000$13,930$8,552Additions for tax positions related to the current year8,7774,0394,116Foreign currency fluctuation1,242--Adjustments for tax positions related to previous years(687)1291,987Reduction of reserve for statute expirations(15)(98)(725)Balance at end of year$ 27,317$ 18,000$ 13,930The Company’s accrual for estimated interest and penalties was $942 thousand as of December 31, 2017. The Company does not expect uncertain taxpositions to change significantly over the next twelve months.The Company is subject to income taxes in the U.S., various states, Israel and certain other foreign jurisdictions. The Company files income tax returns invarious jurisdictions with varying statutes of limitations. Tax returns of Stratasys Inc. submitted in the United States through 2012 tax year are considered tobe final following the completion of the Internal Revenue Service examination. Tax returns of Stratasys Ltd. submitted in Israel through the 2012 tax year areconsidered to be final following the completion of the Israeli Tax Authorities examination upon audit. The expiration of the statute of limitations related tothe various other foreign and state income tax returns that the Company and its subsidiaries file vary by state and foreign jurisdiction.F-31Table of ContentsSTRATASYS LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSc. Basis of taxation:The enacted statutory tax rates applicable to the Company’s major subsidiaries outside of Israel are as follows:Company incorporated in the U.S.—tax rate of approximately 35% through December 31, 2017 and 21% beginning 2018.Company incorporated in Germany—tax rate of approximately 28%.Company incorporated in Hong Kong—tax rate of 16.5%.A significant portion of the Company’s income is taxed in Israel. The following is a summary of how the Company’s income is taxed in Israel:Corporate tax rates in Israel are as follows: 2014 and 2015-26.5%, 2016-25%, 2017-24% and 2018 and thereafter-23%. The Company elected to computeits taxable income in accordance with Income Tax Regulations (Rules for Accounting for Foreign Investors Companies and Certain Partnerships and Settingtheir Taxable Income), 1986. Accordingly, the Company’s taxable income or loss is calculated in U.S. dollars. Applying these regulations reduces the effectof foreign exchange rate fluctuations (of the NIS in relation to the U.S. dollar) on the Company’s Israeli taxable income.Tax benefits under the Law for Encouragement of Capital Investments, 1959 (the “Investment Law”)Various industrial projects of the Company have been granted “Approved Enterprise” and “Beneficiary Enterprise” status, which provides certainbenefits, including tax exemptions for undistributed income and reduced tax rates. Income not eligible for Approved Enterprise and Beneficiary Enterprisebenefits is taxed at the regular corporate rate, which was 24% in 2017.The Company is a Foreign Investors Company, or FIC, as defined by the Investment Law. FICs are entitled to further reductions in the tax rate normallyapplicable to Approved Enterprises and Beneficiary Enterprises, depending on the level of foreign ownership. When foreign (non-Israeli) ownership equal orexceeds 90%, the Approved Enterprise and Beneficiary Enterprise income is either tax-exempt for a limit period between two to ten years depending on thelocation of the enterprise or taxable at a tax rate of 10% for a 10-year period. The Company cannot assure that it will continue to qualify as a FIC in the futureor that the benefits described herein will be granted in the future.In the event of distribution of dividends from the said tax-exempt income during the tax exemption period as described above, the amount distributedwill be subject to tax in respect of the amount of dividend distributed (grossed up to reflect such pre-tax income that it would have had to earn in order todistribute the dividend) at the corporate tax rate that would have been otherwise applicable if such income had not been tax-exempted under the alternativebenefits program. This rate generally ranges from 10% to 25%, depending on the level of foreign investment in the company in each year, as explainedabove, Dividends paid out of income attributed to Approved Enterprise or Beneficiary Enterprise (or out of dividends received from a company whoseincome is attributed to an Approved or Beneficiary Enterprise) are generally subject to withholding tax at the source at the rate of 15%, unless a lower rate isprovided in a treaty between Israel and the shareholder’s country of residence (subject to the receipt in advance of a valid certificate from the Israel TaxAuthority allowing for a reduced tax rate). The 15% tax rate is limited to dividends and distributions out of income derived during the benefits period andactually paid at any time up to 12 years thereafter. After this period, the withholding tax is applied at a rate of up to 30%, or at the lower rate under anapplicable tax treaty (subject to the receipt in advance of a valid certificate from the Israel Tax Authority allowing for a reduced tax rate). In the case of anFIC, the 12-year limitation on reduced withholding tax on dividends does not apply.The entitlement to the above benefits is conditional upon the Company’s fulfilling the conditions stipulated by the Investment Law and regulationspublished thereunder. Should the Company fail to meet such requirements in the future, income attributable to its Approved Enterprise and BeneficiaryEnterprise programs would be subject to the statutory Israeli corporate tax rate and the Company would be required to refund a portion of the tax benefitsalready received with respect to such programs. The refund will be subject to interest and index changes as applicable the law or other monetary penalty.The Company does not intend to distribute any amounts of its undistributed tax-exempt income as dividends, as it intends to reinvest its tax-exemptincome within the Company. Accordingly, no deferred income taxes have been provided on income attributable to the Company’s Approved or BeneficiaryEnterprise programs, as the undistributed tax exempt income is essentially permanent in duration.As of December 31, 2017, tax-exempt income of approximately $229.4 million is attributable to the Company’s various Approved and BeneficiaryEnterprise programs. If such tax exempt income is distributed, it would be taxed at the reduced corporate tax rate applicable to such income, and taxes ofapproximately $22.9 million would be incurred as of December 31, 2017.A January 2011 amendment to the Investment Law (the “2011 Amendment”) created alternative benefit tracks to those previously in place, as follows: aninvestment grants track designed for enterprises located in certain development zones and two new tax benefits tracks (“Preferred Enterprise” and “SpecialPreferred Enterprise”), which provide for application of a unified tax rate to all preferred income of the company, as defined in the Investment Law.F-32Table of ContentsSTRATASYS LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSThe 2011 Amendment canceled the availability of the benefits granted in accordance with the provisions of the Investment Law prior to 2011 and,instead, introduced new benefits for income generated by a “Preferred Company” through its "Preferred Enterprise" (as such terms are defined in theInvestment Law) effective as of January 1, 2011 and thereafter. A Preferred Company is defined as either (i) a company incorporated in Israel which is notwholly owned by a governmental entity, or (ii) a limited partnership that: (a) was registered under the Israeli Partnerships Ordinance, and (b) all of its limitedpartners are companies incorporated in Israel, but not all of them are governmental entities; which has, among other things, Preferred Enterprise status and iscontrolled and managed from Israel. Pursuant to the 2011 Amendment, a Preferred Company was entitled to a reduced corporate tax rate of 16% with respectto its preferred income attributed to its Preferred Enterprise, unless the Preferred Enterprise was located in a certain development zone, in which case the ratewas 9%. In 2017 and thereafter, the corporate tax rate for Preferred Enterprise which is located in a certain development zone was decreased to 7.5%, while thereduced corporate tax rate for other development zones remains 16%.Dividends paid out of preferred income attributed to a Preferred Enterprise is generally subject to withholding tax at source at the rate of 20%, or suchlower rate as may be provided in an applicable tax treaty (subject to the receipt in advance of a valid certificate from the Israel Tax Authority allowing for areduced tax rate). However, if such dividends are paid to an Israeli company, no tax is required to be withheld (although, if such dividends are subsequentlydistributed to individuals or a non-Israeli company, withholding tax at a rate of 20% or such lower rate as may be provided in an applicable tax treaty willapply.Tax benefits under the Israeli Law for the Encouragement of Industry (Taxation), 1969The Company is an “Industrial Company” as defined by the Israeli Law for the Encouragement of Industry (Taxation), 1969, and, as such, is entitled tocertain tax benefits including accelerated depreciation, deduction of public offering expenses in three equal annual installments and amortization of otherintangible property rights for tax purposes.F-33Table of ContentsSTRATASYS LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSNote 10. Commitments and Contingenciesa. CommitmentsThe Company leases certain of its facilities under non-cancellable operating leases, which expire through 2023.Future minimum annual lease payments under all non-cancelable operating leases with an initial term in excess of one year as of December 31, 2017 areas follows:Minimum futureoperating lease paymentsYear ending December 31,(U.S. $ in thousands)2018$9,24320196,94120205,80020214,17820222,314Thereafter79729,273Rent expense for the years ended December 31, 2017, 2016 and 2015 was approximately $10.0 million, $14.0 million and $14.3 million, respectively.b. ContingenciesClaims Related to Company EquityOn March 4, 2013, five current or former minority shareholders (two of whom were former directors) of the Company filed two lawsuits against theCompany in an Israeli central district court. The lawsuits demanded that the Company amend its capitalization table such that certain share issuances prior tothe Stratasys-Objet merger to certain of Objet’s shareholders named as defendants would be cancelled, with a consequent issuance of additional shares to theplaintiffs to account for the subsequent dilution to which they have been subject. The lawsuits also named as defendants Elchanan Jaglom, Chairman of theCompany’s board of directors, in one of the lawsuits, Ilan Levin, the Company’s Chief Executive Officer and director, various shareholders of the Companywho were also shareholders of Objet, and David Reis, a director.The Company filed its statements of defense in May 2013 denying the plaintiffs’ claims. In 2015, the court dismissed the lawsuit of one of the formerdirectors due to lack of cause. In February 2017, the parties reached an agreement pursuant to which all claims were settled at no material cost to theCompany. Notice of the settlement was provided and the suits were subsequently dismissed.Securities Law Class ActionsOn February 5, 2015, a lawsuit styled as a class action was commenced in the United States District Court for the District of Minnesota, naming theCompany and certain of the Company’s officers as defendants. Similar actions were filed on February 9 and 20, 2015 in the Southern District of New Yorkand the Eastern District of New York, respectively. The lawsuits allege violations of the Securities Exchange Act of 1934 in connection with allegedly falseand misleading statements concerning the Company’s business and prospects. The plaintiffs seek damages and awards of reasonable costs and expenses,including attorneys’ fees.F-34Table of ContentsSTRATASYS LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSOn April 15, 2015, the cases were consolidated for all purposes, and on April 24, 2015, the Court entered an order appointing lead plaintiffs andapproving their selection of lead counsel for the putative class. On July 1, 2015, lead plaintiffs filed their consolidated complaint. On August 31, 2015, thedefendants moved to dismiss the consolidated complaint for failure to state a claim. The Court heard the motion on December 11, 2015. On June 30, 2016,the Court granted defendants’ motion to dismiss with prejudice and entered judgment in favor of defendants. On July 29, 2016, lead plaintiffs filed a noticeof appeal to the United States Court of Appeals for the Eighth Circuit from the Court’s judgment. On September 22, 2016, lead plaintiffs filed the openinginitial brief in support of their appeal. On October 24, 2016, defendants filed their answering brief to the appeal. On November 18, 2016, lead plaintiffs filedtheir reply brief in support of the appeal. Oral arguments for appeal were held on March 9, 2017. On July 25, 2017, the Eighth Circuit entered an order andjudgment affirming the Court’s dismissal with prejudice.Patent Law-Based ClaimOn November 23, 2017, a former employee, whose employment had been terminated by the Company in 2008 and who had previously unsuccessfullyfiled a suit against the Company, brought an additional proceeding against the Company under Section 134 of the Israeli Patent Law seeking compensationand royalties for service inventions he invented while he served as an employee of the Company. In this new proceeding, the former employee claims to beentitled to receive royalties in an amount equal to: (a) 20% of the benefits, revenues and /or savings generated by the Company in the past and in the future,including the rise in the value of the Company, as determined in the merger with Stratasys Inc., which took place in December 2012; (b) 20% of the grossprofit generated by the Company in the past and 9% of the gross profit produced and that will be produced by the Company; (c) 20% of the gross profitgenerated by the Company in the past and the relative share of the former Objet entity of the Company in the total gross profit produced and that will beproduced by the Company; or (d) 20% of the value of the service inventions at issue. The former employee further sought an order of accounts. The Companyrejects the claims that serve as a basis for the proceeding and intends to defend against them vigorously.The Company is a party to various other legal proceedings, the outcome of which, in the opinion of management, will not have a significant adverseeffect on the financial position or profitability of the Company.Note 11. Equitya. Share capitalThe Company’s issued share capital is composed of ordinary shares at NIS 0.01 par value. Ordinary shares confer upon their holders the right to receivenotice to participate and vote in general meetings of the Company, and the right to receive dividends if declared.The Company’s ordinary shares are traded in the United States on the Nasdaq Global Select Market under the ticker symbol “SSYS”. As of December 31,2017 and 2016, there were 53,631 thousand ordinary shares and 52,639 thousand ordinary shares issued and outstanding, respectively. The increase in theoutstanding and issued ordinary shares during 2017 was attributable to exercises of stock options and RSUs under the Company’s stock-based compensationplans as well as shares issued related to deferred consideration in connection with business combination transactions.b. Stock-based compensation plansThe Stratasys Ltd. 2012 Omnibus Equity Incentive Plan (the “2012 Plan”), which became effective upon closing of the Stratasys-Objet merger, providesfor the grant of options, restricted shares, restricted share units (“RSUs”) and other share-based awards to the Company’s and its subsidiaries’ respectivedirectors, employees, officers, consultants, and advisors and to any other person whose services are considered valuable to the Company or any of itsaffiliates. Under the 2012 plan, options and RSUs generally have a contractual term of ten years from the grant date. Options granted become exercisable andRSUs are vested over the vesting period, which is normally a four-year period beginning on the grant date, subject to the employee’s continuing service tothe Company. As of December 31, 2017, 1.9 million shares were available for equity awards under the 2012 plan. On January 1, 2018, the reserve pool underthe 2012 plan was automatically increased by 0.5 million shares.Stock optionsA summary of the stock option activity for the year ended December 31, 2017 is as follows: Weighted AverageNumber of OptionsExercise PriceOptions outstanding as of December 31, 2016 2,615,461$37.21Granted2,139,69820.41Exercised(604,536)10.84Forfeited(819,670)35.89Options outstanding as of December 31, 20173,330,953$31.53Options exercisable as of December 31, 20171,109,094$49.68F-35Table of ContentsSTRATASYS LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSThe following table summarizes information about stock options outstanding at December 31, 2017:Options OutstandingOptions Exercisable Outstanding Weighted- Average Exercisable options atRemainingWeighted- Averageoptions atWeighted- AverageRange ofDecember 31,ContractualExerciseDecember 31,ExerciseExercise Prices2017Life in YearsPrice2017Price$2.74-$9.3214,5394.08$6.77$14,536$6.77$ 19.66-$19.661,351,3858.9419.6630,33919.66$19.96-$24.66887,3988.5721.94282,36722.55$27.83-$ 120.511,077,6315.5254.59781,85261.453,330,953$7.71$31.531,109,094$49.68 Aggregate intrinsic value (U.S. $ in thousands)$597$201As of December 31, 2017, the weighted-average remaining contractual life of exercisable options was 5.5 years. The total intrinsic value of optionsexercised during 2017, 2016 and 2015 was approximately $7.2 million, $1.5 million and $4.6 million, respectively.The Company used the Black-Scholes option-pricing model to determine the fair value of options granted during 2017, 2016 and 2015. The followingassumptions were applied in determining the options’ fair value on their grant date:2017 2016 2015Risk-free interest rate1.8%-2.2%1.1%-1.5%1.6% - 1.9%Expected option term (years)5.1-6.05.2-6.06Expected share price volatility52.6%-54.0%53.6%-56.1%50.1%-53.5%Dividend yield---Weighted average grant date fair value$11.10$12.36$15.49As of December 31, 2017, the Company had 2.2 million unvested options. As of December 31, 2017, the unrecognized compensation cost related to allunvested, equity-classified stock options of $22.3 million is expected to be recognized as an expense on a straight-line basis over a weighted-average periodof 2.9 years.Restricted Stock UnitsA summary of the Company’s RSUs activity for the year ended December 31, 2017 is as follows: Weighted AverageNumber of RSUsGrant Date FairUnvested RSUs outstanding as of December 31, 2016267,756$72.17Granted278,51420.18Vested (130,884)75.09Forfeited(113,223)51.10Unvested RSUs outstanding as of December 31, 2017302,163$30.88F-36Table of ContentsSTRATASYS LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSThe total vesting-date value of equity classified RSUs vested during 2017 was $2.9 million. As of December 31, 2017, the unrecognized compensationcost related to all unvested equity classified RSUs of $6.8 million is expected to be recognized as an expense on a straight-line basis over a weighted-averageperiod of 2.8 years.Stock-based compensation expense for stock options and equity classified RSUs included in the Company’s Statements of Operations were allocated asfollows:2017 2016 2015(U.S. $ in thousands)Cost of sales$2,580$2,780$5,381Research and development, net3,5034,7685,759Selling, general and administrative11,63913,22518,870Total stock-based compensation expenses$ 17,722$ 20,773$ 30,010c. Accumulated other comprehensive lossThe following tables present the changes in the components of accumulated other comprehensive loss, net of taxes for the years ended December 31,2017, 2016 and 2015:Year ended December 31, 2017Net unrealized gain Foreign currency (loss) on cash flowtranslationhedgesadjustmentsTotalU.S. $ in thousandsBalance as of January 1, 2017$(24)$(13,455)$ (13,479)Other comprehensive loss before reclassifications1,3155,8347,149Amounts reclassified from accumulated other comprehensive loss(961)268(693)Other comprehensive income (loss)3546,1026,456Balance as of December 31, 2017$330$(7,353)$(7,023)F-37Table of ContentsSTRATASYS LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSYear ended December 31, 2016 Net unrealized gain Foreign currency (loss) on cash flowtranslationhedgesadjustmentsTotalU.S. $ in thousandsBalance as of January 1, 2016$(107)$(10,667)$(10,774)Other comprehensive loss before reclassifications523(2,788)(2,265)Amounts reclassified from accumulated other comprehensive loss(440)-(440)Other comprehensive income (loss)83(2,788)(2,705)Balance as of December 31, 2016$(24)$(13,455)$(13,479) Year ended December 31, 2015Net unrealized gainForeign currency(loss) on cash flowtranslationhedgesadjustmentsTotalU.S. $ in thousandsBalance as of January 1, 2015$(1,243)$(2,404)$(3,647)Other comprehensive loss before reclassifications(288)(8,263)$(8,551)Amounts reclassified from accumulated other comprehensive loss1,424-$1,424Other comprehensive income (loss) 1,136(8,263)(7,127)Balance as of December 31, 2015$(107)$ (10,667)$ (10,774)Realized gains and losses on cash flow hedges were reclassified primarily to research and development, net and selling and general and administrativeexpenses. Other reclassifications from accumulated other comprehensive loss were reclassified to financial expense, net.Note 12. Derivatives and Hedging ActivitiesThe Company carries out transactions involving foreign currency exchange derivative financial instruments. The transactions are designed to hedge theCompany’s exposure in currencies other than the U.S. dollar. The Company is primarily exposed to foreign exchange risk with respect to recognized assetsand liabilities and forecasted transactions denominated in the New Israeli Shekel (“NIS”), the Euro and the Japanese Yen. The Company manages its foreigncurrency exposures on a consolidated basis, which allows the Company to net exposures and take advantage of any natural hedging. In addition, theCompany uses derivative instruments to reduce the net exposure to foreign exchange. Gains and losses on the hedging instruments offset losses and gains onthe hedged items. Financial markets and currency volatility may limit the Company’s ability to hedge these exposures.F-38Table of ContentsSTRATASYS LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSThe following table summarizes the consolidated balance sheets classification and fair values of the Company’s derivative instruments:Fair ValueNotional AmountDecember 31,December 31,December 31,December 31, Balance sheet location 2017 2016 2017 2016(U.S. $ in thousands)Assets derivatives -Foreign exchange contracts, notdesignated as hedging instrumentsOther current assets$ 90$ 1,440$ 22,036$ 39,982Assets derivatives -Foreign exchange contracts,designated as cash flow hedgeOther current assets2633713,1698,348Liability derivatives -Foreign exchange contracts, notdesignated as hedging instrumentsAccrued expenses andother current liabilities(921)(48)65,66813,273Liability derivatives -Foreign exchange contracts,designated as cash flow hedgeAccrued expenses andother current liabilities-(61)-7,534$(568)$1,368$100,873$69,137As of December 31, 2017, the notional amounts of the Company’s outstanding exchange forward contracts, not designated as hedging instruments, were$87.7 million and were used to reduce foreign currency exposures of the Euro, New Israeli Shekel (the “NIS”), Japanese Yen, Korean Won and Chinese Yuan.With respect to such derivatives, loss of $5.0 million and gain $2.1 million were recognized under financial expense, net for the years ended December 31,2017 and 2016, respectively. Such gains partially offset the revaluation losses of the balance sheet items, which are also recognized under financial income(expense), net.As of December 31, 2017 and 2016, the Company had in effect foreign exchange forward contracts for the conversion of $13.2 million and $15.9 million,respectively, into NIS. These foreign exchange forward contracts were designated as cash flow hedge for accounting purposes. The Company uses short-termcash flow hedge contracts to reduce its exposure to variability in expected future cash flows resulting mainly from payroll costs denominated in New IsraeliShekels. The changes in fair value of those contracts are included in the Company’s accumulated other comprehensive loss. These contracts mature throughJune, 2018.Note 13. Entity-Wide DisclosureNet sales by geographic area for the years ended December 31, 2017, 2016 and 2015 were as follows*:Year ended December 31, 2017 2016 2015(U.S. $ in thousands)Americas (primarily the United States)$ 413,326$ 411,536$ 425,569EMEA148,279137,924148,169Asia Pacific106,757122,998122,257$668,362$672,458$695,995*Net sales are attributed to geographic areas based on the location of customer.No single customer accounted for 10% or more of Company’s total net sales, or Company’s net accounts receivable, in any fiscal year presented.F-39Table of ContentsSTRATASYS LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSProperty, plant and equipment by geographical area were as follows as of December 31, 2017 and 2016:December 31, 2017 2016(U.S. $ in thousands)Americas (primarily the United States)$ 75,191$ 91,894EMEA120,498108,978Asia Pacific4,2627,543$199,951$208,415Property, plant and equipment that were located in Israel amounted to $101.4 million and $92.1 million for the years ended December 31, 2017 and 2016,respectively and are included under the EMEA region in the above table.Note 14. Retirement Plans and Employee Rights Upon TerminationIsraeli law generally requires the Company to pay a severance payment upon dismissal of an employee or upon termination of employment in certainother circumstances. The Company makes ongoing deposits into its Israeli employee pension plans to fund their severance liabilities. According to thegeneral collective pension agreement in Israel, Company deposits with respect to employees who were employed by the Company after the agreement tookeffect are made in lieu of the Company’s severance liability therefore, no obligation is provided for in the Company’s consolidated financial statements.Severance pay liabilities with respect to Israeli employees who were employed by the Company prior to the collective pension agreement effective date,as well as employees who have special contractual arrangements, are provided for in the Company’s consolidated financial statements based upon thenumber of years of service and their latest monthly salary. The Company’s liabilities for those Israeli employees, in the amounts of $3.9 million and $3.7million as of December 31, 2017 and 2016, respectively, are presented as other non-current liabilities in the Company’s consolidated balance sheets. Theliability is funded in part from the purchase of insurance policies or by the establishment of pension funds with dedicated deposits in the funds. The amountsused to fund these liabilities are included in the Company’s consolidated balance sheets under other non-current assets. As of December 31, 2017 and 2016,the Company had $3.0 million and $2.7 million, respectively deposited in these insurance policies and pension funds. These policies are the Company’sassets. However, under employment agreements and subject to certain limitations, any policy may be transferred to the ownership of the individual employeefor whose benefit the funds were deposited.In accordance with its current employment agreements with certain employees, the Company makes regular deposits with certain insurance companies foraccounts controlled by each applicable employee in order to secure the employee’s rights upon retirement. The Company is fully relieved from any severancepay liability with respect to each such employee after it makes the payments on behalf of the employee. The liability accrued in respect of these employeesand the amounts funded, as of the respective agreement dates, are not reflected in the Company’s balance sheets, as the amounts funded are not under thecontrol and management of the Company and the pension or severance pay risks have been irrevocably transferred to the applicable insurance companies.For its employees in the United States the Company has a defined contribution retirement plan (the “Plan”) under the provisions of Section 401(k) of theInternal Revenue Code of 1986, as amended (the “Code”) that covers eligible U.S. employees as defined in the Plan. Participants may elect to contribute upto 50% of pre-tax annual compensation, as defined by the Plan, up to a maximum amount prescribed by the Code. The Company, at its discretion, makesmatching contributions equal to the lesser of $3,500 or 4% of the participant’s annual compensation. For the years ended December 31, 2017, 2016 and 2015the Company made 401(k) Plan contributions of approximately $3.7 million, $3.8 million and $4.2 million respectively.F-40Table of ContentsSTRATASYS LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSNote 15. Earnings per ShareThe following table presents the computation of basic and diluted net loss per share:Year ended December 31, 2017 2016 2015(In thousands, except per share amounts)Numerator:Net loss attributable to Stratasys Ltd.$ (39,981)$ (77,219)$ (1,372,835)Adjustment of redeemable non-controlling interest to redemption amount--(1,800)Net loss attributable to Stratasys Ltd. for basic loss per share(39,981)(77,219)(1,374,635) Adjustment of deferred payments liability revaluation-(830)-Net loss attributable to Stratasys Ltd. for diluted loss per share(39,981)(78,049)(1,374,635) Denominator:Add:Weighted average shares – denominator for basic net loss per share52,95952,33051,592Add:Shares settlement presumed for deferred payments liability-252-Denominator for diluted loss per share52,95952,58251,592Net loss per shareBasic$(0.75)$(1.48)$(26.64)Diluted$(0.75)$(1.48)$(26.64)The computation of diluted net loss per share for the years ended December 31, 2017, 2016 and 2015 excluded share awards of 3.8 million, 3.1 millionand 3.8 million, respectively, because their inclusion would have had an anti-dilutive effect on the diluted net loss per share.F-41Table of ContentsSCHEDULE IIVALUATION AND QUALIFYING ACCOUNTS AND RESERVESYears ended December 31, 2017, 2016, and 2015 (U.S. $ in thousands):COLUMN A Column B Column C - AdditionsColumn D - DeductionsColumn EBalances atCharged to Balancesbeginningcosts andCharged toCharged toCharged to at endDescriptionof periodexpensesother accountsincomeother accountsof periodReserve for bad debts and allowances Year ended December 31, 2017$1,687$1,665$-$617$-$2,735Year ended December 31, 2016$1,357$991$-$661$-$1,687Year ended December 31, 2015$1,477$514$-$634$-$1,357Valuation allowances on deferred tax assetsYear ended December 31, 2017$201,376$22,998$-$65,572$6,740152,062Year ended December 31, 2016$152,115$49,261$-$-$-$201,376Year ended December 31, 2015$-$152,115$-$-$-$152,115S-1Table of ContentsITEM 19. EXHIBITS.Please see the exhibit index incorporated herein by reference.99Table of ContentsSIGNATURESThe registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned tosign this annual report filed on its behalf.STRATASYS LTD. /s/ Ilan LevinIlan LevinChief Executive OfficerFebruary 28, 2018100Table of ContentsEXHIBIT INDEXExhibitNumber Document Description1.1Amended and Restated Articles of Association of Stratasys Ltd. (1) 1.2Memorandum of Association of Stratasys Ltd. (2) 2.1Specimen ordinary share certificate of Stratasys Ltd. (3) 4.1.1Stratasys Ltd. 2012 Omnibus Equity Incentive Plan (4) 4.1.2Amendment to Stratasys Ltd. 2012 Omnibus Equity Incentive Plan (5) 4.2Form of Indemnification Agreement by and between Stratasys Ltd. and each of its directors and executive officers (6) 4.3.1Employment Agreement, dated June 27, 2011, by and between Stratasys Ltd. (formerly known as Objet Ltd.) and Ilan Levin, as amended (7) 4.3.2Amendment to employment terms of Ilan Levin as the Chief Executive Officer of Stratasys Ltd. (8) 4.4OEM Purchase and License Agreement, effective as of May 5, 2011, by and between Stratasys Ltd. (formerly known as Objet Geometries Ltd.)and Ricoh Printing Systems America, Inc. (9) 4.5Assignment, dated October 23, 1989, from S. Scott Crump to Stratasys, Inc. (a subsidiary of Stratasys Ltd.) with respect to a patent application foran apparatus and method for creating three-dimensional objects (10) 4.6Assignment, dated June 5, 1992, from S. Scott Crump to Stratasys, Inc. (a subsidiary of Stratasys Ltd.) with respect to a patent application for amodeling apparatus for three dimensional objects (10) 4.7Assignment, dated June 1, 1994, from S. Scott Crump, James W. Comb, William R. Priedeman, Jr., and Robert Zinniel to Stratasys, Inc. (asubsidiary of Stratasys Ltd.) with respect to a patent application for a process and apparatus of support removal for three-dimensional modeling(10) 4.8Stratasys Ltd. Compensation Policy for Executive Officers and Directors (11) 8.1Subsidiary List of Stratasys Ltd. 12.1Certificate of Chief Executive Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) under the Exchange Act 12.2Certificate of Chief Financial Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) under the Exchange Act 13Certification of Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(b)/Rule 15d-14(b) under the Exchange Act and 18U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 15.1Consent of Kesselman & Kesselman, a member firm of PricewaterhouseCoopers International Limited, an independent registered publicaccounting firm 101The following financial information from Stratasys Ltd.’s Annual Report on Form 20-F for the year ended December 31, 2017 formatted in XBRL(eXtensible Business Reporting Language): (i) Consolidated Balance Sheets at December 31, 2017 and 2016; (ii) Consolidated Statements ofOperations and Comprehensive Income for the years ended December 31, 2017, 2016 and 2015; (iii) Consolidated Statements of Changes inEquity for the years ended December 31, 2017, 2016 and 2015; (iv) Consolidated Statements of Cash Flows for the years ended December 31,2017, 2016 and 2015; and (v) Notes to Consolidated Financial Statements, tagged as blocks of text. Users of this data are advised, in accordancewith Rule 406T of Regulation S-T promulgated by the SEC, that this Interactive Data File is deemed not filed or part of a registration statementor prospectus for purposes of Sections 11 or 12 of the Securities Act, is deemed not filed for purposes of Section 18 of the Exchange Act, andotherwise is not subject to liability under those sections.____________________Table of Contents(1)Incorporated by reference to Appendix A to the registrant’s proxy statement for its February 3, 2015 extraordinary general meeting of shareholders,attached as Exhibit 99.1 to the registrant’s report of foreign private issuer on Form 6-K furnished to the SEC on January 6, 2015 (2)Incorporated by reference to Exhibit 3.2 to the registrant’s registration statement on Form F-4, SEC File No. 333-182025, filed with the SEC on June 8,2012 (3)Incorporated by reference to Exhibit 4.1 to Amendment No. 3 to the registrant’s registration statement on Form F-4, SEC File No. 333-182025, filedwith the SEC on August 6, 2012 (4)Incorporated by reference to Exhibit 10.6 to Amendment No. 3 to the registrant’s registration statement on Form F-4, SEC File No. 333- 182025, filedwith the SEC on August 6, 2012 (5)Incorporated by reference to Proposal 3 of the registrant’s proxy statement for its February 2013 extraordinary general meeting of shareholders, attachedas Exhibit 99.1 to the registrant’s report of foreign private issuer on Form 6-K furnished to the SEC on January 28, 2013 (6)Incorporated by reference to Exhibit 10.7 to the registrant’s registration statement on Form F-4, SEC File No. 333- 182025, filed with the SEC on June8, 2012 (7)Incorporated by reference to Exhibit 10.9 to the registrant’s registration statement on Form F-4, SEC File No. 33-99108, filed with the SEC on June 8,2012 (8)Incorporated by reference to Proposal 3 of the registrant’s proxy statement for its 2017 annual general meeting of shareholders, attached as Exhibit 99.1to the registrant’s report of foreign private issuer on Form 6-K furnished to the SEC on June 20, 2017 (9)Incorporated by reference to Exhibit 10.10 to the registrant’s registration statement on Form F-4, SEC File No. 333- 182025, filed with the SEC on June8, 2012# (10)Incorporated by reference to Amendment No. 1 to Stratasys, Inc.’s registration statement on Form SB-2 (SEC File No. 333- 99108) filed with the SEC onDecember 20, 1995 (11)Incorporated by reference to Appendix B to the registrant’s proxy statement for its February 3, 2015 extraordinary general meeting of shareholders,attached as Exhibit 99.2 to the registrant’s report of foreign private issuer on Form 6-K furnished to the SEC on January 6, 2015# Portions of this exhibit have been omitted and filed separately with the SEC pursuant to a confidential treatment request.EXHIBIT 8.1SubsidiariesENTITY JURISDICTION OFINCORPORATIONOR ORGANIZATIONMakerBot Industries, LLCNew YorkStratasys Solutions Ltd.EnglandSolidscape, Inc.DelawareStratasys AP LimitedHong KongStratasys Direct, Inc.CaliforniaStratasys GMBHGermanyStratasys, Inc.DelawareStratasys International Ltd.IsraelStratasys Japan Co. Ltd.JapanStratasys Korea Ltd.KoreaStratasys Latin America Representacao De Equipamentos Ltd.,BrazilStratasys Mexico S.A. de C.V.MexicoStratasys Schweiz AG (Stratasys Switzerland Ltd.)SwitzerlandStratasys Shanghai Ltd.ChinaExhibit 12.1CERTIFICATION PURSUANT TORULE 13a-14(a)/RULE 15d-14(a) UNDERTHE EXCHANGE ACTI, Ilan Levin, certify that:1. I have reviewed this annual report on Form 20-F of Stratasys Ltd.;2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report;4. The company’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f)) for the company andhave:(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensurethat material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities,particularly during the period in which this report is being prepared; (b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision,to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes inaccordance with generally accepted accounting principles; (c)Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness ofthe disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d)Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the period covered by the annualreport that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting; and5. The company’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to thecompany’s auditors and the audit committee of the company’s board of directors (or persons performing the equivalent functions):(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likelyto adversely affect the company’s ability to record, process, summarize and report financial information; and (b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s internal control overfinancial reporting.Date: February 28, 2018/s/ Ilan LevinIlan LevinChief Executive OfficerExhibit 12.2CERTIFICATION PURSUANT TORULE 13a-14(a)/RULE 15d-14(a) UNDERTHE EXCHANGE ACTI, Lilach Payorski, certify that:1. I have reviewed this annual report on Form 20-F of Stratasys Ltd.;2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report;4. The company’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f)) for the company andhave:(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensurethat material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities,particularly during the period in which this report is being prepared; (b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision,to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes inaccordance with generally accepted accounting principles; (c)Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness ofthe disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d)Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the period covered by the annualreport that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting; and5. The company’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to thecompany’s auditors and the audit committee of the company’s board of directors (or persons performing the equivalent functions):(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likelyto adversely affect the company’s ability to record, process, summarize and report financial information; and (b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s internal control overfinancial reporting.Date: February 28, 2018/s/ Lilach Payorski Lilach PayorskiChief Financial OfficerExhibit 13CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER AND CHIEFFINANCIAL OFFICER PURSUANT TORULE 13a-14(b)/RULE 15d-14(b) UNDER THE EXCHANGE ACTAND 18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002In connection with the Annual Report of Stratasys Ltd. (the “Company”) on Form 20-F for the period ended December 31, 2017 as filed with theSecurities and Exchange Commission on the date hereof (the “Report”), we, Ilan Levin, Chief Executive Officer of the Company, and Lilach Payorski, ChiefFinancial Officer of the Company, certify, pursuant to Rule 13a-14(b)/Rule 15d-14(b) under the Securities Exchange Act of 1934, as amended and 18 U.S.C.§1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and(2)The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.Dated: February 28, 2018By/s/ Ilan LevinIlan LevinChief Executive Officer By /s/ Lilach PayorskiLilach PayorskiChief Financial OfficerExhibit 15.1 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMWe hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-185240 and 333-190963) of Stratasys Ltd. of ourreport dated February 28, 2018 relating to the financial statements, schedule of valuation, qualifying accounts and reserves and the effectiveness of internalcontrol over financial reporting, which appears in this Form 20-F.Tel-Aviv, Israel/s/ Kesselman & KesselmanFebruary 28, 2018Certified Public Accountants (Isr.)A member firm of PricewaterhouseCoopers International Limited

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