Varonis Systems
Annual Report 2017

Plain-text annual report

UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549FORM 10-K(Mark One)xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 for the Fiscal Year Ended December 31, 2017 or ¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACTOF 1934 for the transition period from to Commission file number: 001-36324VARONIS SYSTEMS, INC.(Exact name of registrant as specified in its charter)Delaware57-1222280(State or other jurisdiction of incorporation)(I.R.S. Employer Identification Number) 1250 Broadway, 29th FloorNew York, NY 10001(Address of principal executive offices including zip code) Registrant’s telephone number, including area code: (877) 292-8767 Securities registered pursuant to Section 12(b) of the Act: Common Stock, par value $0.001 per shareThe NASDAQ Stock Market LLC(Title of class)(Name of exchange on which registered) Securities registered pursuant to Section 12(g) of the Act: NoneIndicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨ Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x  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 x No ¨ Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, 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 x No ¨ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein andwill not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of thisForm 10-K or any amendment to this Form 10-K. ¨ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or anemerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company”in Rule 12b-2 of the Exchange Act. Large Accelerated FilerxAccelerated Filer¨ Non-accelerated Filer¨ (Do not check if a smaller reporting company)Smaller reporting company¨ Emerging growth company¨ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with anynew or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x The aggregate market value of voting stock held by non-affiliates of the registrant as of June 30, 2017 at a closing sale price of $37.20 as reported bythe NASDAQ Global Select Market was approximately $977.1 million. Shares of common stock held by each officer and director and by each person whoowns or may be deemed to own 10% or more of the outstanding common stock have been excluded since such persons may be deemed to be affiliates. Thisdetermination of affiliate status is not necessarily a conclusive determination for other purposes. As of February 9, 2018, the registrant had 28,157,995 shares of common stock, par value $0.001 per share, outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant’s Proxy Statement to be used in connection with the solicitation of proxies for the Registrant’s 2018 Annual Meeting ofStockholders are incorporated by reference in Part III of this Annual Report on Form 10-K.  Special Note Regarding Forward-Looking Statements This report contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed in theforward-looking statements. The statements contained in this report that are not purely historical are forward-looking statements within the meaning ofSection 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the“Exchange Act”). Forward-looking statements are often identified by the use of words such as, but not limited to, “anticipate,” “believe,” “can,” “continue,”“could,” “estimate,” “expect,” “intend,” “may,” “plan,” “project,” “seek,” “should,” “strategy,” “target,” “will,” “would” and similar expressions or variationsintended to identify forward-looking statements. These statements are based on the beliefs and assumptions of our management based on informationcurrently available to management. Such forward-looking statements are subject to risks, uncertainties and other important factors that could cause actualresults and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that couldcause or contribute to such differences include, but are not limited to, those identified below and those discussed in the section titled “Risk Factors” includedunder Part I, Item 1A below. Furthermore, such forward-looking statements speak only as of the date of this report. Except as required by law, we undertake noobligation to update any forward-looking statements to reflect events or circumstances after the date of such statements. i  VARONIS SYSTEMS, INC.ANNUAL REPORT ON FORM 10-KFor The Fiscal Year Ended December 31, 2017 TABLE OF CONTENTS PagePART I Item 1Business1Item 1ARisk Factors8Item 1BUnresolved Staff Comments25Item 2Properties25Item 3Legal Proceedings25Item 4Mine Safety Disclosures25 PART II Item 5Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities25Item 6Selected Financial Data27Item 7Management’s Discussion and Analysis of Financial Condition and Results of Operations28Item 7AQuantitative and Qualitative Disclosures About Market Risk46Item 8Financial Statements and Supplementary Data47Item 9Changes in and Disagreements with Accountants on Accounting and Financial Disclosure77Item 9AControls and Procedures77Item 9BOther Information78 PART III Item 10Directors, Executive Officers and Corporate Governance78Item 11Executive Compensation78Item 12Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters78Item 13Certain Relationships and Related Transactions, and Director Independence78Item 14Principal Accounting Fees and Services78 PART IV Item 15Exhibits and Financial Statement Schedules78Item 16Form 10-K Summary80 ii  PART I Item 1.Business We were incorporated under the laws of the State of Delaware on November 3, 2004 and commenced operations on January 1, 2005. Our principalexecutive offices are located at 1250 Broadway, 29th Floor, New York, NY 10001. For convenience in this report, the terms “Company,” “Varonis,” “we” and“us” may be used to refer to Varonis Systems, Inc. and/or its subsidiaries, except where indicated otherwise. Our telephone number is (877) 292-8767. Overview Varonis is a pioneer in data security and analytics, fighting a different battle than conventional cybersecurity companies. We are pioneers because overa decade ago, we recognized that enterprise capacity to create and share data far exceeded its capacity to protect it. We believed the vast movement ofinformation from analog to digital mediums combined with increasing information dependence would change both the global economy and the risk profilesof corporations and governments. Since then our focus has been on using innovation to address the cyber-implications of this movement, creating softwarethat provides ways to track and protect data wherever it is stored. Our software allows enterprises to protect data stored on premises and in the cloud: sensitive files and emails; confidential customer, patient andemployee data; financial records; strategic and product plans; and other intellectual property. Recognizing the complexities of securing data, we have built asingle integrated platform for security and analytics to simplify and streamline security and data management. The Varonis Data Security Platform, built on patented technology, allows enterprises to protect data against insider threats and cyberattacks. Ourproducts enable enterprises to analyze data, account activity and user behavior to detect attacks. Our Data Security Platform prevents or limits unauthorizeduse of sensitive information, prevents potential cyberattacks and limits others by locking down sensitive and stale data. Our product efficiently sustains asecure state with automation and addresses additional use cases including governance, compliance, classification and threat analytics. Our Data SecurityPlatform is driven by a proprietary technology, the Metadata Framework, that extracts critical metadata, or data about data, from an enterprise’s ITinfrastructure. Our Data Security Platform uses this contextual information to map functional relationships among employees, data objects, content andusage. The revolution in internet search occurred when search engines began to mine internet metadata, such as the links between pages, in addition to pagecontent, thereby making the internet’s content more usable and consequently more valuable. Similarly, our Data Security Platform creates advancedsearchable data structures out of available content and metadata, providing real-time intelligence about an enterprise’s massive volumes of data, making itmore accessible, manageable and secured. We believe that the technology underlying our Data Security Platform is our primary competitive advantage. The strength of our solution is driven byseveral proprietary technologies and methodologies that we have developed, coupled with how we have combined them into our highly versatile platform.Our belief in our technological advantage stems from us having developed a way to do each of the following: •determine relevant metadata and security information to capture; •capture that metadata without imposing any strains or latencies on the enterprise’s computing infrastructure; •modify that metadata in a way that makes it comparable and analyzable despite it having originated from disparate IT systems; •create supplemental metadata, as needed, when the existing IT infrastructure’s activity logs are not sufficient; •decipher the key functional relationships of metadata, the underlying data, and its creators; •use those functional relationships to create a graphical depiction, or map, of the data that will endure as enterprises add large volumes of data totheir network and storage resources on a daily basis; •analyze the data and related metadata utilizing sophisticated algorithms, including cluster analyses and machine learning; •visualize and depict the analyses in an intuitive manner, including simulating contemplated changes and automatically execute tasks that arenormally manually intensive for IT and business personnel; •identify and classify the data as sensitive, critical, private or regulated; •automate changes to directory service objects and access controls on large file systems; •detect suspicious user behavior and unusual file and email activity using deep analysis of metadata, machine learning and user behavioranalytics; and •generate meaningful, actionable alerts when security-related incidents are detected. 1  The broad applicability of our technology has resulted in our customers deploying our platform for numerous use cases. These use cases include:discovery and classification of high-risk, sensitive data; centralized visibility into enterprise data, user behavior and file activity; security monitoring andrisk reduction; data breach, insider threat, malware and ransomware detection; data ownership identification; reporting and auditing with searchable logs;meeting security policy and compliance regulation; data migration; and intelligent archiving. We sell substantially all of our products and services to channel partners, including distributors and resellers, which sell to end-user customers, whichwe refer to in this report as our customers. We believe that our sales model, which combines the leverage of a channel sales model with our highly trained andprofessional sales force, has played and will continue to play a major role in our ability to grow and to successfully deliver our unique value proposition forenterprise data. While our products serve customers of all sizes, in all industries and all geographies, the marketing focus and majority of our sales focus is ontargeting organizations with 1,000 users or more who can make larger purchases with us over time and have a greater potential lifetime value. As ofDecember 31, 2017, we had approximately 6,250 customers, spanning leading firms in the financial services, healthcare, public, industrial, insurance, energyand utilities, consumer and retail, education, media and entertainment and technology sectors. Size of Our Market Opportunity The International Data Corporation’s Data Age 2025: The Evolution of Data to Life-Critical study estimates that the amount of data created in the worldwill grow to 163 Zettabytes (or 151 trillion gigabytes) in 2025, representing a nearly tenfold increase from the amount created in 2016. They estimate thatnearly 20% of that data will be critical to our daily lives (and nearly 10% hypercritical). The study also suggests that by 2025, almost 90% of all data willrequire a meaningful level of security, but less than half will be secured. Every enterprise and government will almost certainly require new technologies toprotect and manage data. We believe that the diverse functionalities offered by our platform position us at the intersection of several powerful trends in the digital enterprise datauniverse. We believe that the business intelligence and functionalities delivered by our platform define a new market, and we are not aware of any third partystudies that accurately define our addressable market. The functionality of our software platform overlaps with portions of several established and growingenterprise software markets as defined by Gartner, Inc. in 2017, including security software ($23.6 billion), IT operations management ($23.3 billion), storagemanagement ($15.2 billion), infrastructure software ($10.0 billion) and data integration ($4.5 billion). We believe that our comprehensive product offeringwill attract a meaningful portion of this overall spend, estimating that our total addressable market is approximately 20% of these combined markets, or $15billion dollars. Our Technology Our proprietary technology extracts critical information about an enterprise’s data and uses this contextual information, or metadata, to create afunctional map of an enterprise’s data and underlying file systems. Our Metadata Framework technology has been architected to process large volumes ofenterprise data and the related metadata at a massive scale with minimal demands on the existing IT infrastructure. All of our products, except DatAnywhere,utilize our Data Security Platform and a core single codebase, thereby streamlining our product development initiatives. Key Benefits of Our Technology Protect Data from Insider Threats, Data Breaches and Cyberattacks. Our solutions analyze how employee accounts, service accounts and adminaccounts use and access data, profile employees’ roles and file contents, baseline “normal” behavior patterns, and alert on significant deviations from profiledbehaviors. Our customers are able to detect rogue insiders, attackers that have compromised internal systems and employee accounts, malware and othersignificant threats. Comprehensive Solution for Managing and Protecting Enterprise Data. Our products enable a broad range of functionality, including datagovernance, secure search and remote collaboration and intelligent retention—all from one core technology platform. Moreover, our platform is applicableacross all major enterprise data stores (Windows, UNIX/Linux, Intranets, email systems and Office365). Security Analytics with User, Data and System Context. Our solutions combine classification and data access governance with User and EntityBehavior Analytics (UBA) for accurate detection and risk reduction. Our solutions discover, identify and classify sensitive, critical and regulated data to helpmeet regulatory compliance and sustainably reduce risk relating to unauthorized use and cyberattacks. Fast Time to Value and Low Total Cost of Ownership. Our solutions do not require custom implementations or long deployment cycles. Our DataSecurity Platform can be installed and ready for use within hours and allows customers to realize real value within days of implementation. We designed ourplatform to operate on commodity hardware with standard operating systems, further reducing the cost of ownership of our product. Ease of Use. While we utilize complex data structures and algorithms in our data engine, we abstract that complexity to provide a sleek, intuitiveinterface. Our software is accessible through either the local client or a standard web browser and requires limited training, saving on time and cost andmaking it accessible to the broader set of non-technical users. 2  Highly Scalable and Flexible Data Engine. Our metadata analysis technology is built to be highly scalable and flexible, allowing our customers toanalyze vast amounts of enterprise data. Moreover, our proprietary Metadata Framework is built with a modular architecture, allowing customers to grow intothe full capabilities of our solution over time. Our Growth Strategy Our objective is to be the primary vendor to which enterprises turn to analyze and protect their data. The following are key elements of our growthstrategy. Extend Our Technological Capabilities Through Innovation. We intend to increase our current level of investment in product development in order toenhance existing products to address new use cases and deliver new products. We believe that the flexibility, sophistication and broad applicability of ourMetadata Framework will allow us to use this framework as the core of numerous future products built on our same core technology. Our ability to leverageour research and development resources has enabled us to create a new product development engine that we believe can proactively identify and solveenterprise needs. Grow Our Customer Base. The unabated rise in enterprise data, ubiquitous reliance on digital collaboration and increased cybersecurity concerns willcontinue to drive demand for data collaboration, governance, retention and protection solutions. We intend to capitalize on this demand by targeting newcustomers, vertical markets and use cases for our solutions. Our solutions address the needs of customers of all sizes ranging from small and mediumbusinesses to large multinational companies with thousands of employees and petabytes of data. Although our solutions are applicable to organizations of allsizes, we will continue our focus on targeting larger organizations who can make larger purchases with us over time. Increase Sales to Existing Customers. We believe significant opportunities exist to further expand relationships with existing customers. Data growth(and subsequent security concerns) continues across all the data stores, and enterprises wish to standardize on solutions that help them manage, protect andextract more value from their data wherever it is stored. We will continue to cultivate incremental sales from our existing customers by driving increased useof our software within our installed base by expanding footprint and usage. We currently have six product families, and, as of December 31, 2017,approximately 52% of our customers had purchased two or more product families. We believe our existing customer base serves as a strong source ofincremental revenues given the broad platform of products we have and the growing volumes and complexity of enterprise data that our customers have. Aswe innovate and expand our product offering, we expect to have an even broader suite of products to offer our customers. Grow Sales From Our Newer Licenses. During the past year, we have introduced additional licenses to existing products to support new functionalities,such as new threat models to detect suspicious mailbox, Exchange and Exchange Online behaviors. We released GDPR Patterns, part of the DataClassification Engine family, to help enterprises identify data that falls under the EU General Data Protection Regulation (GDPR) and expand our offeringsthat help enterprises meet compliance and regulation requirements. We released the Automation Engine to allow customers to automatically repair andmaintain file systems so that organizations are less vulnerable to attacks and security breaches, more compliant and consistently meeting a least privilegemodel. We have enhanced our products to provide even more value to our customers, including additional data store support, enhanced threat detection andsecurity monitoring and new threat models to protect against security breaches, malware, ransomware and insider threats. We believe these new additions toour product offering can be a meaningful contributor to our growth. Expand Our Sales Force. Continuing to expand our salesforce will be essential to achieving our customer base expansion goals. The salesforce and ourapproach to introducing products to the market has been key to our successful growth in the past and will be central to our growth plan in the future. Whileour products serve customers of all sizes, in all industries and all geographies, the marketing focus and majority of our sales focus is on targetingorganizations with 1,000 users or more who can make larger purchases with us over time and have a greater potential lifetime value. The ability of our salesteams to support our channel partners to efficiently identify leads, generate evaluations and convert them to satisfied customers will continue to impact ourability to grow. We intend to expand our sales capacity by adding headcount throughout our sales and marketing department. Establish Our Data Security Platform as the Industry Standard. We have worked with several of the leading providers of network attached storage, orNAS, hybrid cloud storage, including EMC, IBM, NetApp, HP, Hitachi and Nasuni in order to expand our market reach and deliver enhanced functionality toour customers. We have worked with these vendors to assure compatibility with their product lines. Through the use of application programming interfaces,or APIs, and other integration work, our solutions also integrate with many providers of solutions in the ecosystem. We will continue to pursue suchcollaborations wherever they advance the strategic goals of the company, thereby expanding our reach and establishing our product user interface as the defacto industry standard when it comes to enterprise data. Continue International Expansion. We believe there is a significant opportunity for our platform in international markets to comply with regulationssuch as GDPR. Revenues from EMEA accounted for approximately a third of our revenues in 2017. Europe represented the substantial majority of revenuesoutside the United States. Although we have experienced inconsistent quarterly growth rates over the last few years in our European market, we believe thatinternational expansion will be a key component of our growth strategy, and we will continue to market our products and services overseas. 3  Our Products We have six product families, most of which utilize our core Metadata Framework technology to deliver features and functionality that allowenterprises to fully understand, secure and benefit from the value of their data. This architecture easily extends through modular functionalities giving ourclients the flexibility to select the features they require for their business needs and the flexibility to expand their usage simply by adding a license. •DatAdvantage. DatAdvantage, our flagship product, launched in 2006, builds on our Metadata Framework and captures, aggregates, normalizesand analyzes every data access event for every user on Windows and UNIX/Linux servers, storage devices, email systems and Intranet servers,without requiring native operating system auditing functionalities or impacting performance or storage on file systems. Through an intuitivegraphical interface, DatAdvantage presents insights from massive volumes of data using normal computing infrastructure. It is also ourpresentation layer for IT departments, which provides an interactive map of relevant user, group, and data objects, usage and content, facilitatinganalysis from multiple vectors. IT departments can pinpoint areas of interest starting with any metadata object, simulate changes measuringpotential impact against historical access patterns, and easily execute changes on all data stores through a unified interface. DatAdvantageidentifies where users have unneeded access based on user behavior. ·The Automation Engine, a module introduced in 2017, helps customers accelerate the enforcement of least privilege by limiting broadaccess without all the manual legwork. It automatically repairs and maintains file systems, helping reduce customers’ risk profiles anddecreasing their overhead and resources required to get to a least privilege model. ·DatAlert, a module introduced in 2013, profiles users and their behaviors with respect to systems and data, detects and alerts onmeaningful deviations to established baselines, and provides a web-based dashboard and investigative interface. DatAlert allowsdetection of suspicious activity and prevent data breaches and cyberattacks, perform security forensics, visualize risk and prioritizeinvestigation. ·Varonis Edge, a module announced in 2017 and introduced in early 2018, analyzes perimeter devices like DNS, VPN and Web Proxy todetect attacks like malware, APT intrusion and exfiltration and enables enterprises to correlate events and alerts at the perimeter withalerts and events concerning data to better spot attacks at the point of entry and egress. •DataPrivilege. DataPrivilege, launched in 2006 and designed for use by business unit personnel, provides a self-service web portal that allowsusers to request access to data necessary for their business functions, and owners to grant access without IT intervention. DataPrivilege alsoenables IT and business users to make access decisions based on queries, user requests and metadata analytics information, rather than static ITpolicies. DataPrivilege provides a presentation layer for business users to review accessibility and usage of their data assets, and grant and revokeaccess. •Data Classification Engine (formerly IDU Classification Framework). As the volume of an enterprise’s information grows, enterprises struggle tofind and tag different types of sensitive data, such as intellectual property, regulated content, including Personally Identifiable Information, andmedical records. Furthermore, content by itself does not provide adequate context to determine ownership, relevance, or protection requirements.Our Data Classification Engine, introduced in 2009 as the IDU Classification Framework, identifies and tags data based on criteria set in multiplemetadata dimensions and provides business and IT personnel with actionable intelligence about this data, including a prioritized list of foldersand files containing the most sensitive data and with the most inadequate permissions. For the identified folders and files, it also identifies whohas access to that data, who is using it, who owns it, and recommendations for how to restrict access without disrupting workflow. Our DataClassification Engine provides visibility into the content of data across file systems and Intranets sites and combining it with other metadata,including usage and accessibility. ·GDPR Patterns, introduced in 2017, uses the Data Classification Engine as a foundation to identify and classify regulated data in theEuropean Union (“EU”) that falls under the GDPR, with over 250 unique patterns that cover all 28 EU countries. •Data Transport Engine. We introduced our Data Transport Engine software in 2012 to provide an execution engine that unifies the manipulationof data and metadata, translating business decisions and instructions into technical commands such as data migration or archiving. DataTransport Engine allows both IT and business personnel to standardize and streamline activities for data management and retention, from day-to-day maintenance to complex data store and domain migrations and archiving. Our Data Transport Engine ensures that data migrationsautomatically synchronize source and destination data with incremental copying even if the source data is still in use, translates accesspermissions across data stores and domains and provides reporting capabilities for data migration status. Moreover, it also provides IT personnelthe flexibility to schedule recurring migrations to automatically find and move certain types of data such as sensitive or stale data and to performactive migrations, dispositions and archiving safely and efficiently. 4  •DatAnswers. As employees continue to generate and store data in numerous enterprise data stores, relevant files they and their coworkers andpredecessors create become harder to find. Unlike the internet, where powerful search engines make relevant web information easy to find despiterapid growth, enterprise file systems are frequently not searchable by employees or IT. Though enterprise search technologies exist, manyenterprises do not own or use them to index data, for several reasons, including performance (the index must be up to date to be useful, requiringcontinual scanning for new and changed content), security (sensitive files that are not adequately restricted become far easier for the wrongpeople to find), relevance (when many files contain the term or terms a searcher is looking for they are not ranked or presented in a way that theyare likely to find the right files), and cost (enterprise search technologies require significant, ongoing investments in hardware and software).DatAnswers was introduced in 2014 to provide secure, relevant and timely search functionality for enterprise data. Capitalizing on the MetadataFramework infrastructure and its analysis of data access events, file system and directory services metadata, DatAnswers indexes files as they arecreated and changed without requiring continual scanning, filters out results users should not see based on the patented recommendations enginein DatAdvantage and classification results found by the Data Classification Engine, and ranks results using analysis of data usage. DatAnswers isused primarily for end user search and ediscovery projects. •DatAnywhere. We introduced DatAnywhere in 2012 in response to the need by enterprises for a secure and easy-to-use alternative to consumercloud-based file sharing solutions. DatAnywhere provides our customers’ employees a modern collaboration, hybrid-cloud experience using theirexisting storage infrastructure. As of February 1, 2018, in order to focus our resources on our data security portfolio, we are no longer sellingDatAnywhere to new customers although we will continue to provide maintenance and support to our existing DatAnywhere customers for thenear future. Our Customers Our customer base has grown from approximately 550 customers at December 31, 2009 to approximately 6,250 customers in more than 75 countries asof December 31, 2017. Our customers vary greatly in size ranging from small and medium businesses to large multinational enterprises with hundreds ofthousands of employees and hundreds of terabytes of data. Moreover, we have customers across numerous industries and geographies. Services Maintenance and Support Our customers typically purchase one year of software maintenance and support as part of their initial purchase of our products, with an option torenew. These maintenance agreements provide customers the right to receive support and unspecified upgrades and enhancements when and if they becomeavailable during the maintenance period and access to our technical support services. We maintain a customer support organization that provides all levels of support to our customers. Our customers that purchase maintenance andsupport services receive guaranteed response times, direct telephonic support and access to online support portals. Our customer support organization hasglobal capabilities with expertise in both our software and complex IT environments and associated third-party infrastructure. Professional Services While users can easily download, install and deploy our software on their own, certain enterprises use our professional service team to provide fee-based services, which include training our customers in the use of our products, providing advice on deployment planning, network design, productconfiguration and implementation, automating and customizing reports and tuning policies and configuration of our products for the particularcharacteristics of the customer’s environment. Sales and Marketing Sales We sell the vast majority of our products and services to a global network of hundreds of resellers and distributors that we refer to as our channelpartners. Our channel partners, in turn, sell the products they purchase from us to customers globally. In addition, we maintain a highly trained professionalsales force that is responsible for overall market development, including the management of the relationships with our channel partners and supportingchannel partners in winning customers through operating demonstrations and risk assessments. Our channel partners identify potential sales targets, maintainrelationships with customers and introduce new products to existing customers. Sales to our channel partners are generally subject to our standard, non-exclusive channel partner agreement, meaning our channel partners may offer customers the products of several different companies. These agreements aregenerally for a term of one year with a one year renewal term and can be terminated by us or the channel partner for any reason upon 30 days’ notice. Atermination of the agreement has no effect on orders already placed. Payment to us from the channel partner is typically due within 30 – 90 calendar days ofthe date we issue an invoice for such sales. 5  Marketing Our marketing strategy focuses on building our brand and product awareness, increasing customer adoption and demand, communicating advantagesand business benefits and generating leads for our channel partners and sales force. We market our software as a Data Security Platform, a solution forsecuring and managing file systems and enterprise data and transforming that data into actionable intelligence. We execute our marketing strategy byleveraging a combination of internal marketing professionals, external marketing partners and a network of regional and global channel partners. Our internalmarketing organization is responsible for branding, content generation and product marketing and works with our business operations team to supportchannel marketing and sales support programs. We provide one on one and community education and awareness and promote the expanded use of oursoftware. We host in-person Varonis Connect! events annually across sales regions, as well as free, online monthly or bi-weekly technical webinars inmultiple regions. We focus our efforts on events, campaigns, tools and activities that can be leveraged by our channel partners worldwide to extend ourmarketing reach, such as sales tools, information regarding product awards and technical certifications, training, regional seminars and conferences, webinarsand various other demand-generation activities. Our marketing efforts also include public relations in multiple regions, analyst relations, customer marketing,extensive content development available through our web site and content syndication, and our active blog, “The Inside Out Security Blog.” Seasonality See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Seasonality and Quarterly Trends.” Research and Development Our research and development efforts are focused primarily on improving and enhancing our existing products and services, as well as developing newproducts, features and functionality. Use of our products has expanded from governance into new areas such as data security, accessibility and retention, andwe anticipate that customers and innovation will drive functionality into additional areas. We regularly release new versions of our products whichincorporate new features and enhancements to existing ones. We conduct substantially all of our research and development activities in Israel, and we believethis provides us with access to world class engineering talent. Our research and development expense was $47.4 million, $36.7 million and $31.8 million in 2017, 2016 and 2015, respectively. Intellectual Property We rely on patent, trademark, copyright and trade secret laws, confidentiality procedures and contractual provisions to protect our technology and therelated intellectual property. The nature and extent of legal protection of our intellectual property rights depends on, among other things, its type and thejurisdiction in which it arises. As of January 31, 2018, we had 52 issued patents and 33 pending patent applications in the United States. Our issued U.S.patents expire between 2025 and 2038. We also had 18 patents issued and 67 applications pending for examination in non-U.S. jurisdictions, and 10 pendingPatent Cooperation Treaty (“PCT”) patent applications, all of which are counterparts of our U.S. patent applications. Certain of our patents are owned by ourIsraeli subsidiary. The claims for which we have sought patent protection relate primarily to inventions we have developed for incorporation into ourproducts. We also license software from third parties for use in developing our products and for integration into our products, including open source software. Despite our efforts to protect our proprietary technologies and intellectual property rights, unauthorized parties may attempt to copy aspects of ourproducts or obtain and use our trade secrets or other confidential information. We generally enter into confidentiality agreements with our employees,consultants, service providers, vendors and customers and generally limit internal and external access to, and distribution of, our proprietary information andproprietary technology through certain procedural safeguards. These agreements may not effectively prevent unauthorized use or disclosure of ourintellectual property or technology and may not provide an adequate remedy in the event of unauthorized use or disclosure of our intellectual property ortechnology. We cannot assure you that the steps taken by us will prevent misappropriation of our trade secrets or technology or infringement of ourintellectual property. In addition, the laws of some foreign countries do not protect our proprietary rights to as great an extent as the laws of the United States,and many foreign countries do not enforce these laws as diligently as government agencies and private parties in the United States. 6  Our industry is characterized by the existence of a large number of relevant patents and frequent claims and related litigation regarding patents andother intellectual property rights. From time to time, third-parties have asserted and may assert their patent, copyright, trademark and other intellectualproperty rights against us, our channel partners or customers. Successful claims of infringement or misappropriation by a third party could prevent us fromdistributing certain products or performing certain services or could require us to pay substantial damages (including, for example, treble damages if we arefound to have willfully infringed patents and increased statutory damages if we are found to have willfully infringed copyrights), royalties or other fees. Suchclaims also could require us to cease making, licensing or using solutions that are alleged to infringe or misappropriate the intellectual property of others, orto expend additional development resources to attempt to redesign our products or services or otherwise to develop non-infringing technology. Even if thirdparties may offer a license to their technology, the terms of any offered license may not be acceptable, and the failure to obtain a license or the costsassociated with any license could cause our business, results of operations or financial condition to be materially and adversely affected. In some cases, weindemnify our channel partners and customers against claims that our products infringe the intellectual property of third parties. Competition While there are some companies which offer certain features similar to those embedded in our solutions, as well as others with which we compete incertain use cases, we believe that we do not currently compete with a company that offers the same breadth of functionalities that we offer in a singleintegrated solution. Nevertheless, we do compete against a select group of software vendors, such as Veritas Technologies LLC and Quest Software, thatprovide standalone solutions, similar to those found in our comprehensive software suite, in the specific markets in which we operate. We also face directcompetition with respect to certain of our products, specifically Data Transport Engine, DatAnswers and DatAdvantage for Directory Services. As we continueto augment our functionality with insider threat detection and user behavior analytics and as we expand our classification capabilities to better servecompliance needs with new regulations, like GDPR, we may face increased perceived and real competition from other security and classificationtechnologies. In the future, as customer requirements evolve and new technologies are introduced, we may experience increased competition if established oremerging companies develop solutions that address the enterprise data market. Furthermore, because we operate in a relatively new and evolving area, weanticipate that competition will increase based on customer demand for these types of products. A number of factors influence our ability to compete in the markets in which we operate, including, without limitation: the continued reliability andeffectiveness of our products’ functionalities; the breadth and completeness of our solutions’ features; the scalability of our solutions; and the ease ofdeployment and use of our products. We believe that we generally compete favorably in each of these categories. We also believe that we distinguishourselves from others by delivering a single, integrated solution to address our customers’ needs regarding access, governance, collaboration and retentionwith respect to their enterprise data. There can, however, be no assurance that we will remain unique in this capacity or that we will be able to competefavorably with other providers in the future. If a more established company were to target our market, we may face significant competition. They may have competitive advantages, such as greatername recognition, larger sales, marketing, research and acquisition resources, access to larger customer bases and channel partners, a longer operating historyand lower labor and development costs, which may enable them to respond more quickly to new or emerging technologies and changes in customerrequirements or devote greater resources to the development, promotion and sale of their products than we do. Increased competition could result in us failingto attract customers or maintain renewals and licenses at the same rate. It could also lead to price cuts, alternative pricing structures or the introduction ofproducts available for free or a nominal price, reduced gross margins, longer sales cycles and loss of market share. In addition, our current or prospective channel partners may establish cooperative relationships with any future competitors. These relationships mayallow future competitors to rapidly gain significant market share. These developments could also limit our ability to generate revenues from existing and newcustomers. If we are unable to compete successfully against current and future competitors our business, results of operations and financial condition may beharmed. Employees As of December 31, 2017, we had 1,251 employees and independent contractors, of which 547 were in the United States, 409 were in Israel and 295were in other countries. None of our employees is represented by a labor union with respect to his or her employment with us. Employees in certain Europeancountries have the benefits of collective bargaining arrangements at the national level. We have not experienced any work stoppages, and we consider ourrelations with our employees to be good. 7  Available Information Our website is located at www.varonis.com, and our investor relations website is located at http://ir.varonis.com/. The information posted on our websiteis not incorporated into this Annual Report on Form 10-K. Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-Kand amendments to reports filed or furnished pursuant to Sections 13(a) and 15(d) of the Exchange Act are available free of charge on our investor relationswebsite as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. You may also access all of our public filingsthrough the SEC’s website at www.sec.gov. Further, a copy of this Annual Report on Form 10-K is located at the SEC’s Public Reference Room at 100 FStreet, NE, Washington, D.C. 20549. Information on the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330. Investors and other interested parties should note that we use our media and investor relations website and our social media channels to publishimportant information about us, including information that may be deemed material to investors. We encourage investors and other interested parties toreview the information we may publish through our media and investor relations website and the social media channels listed on our media and investorrelations website, in addition to our SEC filings, press releases, conference calls and webcasts. Item 1A.Risk Factors Investing in our common stock involves a high degree of risk. You should carefully consider the following risks and all other information contained herein,including our consolidated financial statements and the related notes thereto, before investing in our common stock. The risks and uncertainties describedbelow are not the only ones we face. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, also maybecome important factors that affect us. If any of the following risks materialize, our business, financial condition and results of operations could bematerially harmed. In that case, the trading price of our common stock could decline, and you may lose some or all of your investment. Risks Related to Our Business and Industry The market for software that analyzes, secures, manages and migrates enterprise data is new and unproven and may not grow. We believe our future success depends in large part on the growth of the market for software that enables enterprises to analyze, secure, manage and migratetheir data. In order for us to market and sell our products, we must successfully demonstrate to enterprise IT and business personnel the potential value of theirdata and the risk of that data getting compromised or stolen. We must persuade them to devote a portion of their budgets to a unified platform that we offer tomanage, protect, secure and extract value from this resource. We cannot provide any assurance that enterprises will recognize the need for our products or, ifthey do, that they will decide that they need a solution that offers the range of functionalities that we offer. Software solutions focused on enterprise data maynot yet be viewed as a necessity, and accordingly, our sales effort is and will continue to be focused in large part on explaining the need for, and value offeredby, our solution. We can provide no assurance that the market for our solution will continue to grow at its current rate or at all. The failure of the market todevelop would materially adversely impact our results of operations. Our quarterly results of operations have fluctuated and may fluctuate significantly due to variability in our revenues which could adversely impact ourstock price. Our revenues and other results of operations have fluctuated from quarter to quarter in the past and could continue to fluctuate in the future. As a result,comparing our revenues and results of operations on a period-to-period basis may not be meaningful, and you should not rely on any particular past quarteror other period results. Our revenues depend in part on the conversion of enterprises that have installed an evaluation license for our software into payingcustomers. In this regard, most of our sales are typically made during the last three weeks of every quarter. We may fail to meet market expectations for thatquarter if we are unable to close the number of transactions that we expect during this short period and closings are deferred to a subsequent quarter. Inaddition, our sales cycle from initial contact to delivery of and payment for the software license generally becomes longer and less predictable with respect tolarge transactions and often involves multiple meetings or consultations at a substantial cost and time commitment to us. Although we try to minimize thepotential impact of large transactions on our quarterly results of operations, the closing of a large transaction in a particular quarter may raise our revenues inthat quarter and thereby make it more difficult for us to meet market expectations in subsequent quarters, and our failure to close a large transaction in aparticular quarter may adversely impact our revenues in that quarter. In addition, we base our current and future expense levels on our revenue forecasts andoperating plans, and our expenses are relatively fixed in the short term. Accordingly, we would likely not be able to reduce our costs sufficiently tocompensate for an unexpected shortfall in revenues and even a relatively small decrease in revenues could disproportionately and adversely affect ourfinancial results for that quarter. The variability and unpredictability of these and other factors, many of which are outside of our control, could result in our failing to meet or exceedfinancial expectations for a given period. If our revenues or results of operations fall below the expectations of investors or any securities analysts that coverour stock, the price of our common stock could decline substantially. 8  A failure to hire and integrate additional sales and marketing personnel or maintain their productivity could adversely affect our results of operations andgrowth prospects. Our business requires intensive sales and marketing activities. Our sales and marketing personnel are essential to attracting new customers and expandingsales to existing customers, both of which are key to our future growth. We face a number of challenges in successfully expanding our sales force. We mustlocate and hire a significant number of qualified individuals, and competition for such individuals is intense. In addition, as we expand into new marketswith which we have less familiarity, we will need to recruit individuals who are multilingual or who have skills particular to a certain geography, and it maybe difficult to find candidates with those qualifications. We may be unable to achieve our hiring or integration goals due to a number of factors, including,but not limited to, the number of individuals we hire, challenges in finding individuals with the correct background due to increased competition for suchhires and increased attrition rates among new hires and existing personnel. Furthermore, based on our past experience, it often can take up to 12 monthsbefore a new sales force member is trained and operating at a level that meets our expectations. We invest significant time and resources in training newmembers of our sales force, and we may be unable to achieve our target performance levels with new sales personnel as rapidly as we have done in the pastdue to larger numbers of hires or lack of experience training sales personnel to operate in new jurisdictions. Our failure to hire a sufficient number of qualifiedindividuals, to integrate new sales force members within the time periods we have achieved historically or to keep our attrition rates at levels comparable toothers in our industry may materially impact our projected growth rate. Failure to attract, recruit and retain highly qualified engineers could adversely affect our results of operations and growth prospects. Our future success and growth depends, in part, on our ability to continue to recruit and retain highly skilled personnel, particularly engineers. Any of ouremployees may terminate their employment at any time and competition for highly skilled engineering personnel is frequently intense, especially in Israel,where we have a substantial presence and need for qualified engineers. Moreover, to the extent we hire personnel from other companies, we may be subject toallegations that they have been improperly solicited or may have divulged proprietary or other confidential information to us. If we are unable to attract orretain qualified engineers, our ability to innovate, introduce new products and compete would be adversely impacted, and our financial condition and resultsof operations may suffer. If we fail to manage our rapid growth effectively, our business and results of operations will be adversely affected. We have experienced rapid growth in a relatively short period of time. Our revenues grew from $53.4 million in 2012 to $217.4 million in 2017. Our numberof employees and independent contractors increased from 399 as of December 31, 2012 to 1,251 as of December 31, 2017. During this period, we alsoestablished and expanded our operations in a number of countries outside the United States. We intend to continue to grow our business and plan to continueto hire new employees, particularly in our sales and marketing and research and development groups. If we cannot adequately train these new employees,including our sales force, software engineers and customer support staff, our sales may not grow at the rates we project or our customers may lose confidencein the knowledge and capability of our employees. In addition, we are expanding our current operations, and we intend to make investments to continue ourexpansion efforts. We must successfully manage our growth to achieve our objectives. Although our business has experienced significant growth in the past,we cannot provide any assurance that our business will continue to grow at the same rate, or at all. Our ability to effectively manage any significant growth of our business will depend on a number of factors, including our ability to do the following: •effectively recruit, integrate, train and motivate a large number of new employees, including our sales force and engineers, while retainingexisting employees, maintaining the beneficial aspects of our corporate culture and effectively executing our business plan; •satisfy existing customers and attract new customers; •effectively manage existing channel partnerships and expand to new ones; •successfully introduce new products and enhancements; •improve our key business applications and processes to support our business needs; •enhance information and communication systems to ensure that our employees and offices around the world are well-coordinated and caneffectively communicate with each other and our growing customer base; •enhance our internal controls to ensure timely and accurate reporting of all of our operations and financial results; •protect and further develop our strategic assets, including our intellectual property rights; and •make sound business decisions in light of the scrutiny associated with operating as a public company. 9  These activities will require significant investments and allocation of valuable management and employee resources, and our growth will continue to placesignificant demands on our management and our operational and financial infrastructure. There are no guarantees we will be able to grow our business in anefficient or timely manner, or at all. Moreover, if we do not effectively manage the growth of our business and operations, the quality of our software couldsuffer, which could negatively affect our brand, results of operations and overall business. Our failure to continually enhance and improve our technology could adversely affect sales of our products. The market is characterized by the exponential growth in enterprise data, rapid technological advances, changes in customer requirements, includingcustomer requirements driven by changes to legal, regulatory and self-regulatory compliance mandates, frequent new product introductions andenhancements and evolving industry standards in computer hardware and software technology. As a result, we must continually change and improve ourproducts in response to changes in operating systems, application software, computer and communications hardware, networking software, data centerarchitectures, programming tools and computer language technology. Moreover, the technology in our products is especially complex because it needs toeffectively identify and respond to a user’s data retention, security and governance needs, while minimizing the impact on database and file systemperformance. Our products must also successfully interoperate with products from other vendors. We cannot guarantee that we will be able to anticipate future market needs and opportunities or be able to extend our technological expertise and developnew products or expand the functionality of our current products in a timely manner or at all. Even if we are able to anticipate, develop and introduce newproducts and expand the functionality of our current products, there can be no assurance that enhancements or new products will achieve widespread marketacceptance. Our product enhancements or new products could fail to attain sufficient market acceptance for many reasons, including: •failure to accurately predict market demand in terms of product functionality and to supply products that meet this demand in a timelyfashion; •inability to interoperate effectively with the database technologies and file systems of prospective customers; •defects, errors or failures; •negative publicity or customer complaints about performance or effectiveness; and •poor business conditions, causing customers to delay IT purchases. If we fail to anticipate market requirements or stay abreast of technological changes, we may be unable to successfully introduce new products, expand thefunctionality of our current products or convince our customers and potential customers of the value of our solutions in light of new technologies.Accordingly, our business, results of operations and financial condition could be materially and adversely affected. We are dependent on the continued services and performance of our co-founder, Yakov Faitelson, the loss of whom could adversely affect our business. Our future performance depends in large part on the continued services and continuing contributions of our co-founder, our Chief Executive Officer andPresident, Yakov Faitelson, to successfully manage our company, to execute on our business plan and to identify and pursue new opportunities and productinnovations. The loss of services of Mr. Faitelson could significantly delay or prevent the achievement of our development and strategic objectives andadversely affect our business. Due to our rapid growth, we have a limited operating history at our current scale, which makes it difficult to evaluate and predict our future prospects andmay increase the risk that we will not be successful. We have been growing rapidly in recent periods and, as a result, have a relatively short history operating our business at its current scale. For example, wehave significantly increased the number of our employees and have expanded our operations and product offerings. This limits our ability to forecast ourfuture operating results and subjects us to a number of uncertainties, including our ability to plan for and model future growth. We have encountered and willcontinue to encounter risks and uncertainties frequently experienced by growing companies in new markets that may not develop as expected. Because wedepend in part on the market’s acceptance of our products, it is difficult to evaluate trends that may affect our business. If our assumptions regarding thesetrends and uncertainties, which we use to plan our business, are incorrect or change in reaction to changes in our markets, or if we do not address these riskssuccessfully, our operating and financial results could differ materially from our expectations and our business could suffer. Moreover, although we haveexperienced significant growth historically, we may not continue to grow as quickly in the future. 10  Our future success will depend in large part on our ability to, among other things: •maintain and expand our business, including our customer base and operations, to support our growth, both domestically andinternationally; •hire, integrate, train and retain skilled talent, including members of our sales force and software engineers; •develop new products and services and bring products and services in beta to market; •renew maintenance and support agreements with, and sell additional products to, existing customers; •increase market awareness of our products and enhance our brand; and •maintain compliance with applicable governmental regulations and other legal obligations, including those related to intellectualproperty, international sales and taxation. If we fail to address the risks and difficulties that we face, including those associated with the challenges listed above as well as those described elsewhere inthis “Risk Factors” section, our business will be adversely affected, and our results of operations will suffer. If we are unable to attract new customers and expand sales to existing customers, both domestically and internationally, our growth could be slower thanwe expect, and our business may be harmed. Our future growth depends in part upon increasing our customer base. Our ability to achieve significant growth in revenues in the future will depend, in largepart, upon the effectiveness of our sales and marketing efforts, both domestically and internationally, and our ability to attract new customers. If we fail toattract new customers and maintain and expand those customer relationships, our revenues will grow more slowly than expected, and our business will beharmed. Our future growth also depends upon expanding sales of our products to existing customers and their organizations. If our customers do not purchaseadditional licenses or capabilities, our revenues may grow more slowly than expected, may not grow at all or may decline. There can be no assurance that ourefforts would result in increased sales to existing customers ("upsells") and additional revenues. If our efforts to upsell to our customers are not successful, ourbusiness would suffer. We may face increased competition in our market. While there are some companies which offer certain features similar to those embedded in our solutions, as well as others with whom we compete in certaintactical use cases, we believe that we do not currently compete with a company that offers the same breadth of functionalities that we offer in a singleintegrated solution. Nevertheless, we do compete against a select group of software vendors, such as Veritas Technologies LLC and Quest Software, thatprovide standalone solutions, similar to those found in our comprehensive software suite, in the specific markets in which we operate. We also face directcompetition with respect to certain of our products, specifically DatAnywhere, Data Transport Engine, DatAnswers and DatAdvantage for Directory Services.As we continue to augment our functionality with insider threat detection and user behavior analytics and as we expand our classification capabilities tobetter serve compliance needs with new regulations, like GDPR, we may face increased perceived and real competition from other security and classificationtechnologies. As we expand our coverage and penetration in the cloud, we may face increased perceived and real competition from other cloud-focusedtechnologies. In the future, as customer requirements evolve and new technologies are introduced, we may experience increased competition if established oremerging companies develop solutions that address the enterprise data market. Furthermore, because we operate in a relatively new and evolving area, weanticipate that competition will increase based on customer demand for these types of products. In particular, if a more established company were to target our market, we may face significant competition. They may have competitive advantages, such asgreater name recognition, larger sales, marketing, research and acquisition resources, access to larger customer bases and channel partners, a longer operatinghistory and lower labor and development costs, which may enable them to respond more quickly to new or emerging technologies and changes in customerrequirements or devote greater resources to the development, promotion and sale of their products than we do. Increased competition could result in us failingto attract customers or maintain licenses at the same rate. It could also lead to price cuts, alternative pricing structures or the introduction of productsavailable for free or a nominal price, reduced gross margins, longer sales cycles and loss of market share. In addition, our current or prospective channel partners may establish cooperative relationships with any future competitors. These relationships may allowfuture competitors to rapidly gain significant market share. These developments could also limit our ability to obtain revenues from existing and newcustomers. 11  Our ability to compete successfully in our market will also depend on a number of factors, including ease and speed of product deployment and use, thequality and reliability of our customer service and support, total cost of ownership, return on investment and brand recognition. Any failure by us tosuccessfully address current or future competition in any one of these or other areas may reduce the demand for our products and adversely affect ourbusiness, results of operations and financial condition. We have a history of losses, and we may not be profitable in the future. We have incurred net losses in each year since our inception, including a net loss of $13.7 million, $17.7 million and $21.3 million in each of the yearsended December 31, 2017, 2016 and 2015, respectively. Because the market for our software is rapidly evolving and has not yet reached widespreadadoption, it is difficult for us to predict our future results of operations. We expect our operating expenses to increase over the next several years as we hireadditional personnel, particularly in our sales and marketing and research and development groups, expand and improve the effectiveness of our distributionchannels, and continue to develop features and applications for our software. Prolonged economic uncertainties or downturns could materially adversely affect our business. Our business depends on our current and prospective customers’ ability and willingness to invest money in information technology services, which in turn isdependent upon their overall economic health. Negative conditions in the general economy both in the United States and abroad, including conditionsresulting from financial and credit market fluctuations and terrorist attacks on the United States, Europe, Asia Pacific or elsewhere, could cause a decrease incorporate spending on enterprise software in general. Continuing uncertainty in the global economy, particularly in EMEA, which accounted for approximately one-third of our revenues in 2017 and where wehave experienced inconsistent quarterly growth rates over the last few years, makes it extremely difficult for our customers and us to forecast and plan futurebusiness activities accurately. This could cause our customers to reevaluate decisions to purchase our product or to delay their purchasing decisions, whichcould lengthen our sales cycles. We have a significant number of customers in the financial services, healthcare, public sector and industrial industries. A substantial downturn in any of theseindustries, or a reduction in public sector spending, may cause enterprises to react to worsening conditions by reducing their capital expenditures in generalor by specifically reducing their spending on information technology. Customers may delay or cancel information technology projects, choose to focus onin-house development efforts or seek to lower their costs by renegotiating maintenance and support agreements. To the extent purchases of licenses for oursoftware are perceived by customers and potential customers to be discretionary, our revenues may be disproportionately affected by delays or reductions ingeneral information technology spending. In addition, the increased pace of consolidation in certain industries may result in reduced overall spending on oursoftware. If the economic conditions of the general economy or industries in which we operate worsen from present levels, our business, results of operationsand financial condition could be adversely affected. If we are unable to maintain successful relationships with our channel partners, our business could be adversely affected. We rely on channel partners, such as distribution partners and resellers, to sell licenses and support and maintenance agreements for our software. In 2017, ourchannel partners fulfilled substantially all of our sales, and we expect that sales to channel partners will continue to account for substantially all of ourrevenues for the foreseeable future. Our ability to achieve revenue growth in the future will depend in part on our success in maintaining successfulrelationships with our channel partners. Our agreements with our channel partners are generally non-exclusive, meaning our channel partners may offer customers the products of several differentcompanies. If our channel partners do not effectively market and sell our software, choose to use greater efforts to market and sell their own products or thoseof others, or fail to meet the needs of our customers, our ability to grow our business, sell our software and maintain our reputation may be adversely affected.Our contracts with our channel partners generally allow them to terminate their agreements for any reason upon 30 days’ notice. A termination of theagreement has no effect on orders already placed. The loss of a substantial number of our channel partners, our possible inability to replace them, or thefailure to recruit additional channel partners could materially and adversely affect our results of operations. If we are unable to maintain our relationshipswith these channel partners, our business, results of operations, financial condition or cash flows could be adversely affected. If our technical support or professional services are not satisfactory to our customers, they may not renew their maintenance and support agreements orbuy future products, which could adversely affect our future results of operations. Our business relies on our customers’ satisfaction with the technical support and professional services we provide to support our products. Whilesubstantially all of our software is sold under perpetual license agreements, all of our maintenance and support agreements are sold on a term basis. Ourcustomers typically purchase one year of software maintenance and support as part of their initial purchase of our products, with an option to renew theirmaintenance agreements. In order for us to maintain and improve our results of operations, it is important that our existing customers renew their maintenanceand support agreements and term licenses, if applicable, when the contract term expires. For example, our maintenance renewal rate for each of the yearsended December 31, 2015, 2016 and 2017 was over 90%. 12  If we fail to provide technical support services that are responsive, satisfy our customers’ expectations and resolve issues that they encounter with ourproducts and services, then they may elect not to purchase or renew annual maintenance and support contracts and they may choose not to purchaseadditional products and services from us. Accordingly, our failure to provide satisfactory technical support or professional services could lead our customersnot to renew their agreements with us or renew on terms less favorable to us, and therefore have a material and adverse effect on our business and results ofoperations. Because we derive substantially all of our revenues and cash flows from sales of licenses from a single platform of products, failure of the products in theplatform to satisfy customers or to achieve increased market acceptance would adversely affect our business. In 2017, we generated substantially all of our revenues from sales of licenses from four of our current product families, DatAdvantage, DataPrivilege, DataClassification Engine and Data Transport Engine. We expect to continue to derive a majority of our revenues from license sales relating to this platform inthe future. As such, market acceptance of this platform of products is critical to our continued success. Demand for licenses for our platform of products isaffected by a number of factors, some of which are outside of our control, including continued market acceptance of our software by referenceable accountsfor existing and new use cases, technological change and growth or contraction in our market. We expect the proliferation of enterprise data to lead to anincrease in the data analysis demands, and data security and retention concerns, of our customers, and our software, including the software underlying ourData Security Platform, may not be able to scale and perform to meet those demands. If we are unable to continue to meet customer demands or to achievemore widespread market acceptance of our software, our business, operations, financial results and growth prospects will be materially and adversely affected. Breaches in our security, cyber-attacks or other cyber-risks could expose us to significant liability and cause our business and reputation to suffer. Our operations involve transmission and processing of our customers' confidential, proprietary and sensitive information. We have legal and contractualobligations to protect the confidentiality and appropriate use of customer data. Despite our security measures, our information technology and infrastructuremay be vulnerable to attacks as a result of third party action, employee error or misconduct. Security risks, including, but not limited to, unauthorized use ordisclosure of customer data, theft of proprietary information, loss or corruption of customer data and computer hacking attacks or other cyber-attacks, couldexpose us to substantial litigation expenses and damages, indemnity and other contractual obligations, government fines and penalties, mitigation expensesand other liabilities. We are continuously working to improve our information technology systems, together with creating security boundaries around ourcritical and sensitive assets. We provide advance security awareness training to our employees and contractors that focuses on various aspects of the cybersecurity world. All of these steps are taken in order to mitigate the risk of attack and to ensure our readiness to responsibly handle any security violation orattack. However, because techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not recognized untilsuccessfully launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. If an actual orperceived breach of our security occurs, the market perception of the effectiveness of our security measures and our products could be harmed, we could losepotential sales and existing customers, our ability to operate our business could be impaired, and we may incur significant liabilities. Failure to protect our proprietary technology and intellectual property rights could substantially harm our business. The success of our business depends on our ability to obtain, protect and enforce our trade secrets, trademarks, copyrights, patents and other intellectualproperty rights. We attempt to protect our intellectual property under patent, trademark, copyrights and trade secret laws, and through a combination ofconfidentiality procedures, contractual provisions and other methods, all of which offer only limited protection. As of January 31, 2018, we had 52 issued patents in the United States and 33 pending U.S. patent applications. We also had 18 patents issued and 67applications pending for examination in non-U.S. jurisdictions, and 10 pending PCT, patent applications, all of which are counterparts of our U.S. patentapplications. We may file additional patent applications in the future. The process of obtaining patent protection is expensive and time-consuming, and wemay not be able to prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner all the way through to the successfulissuance of a patent. We may choose not to seek patent protection for certain innovations and may choose not to pursue patent protection in certainjurisdictions. Furthermore, it is possible that our patent applications may not issue as granted patents, that the scope of our issued patents will be insufficientor not have the coverage originally sought, that our issued patents will not provide us with any competitive advantages, and that our patents and otherintellectual property rights may be challenged by others or invalidated through administrative process or litigation. In addition, issuance of a patent does notguarantee that we have an absolute right to practice the patented invention. Our policy is to require our employees (and our consultants and service providersthat develop intellectual property included in our products) to execute written agreements in which they assign to us their rights in potential inventions andother intellectual property created within the scope of their employment (or, with respect to consultants and service providers, their engagement to developsuch intellectual property), but we cannot assure you that we have adequately protected our rights in every such agreement or that we have executed anagreement with every such party. Finally, in order to benefit from patent and other intellectual property protection, we must monitor, detect and pursueinfringement claims in certain circumstances in relevant jurisdictions, all of which is costly and time-consuming. As a result, we may not be able to obtainadequate protection or to enforce our issued patents or other intellectual property effectively. 13  In addition to patented technology, we rely on our unpatented proprietary technology and trade secrets. Despite our efforts to protect our proprietarytechnologies and our intellectual property rights, unauthorized parties, including our employees, consultants, service providers or customers, may attempt tocopy aspects of our products or obtain and use our trade secrets or other confidential information. We generally enter into confidentiality agreements with ouremployees, consultants, service providers, vendors, channel partners and customers, and generally limit access to and distribution of our proprietaryinformation and proprietary technology through certain procedural safeguards. These agreements may not effectively prevent unauthorized use or disclosureof our intellectual property or technology and may not provide an adequate remedy in the event of unauthorized use or disclosure of our intellectual propertyor technology. We cannot assure you that the steps taken by us will prevent misappropriation of our trade secrets or technology or infringement of ourintellectual property. In addition, the laws of some foreign countries where we operate do not protect our proprietary rights to as great an extent as the laws ofthe United States, and many foreign countries do not enforce these laws as diligently as government agencies and private parties in the United States. Moreover, industries in which we operate, such as data security, cyber security, data retention and data governance are characterized by the existence of alarge number of relevant patents and frequent claims and related litigation regarding patent and other intellectual property rights. From time to time, thirdparties have asserted and may assert their patent, copyright, trademark and other intellectual property rights against us, our channel partners or our customers.Successful claims of infringement or misappropriation by a third party could prevent us from distributing certain products or performing certain services orcould require us to pay substantial damages (including, for example, treble damages if we are found to have willfully infringed patents and increasedstatutory damages if we are found to have willfully infringed copyrights), royalties or other fees. Such claims also could require us to cease making, licensingor using solutions that are alleged to infringe or misappropriate the intellectual property of others or to expend additional development resources to attemptto redesign our products or services or otherwise to develop non-infringing technology. Even if third parties may offer a license to their technology, the termsof any offered license may not be acceptable, and the failure to obtain a license or the costs associated with any license could cause our business, results ofoperations or financial condition to be materially and adversely affected. In some cases, we indemnify our channel partners and customers against claims thatour products infringe the intellectual property of third parties. Defending against claims of infringement or being deemed to be infringing the intellectualproperty rights of others could impair our ability to innovate, develop, distribute and sell our current and planned products and services. If we are unable toprotect our intellectual property rights and ensure that we are not violating the intellectual property rights of others, we may find ourselves at a competitivedisadvantage to others who need not incur the additional expense, time and effort required to create the innovative products that have enabled us to besuccessful to date. Interruptions or performance problems, including associated with our website or support website or any caused by cyber-attacks, may adversely affect ourbusiness. Our continued growth depends in part on the ability of our existing and potential customers to quickly access our website and support website. Access to oursupport website is also imperative to our daily operations and interaction with customers, as it allows customers to download our software, fixes and patches,as well as open and respond to support tickets and register license keys for evaluation or production purposes. We have experienced, and may in the futureexperience, website disruptions, outages and other performance problems due to a variety of factors, including technical failures, cyber-attacks, naturaldisasters, infrastructure changes, human or software errors, capacity constraints due to an overwhelming number of users accessing our websitesimultaneously and denial of service or fraud. In some instances, we may not be able to identify the cause or causes of these website performance problemswithin an acceptable period of time. It may become increasingly difficult to maintain and improve the performance of our websites, especially during peakusage times and as our software becomes more complex and our user traffic increases. If our websites are unavailable or if our users are unable to downloadour software, patches or fixes within a reasonable amount of time or at all, we may suffer reputational harm and our business would be negatively affected. Real or perceived errors, failures or bugs in our software could adversely affect our growth prospects. Because our software uses complex technology, undetected errors, failures or bugs may occur. Our software is often installed and used in a variety ofcomputing environments with different operating system management software, and equipment and networking configurations, which may cause errors orfailures of our software or other aspects of the computing environment into which it is deployed. In addition, deployment of our software into computingenvironments may expose undetected errors, compatibility issues, failures or bugs in our software. Despite testing by us, errors, failures or bugs may not befound in our software until it is released to our customers. Moreover, our customers could incorrectly implement or inadvertently misuse our software, whichcould result in customer dissatisfaction and adversely impact the perceived utility of our products as well as our brand. Any of these real or perceived errors,compatibility issues, failures or bugs in our software could result in negative publicity, reputational harm, loss of or delay in market acceptance of oursoftware, loss of competitive position or claims by customers for losses sustained by them. In such an event, we may be required, or may choose, for customerrelations or other reasons, to expend additional resources in order to help correct the problem. 14  If our software is perceived as not being secure, customers may reduce the use of or stop using our software, and we may incur significant liabilities. Our software involves the transmission of data between data stores, and between data stores and desktop and mobile computers, and may in the future involvethe storage of data. Any security breaches with respect to such data could result in the loss of this information, litigation, indemnity obligations and otherliabilities. While we have taken steps to protect the confidential information that we have access to, including confidential information we may obtainthrough our customer support services or customer usage of our products, we have no direct control over the substance of the content. Therefore, if customersuse our software for the transmission of personally identifiable information and our security measures are breached as a result of third-party action, employeeerror, malfeasance or otherwise, our reputation could be damaged, our business may suffer and we could incur significant liability. Because techniques usedto obtain unauthorized access or sabotage systems change frequently and generally are not identified until they are launched against a target, we may beunable to anticipate these techniques or to implement adequate preventative measures. While we maintain insurance coverage for some of the above events,the potential liabilities associated with these events could exceed the insurance coverage we maintain. Any or all of these issues could tarnish our reputation,negatively impact our ability to attract new customers or sell additional products to our existing customers, cause existing customers to elect not to renewtheir maintenance and support agreements or subject us to third-party lawsuits, regulatory fines or other action or liability, thereby adversely affecting ourresults of operations. We are subject to federal, state and industry privacy and data security regulations, which could result in additional costs and liabilities to us or inhibitsales of our software. Although our current software products do not transmit our customers’ data to us, we collect and utilize demographic and other information, includingpersonally identifiable information, from and about users (such as customers, potential customers and others) as they interact with us over the internet andotherwise provide us with information whether via our website or blog or through email or other means. Users may provide personal information to us inmany contexts, including through our direct telephonic support service, blog alert sign-up, product purchase, survey registration, or when accessing ouronline support portals or using other community or social networking features. Because we may collect and utilize this information, we are subject to lawsand regulations regarding the collection, use and disclosure of personal information. In the United States, these include rules and regulations promulgatedunder the authority of the Federal Trade Commission, the Health Insurance Portability and Accountability Act of 1996, and state breach notification laws.Internationally, virtually every jurisdiction in which we operate has established its own data security and privacy legal framework with which we or ourcustomers must comply, including the GDPR adopted in the EU and which will become enforceable on May 25, 2018. Further, the regulatory framework for privacy issues worldwide is rapidly evolving and is likely to remain uncertain for the foreseeable future. Many federal,state and foreign government bodies and agencies have adopted or are considering adopting laws and regulations. In addition, privacy advocates andindustry groups may propose new and different self-regulatory standards that either legally or contractually apply to us. Because the interpretation andapplication of privacy and data protection laws are still uncertain, it is possible that these laws may be interpreted and applied in a manner that is inconsistentwith our existing data management practices or the features of our software. If so, in addition to the possibility of fines, lawsuits and other claims, we could berequired to fundamentally change our business activities and practices or modify our software, which could have an adverse effect on our business. Anyinability to adequately address privacy concerns, even if unfounded, or comply with applicable privacy or data protection laws, regulations and policies,could result in additional cost and liability to us, damage our reputation, inhibit sales and adversely affect our business. 15  Our long-term growth depends, in part, on being able to continue to expand internationally on a profitable basis, which subjects us to risks associated withconducting international operations. Historically, we have generated a majority of our revenues from customers in the United States. For the year ended December 31, 2017, approximately 62% ofour total revenues were derived from sales in the United States. Nevertheless, we have operations across the globe, and we plan to continue to expand ourinternational operations as part of our long-term growth strategy. The further expansion of our international operations will subject us to a variety of risks andchallenges, including: •sales and customer service challenges associated with operating in different countries; •increased management travel, infrastructure and legal compliance costs associated with having multiple international operations; •difficulties in receiving payments from different geographies, including difficulties associated with currency fluctuations, paymentcycles, transfer of funds or collecting accounts receivable, especially in emerging markets; •variations in economic or political conditions between each country or region; •economic uncertainty around the world and adverse effects arising from economic interdependencies across countries and regions; •uncertainty around how the United Kingdom’s decision to exit the European Union (“Brexit”) will impact its access to the EuropeanUnion Single Market, the related regulatory environment, the global economy and the resulting impact on our business; •compliance with foreign laws and regulations and the risks and costs of non-compliance with such laws and regulations; •compliance with laws and regulations for foreign operations, including the U.S. Foreign Corrupt Practices Act of 1977, or the FCPA, theU.K. Bribery Act of 2010, import and export control laws, tariffs, trade barriers, economic sanctions and other regulatory or contractuallimitations on our ability to sell our software in certain foreign markets, and the risks and costs of non-compliance; •heightened risks of unfair or corrupt business practices in certain geographies and of improper or fraudulent sales arrangements that mayimpact financial results and result in restatements of financial statements and irregularities in financial statements; •reduced protection for intellectual property rights in certain countries and practical difficulties and costs of enforcing rights abroad; •compliance with the laws of numerous foreign taxing jurisdictions and overlapping of different tax regimes; and •uncertainty around a potential reverse or renegotiation of international trade agreements and partnerships under the administration of U.S.President Donald J. Trump. Any of these risks could adversely affect our international operations, reduce our revenues from outside the United States or increase our operating costs,adversely affecting our business, results of operations and financial condition and growth prospects. There can be no assurance that all of our employees,independent contractors and channel partners will comply with the formal policies we have and will implement, or applicable laws and regulations.Violations of laws or key control policies by our employees, independent contractors and channel partners could result in delays in revenue recognition,financial reporting misstatements, fines, penalties or the prohibition of the importation or exportation of our software and services and could have a materialadverse effect on our business and results of operations. If currency exchange rates fluctuate substantially in the future, our results of operations, which are reported in U.S. dollars, could be adversely affected. Our functional and reporting currency is the U.S. dollar, and we generate a majority of our revenues and incur a majority of our expenses in U.S. dollars.Revenues and expenses are also incurred in other currencies, primarily Euros, Pounds Sterling, Canadian dollars, Australian dollars and New Israeli Shekels(“NIS”). Accordingly, changes in exchange rates may have a material adverse effect on our business, results of operations and financial condition. Theexchange rates between the U.S. dollar and foreign currencies have fluctuated substantially in recent years and may continue to fluctuate substantially in thefuture. For example, due to the recent appreciation of the NIS against the U.S. Dollar, we expect our operating expenses, mainly those related to research anddevelopment, to be negatively impacted by this foreign currency movement compared to 2017. For both the first quarter and full year 2018, we expect thisimpact to be approximately 300 basis points to our operating margin. Furthermore, a strengthening of the U.S. dollar could increase the cost in local currencyof our software and our maintenance renewals to customers outside the United States, which could adversely affect our business, results of operations,financial condition and cash flows. Volatility in exchange rates may continue in the short term as the United Kingdom negotiates its exit from the EuropeanUnion which is scheduled to occur by the end of March 2019. Brexit and the withdrawal of the United Kingdom from the European Union, as well as othermember countries public discussions about the possibility of withdrawing from the European Union, may also create global economic uncertainty, whichmay impact, among other things, the demand for our products. 16  We incur expenses for employee compensation and other operating expenses at our non-U.S. locations in local currencies. The weakening of the U.S. dollaragainst such currencies would cause the U.S. dollar equivalent of such expenses to increase which could have a negative impact on our reported results ofoperations. We use forward foreign exchange contracts to hedge or mitigate the effect of changes in foreign exchange rates on our operating expensesdenominated in certain foreign currencies. However, this strategy might not eliminate our exposure to foreign exchange rate fluctuations and involves costsand risks of its own, such as cash expenditures, ongoing management time and expertise, external costs to implement the strategy and potential accountingimplications. Additionally, our hedging activities may contribute to increased losses as a result of volatility in foreign currency markets. Our use of open source software could negatively affect our ability to sell our software and subject us to possible litigation. We use open source software and expect to continue to use open source software in the future. Some open source software licenses require users whodistribute open source software as part of their own software product to publicly disclose all or part of the source code to such software product or to makeavailable any derivative works of the open source code on unfavorable terms or at no cost. We may face ownership claims of third parties over, or seeking toenforce the license terms applicable to, such open source software, including by demanding the release of the open source software, derivative works or ourproprietary source code that was developed using such software. These claims could also result in litigation, require us to purchase a costly license or requireus to devote additional research and development resources to change our software, any of which would have a negative effect on our business and results ofoperations. In addition, if the license terms for the open source code change, we may be forced to re-engineer our software or incur additional costs. Finally,we cannot assure you that we have incorporated open source software into our own software in a manner that conforms with our current policies andprocedures. Our business is highly dependent upon our brand recognition and reputation, and the failure to maintain or enhance our brand recognition or reputationmay adversely affect our business. We believe that enhancing the “Varonis” brand identity and maintaining our reputation in the information technology industry is critical to our relationshipswith our customers and to our ability to attract new customers. Our brand recognition and reputation is dependent upon: •our ability to continue to offer high-quality, innovative and error- and bug-free products; •our ability to maintain customer satisfaction with our products; •our ability to be responsive to customer concerns and provide high quality customer support, training and professional services; •our marketing efforts; •any misuse or perceived misuse of our products; •positive or negative publicity; •interruptions, delays or attacks on our website; and •litigation or regulatory-related developments. We may not be able to successfully promote our brand or maintain our reputation. In addition, independent industry analysts often provide reviews of ourproducts, as well as other products available in the market, and perception of our product in the marketplace may be significantly influenced by thesereviews. If these reviews are negative, or less positive than reviews about other products available in the market, our brand may be adversely affected.Furthermore, negative publicity relating to events or activities attributed to us, our employees, our channel partners or others associated with any of theseparties, may tarnish our reputation and reduce the value of our brand. Damage to our reputation and loss of brand equity may reduce demand for our productsand have an adverse effect on our business, results of operations and financial condition. Any attempts to rebuild our reputation and restore the value of ourbrand may be costly and time consuming, and such efforts may not ultimately be successful. Moreover, it may be difficult to enhance our brand and maintain our reputation in connection with sales to channel partners. Promoting our brand requires usto make significant expenditures, and we anticipate that the expenditures will increase as our market becomes more competitive, as we expand into newmarkets and geographies and as more sales are generated to our channel partners. To the extent that these activities yield increased revenues, these revenuesmay not offset the increased expenses we incur. If we do not successfully enhance our brand and maintain our reputation, our business may not grow, we mayhave reduced pricing power relative to competitors with stronger brands, and we could lose customers, all of which would adversely affect our business,operations and financial results. 17  False detection of security breaches, false identification of malicious sources or misidentification of sensitive or regulated information could adverselyaffect our business. Our cyber-security products may falsely detect threats that do not actually exist. For example, our DatAlert solution may enrich metadata collected by ourproducts with information from external sources and third-party data providers. If the information from these data providers is inaccurate, the potential forfalse positives increases. These false positives, while typical in the industry, may affect the perceived reliability of our products and solutions and maytherefore adversely impact market acceptance of our products. As definitions and instantiations of personal identifiers and other sensitive content change,automated classification technologies may falsely identify or fail to identify data as sensitive. If our products and solutions fail to detect exposures or restrictaccess to important systems, files or applications based on falsely identifying legitimate use as an attack or otherwise unauthorized, then our customers’businesses could be adversely affected. Any such false identification of use and subsequent restriction could result in negative publicity, loss of customersand sales, increased costs to remedy any problem and costly litigation. Our success depends in part on maintaining and increasing our sales to customers in the public sector. We derive a portion of our revenues from contracts with federal, state, local and foreign governments and government-owned or -controlled entities (such aspublic health care bodies, educational institutions and utilities), which we refer to as the public sector herein. We believe that the success and growth of ourbusiness will continue to depend on our successful procurement of public sector contracts. Selling to public sector entities can be highly competitive,expensive and time consuming, often requiring significant upfront time and expense without any assurance that our efforts will produce any sales. Factorsthat could impede our ability to maintain or increase the amount of revenues derived from public sector contracts include: •changes in public sector fiscal or contracting policies; •decreases in available public sector funding; •changes in public sector programs or applicable requirements; •the adoption of new laws or regulations or changes to existing laws or regulations; •potential delays or changes in the public sector appropriations or other funding authorization processes; •the requirement of contractual terms that are unfavorable to us, such as most-favored-nation pricing provisions; and •delays in the payment of our invoices by public sector payment offices. Furthermore, we must comply with laws and regulations relating to public sector contracting, which affect how we and our channel partners do business inboth the United States and abroad. These laws and regulations may impose added costs on our business, and failure to comply with these or other applicableregulations and requirements, including non-compliance in the past, could lead to claims for damages from our channel partners, penalties, termination ofcontracts, and temporary suspension or permanent debarment from public sector contracting. The occurrence of any of the foregoing could cause public sector customers to delay or refrain from purchasing licenses of our software in the future orotherwise have an adverse effect on our business, operations and financial results. We are subject to governmental export and import controls that could subject us to liability or impair our ability to compete in international markets. We incorporate encryption technology into certain of our products and these products are subject to U.S. export control. We are also subject to Israeli exportcontrols on encryption technology since our product development initiatives are primarily conducted by our wholly-owned Israeli subsidiary. We haveobtained the required licenses to export our products outside of the United States. In addition, the current encryption means used in our products are listed inthe “free means encryption items” published by the Israeli Ministry of Defense, which means we are exempt from obtaining an encryption control license. Ifthe applicable U.S. or Israeli legal requirements regarding the export of encryption technology were to change or if we change the encryption means in ourproducts, we may need to apply for new licenses in the United States and may no longer be able to rely on our licensing exception in Israel. There can be noassurance that we will be able to obtain the required licenses under these circumstances. Furthermore, various other countries regulate the import of certainencryption technology, including import permitting and licensing requirements, and have enacted laws that could limit our ability to distribute our productsor could limit our customers’ ability to implement our products in those countries. We are also subject to U.S. and Israeli export control and economic sanctions laws, which prohibit the shipment of certain products to embargoed orsanctioned countries, governments and persons. Our products could be exported to these sanctioned targets by our channel partners despite the contractualundertakings they have given us and any such export could have negative consequences, including government investigations, penalties and reputationalharm. Moreover, the Trump Administration may create further uncertainty regarding export or import regulations, economic sanctions or related legislation. Itremains unclear what specifically President Trump would or would not do with respect to the initiatives he has raised and what support he would have toimplement any such potential changes. Any change in export or import regulations, economic sanctions or related legislation, shift in the enforcement orscope of existing regulations, or change in the countries, governments, persons or technologies targeted by such regulations, could result in decreased use ofour products by, or in our decreased ability to export or sell our products to, existing or potential customers with international operations. Any decreased useof our products or limitation on our ability to export or sell our products would likely adversely affect our business, financial condition and results ofoperations. 18  Our business in countries with a history of corruption and transactions with foreign governments increase the risks associated with our internationalactivities. As we operate and sell internationally, we are subject to the FCPA and other laws that prohibit improper payments or offers of payments to foreigngovernments and their officials and political parties for the purpose of obtaining or retaining business. We have operations, deal with and make sales togovernmental customers in countries known to experience corruption, particularly certain emerging countries in Eastern Europe, South and Central America,East Asia, Africa and the Middle East. Our activities in these countries create the risk of unauthorized payments or offers of payments by one of ouremployees, consultants, channel partners or sales agents that could be in violation of various anti-corruption laws, even though these parties may not beunder our control. While we have implemented safeguards to prevent these practices by our employees, consultants, channel partners and sales agents, ourexisting safeguards and any future improvements may prove to be less than effective, and our employees, consultants, channel partners or sales agents mayengage in conduct for which we might be held responsible. Violations of the FCPA or other anti-corruption laws may result in severe criminal or civilsanctions, including suspension or debarment from government contracting, and we may be subject to other liabilities, which could negatively affect ourbusiness, operating results and financial condition. Our ability to use our net operating loss carryforwards and other tax attributes may be limited if we undergo an “ownership change.” Our ability to utilize our net operating loss carryforwards (“NOLs”) and other tax attributes could be limited if we undergo an “ownership change” within themeaning of Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”). An ownership change is generally defined as a greater than 50percentage point increase in equity ownership by 5% stockholders in any three-year period. If an ownership change occurred as a result of the sale of futureequity issuances, we may not be able to fully realize the benefits of these NOLs. Also, the cash tax benefit from our NOLs is dependent upon our ability togenerate sufficient taxable income. Accordingly, we may be unable to earn enough taxable income in order to fully utilize our current NOLs. Changes in our provision for income taxes or adverse outcomes resulting from examination of our income tax returns could adversely affect our results. We are subject to income taxation in the United States, Israel and numerous other jurisdictions. Determining our provision for income taxes requiressignificant management judgment. In addition, our provision for income taxes could be adversely affected by many factors, including, among other things,changes to our operating structure, changes in the amounts of earnings in jurisdictions with different statutory tax rates, changes in the valuation of deferredtax assets and liabilities and changes in tax laws. We are subject to ongoing tax examinations in various jurisdictions. Tax authorities may disagree with ourintercompany charges, cross-jurisdictional transfer pricing or other matters and assess additional taxes. While we regularly evaluate the likely outcomes ofthese examinations to determine the adequacy of our provision for income taxes, there can be no assurance that the outcomes of such examinations will nothave a material impact on our results of operations and cash flows. In addition, we may be audited in various jurisdictions, and such jurisdictions may assessadditional taxes against us. For example, we are currently subject to a tax audit in Israel. Although we believe our tax estimates are reasonable, the finaldetermination of any tax audits or litigation could be materially different from our historical tax provisions and accruals, which could have a material adverseeffect on our results of operations or cash flows in the period or periods for which a determination is made. Significant judgment is required to determine the recognition and measurement attributes prescribed in Accounting Standards Codification (“ASC 740-10-25”). In addition, ASC 740-10-25 applies to all income tax positions, including the potential recovery of previously paid taxes, which if settled unfavorablycould adversely impact our provision for income taxes. Further, as a result of certain of our ongoing employment and capital investment actions andcommitments, our income in certain countries is subject to reduced tax rates. Our failure to meet these commitments could adversely impact our provision forincome taxes. In addition, we are subject to the continuous examination of our income tax returns by the U.S. Internal Revenue Service and other taxauthorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for incometaxes. There can be no assurance that the outcomes from these continuous examinations will not have an adverse effect on our results of operations. 19  The adoption of the recent tax reform and the enactment of additional legislation changing the United States taxation of international business activitiescould materially impact our financial position and results of operations. On December 22, 2017, President Trump signed into law the “Tax Cuts and Jobs Act” (TCJA) that significantly reforms the Code. The TCJA, among otherthings, includes changes to U.S. federal tax rates, imposes significant additional limitations on the deductibility of interest and restricts the use of netoperating loss carryforwards arising after December 31, 2017, allows for the expensing of capital expenditures, and puts into effect the migration from a“worldwide” system of taxation to a territorial system. We do not expect tax reform to have a material impact to our net operating losses. We continue toexamine the impact this tax reform legislation may have on our business. Due to the expansion of our international business activities, any changes in theU.S. taxation of such activities may increase our worldwide effective tax rate and adversely affect our financial position and results of operations. Further,foreign governments may enact tax laws in response to the TCJA that could result in further changes to global taxation and materially affect our financialposition and results of operations. The impact of the TCJA on holders of our securities is uncertain. We urge our stockholders to consult with their legal andtax advisors with respect to such legislation and the potential tax consequences. We conduct our operations in a number of jurisdictions worldwide and report our taxable income based on our business operations in those jurisdictions. Ourintercompany relationships are subject to transfer pricing regulations administered by taxing authorities in various jurisdictions. The relevant taxingauthorities may disagree with our determinations as to the income and expenses attributable to specific jurisdictions. If such a disagreement were to occur,and our position were not sustained, we could be required to pay additional taxes, interest and penalties, which could result in one-time tax charges, highereffective tax rates, reduced cash flows and lower overall profitability of our operations. Changes in financial accounting standards may cause adverse and unexpected revenue fluctuations and impact our reported results of operations. A change in accounting standards or practices could harm our operating results and may even affect our reporting of transactions completed before thechange is effective. New accounting pronouncements, such as Accounting Standards Update 2014-09 related to revenue recognition, and varyinginterpretations of accounting pronouncements have occurred and may occur in the future. Changes to existing rules or the questioning of current practicesmay harm our operating results or the way we conduct our business. Additionally, the adoption of new or revised accounting principles may require that wemake significant changes to our systems process and controls. Acquisitions could disrupt our business and adversely affect our results of operations, financial condition and cash flows. We may make acquisitions that could be material to our business, results of operations, financial condition and cash flows. Our ability as an organization tosuccessfully acquire and integrate technologies or businesses is unproven. Acquisitions involve many risks, including the following: •an acquisition may negatively affect our results of operations, financial condition or cash flows because it may require us to incur charges orassume substantial debt or other liabilities, may cause adverse tax consequences or unfavorable accounting treatment, including potential write-downs of deferred revenues, may expose us to claims and disputes by third parties, including intellectual property claims and disputes, or may notgenerate sufficient financial return to offset additional costs and expenses related to the acquisition; •we may encounter difficulties or unforeseen expenditures in integrating the business, technologies, products, personnel or operations of anycompany that we acquire, particularly if key personnel of the acquired company decide not to work for us; •an acquisition may disrupt our ongoing business, divert resources, increase our expenses and distract our management; •an acquisition may result in a delay or reduction of customer purchases for both us and the company we acquired due to customer uncertaintyabout continuity and effectiveness of service from either company; •we may encounter difficulties in, or may be unable to, successfully sell any acquired products; •an acquisition may involve the entry into geographic or business markets in which we have little or no prior experience or where competitors havestronger market positions; •challenges inherent in effectively managing an increased number of employees in diverse locations; •the potential strain on our financial and managerial controls and reporting systems and procedures; •potential known and unknown liabilities or deficiencies associated with an acquired company that were not identified in advance; •our use of cash to pay for acquisitions would limit other potential uses for our cash and affect our liquidity; •if we incur debt to fund such acquisitions, such debt may subject us to material restrictions on our ability to conduct our business as well asfinancial maintenance covenants; •the risk of impairment charges related to potential write-downs of acquired assets or goodwill in future acquisitions; 20  •to the extent that we issue a significant amount of equity or convertible debt securities in connection with future acquisitions, existingstockholders may be diluted and earnings per share may decrease; and •managing the varying intellectual property protection strategies and other activities of an acquired company. We may not succeed in addressing these or other risks or any other problems encountered in connection with the integration of any acquired business. Theinability to integrate successfully the business, technologies, products, personnel or operations of any acquired business, or any significant delay inachieving integration, could have a material adverse effect on our business, results of operations, financial condition and cash flows. We may require additional capital to support our business growth, and this capital might not be available on acceptable terms, or at all. We continue to make investments to support our business growth and may require additional funds to respond to business challenges, including the need todevelop new features or enhance our software, improve our operating infrastructure or acquire complementary businesses and technologies. Accordingly, wemay need to engage in equity or debt financing to secure additional funds. If we raise additional funds through future issuances of equity or convertible debtsecurities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privilegessuperior to those of holders of our common stock. Any debt financing that we may secure in the future could involve restrictive covenants relating to ourcapital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursuebusiness opportunities, including potential acquisitions. We may not be able to obtain additional financing on terms favorable to us, if at all. If we are unableto obtain adequate financing on terms satisfactory to us when we require it, our ability to continue to support our business growth and to respond to businesschallenges could be significantly impaired, and our business may be adversely affected. Our business is subject to the risks of fire, power outages, floods, earthquakes and other catastrophic events, and to interruption by manmade problemssuch as terrorism. A significant natural disaster, such as a fire, flood or an earthquake, or a significant power outage could have a material adverse impact on our business,results of operations and financial condition. In the event our customers’ information technology systems or our channel partners’ selling or distributionabilities are hindered by any of these events, we may miss financial targets, such as revenues and sales targets, for a particular quarter. Further, if a naturaldisaster occurs in a region from which we derive a significant portion of our revenue, customers in that region may delay or forego purchases of our products,which may materially and adversely impact our results of operations for a particular period. In addition, acts of terrorism could cause disruptions in ourbusiness or the business of channel partners, customers or the economy as a whole. Given our typical concentration of sales at each quarter end, anydisruption in the business of our channel partners or customers that impacts sales at the end of our quarter could have a significant adverse impact on ourquarterly results. All of the aforementioned risks may be augmented if the disaster recovery plans for us and our channel partners prove to be inadequate. Tothe extent that any of the above results in delays or cancellations of customer orders, or the delay in the manufacture, deployment or shipment of ourproducts, our business, financial condition and results of operations would be adversely affected. Risks Related to our Operations in Israel Conditions in Israel may limit our ability to develop and sell our products, which could result in a decrease of our revenues. Our principal research and development facility, which also houses a portion of our support and general and administrative teams, is located in Israel. Sincethe establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its neighboring countries, as well asincidents of terror activities and other hostilities, and a number of state and non-state actors have publicly committed to its destruction. Political, economicand security conditions in Israel could directly affect our operations. We could be adversely affected by hostilities involving Israel, including acts ofterrorism or any other hostilities involving or threatening Israel, the interruption or curtailment of trade between Israel and its trading partners, a significantincrease in inflation or a significant downturn in the economic or financial condition of Israel. Any on-going or future armed conflicts, terrorist activities,tension along the Israeli borders or with other countries in the region, including Iran, or political instability in the region could disrupt international tradingactivities in Israel and may materially and negatively affect our business and could harm our results of operations. Certain countries, as well as certain companies and organizations, continue to participate in a boycott of Israeli companies, companies with large Israelioperations and others doing business with Israel and Israeli companies. The boycott, restrictive laws, policies or practices directed towards Israel, Israelibusinesses or Israeli citizens could, individually or in the aggregate, have a material adverse effect on our business in the future. 21  Some of our officers and employees in Israel are obligated to perform routine military reserve duty in the Israel Defense Forces, depending on their age andposition in the armed forces. Furthermore, they have been and may in the future be called to active reserve duty at any time under emergency circumstancesfor extended periods of time. Our operations could be disrupted by the absence, for a significant period, of one or more of our officers or key employees dueto military service, and any significant disruption in our operations could harm our business. The tax benefits that are available to our Israeli subsidiary require it to continue to meet various conditions and may be terminated or reduced in thefuture, which could increase its taxes. Our Israeli subsidiary benefits from a status of a “Beneficiary Enterprise” under the Israeli Law for the Encouragement of Capital Investments, 5719-1959, orthe Investment Law. Based on an evaluation of the relevant factors under the Investment Law, including the level of foreign (i.e., non-Israeli) investment inour company, we have determined that the effective tax rate to be paid by our Israeli subsidiary as a “Beneficiary Enterprise” has historically beenapproximately 10%. If our Israeli subsidiary does not meet the requirements for maintaining this status, for example, if the Israeli subsidiary materiallychanges the nature of its business or, if the level of foreign investment in our company decreases, it may no longer be eligible to enjoy this reduced tax rate.As a result, our Israeli subsidiary would be subject to Israeli corporate tax at the standard rate, which, as of January 1, 2018, was set at 23%. Even if our Israelisubsidiary continues to meet the relevant requirements, the tax benefits that the status of “Beneficiary Enterprise” provides may not be continued in thefuture at their current levels or at all. If these tax benefits were reduced or eliminated, the amount of taxes that our Israeli subsidiary would pay would likelyincrease, as all of our Israeli operations would consequently be subject to corporate tax at the standard rate, which could adversely affect our results ofoperations. Additionally, if our Israeli subsidiary increases its activities outside of Israel, for example, through acquisitions, these activities may not beeligible for inclusion in Israeli tax benefit programs. The tax benefits derived from the status of “Beneficiary Enterprise” is dependent upon the ability togenerate sufficient taxable income. Accordingly, our Israeli subsidiary may be unable to earn enough taxable income in order to fully utilize its tax benefits. Risks Related to the Ownership of our Common Stock Our stock price has been and will likely continue to be volatile. The market price for our common stock has been, and is likely to continue to be, volatile for the foreseeable future. For example, since shares of our commonstock were sold in our initial public offering (“IPO”) in March 2014 at a price of $22.00 per share, our common stock’s price on The Nasdaq Global SelectMarket has ranged from $13.25 to $56.80 through February 9, 2018. On February 9, 2018, the closing price of our common stock was $52.40. The marketprice of our common stock may fluctuate significantly in response to a number of factors, many of which we cannot predict or control, including the factorslisted below and other factors described in this “Risk Factors” section: •actual or anticipated fluctuations in our results or those of our competitors; •the financial projections we may provide to the public, any changes in these projections or our failure to meet these projections; •failure of securities analysts to initiate or maintain coverage of our company, changes in financial estimates by any securities analystswho follow our company, or our failure to meet these estimates or the expectations of investors; •ratings changes by any securities analysts who follow our company; •announcements of new products, services or technologies, commercial relationships, acquisitions or other events by us or our competitors; •changes in operating performance and stock market valuations of other technology companies generally, or those in our industry inparticular; •price and volume fluctuations in in certain categories of companies or the overall stock market, including as a result of trends in theglobal economy; •changes in accounting principles; •sales of large blocks of our common stock, including sales by our executive officers, directors and significant stockholders; •additions or departures of any of our key personnel; •lawsuits threatened or filed against us; •short sales, hedging and other derivative transactions involving our capital stock; •general economic conditions in the United States and abroad; 22  •changing legal or regulatory developments in the United States and other countries; and •other events or factors, including those resulting from war, incidents of terrorism or responses to these events. In addition, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equitysecurities of many technology companies. Stock prices of many technology companies have fluctuated in a manner unrelated or disproportionate to theoperating performance of those companies. In the past, stockholders have instituted securities class action litigation following periods of market volatility. Ifwe were to become involved in securities litigation, it could subject us to substantial costs, divert resources and the attention of management from ourbusiness and adversely affect our business, results of operations, financial condition and cash flows. If securities or industry analysts do not publish research or reports about our business, or publish negative reports about our business, our stock price andtrading volume could decline. The trading market for our common stock depends in part on the research and reports that securities or industry analysts publish about us or our business, ourmarket and our competitors. We do not have any control over these analysts or their expectations regarding our performance on a quarterly or annual basis. Ifone or more of the analysts who cover us downgrade our stock or change their opinion of our stock, our stock price would likely decline. If we fail to meetone or more of these analysts' published expectations regarding our performance on a quarterly basis, our stock price or trading volume could decline. If oneor more of these analysts cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, whichcould cause our stock price or trading volume to decline. Substantial future sales of shares of our common stock could cause the market price of our common stock to decline. Sales of a substantial number of shares of our common stock into the public market, or the perception that these sales might occur, could depress the marketprice of our common stock and could impair our ability to raise capital through the sale of additional equity securities. We are unable to predict the effectthat such sales may have on the prevailing market price of our common stock. As of December 31, 2017, we had options and restricted stock units (“RSUs”) outstanding that, if fully vested and exercised, would result in the issuance ofapproximately 3.5 million shares of our common stock. All of the shares of our common stock issuable upon exercise of options and vesting of RSUs havebeen registered for public resale under the Securities Act. Accordingly, these shares will be able to be freely sold in the public market upon issuance aspermitted by any applicable vesting requirements. The requirements of being a public company may strain our resources, divert management’s attention and affect our ability to attract and retain executivemanagement and qualified board members. As a public company, we are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), theDodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the listing requirements of The Nasdaq Global Select Market and other applicablesecurities rules and regulations. Compliance with these rules and regulations have increased our legal and financial compliance costs, make some activitiesmore difficult, time-consuming or costly and increase demand on our systems and resources. The Exchange Act requires, among other things, that we file annual, quarterly and current reports with respect to our business and results of operations. TheSarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting.In order to maintain and, if required, improve our disclosure controls and procedures and internal control over financial reporting to meet this standard,significant resources and management oversight is required. As a result, management’s attention may be diverted from other business concerns, which couldadversely affect our business and results of operations. We may need to hire more employees in the future or engage outside consultants, which will increaseour costs and expenses. In addition, changing laws, regulations and standards relating to corporate governance and public disclosure are creating uncertaintyfor public companies, increasing legal and financial compliance costs and making some activities more time consuming. These laws, regulations andstandards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve overtime as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and highercosts necessitated by ongoing revisions to disclosure and governance practices. Being a public company, these rules and regulations have made it more expensive for us to obtain director and officer liability insurance, and in the future wemay be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us toattract and retain qualified members of our board of directors, particularly to serve on our audit and compensation committees, and qualified executiveofficers. 23  As a result of disclosure of information in our filings with the SEC, our business and financial condition have become more visible, which we believe mayresult in threatened or actual litigation, including by competitors and other third parties. If such claims are successful, our business and results of operationscould be adversely affected, and even if the claims do not result in litigation or are resolved in our favor, these claims, and the time and resources necessary toresolve them, could divert the resources of our management and adversely affect our business and results of operations. We are obligated to develop and maintain proper and effective internal control over financial reporting. These internal controls may not be determined tobe effective, which may adversely affect investor confidence in our company and, as a result, the value of our common stock. We are required, pursuant to Section 404 of the Sarbanes–Oxley Act, to furnish a report by management on, among other things, the effectiveness of ourinternal control over financial reporting on an annual basis. This assessment includes disclosure of any material weaknesses identified by our management inour internal control over financial reporting. We are also required to have our independent registered public accounting firm issue an opinion on theeffectiveness of our internal control over financial reporting on an annual basis. During the evaluation and testing process, if we identify one or more materialweaknesses in our internal control over financial reporting, we will be unable to assert that our internal control over financial reporting is effective. If we are unable to assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable toexpress an opinion on the effectiveness of our internal control over financial reporting, we could lose investor confidence in the accuracy and completenessof our financial reports, which could cause the price of our common stock to decline, and we may be subject to investigation or sanctions by the SEC. Future sales and issuances of our capital stock or rights to purchase capital stock could result in additional dilution of the percentage ownership of ourstockholders and could cause our stock price to decline. Future sales and issuances of our capital stock or rights to purchase our capital stock could result in substantial dilution to our existing stockholders. We maysell common stock, convertible securities and other equity securities in one or more transactions at prices and in a manner as we may determine from time totime. If we sell any such securities in subsequent transactions, investors may be materially diluted. New investors in such subsequent transactions could gainrights, preferences and privileges senior to those of holders of our common stock. We do not intend to pay dividends on our common stock, so any returns will be limited to the value of our stock. We have never declared or paid cash dividends on our common stock. We currently anticipate that we will retain any future earnings and do not expect topay any dividends in the foreseeable future. Any determination to pay dividends in the future will be at the discretion of our board of directors and will bedependent on a number of factors, including our financial condition, results of operations, capital requirements, general business conditions and other factorsthat our board of directors may deem relevant. In addition, the loan agreement for our credit facility contains a prohibition on the payment of cash dividends.Until such time that we pay a dividend, investors must rely on sales of their common stock after price appreciation, which may never occur, as the only way torealize any future gains on their investments. Anti-takeover provisions in our charter documents and under Delaware law could make an acquisition of us, which may be beneficial to our stockholders,more difficult and may prevent attempts by our stockholders to replace or remove our current management. Provisions in our amended and restated certificate of incorporation and amended and restated bylaws may delay or prevent an acquisition of us or a change inour management. These provisions include: •authorizing “blank check” preferred stock, which could be issued by the board without stockholder approval and may contain voting,liquidation, dividend and other rights superior to our common stock, which would increase the number of outstanding shares and couldthwart a takeover attempt; •a classified board of directors whose members can only be dismissed for cause; •the prohibition on actions by written consent of our stockholders; •the limitation on who may call a special meeting of stockholders; •the establishment of advance notice requirements for nominations for election to our board of directors or for proposing matters that canbe acted upon at stockholder meetings; and •the requirement of at least 75% of the outstanding capital stock to amend any of the foregoing second through fifth provisions. 24  In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, whichlimits the ability of stockholders owning in excess of 15% of our outstanding voting stock to merge or combine with us. Although we believe theseprovisions collectively provide for an opportunity to obtain greater value for stockholders by requiring potential acquirers to negotiate with our board ofdirectors, they would apply even if an offer rejected by our board were considered beneficial by some stockholders. In addition, these provisions may frustrateor prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members ofour board of directors, which is responsible for appointing the members of our management. Item 1B.Unresolved Staff Comments We do not have any unresolved comments from the SEC staff. Item 2.Properties Our corporate headquarters are located in New York City in an office consisting of approximately 31,000 square feet. This lease expires in February 2026,although we have the option to both terminate the lease in February 2023 and extend the lease for an additional five years. Additionally, we currently leasean office located in Herzliya, Israel, consisting of approximately 76,000 square feet, where we employ our research and development team and a portion ofour support and general and administrative teams. The lease for this office expires in December 2019, although we have the option to extend the lease for anadditional five years. We also lease smaller offices in North Carolina, France, the United Kingdom, Ireland, Oregon, Virginia, Australia and Germany (whichserve as regional sales offices and some of which are customer support centers) and a second office in Herzliya, Israel (which houses a portion of our generaland administrative team). We plan to invest in additional space as needed to accommodate our growth. Item 3.Legal Proceedings We are not currently a party to any material litigation. Item 4.Mine Safety Disclosures Not applicable. PART II Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Market for Registrant’s Common Equity Our common stock has been listed on The NASDAQ Global Select Market under the symbol “VRNS” since February 28, 2014, the date of our initialpublic offering. The following table sets forth, for the periods indicated, the range of high and low sales prices for our common stock as reported by TheNASDAQ Global Select Market: 2017 2016 High Low High LowFirst Quarter $31.80 $25.20 $19.87 $13.25 Second Quarter 37.90 26.35 26.14 17.09 Third Quarter 43.05 35.45 30.63 22.07 Fourth Quarter 53.60 41.50 32.05 24.45 Dividend Policy We have never declared or paid cash dividends on our common stock. We currently intend to retain any future earnings for use in the operation of ourbusiness and do not intend to declare or pay any cash dividends in the foreseeable future. Any further determination to pay dividends on our common stockwill be at the discretion of our board of directors, subject to applicable laws, and will depend on our financial condition, results of operations, capitalrequirements, general business conditions and other factors that our board of directors considers relevant. Stockholders As of February 1, 2018, there were nine stockholders of record of our common stock, including The Depository Trust Company, which holds shares ofour common stock on behalf of an indeterminate number of beneficial owners. 25  STOCK PERFORMANCE GRAPH The following shall not be deemed “filed” for purposes of Section 18 of the Exchange Act, or incorporated by reference into any of our other filingsunder the Exchange Act or the Securities Act, except to the extent we specifically incorporate it by reference into such filing. This chart compares the cumulative total return on our common stock with that of the NASDAQ Composite Index and the NASDAQ Computer Index.The chart assumes $100 was invested at the close of market on February 28, 2014 in our common stock, the NASDAQ Composite Index and the NASDAQComputer Index, and assumes the reinvestment of any dividends. The stock price performance on the following graph is not necessarily indicative of futurestock price performance. The closing price of our common stock on December 29, 2017, the last trading day of our 2017 fiscal year, was $48.55 per share. Company/Index 2/28/2014 12/31/2014 12/31/2015 12/31/2016 12/31/2017VRNS $100.00 $74.61 $42.73 $60.91 $110.34 NASDAQ Composite $100.00 $109.66 $115.94 $124.64 $159.84 NASDAQ Computer $100.00 $116.57 $123.85 $139.05 $192.95 Sales of Unregistered Securities None. 26  Use of Proceeds from Public Offerings of Common Stock On March 5, 2014, we closed our initial public offering of 5,520,000 million shares of common stock, including 5,300,436 shares of common stocksold by us (inclusive of 500,436 shares of common stock from the full exercise of the overallotment option of shares granted to the underwriters) and 219,564shares of common stock sold by the selling stockholder at a price to the public of $22.00 per share. The offer and sale of all of the shares in the IPO wereregistered under the Securities Act pursuant to a registration statement on Form S-1 (Registration No. 333-191840), which was declared effective by the SECon February 27, 2014. The offering commenced on February 28, 2014, closed on March 5, 2014 and did not terminate before all of the shares in the IPO thatwere registered in the registration statement were sold. Morgan Stanley & Co. LLC, Barclays Capital Inc., Jefferies LLC, RBC Capital Markets, LLC andNeedham & Company, LLC acted as the underwriters. The aggregate offering price for shares sold in the offering was approximately $121.4 million. We didnot receive any proceeds from the sale of shares by the selling stockholder. We raised approximately $106.1 million in net proceeds from the offering, afterdeducting underwriter discounts and commissions of approximately $8.2 million and other offering expenses of approximately $2.4 million. No payments were made by us to directors, officers or persons owning ten percent or more of our common stock or to their associates, or to our affiliates,other than payments in the ordinary course of business to our officers for salaries and bonuses and to our non-employee directors as compensation for servingon our board of directors and the various committees thereof. There has been no material change in the planned use of proceeds from our IPO as described inour final prospectus filed with the SEC pursuant to Rule 424(b) under the Securities Act on March 3, 2014. Pending the uses described, we have invested thenet proceeds in short-term securities such as certificates of deposit and money market funds. Purchase of Equity Securities by Issuer and Affiliated Purchasers None. Item 6.Selected Financial Data The following selected consolidated historical financial data are derived from our audited financial statements. The consolidated balance sheet data asof December 31, 2017 and 2016 and the consolidated statement of operations data for the years ended December 31, 2017, 2016 and 2015 are derived fromour audited consolidated financial statements and related notes that are included elsewhere in this Annual Report on Form 10-K. The consolidated balancesheet data as of December 31, 2015, 2014 and 2013 and the consolidated statement of operations for the years ended December 31, 2014 and 2013 arederived from our audited consolidated financial statements and related notes which are not included in this Annual Report. The information set forth belowshould be read in conjunction with our historical financial statements, including the notes thereto, and “Management’s Discussion and Analysis of FinancialCondition and Results of Operations,” included elsewhere in this Annual Report. Year Ended December 31, 2017 2016 2015 2014 2013 (in thousands, except share and per share data)Consolidated Statement of Operations Data: Revenues: Licenses $123,610 $92,873 $71,273 $58,420 $43,488 Maintenance and services 93,754 71,583 55,937 42,928 31,128 Total revenues 217,364 164,456 127,210 101,348 74,616 Cost of revenues(1) 20,873 15,843 12,019 9,911 6,476 Gross profit 196,491 148,613 115,191 91,437 68,140 Operating costs and expenses: Research and development(1) 47,369 36,660 31,792 28,086 20,973 Sales and marketing(1) 135,896 107,825 86,367 68,787 44,131 General and administrative(1) 26,823 19,822 16,106 11,872 8,881 Total operating expenses 210,088 164,307 134,265 108,745 73,985 Operating loss (13,597) (15,694) (19,074) (17,308) (5,845)Financial income (expenses), net 2,362 (885) (1,523) (1,714) (1,274)Loss before income taxes (11,235) (16,579) (20,597) (19,022) (7,119)Income taxes (2,459) (1,131) (686) (376) (356)Net loss $(13,694) $(17,710) $(21,283) $(19,398) $(7,475)Net loss per share of common stock, basic and diluted(2) $(0.50) $(0.67) $(0.84) $(0.91) $(1.93)Weighted average shares used to compute net loss per shareattributable to common stockholders, basic and diluted 27,467,440 26,406,312 25,198,546 21,242,313 3,880,761 (1) Includes non-cash stock-based compensation as follows: 27  Year Ended December 31, 2017 2016 2015 2014 2013 (in thousands)Cost of revenues $1,078 $699 $419 $192 $39 Research and development 5,209 3,052 1,954 1,198 551 Sales and marketing 8,542 6,104 3,041 2,478 841 General and administrative 5,006 3,083 2,380 796 357 Total $19,835 $12,938 $7,794 $4,664 $1,788 (2)Basic and diluted net loss per share of common stock is computed based on the weighted average number of shares of common stock outstandingduring each period. For additional information, see Note 2.s to our consolidated financial statements included elsewhere in this Annual Report. As of December 31, 2017 2016 2015 2014 2013 (in thousands)Consolidated Balance Sheet Data: Cash, cash equivalents and short-term investments $136,557 $113,808 $106,344 $111,695 $13,977 Working capital 102,304 83,074 85,086 99,316 3,376 Total assets 232,152 181,838 165,144 156,847 47,254 Deferred revenues, current and long-term 80,925 62,040 48,771 37,217 28,700 Warrants to purchase convertible preferred stock — — — — 2,866 Convertible preferred stock — — — — 43,775 Total stockholders’ equity (deficiency) 101,578 82,739 83,587 95,026 (43,008) Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financialstatements and related notes appearing elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements that reflect ourplans, estimates and beliefs, and involve risks and uncertainties. Our actual results and the timing of certain events could differ materially from thoseanticipated in these forward-looking statements as a result of several factors, including those discussed in the section titled “Risk Factors” included underPart I, Item 1A and elsewhere in this Annual Report. See “Special Note Regarding Forward-Looking Statements” in this Annual Report. Overview Varonis is a pioneer in data security and analytics, fighting a different battle than conventional cybersecurity companies. We are pioneers because over adecade ago, we recognized that enterprise capacity to create and share data far exceeded its capacity to protect it. We believed the vast movement ofinformation from analog to digital mediums combined with increasing information dependence would change both the global economy and the risk profilesof corporations and government. Since then our focus has been on using innovation to address the cyber-implications of this movement, creating softwarethat provides new ways to track and protect data wherever it is stored. Our software allows enterprises to protect data stored on premises and in the cloud: sensitive files and emails; confidential customer, patient and employeedata; financial records; strategic and product plans; and other intellectual property. Recognizing the complexities of securing data, we have built a singleintegrated platform for security and analytics to simplify and streamline security and data management. 28  The Varonis Data Security Platform, built on patented technology, allows enterprises to protect data against insider threats and cyberattacks. Our productsenable enterprises to analyze data, account activity and user behavior to detect attacks. Our Data Security Platform prevents or limits unauthorized use ofsensitive information, prevents potential cyberattacks and limits others by locking down sensitive and stale data. Our product efficiently sustains a securestate with automation and addresses additional important use cases including governance, compliance, classification and threat analytics. Our Data SecurityPlatform is driven by a proprietary technology, our Metadata Framework, that extracts critical metadata, or data about data, from an enterprise’s ITinfrastructure. Our Data Security Platform uses this contextual information to map functional relationships among employees, data objects, content andusage. We started operations in 2005 with a vision to make enterprise data more accessible, manageable, secure and actionable. We began offering our flagshipproduct, DatAdvantage, which provides centralized visibility for enterprise data, in 2006. Since then we have continued to invest in innovation and haveconsistently introduced new products to our customers. In 2006, we introduced DataPrivilege as our self-service web portal for business users. In 2008, weenhanced our DatAdvantage offering with DatAdvantage for UNIX/Linux. In 2009, we introduced the IDU Classification Framework (later renamed the DataClassification Engine) for sensitive data classification and DatAdvantage for SharePoint. We further enhanced our DatAdvantage offering by releasingDatAdvantage for Exchange in 2010, enabling our customers to exercise control over the information transferred through corporate e-mails. In 2011, weintroduced DatAdvantage for Directory Services for increased visibility into Active Directory. In 2012, we released the Data Transport Engine for intelligent data migration and archiving and DatAnywhere for secure hybrid cloud collaboration. In 2013,we introduced DatAlert to monitor and alert on sensitive data and file activity. In 2014, we introduced DatAnswers, a secure enterprise search solution forenterprise data that delivers highly relevant and secure search results to enterprise employees, greatly improving their productivity. In 2015, we enhanced ourDatAdvantage, DataPrivilege and Data Classification Engine offerings; with DatAdvantage support for the following Microsoft Office 365 data stores:Exchange Online, SharePoint Online, OneDrive and Active Directory hosted in Azure; with DataPrivilege for SharePoint; and with Data ClassificationEngine for UNIX, SharePoint Online and OneDrive. In 2016, we enhanced our DatAdvantage offerings with additional Office 365 support; DatAnswerssupport for SharePoint Online and OneDrive; and introduced a new web UI for DatAlert for comprehensive security management and threat detection. In thatyear we also added additional user behavior analytics driven threat models to DatAlert to significantly enhance our detection of insider threats, includingpotential disgruntled employees, rogue administrators, hijacked accounts and malware, such as ransomware. We also established a behavioral researchlaboratory where a dedicated team of security experts and data scientists from Varonis continually research the latest threats and emerging securityvulnerabilities and introduce new behavior-based threat models to DatAlert. In 2017, we introduced the Automation Engine to allow customers to automatically repair and maintain file systems so that organizations are less vulnerableto attacks and security breaches, more compliant and consistently meeting a least privilege model. We enhanced DatAlert with DatAlert Analytics Rewind toallow customers to analyze past user and data activity to identify security breaches that may have occurred in the past and pre-emptively tune out falsepositives. We have continued to update our web UI for DatAlert and added new threat models to detect suspicious mailbox, Exchange and Exchange Onlinebehaviors, password resets, unusual activity from personal devices and more. We introduced a new security dashboard in DatAlert, along with enhancedbehavioral analytics, geolocation and more to make it easier than ever to perform security investigations and forensics. In 2017, we also released GDPRPatterns, part of the Data Classification Engine family, to help enterprises identify data that falls under the GDPR and expanded our offerings that can helpenterprises meet compliance and regulation requirements. Finally, in early 2018, we introduced Varonis Edge to extend our proactive security approach tothe perimeter enabling customers to spot signs of attack at the perimeter with telemetry from DNS, VPN and Web Proxies. At the core of our technology is our ability to intelligently extract and analyze metadata from an enterprise’s vast, distributed data stores. The broadapplicability of our technology has resulted in our customers deploying our platform for numerous use cases for security, IT, operations and businesspersonnel. We currently have six product families, and, as of December 31, 2017, approximately 52% of our customers had purchased products in two or morefamilies, one of which was DatAdvantage for all of these customers. We believe our existing customer base serves as a strong source of incremental revenuesgiven our broad platform of products, their growing volumes and complexity of enterprise data and associated security concerns. Our maintenance renewalrate for each of the years ended December 31, 2017, 2016 and 2015 was over 90%. Our key strategies to maintain our renewal rate include focusing on thequality and reliability of our customer service and support to ensure our customers receive value from our products, providing consistent software upgradesand having sufficient dedicated renewal sales personnel. 29  We sell substantially all of our products and services to channel partners, including distributors and resellers, which sell to end-user customers, which we referto in this report as our customers. We believe that our sales model, which combines the leverage of a channel sales model with our highly trained andprofessional sales force, has and will continue to play a major role in our ability to grow and to successfully deliver our unique value proposition forenterprise data. While our products serve customers of all sizes, in all industries and all geographies, the marketing focus and majority of our sales focus is ontargeting organizations with 1,000 users or more who can make larger purchases with us over time and have a greater potential lifetime value. As ofDecember 31, 2017, we had approximately 6,250 customers, spanning leading firms in the financial services, healthcare, public, industrial, insurance, energyand utilities, consumer and retail, education, media and entertainment and technology sectors. We believe our customer count is a key indicator of our marketpenetration and the value that our products bring to our customer base. We also believe our existing customers represent significant future revenueopportunities for us. We will continue our focus on targeting organizations with 1,000 users or more who can make larger purchases with us over time. Theaverage spending per customer for each of the years ended December 31, 2017, 2016 and 2015 was approximately $83,000, $65,000 and $59,000,respectively. We believe there is a significant long term growth opportunity in both domestic and foreign markets, which could include any organization that uses fileshares, intranets and email for collaboration, regardless of region. For the year ended December 31, 2017, approximately 62% of our revenues were derivedfrom the United States, while Europe, the Middle East and Africa accounted for approximately 32% of our revenues and Rest of World (“ROW”) accountedfor approximately 6% of our revenues. Growth in the US was strong, increasing 28% and 34%, respectively, for the three months and year ended December31, 2017 as compared to the comparable periods in the prior year. In EMEA, growth for the three months and year ended December 31, 2017 was 52% and34%, respectively, as compared to the comparable periods in the prior year. We expect both continued sales growth in the United States and internationalexpansion to be key components of our growth strategy, and we will continue to market our products and services in international markets. We plan to continue to expand our international operations as part of our growth strategy. The expansion of our international operations depends inparticular on our ability to hire, integrate and retain local sales and marketing personnel in these international markets, acquire new channel partners andimplement an effective marketing strategy. Given the nominal amount of our ROW revenues, our ROW revenue growth rates have fluctuated in the past andmay fluctuate in the future based on the timing of deal closures. In addition, the further expansion of our international operations will increase our sales andmarketing and general and administrative expenses and will subject us to a variety of risks and challenges, including those related to economic and politicalconditions in each region, compliance with foreign laws and regulations, and compliance with domestic laws and regulations applicable to our internationaloperations. We derive revenues from license sales of our products, services, including initial maintenance contracts and professional services, and renewals. Substantiallyall of our license sales are derived from a platform of products, consisting of DatAdvantage, Data Classification Engine, DataPrivilege and Data TransportEngine. As of December 31, 2017, 2016 and 2015, 93.6%, 92.8% and 92.5% of our customers, respectively, had purchased DatAdvantage; 41.2%, 35.2% and30.5% of our customers, respectively, had purchased Data Classification Engine; 15.1%, 16.0% and 17.2% of our customers, respectively, had purchasedDataPrivilege and 6.3%, 5.5% and 4.5% of our customers, respectively, had purchased Data Transport Engine. As of December 31, 2017, 2016 and 2015,41.1%, 44.7% and 47.4% of our customers, respectively, made standalone purchases of DatAdvantage, and less than 0.4% of our customers made standalonepurchases of DataPrivilege. As of December 31, 2017, our customers made no standalone purchases of Data Classification Engine or Data Transport Engine.Licenses sales accounted for 56.9%, 56.5% and 56.0% of our total revenues for the years ended December 31, 2017, 2016 and 2015, respectively. We have achieved significant growth and scale in recent periods utilizing our business model. For the years ended December 31, 2017, 2016 and 2015, ourrevenues were $217.4 million, $164.5 million and $127.2 million, respectively, representing year-over-year growth of 32% and 29%. For the years endedDecember 31, 2017, 2016 and 2015, we had operating losses of $13.6 million, $15.7 million and $19.1 million and net losses of $13.7 million, $17.7 millionand $21.3 million, respectively. Components of Operating Results Revenues Our revenues consist of licenses and maintenance and services revenues. License Revenues. License revenues reflect the revenues recognized from sales of software licenses to new customers and sales of additional licenses toexisting customers who can purchase additional users for existing licenses or purchase new licenses. Substantially all of our license revenues consist ofrevenues from perpetual licenses, under which we generally recognize the license fee portion of the arrangement upon delivery, assuming all revenuerecognition criteria are satisfied. Customers may also purchase term license agreements, under which we recognize the license fee ratably, on a straight-linebasis, over the term of the underlying maintenance contract, which is typically up to one year. We are focused on acquiring new customers and increasingrevenues from our existing customers. 30  Maintenance and Services Revenues. Maintenance and services revenues consist of revenues from maintenance agreements and, to a lesser extent,professional services. Typically, when purchasing a perpetual license, a customer also purchases a one year maintenance contract for which we charge apercentage of the license fee. Customers may renew, and generally have renewed, their maintenance agreements for a fee that is based upon a percentage ofthe initial license fee paid. Customers with maintenance agreements are entitled to receive support and unspecified upgrades and enhancements when and ifthey become available during the maintenance period. We have experienced growth in maintenance revenues primarily due to increased license sales to newand existing customers and high annual retention of existing customers. We recognize the revenues associated with maintenance ratably, on a straight-linebasis, over the associated maintenance period. We measure the perpetual license maintenance renewal rate for our customers over a 12-month period, basedon a dollar renewal rate for contracts expiring during that time period. Our maintenance renewal rate for each of the years ended December 31, 2017, 2016and 2015 has been over 90%. We also offer professional services focused on both deployment and training our customers to fully leverage the use of ourproducts. We recognize the revenues associated with these professional services, which are generally provided on a time and materials basis, as we deliver theservices, provide the training or when the service term has expired. The following table sets forth the percentage of our revenues that have been derived from licenses and maintenance and services revenues for theperiods presented. Year Ended December 31, 2017 2016 2015 (as a percentage of total revenues)Revenues: Licenses 56.9% 56.5% 56.0%Maintenance and services 43.1% 43.5% 44.0%Total revenues 100.0% 100.0% 100.0% Our products are used by a wide range of enterprises, including Fortune 500 corporations and small and medium-sized businesses. As of December 31,2017, we had approximately 6,250 customers across a broad array of company sizes and industries located in over 75 countries. Cost of Revenues, Gross Profit and Gross Margin Our cost of revenues consists of cost of maintenance and services revenues. Cost of maintenance and services revenues consist primarily of salaries(including payroll tax expense related to stock-based compensation), employee benefits (including commissions and bonuses) and stock-basedcompensation for our maintenance and services employees; travel expenses; and allocated overhead costs for facilities, IT and depreciation of equipment. Werecognize expenses related to maintenance and services as they are incurred. We expect that our cost of maintenance and services revenues will increase inabsolute dollars as we increase our headcount to support revenue growth. Gross profit is total revenues less total cost of revenues. Gross margin is gross profit expressed as a percentage of total revenues. Our gross margin hashistorically fluctuated slightly from period to period as a result of changes in the mix of license and maintenance and services revenues. Due to theseasonality of our business, the first quarter typically results in the lowest gross margin as our first quarter revenues have historically been the lowest for theyear and the majority of our expenses are relatively fixed quarter over quarter. Conversely, the fourth quarter typically results in the highest gross margin asour fourth quarter revenues have historically been the highest for the year. Operating Costs and Expenses Our operating costs and expenses are classified into three categories: research and development, sales and marketing and general and administrative.For each category, the largest component is personnel costs, which consists of salaries (including payroll tax expense related to stock-based compensation),employee benefits (including commissions and bonuses) and stock-based compensation. Operating costs and expenses also include allocated overhead costsfor depreciation of equipment. Allocated costs for facilities primarily consist of rent and office maintenance. Operating costs and expenses are generallyrecognized as incurred. We expect personnel costs to continue to increase in absolute dollars as we hire new employees to continue to grow our business. 31  Research and Development. Research and development expenses primarily consist of personnel costs attributable to our research and developmentpersonnel, as well as allocated overhead costs. We expense research and development costs as incurred. We expect that our research and developmentexpenses will continue to increase in absolute dollars as we increase our research and development headcount to further strengthen our technology platformand invest in the development of both existing and new products. Sales and Marketing. Sales and marketing expenses are the largest component of our operating costs and expenses and consist primarily of personnelcosts, as well as marketing and business development costs, travel expenses, training and education and allocated overhead costs. We expect that sales andmarketing expenses will continue to increase in absolute dollars, as we plan to expand our sales and marketing efforts, both domestically and internationally.We expect sales and marketing expenses to be our largest category of operating costs and expenses as we continue to expand our business worldwide. General and Administrative. General and administrative expenses mostly consist of personnel and facility-related costs for our executive, finance,legal, human resources and administrative personnel. Other expenses are comprised of legal, accounting and other consultant fees and other corporateexpenses and allocated overhead. We expect that general and administrative expense will increase in absolute dollars as we grow and expand our operations,including higher legal, corporate insurance and accounting expenses, and the additional costs of achieving and maintaining compliance with the Sarbanes-Oxley Act and related regulations. Financial Income (Expenses), Net Financial income (expenses), net consist primarily of foreign exchange gains or losses and net interest. Foreign exchange gains or losses relate to ourbusiness activities in foreign countries with different operational reporting currencies. As a result of our business activities in foreign countries, we expectthat foreign exchange gains or losses will continue to occur due to fluctuations in exchange rates in the countries where we do business. Brexit, as well asother member countries public discussions about the possibility of withdrawing from the European Union, could also contribute to instability and volatilityin the global financial and foreign exchange markets, including volatility in the value of Pounds Sterling, Euros and other currencies. Net interest representsinterest income received on our cash, cash equivalents and short-term investments. Income Taxes We operate in several tax jurisdictions and are subject to taxes in each country or jurisdiction in which we conduct business. Earnings from our non-U.S. activities are subject to local country income tax and may be subject to U.S. income tax. To date, on a consolidated basis, we have incurred accumulatednet losses and have not recorded any U.S. federal tax provisions. Because of our history of U.S. and Israel net operating losses, we have established a full valuation allowance against potential future benefits fordeferred tax assets including loss carryforwards, in those jurisdictions; however, we have recorded a deferred tax asset of $0.2 million as of December 31,2017 for other foreign jurisdictions. Our income tax provision could be significantly impacted by estimates surrounding our uncertain tax positions andchanges to our valuation allowance in future periods. We reevaluate the judgments surrounding our estimates and make adjustments as appropriate eachreporting period. Our Israeli subsidiary currently qualifies as a “Beneficiary Enterprise” which, upon fulfillment of certain conditions, allows it to qualify for a reducedtax rate based on the beneficiary program guidelines. In addition, we are subject to the continuous examinations of our income tax returns by different tax authorities. We regularly assess the likelihood ofadverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. On December 22, 2017, the TCJA was signed into law making significant changes to the Code. These changes include, but are not limited to: ·A corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017; ·The transition of U.S international taxation from a worldwide tax system to a territorial system; 32  ·A one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017 (“Deemed RepatriationTransition Tax”); ·Taxation of global intangible low-taxed income (“GILTI”) earned by foreign subsidiaries beginning after December 31, 2017. The GILTI taximposes a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations; and ·Taxation of base erosion and anti-abuse (“BEAT”) payments made by U.S. corporations to foreign related parties. The BEAT tax applies only tocorporation with average gross domestic sales of $500 million over three successive years. We have calculated our best estimate of the impact of the TCJA in our year end income tax provision in accordance with our understanding of theTCJA and guidance available as of the date of this filing. As a result: ·While we are able to make reasonable estimates of the impact of the reduction in corporate rate and the deemed repatriation transition tax, the finalimpact of the TCJA may differ from these estimates, due to, among other things, changes in our interpretations and assumptions, additional guidancethat may be issued by the IRS, and actions we may take. We are continuing to gather additional information to determine the final impact of theTCJA. ·Due to the aggregated accumulated deficits of our foreign subsidiaries, we should not be subject to any transition tax under this provision of theTCJA. ·Because of the complexity of the new GILTI tax rules, we have not yet completed our analysis of the GILTI tax rules and are not yet able toreasonably estimate the effect of this provision of the TCJA or make an accounting policy election for the ASC 740 treatment of the GILTI tax. We should not be subject to BEAT during 2018 due to the gross domestic sales threshold. 33  Results of Operations The following tables are a summary of our consolidated statements of operations in dollars and as a percentage of our total revenues. Year Ended December 31 2017 2016 2015 (in thousands)Statement of Operations Data: Revenues: Licenses $123,610 $92,873 $71,273 Maintenance and services 93,754 71,583 55,937 Total revenues 217,364 164,456 127,210 Cost of revenues 20,873 15,843 12,019 Gross profit 196,491 148,613 115,191 Operating costs and expenses: Research and development 47,369 36,660 31,792 Sales and marketing 135,896 107,825 86,367 General and administrative 26,823 19,822 16,106 Total operating expenses 210,088 164,307 134,265 Operating loss (13,597) (15,694) (19,074)Financial income (expenses), net 2,362 (885) (1,523)Loss before income taxes, net (11,235) (16,579) (20,597)Income taxes (2,459) (1,131) (686)Net loss $(13,694) $(17,710) $(21,283) Year Ended December 31, 2017 2016 2015 (as a percentage of total revenues)Statement of Operations Data: Revenues: Licenses 56.9% 56.5% 56.0%Maintenance and services 43.1 43.5 44.0 Total revenues 100.0 100.0 100.0 Cost of revenues 9.6 9.6 9.4 Gross profit 90.4 90.4 90.6 Operating costs and expenses: Research and development 21.8 22.3 25.0 Sales and marketing 62.6 65.6 67.9 General and administrative 12.3 12.1 12.7 Total operating expenses 96.7 100.0 105.6 Operating loss (6.3) (9.6) (15.0)Financial income (expenses), net 1.1 (0.5) (1.2)Loss before income taxes, net (5.2) (10.1) (16.2)Income taxes (1.1) (0.7) (0.5)Net loss (6.3)% (10.8)% (16.7)% 34  Comparison of Years Ended December 31, 2017 and 2016 Revenues Year EndedDecember 31, 2017 2016 % Change (in thousands) Revenues: Licenses $123,610 $92,873 33.1%Maintenance and services 93,754 71,583 31.0%Total revenues $217,364 $164,456 32.2% Year Ended December 31, 2017 2016 (as a percentage of total revenues)Revenues: Licenses 56.9% 56.5%Maintenance and services 43.1% 43.5%Total revenues 100.0% 100.0% Total revenue growth was achieved due to increased demand for our products and services from existing and new customers, mostly in the domesticmarket, as well as in international markets. The increase in license revenues was driven by sales to existing customers, larger aggregate sales to 987 newcustomers in 2017 compared to the aggregate sales to 1,098 new customers in 2016 and sales of new products. As of December 31, 2017 and 2016, we hadapproximately 6,250 and approximately 5,350 customers, respectively. Almost all of our license revenues was attributable to sales of perpetual licenses. Theincrease in maintenance and services revenues was primarily due to an increase in the sale of maintenance agreements resulting from the growth of ourinstalled customer base. In each of 2017 and 2016, our maintenance renewal rate was over 90%. Of the license and first year maintenance and servicesrevenues recognized in the year ended December 31, 2017, 54% was attributable to revenues from new customers, and 46% was attributable to revenues fromexisting customers. Of the license and first year maintenance and services revenues recognized in the year ended December 31, 2016, 58% was attributable torevenues from new customers, and 42% was attributable to revenues from existing customers. As of December 31, 2017 and 2016, 52% and 48% of ourcustomers, respectively, had purchased two or more product families. Cost of Revenues and Gross Margin Year EndedDecember 31, 2017 2016 % Change (in thousands) Cost of revenues $20,873 $15,843 31.7% Year Ended December 31, 2017 2016 (as a percentage of total revenues)Total gross margin 90.4% 90.4% The increase in cost of revenues was primarily related to an increase of $3.7 million in salaries and benefits and stock based compensation expense dueto increased headcount for support personnel to support our greater revenues and high renewal rate and a $0.9 million increase in facilities and allocatedoverhead costs. 35  Operating Costs and Expenses Year EndedDecember 31, 2017 2016 % Change (in thousands) Operating costs and expenses: Research and development $47,369 $36,660 29.2%Sales and marketing 135,896 107,825 26.0%General and administrative 26,823 19,822 35.3%Total operating expenses $210,088 $164,307 27.9% Year Ended December 31, 2017 201 (as a percentage of total revenues)Operating costs and expenses: Research and development 21.8% 22.3%Sales and marketing 62.6% 65.6%General and administrative 12.3% 12.1%Total operating expenses 96.7% 100.0% The increase in research and development expenses was primarily related to an increase of $8.7 million in salaries and stock based compensationexpense resulting from increased headcount as part of our focus on enhancing and developing our existing and new products. The remainder of the increasewas attributable to a $1.6 million increase in facilities and allocated overhead costs. The increase in sales and marketing expenses was primarily related to a $23.4 million increase in salaries and benefits and stock based compensationexpense due to increased headcount to expand our sales force, and commissions on increased customer orders. The remainder of the increase was attributableto a $3.3 million increase in facilities and allocated overhead costs and a $0.6 million increase in marketing related expenses. The increase in general and administrative expenses was primarily related to an increase of $5.0 million in salaries and benefits and stock basedcompensation expense due to increased headcount to support the overall growth of our business and an increase of $1.6 million of other expensespredominately relating to IT. Financial Income (Expenses), Net Year EndedDecember 31, 2017 2016 % Change (in thousands) Financial income (expenses), net $2,362 $(885) 366.9% Financial income (expense), net for the year ended December 31, 2017 was primarily comprised of foreign currency gains compared to foreign currencylosses for the year ended December 31, 2016. Income Taxes Year EndedDecember 31, 2017 2016 % Change (in thousands) Income taxes $(2,459) $(1,131) (117.4)% Income taxes for the years ended December 31, 2017 and 2016 were comprised primarily of foreign income taxes and state taxes. 36  Comparison of Years Ended December 31, 2016 and 2015 Revenues Year EndedDecember 31, 2016 2015 % Change (in thousands) Revenues: Licenses $92,873 $71,273 30.3%Maintenance and services 71,583 55,937 28.0%Total revenues $164,456 $127,210 29.3% Year Ended December 31, 2016 2015 (as a percentage of total revenues)Revenues: Licenses 56.5% 56.0%Maintenance and services 43.5% 44.0%Total revenues 100.0% 100.0% Total revenue growth was achieved due to increased demand for our products and services from existing and new customers, mostly in the domesticmarket, as well as in international markets. The increase in license revenues was driven by sales to 1,098 new customers in 2016 compared to 1,065 newcustomers in 2015, sales to existing customers and sales of new products. As of December 31, 2016 and 2015, we had approximately 5,350 andapproximately 4,350 customers, respectively. Almost all of our license revenues was attributable to sales of perpetual licenses. The increase in maintenanceand services revenues was primarily due to an increase in the sale of maintenance agreements resulting from the growth of our installed customer base. In eachof 2016 and 2015, our maintenance renewal rate was over 90%. Of the license and first year maintenance and services revenues recognized in the year endedDecember 31, 2016, 58% was attributable to revenues from new customers, and 42% was attributable to revenues from existing customers. Of the license andfirst year maintenance and services revenues recognized in the year ended December 31, 2015, 63% was attributable to revenues from new customers, and37% was attributable to revenues from existing customers. As of December 31, 2016 and 2015, 48% and 45% of our customers, respectively, had purchasedtwo or more product families. Cost of Revenues and Gross Margin Year EndedDecember 31, 2016 2015 % Change (in thousands) Cost of revenues $15,843 $12,019 31.8% Year Ended December 31, 201 2015 (as a percentage of total revenues)Total gross margin 90.4% 90.6% The increase in cost of revenues was primarily related to an increase of $3.7 million in salaries and benefits and stock based compensation expense dueto increased headcount for support. 37  Operating Costs and Expenses Year EndedDecember 31, 2016 2015 % Change (in thousands) Operating costs and expenses: Research and development $36,660 $31,792 15.3%Sales and marketing 107,825 86,367 24.8%General and administrative 19,822 16,106 23.1%Total operating expenses $164,307 $134,265 22.4% Year Ended December 31, 2016 2015 (as a percentage of total revenues)Operating costs and expenses: Research and development 22.3% 25.0%Sales and marketing 65.6% 67.9%General and administrative 12.1% 12.7%Total operating expenses 100.0% 105.6% The increase in research and development expenses was primarily related to an increase of $4.7 million in salaries and stock based compensationexpense resulting from increased headcount as part of our focus on enhancing and developing our existing and new products. The increase in sales and marketing expenses was primarily related to a $19.6 million increase in salaries and benefits and stock based compensationexpense due to increased headcount to expand our sales force, and commissions on increased customer orders. The remainder of the increase was attributableto a $1.3 million increase in marketing related expenses. The increase in general and administrative expenses was primarily related to an increase of $3.3 million in salaries and benefits and stock basedcompensation expense due to increased headcount to support the overall growth of our business and an increase of $0.4 million of other expensespredominately relating to IT. Financial Expenses, Net Year EndedDecember 31, 2016 2015 % Change (in thousands) Financial expenses, net $(885) $(1,523) 41.9% For the years ended December 31, 2016 and 2015, financial expenses, net were primarily comprised of foreign exchange losses. Income Taxes Year EndedDecember 31, 2016 2015 % Change (in thousands) Income taxes $(1,131) $(686) (64.9)% Income taxes for the years ended December 31, 2016 and 2015 were comprised primarily of foreign income taxes and state taxes. 38  Quarterly Results of Operations The following table sets forth our unaudited quarterly consolidated statement of operations data for each of the eight quarters ended December 31,2017. The data presented below has been prepared on the same basis as the audited consolidated financial statements included elsewhere in this AnnualReport and, in the opinion of management, reflects all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of thisdata. This information should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Annual Report.The results of historical periods are not necessarily indicative of the results of operations for a full year or any future period. Three Months Ended Dec. 31,2017 Sept. 30,2017 June 30,2017 March 31,2017 Dec. 31,2016 Sept. 30,2016 June 30,2016 March 31,2016 (in thousands)Revenues: Licenses $46,626 $29,409 $28,420 $19,155 $34,696 $22,591 $21,742 $13,844 Maintenance and services 26,583 24,192 21,754 21,225 19,713 18,346 16,899 16,626 Total revenues 73,209 53,601 50,174 40,380 54,409 40,937 38,641 30,470 Cost of revenues (1) 5,887 5,436 4,878 4,672 4,510 4,116 3,721 3,496 Gross profit 67,322 48,165 45,296 35,708 49,899 36,821 34,920 26,974 Operating costs and expenses: Research and development (1) 13,559 11,903 11,498 10,409 9,627 9,290 8,905 8,837 Sales and marketing (1) 39,723 32,802 32,560 30,811 30,212 26,410 26,840 24,364 General and administrative (1) 8,017 6,711 6,582 5,513 5,449 5,051 4,760 4,562 Total operating expenses 61,299 51,416 50,640 46,733 45,288 40,751 40,505 37,763 Operating income (loss) 6,023 (3,251) (5,344) (11,025) 4,611 (3,930) (5,585) (10,789)Financial income (expenses), net 321 622 950 469 (739) (187) (605) 645 Income (loss) before income taxes 6,344 (2,629) (4,394) (10,556) 3,872 (4,117) (6,190) (10,144)Provision for income taxes (810) (685) (641) (323) (350) (272) (303) (206)Net income (loss) $5,534 $(3,314) $(5,035) $(10,879) $3,522 $(4,389) $(6,493) $(10,350) 39  Three Months Ended Dec. 31,2017 Sept. 30,2017 June 30,2017 March 31,2017 Dec. 31,2016 Sept. 30,2016 June 30,2016 March 31,2016 (as a percentage of total revenues)Revenues: Licenses 63.7% 54.9% 56.6% 47.4% 63.8% 55.2% 56.3% 45.4%Maintenance and services 36.3 45.1 43.4 52.6 36.2 44.8 43.7 54.6 Total revenues 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Cost of revenues 8.0 10.1 9.7 11.6 8.3 10.1 9.6 11.5 Gross profit 92.0 89.9 90.3 88.4 91.7 89.9 90.4 88.5 Operating costs and expenses: Research and development 18.5 22.2 22.9 25.8 17.7 22.7 23.1 29.0 Sales and marketing 54.3 61.2 64.9 76.2 55.5 64.5 69.5 79.9 General and administrative 11.0 12.6 13.1 13.7 10.0 12.3 12.3 15.0 Total operating expenses 83.8 96.0 100.9 115.7 83.2 99.5 104.9 123.9 Operating income (loss) 8.2 (6.1) (10.6) (27.3) 8.5 (9.6) (14.5) (35.4)Financial income (expenses), net 0.5 1.2 1.9 1.2 (1.4) (0.5) (1.5) 2.1 Income (loss) before income taxes 8.7 (4.9) (8.7) (26.1) 7.1 (10.1) (16.0) (33.3)Provision for income taxes (1.1) (1.3) (1.3) (0.8) (0.6) (0.6) (0.8) (0.7)Net income (loss) 7.6% (6.2)% (10.0)% (26.9)% 6.5% (10.7)% (16.8)% (34.0)% (1)Includes non-cash stock-based compensation expense and payroll tax expense related to stock-based compensation as follows: Three Months Ended Dec. 31,2017 Sept. 30,2017 June 30,2017 March 31,2017 Dec. 31,2016 Sept. 30,2016 June 30,2016 March 31,2016 (in thousands)Cost of revenues $295 $283 $273 $227 $195 $186 $172 $146 Research and development 1,404 1,374 1,301 1,130 789 805 793 665 Sales and marketing 2,265 1,856 2,362 2,059 1,688 1,613 1,628 1,175 General and administrative 1,426 1,269 1,323 988 811 854 780 638 Total non-cash stock-basedcompensation expense related toemployees and consultants $5,390 $4,782 $5,259 $4,404 $3,483 $3,458 $3,373 $2,624 Three Months Ended Dec. 31,2017 Sept. 30,2017 June 30,2017 March 31,2017 Dec. 31,2016 Sept. 30,2016 June 30,2016 March 31,2016 (in thousands)Cost of revenues $21 $25 $12 $33 $2 $2 $9 $13 Research and development 12 27 13 15 9 9 2 8 Sales and marketing 243 213 166 319 15 40 60 63 General and administrative 8 8 8 35 2 3 8 14 Total payroll tax expense related tostock-based compensation $284 $273 $199 $402 $28 $54 $79 $98 40  Seasonality and Quarterly Trends Our quarterly results reflect seasonality in the sale of our products and services. Historically, we have experienced a pattern of increased license sales inthe fourth quarter. This trend makes it difficult to achieve sequential revenue growth in the first quarter of the following year. Because of customer budgetand purchasing trends, demand for our products and services is typically slowest in the first quarter resulting in a decrease in quarterly revenues from thefourth quarter to the first quarter of the subsequent fiscal year. We expect these seasonal patterns to continue in the future. Our gross margins and operatingloss have been affected by these historical trends because the majority of our expenses are relatively fixed quarter over quarter. The timing of revenues inrelation to our expenses, much of which does not vary directly with revenues, has an impact on the cost of revenues, research and development expenses,sales and marketing expenses and general and administrative expenses as a percentage of revenues in each calendar quarter during the year. The majority ofour expenses is personnel-related costs, which consists of salaries (including payroll tax expense related to stock-based compensation), employee benefits(including commissions and bonuses) and stock-based compensation. As a result, we have not experienced significant seasonal fluctuations in the timing ofexpenses from period to period. Although these seasonal factors are common in the technology industry, historical patterns should not be considered areliable indicator of our future sales activity or performance. Our revenues increased in each quarter as compared with the same quarter in the prior year due to an increase in sales of our licenses to new customersas well as incremental sales to existing customers and due to increases in our maintenance and services revenues primarily resulting from increases in ourinstalled base of customers. Cost of revenues has increased in each quarter as compared with the same quarter in the prior year primarily due to the increased cost of providingmaintenance and services to our expanding customer base. Total operating costs and expenses increased in each quarter as compared with the same quarter in the prior year, primarily due to the addition ofpersonnel in connection with the expansion of our business. Furthermore, our commission expense has historically been the greatest towards the end of theyear due to increased commissions earned on customer orders entered at year end. Liquidity and Capital Resources The following table shows our cash flows from operating activities, investing activities and financing activities for the stated periods: Year Ended December 31, 2017 2016 2015 (in thousands)Net cash provided by (used in) operating activities $16,351 $7,347 $(2,729)Net cash used in investing activities (20,001) (12,324) (26,522)Net cash provided by financing activities 12,083 4,072 2,055 Increase (decrease) in cash, cash equivalents and restricted cash $8,433 $(905) $(27,196) On December 31, 2017, our cash and cash equivalents and short-term investments of $136.6 million were held for working capital purposes and wereinvested primarily in short-term investments. We intend to increase our investment in capital expenditures in 2018 to support the growth in our business andoperations. We believe that our existing cash and cash equivalents, short-term investments and cash flow from operations will be sufficient to fund ouroperations and capital expenditures for at least the next 12 months. Our future capital requirements will depend on many factors, including our rate ofrevenue growth, the expansion of our sales and marketing activities, the timing and extent of spending to support product development efforts and expansioninto new geographic locations, the timing of introductions of new software products and enhancements to existing software products, the continuing marketacceptance of our software offerings and our use of cash to pay for acquisitions, if any. 41  Operating Activities Net cash provided by operating activities is driven by sales of our products less costs and expenses, primarily payroll and related expenses, andadjusted for certain non-cash items, mainly depreciation and stock-based compensation, and changes in operating assets and liabilities. Changes in operatingassets and liabilities are driven mainly by collection of accounts receivable from the sales of our software products and deferred revenues which representsunearned amounts billed to our channel partners, related to these sales. For 2017, cash inflows from our operating activities were $16.4 million, compared to cash inflows of $7.3 million for the prior year. Our $13.7 millionnet loss included non-cash charges of $23.1 million driven primarily by increased headcount of our sales force and R&D personnel. Net loss was further offsetby changes in our working capital, including an $18.9 million increase in deferred revenues and a $14.5 million increase in accrued expenses and other shortterm liabilities which were partially offset by a $21.7 million increase in accounts receivable. This increase in working capital was impacted by the increasedsales for the year ended December 31, 2017 and consistent with the seasonal pattern discussed above. Other changes in our working capital included anincrease of $3.3 million in prepaid expenses and other current assets, a decrease of $0.7 million in accounts payable due to timing of payments and a decreaseof $0.7 million in other long term liabilities. Our days’ sales outstanding (“DSO”) for the three months and year ended December 31, 2017 was 77 and 72days, respectively. For 2016, cash inflows from our operating activities were $7.3 million, compared to cash outflows of $2.7 million for the prior year. Our $17.7 millionnet loss included non-cash charges of $15.1 million driven primarily by increased headcount of our sales force and R&D personnel. Net loss was further offsetby changes in our working capital, including a $13.3 million increase in deferred revenues and a $5.3 million increase in accrued expenses and other shortterm liabilities which were partially offset by a $6.4 million increase in accounts receivable. This increase in working capital was impacted by the increasedsales for the year ended December 31, 2016 and consistent with the seasonal pattern discussed above. Other changes in our working capital included adecrease of $1.3 million in accounts payable due to timing of payments and a decrease of $1.0 million in prepaid expenses and other current assets. Our DSOfor the three months and year ended December 31, 2016 was 74 days. For 2015, cash outflows from our operating activities were $2.7 million, compared to cash outflows of $7.1 million for the prior year, mainly related toan increase in non-cash charges which exceeded the increase in net loss year over year. Our $21.3 million net loss included non-cash charges of $9.4 milliondriven primarily by increased headcount of our sales force and R&D personnel. Net loss was further offset by changes in our working capital, including an$11.6 million increase in deferred revenues and a $6.3 million increase in accrued expenses and other short term liabilities which were partially offset by a$9.6 million increase in accounts receivable. This increase in working capital was impacted by the increased sales for the year ended December 31, 2015 andconsistent with the seasonal pattern discussed above. Other changes in our working capital included a decrease of $0.8 million in prepaid expenses and othercurrent assets and an increase of $0.1 million in other long term liabilities. Our DSO for the three months and year ended December 31, 2015 was 80 and 84days, respectively. Investing Activities Our investing activities consist primarily of capital expenditures to purchase property and equipment, leasehold improvements, sales and purchases ofshort-term investments and changes in our restricted cash. In the future, we expect to continue to incur capital expenditures to support our expandingoperations. During 2017, net cash used in investing activities of $20.0 million was attributable to an increase of $14.7 million in short-term investments andcapital expenditures of $5.3 million to support our growth during the period including hardware, software, office equipment and leasehold improvements. During 2016, net cash used in investing activities of $12.3 million was attributable to an increase of $8.5 million in short-term investments and capitalexpenditures of $3.8 million to support our growth during the period including hardware, software, office equipment and leasehold improvements. During 2015, net cash used in investing activities of $26.5 million was primarily attributable to an increase of $22.0 million in short-term investmentsand capital expenditures of $4.5 million to support our growth during the period including hardware, software, office equipment and leaseholdimprovements. 42  Financing Activities In 2017, 2016 and 2015, net cash provided by financing activities of $12.1 million, $4.1 million and $2.1 million, respectively, was attributable to netproceeds from employee stock plans. Promissory Note On March 31, 2014, we entered into a promissory note and related security documents with Bank Leumi USA. We may borrow up to $7.0 millionagainst certain of our accounts receivable outstanding amount, based on several conditions, at an annual interest rate of the Wall Street Journal Prime Rateless 0.15%, provided that the annual interest rate applicable to advances will not be lower than 4.10%. As of December 31, 2017, that rate amounted to4.35%. This promissory note enables us, among other things, to engage in foreign currency hedging transactions with Bank Leumi USA to manage ourexposure to foreign currency risk without restricted cash requirements. We may borrow under the promissory note until August 15, 2018 at which time theprincipal sum of each such loan, together with accrued and unpaid interest payable, will become due and payable. As of December 31, 2017, we had nobalance outstanding under the promissory note. As part of the transaction, we granted the lender a security interest in our personal property, excludingintellectual property and other intangible assets. The promissory note also contains customary events of default. Contractual Payment Obligations Our principal commitments primarily consist of obligations under leases for office space and motor vehicles. Aggregate minimum rental commitments undernon-cancelable leases as of December 31, 2017 for the upcoming years were as follows: Payments Due by Period 2018 2019 2020 2021 2022 Thereafter Total (in thousands) Operating lease obligations $6,418 $5,561 $4,335 $4,561 $4,587 $21,063 $46,525 We have obligations related to unrecognized tax benefit liabilities totaling $3.4 million and others related to severance pay, which have been excluded fromthe table above as we do not believe it is practicable to make reliable estimates of the periods in which payments for these obligations will be made. Off-Balance Sheet Arrangements As of December 31, 2017, we did not have any off-balance sheet arrangements. Critical Accounting Policies and Estimates We prepare our consolidated financial statements in accordance with generally accepted accounting principles in the United States. The preparation ofconsolidated financial statements also requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs andexpenses and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under thecircumstances. Actual results could differ significantly from the estimates made by our management. To the extent that there are differences between ourestimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected. We believethat the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the moresignificant areas involving management’s judgments and estimates. Critical accounting policies and estimates are those that we consider the most importantto the portrayal of our financial condition and results of operations because they require our most difficult, subjective or complex judgments, often as a resultof the need to make estimates about the effect of the matters that are inherently uncertain. Revenue Recognition: We generate revenues in the form of software license fees and related maintenance and services fees. Maintenance and services primarily consist of fees formaintenance services (including support and unspecified upgrades and enhancements when and if they are available) and professional services (includingtraining) that are not essential to functionality of our software. We sell our products worldwide directly to a network of distributors and Value AddedResellers (VARs). We account for the sale of perpetual software in accordance with ASC No. 985-605, “Software Revenue Recognition.” As required by ASC 985-605, wedetermine the value of the software component of its multiple-element arrangements using the residual method when vendor specific objective evidence(VSOE) of fair value exists for the undelivered elements of maintenance and professional services agreements. VSOE is based on the price charged when anelement is sold separately or renewed. Under the residual method, the fair value of the undelivered elements is deferred, and the remaining portion of thearrangement fee is allocated to the delivered elements and is recognized as revenue, when all ASC 985-605 criteria for revenue recognition are met. 43  We determine the fair value based on the stand alone sales price charged for maintenance and professional services. We have defined classes of transactionsbased on the value of licensed software products purchased from us. We price renewals for each class of transaction as a fixed percentage of the total grossvalue of licensed software products the customer purchased. Software license revenues are recognized when persuasive evidence of an arrangement exists, the software license has been delivered, there are nouncertainties surrounding product acceptance, there are no significant future performance obligations, the license fees are fixed or determinable andcollection of the license fee is considered probable. Fees for arrangements with payment terms extending beyond customary payment terms are considerednot to be fixed or determinable, in which case revenue is deferred and recognized when payments become due from the customer provided that all otherrevenue recognition criteria have been met. We recognize revenues from the sale of term license arrangements, ratably, on a straight-line basis, over the term of the underlying contract and is typicallyup to one year. We recognize revenues from maintenance ratably over the term of the underlying maintenance contract term. The term of the maintenance contract is usuallyone year. Revenues from professional services consist mostly of time and material services and, accordingly, are generally recognized as the services are performed orwhen the service term has expired. Professional services bundled with licensed software and other software related elements are not essential to the functionality of the other elements of thearrangement. Revenues allocable to the services are recognized as the services are performed or when the service term has expired, using VSOE for suchservices. Deferred revenues represent mostly unrecognized fees billed or collected for maintenance and professional services. We do not grant a right of return to our customers, except for one of our resellers. During the years ended December 31, 2017, 2016 and 2015, there were noreturns from this reseller. Accounting for Stock-Based Compensation: We account for stock-based compensation in accordance with ASC No. 718, “Compensation-Stock Compensation.” ASC No. 718 requires companies toestimate the fair value of equity-based payment awards on the date of grant using an Option-Pricing Model (“OPM”). The value of the portion of the awardthat is ultimately expected to vest is recognized as an expense over the requisite service periods in our consolidated statements of operations. We recognize compensation expenses for the value of our equity awards granted based on the straight-line method over the requisite service period of each ofthe awards. Upon adoption of ASU 2016-09, we elected to change our accounting policy to account for forfeitures as they occur. We applied ASC 718 and ASC 505-50, “Equity-Based Payments to Non-Employees” with respect to options issued to non-employee consultants.Accordingly, we use option valuation models to measure the fair value of the options at the measurement date as defined in ASC 505-50. We selected the Black-Scholes-Merton option pricing model as the most appropriate fair value method for our stock options awards, whereas the fair value ofrestricted stock units is based on the market value of the underlying shares at the date of grant. Recently Issued Accounting Pronouncements In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers”, an updated standard on revenue recognition and issuedsubsequent amendments to the initial guidance in March 2016, April 2016, May 2016 and December 2016 within ASU 2016-08, 2016-10, 2016-12 and2016-20, respectively. The new standards provide enhancements to the quality and consistency of how revenue is reported while also improvingcomparability in the financial statements of companies reporting using IFRS and US GAAP. The core principle of the new standard is for companies torecognize revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration (that is, payment) to which the companyexpects to be entitled in exchange for those goods or services. The new standard also will result in enhanced disclosures about revenue, provide guidance fortransactions that were not previously addressed comprehensively (for example, service revenue and contract modifications) and improve guidance formultiple-element arrangements. ASU 2014-09 was initially scheduled to be effective for annual and interim reporting periods beginning after December 15,2016 and may be adopted either on a full retrospective or modified retrospective approach. However, on July 9, 2015, the FASB approved a one year deferralof the effective date of ASU 2014-09. The revised effective date is for annual reporting periods beginning after December 15, 2017 and interim periodsthereafter, with an early adoption permitted as of the original effective date. We have decided to adopt this standard effective January 1, 2018 using the fullretrospective method which will require each prior reporting period presented to be recast in future issuances of our financial statements. In preparation foradoption of the standard, we have implemented internal controls and key system functionality to enable the preparation of financial information and havereached conclusions on key accounting assessments related to the standard, including our assessment of the impact. 44  The most significant impact of the new standard relates to the way we account for term agreements and commission expense. Specifically, under the currentrevenue standard, we recognize both the term license and maintenance revenues ratably over the contract period whereas under the new revenue standard wewould recognize term license revenues upfront and the associated maintenance revenues over the contract period. We have also considered the impact of theguidance in ASC 340-40, “Other Assets and Deferred Costs” under the new standard. Under ASC 340-40, we may be required to capitalize and amortizecertain incremental costs of obtaining a contract such as the maintenance portion of sales commissions over the life of the license. Under our currentaccounting policy, we do not capitalize sales commission costs but rather recognize these costs when the purchase order is received. Adoption of the standard will result in a reduction of revenues of $2.0 million for the year ended December 31, 2017 and recognition of additional revenuesof $1.4 million for the year ended December 31, 2016, primarily due to the net change in term license revenue recognition. In addition, adoption of thestandard will result in an increase in prepaid expenses and other current assets and a decrease in deferred revenues of $9.9 and $0.1 million, respectively, as ofDecember 31, 2017, driven by the capitalization of sales commission costs and the upfront recognition of license revenues from term licenses. Thecumulative impact to our accumulated deficit as of January 1, 2016 is a reduction of $5.6 million. Adoption of the standard related to revenue recognition had no impact to cash from or used in operating, financing or investing activities on ourconsolidated statements of cash flows. Select recast financial statement information, which reflects the preliminary effect of the adoption of this standard, is set forth below. Year endedDecember 31, 2017 As Reported Adjustments Recast for Adoption of ASC 606Total revenues $217,364 $(1,974) $215,390 Operating loss $(13,597) $178 $(13,419)Income taxes $(2,459) $(328) $(2,787)Net loss $(13,694) $(151) $(13,845) Year endedDecember 31, 2016 As Reported Adjustments Recast for Adoption of ASC 606Total revenues $164,456 $1,407 $165,863 Operating loss $(15,694) $3,699 $(11,995)Income taxes $(1,131) $(182) $(1,313)Net loss $(17,710) $3,517 $(14,193) December 31, 2017 Balance Sheet Data As Reported Adjustments Recast for Adoption of ASC 606Assets Current assets: Prepaid expenses and other current assets $7,130 $9,865 $16,995 Liabilities and stockholders’ equity Current liabilities: Accrued expenses and other short term liabilities $42,453 $1,014 $43,467 Deferred revenues $73,891 $(227) $73,664 Long-term liabilities: Deferred revenues $7,034 $130 $7,164 45  In January 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses on Financial Instruments”, which requires that expected credit lossesrelating to financial assets measured on an amortized cost basis and available for sale debt securities be recorded through an allowance for credit losses. ASU2016-13 limits the amount of credit losses to be recognized for available for sale debt securities to the amount by which carrying value exceeds fair value andalso requires the reversal of previously recognized credit losses if fair value increases. The new standard will be effective for interim and annual periodsbeginning after January 1, 2020, and early adoption is permitted. We are currently evaluating whether to early adopt this standard and the potential effect onour consolidated financial statements. In February 2016, the FASB issued ASU 2016-02, “Leases”, on the recognition, measurement, presentation and disclosure of leases for both parties to acontract (i.e., lessees and lessors). The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based onthe principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense isrecognized based on an effective interest method or on a straight line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or lesswill be accounted for in a manner similar to the accounting under existing guidance for operating leases today. The new standard requires lessors to accountfor leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. ASC 842supersedes the previous leases standard, ASC 840, "Leases". The guidance is effective for the interim and annual periods beginning on or after December 15,2018, and early adoption is permitted. We are currently evaluating whether to early adopt this standard and the potential effect of the guidance on ourconsolidated financial statements. In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash”, which requires companies to include amountsgenerally described as restricted cash and restricted cash equivalents in cash and cash equivalents when reconciling beginning-of-period and end-of-periodtotal amounts shown on the statement of cash flows. This ASU is effective for annual and interim periods beginning after December 15, 2017. We havedecided to adopt this standard effective December 31, 2017 using the retrospective transition method, as required by the new standard. The adoption of thisstandard has an immaterial impact on our consolidated statements of cash flows. The following table provides a reconciliation of cash and cash equivalents, and long term restricted cash reported within the consolidated balance sheets thatsum to the total of such amounts in the consolidated statements of cash flows: December 31, 2017 December 31,2016 December 31,2015Cash and cash equivalents $56,689 $48,315 $49,241 Long term restricted cash included in other assets 547 488 467 Cash, cash equivalents and long term restricted cash shown in the consolidated statementof cash flows $57,236 $48,803 $49,708 In January 2018, the FASB released guidance on the accounting for tax on the global intangible low-taxed income provisions of the TCJA. The GILTIprovisions impose a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations. The guidance indicates that either (i)accounting for deferred taxes related to GILTI inclusions, or (ii) to treat any taxes on GILTI inclusions as period cost, are both acceptable methods subject toan accounting policy election. In accordance with SEC Staff Accounting Bulletin No. 118, and as we are not yet able to reasonably estimate the effect of theGILTI tax, as described in note 9 to our consolidated financial statements, we have not yet adopted an accounting policy with respect to the GILTI tax. Item 7A.Quantitative and Qualitative Disclosures About Market Risk Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market riskexposure is primarily a result of fluctuations in foreign currency exchange rates. We do not hold financial instruments for trading purposes. 46  Market Risk We are exposed to certain financial risks, including fluctuations in foreign currency exchange rates and interest rates. We manage our exposure to thesemarket risks through internally established policies and procedures. Our policies do not allow speculation in derivative instruments for profit or execution ofderivative instrument contracts for which there are no underlying exposures. We do not use financial instruments for trading purposes, and we are not a partyto any leveraged derivatives. We monitor our underlying market risk exposures on an ongoing basis and, where appropriate, may use hedging strategies tomitigate these risks. Foreign Currency Exchange Risk Approximately 30% of our revenues for the years ended December 31, 2017 and 2016 were earned in non-U.S. dollar denominated currencies, mainly in theEuro and Pound Sterling. Our expenses are generally denominated in the currencies in which our operations are located, primarily the U.S. dollar and NIS,and to a lesser extent the Euro, Pound Sterling and Canadian dollar. Our NIS-denominated expenses consist primarily of personnel and overhead costs fromour operations in Israel. Our consolidated results of operations and cash flow are, therefore, subject to fluctuations due to changes in foreign currencyexchange rates and may be adversely affected in the future due to changes in foreign exchange rates. The effect of a hypothetical 10% change in foreigncurrency exchange rates applicable to our business would not have a material impact on our historical consolidated financial statements. For purposes of our consolidated financial statements, local currency assets and liabilities are translated at the rate of exchange to the U.S. dollar on thebalance sheet date and local currency revenues and expenses are translated at the exchange rate at the date of the transaction or the average exchange ratedollar during the reporting period to the United States. To date, we have used derivative financial instruments, specifically foreign currency forward contracts, to manage exposure to foreign currency risks, byhedging a portion of our forecasted expenses denominated in NIS expected to occur within 12 months. The effect of exchange rate changes on foreigncurrency forward contracts is expected to offset the effect of exchange rate changes on the underlying hedged item. We do not use derivative financialinstruments for speculative or trading purposes. Interest Rate Risk We had cash and cash equivalents and short-term investments of $136.6 million as of December 31, 2017. We hold our cash and cash equivalents and short-term investments for working capital purposes. Our cash and cash equivalents are held in cash deposits and money market funds. Due to the short-term natureof these instruments, we believe that we do not have any material exposure to changes in the fair value of our investment portfolio as a result of changes ininterest rates. Declines in interest rates, however, would reduce our future interest income. As of December 31, 2017, we had no outstanding obligations under our promissory note. To the extent we enter into other long-term debt arrangements in thefuture, we would be subject to fluctuations in interest rates which could have a material impact on our future financial condition and results of operation. Inflation We do not believe that inflation had a material effect on our business, financial condition or results of operations in the last three fiscal years. If our costs wereto become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure todo so could harm our business, financial condition and results of operations. Item 8.Financial Statements and Supplementary Data INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PageReport of Independent Registered Public Accounting Firm48Consolidated Balance Sheets51Consolidated Statements of Operations53Consolidated Statements of Comprehensive Loss54Consolidated Statements of Changes in Stockholders’ Equity55Consolidated Statements of Cash Flows56Notes to Consolidated Financial Statements57 47  Kost Forer Gabbay & Kasierer144 Menachem Begin Road, Building ATel-Aviv 6492102, IsraelTel: +972-3-6232525Fax: +972-3-5622555ey.com REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of VARONIS SYSTEMS, INC. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Varonis Systems, Inc. and its subsidiaries (the "Company") as of December 31,2017 and 2016 and the related consolidated statements of operations, statements of comprehensive loss, changes in stockholders’ equity and cash flows foreach of the three years in the period ended December 31, 2017 and the related notes (collectively referred to as the “financial statements”). In our opinion, thefinancial statements present fairly, in all material respects, the consolidated financial position of the Company at December 31, 2017 and 2016 and theconsolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with U.S. generallyaccepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company'sinternal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control-Integrated Framework issued by theCommittee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 13, 2018 expressed an unqualifiedopinion thereon. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’sfinancial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to theCompany in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and thePCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performingprocedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond tothose risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits alsoincluded evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of thefinancial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ KOST FORER GABBAY & KASIERERA Member of Ernst & Young Global We have served as the Company’s auditor since 2007.Tel-Aviv, IsraelFebruary 13, 2018 48  Kost Forer Gabbay & Kasierer144 Menachem Begin Road, Building ATel-Aviv 6492102, IsraelTel: +972-3-6232525Fax: +972-3-5622555ey.com REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of VARONIS SYSTEMS, INC. Opinion on Internal Control over Financial Reporting We have audited Varonis Systems, Inc. and its subsidiaries (the "Company") internal control over financial reporting as of December 31, 2017, basedon criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013framework) (the "COSO Criteria"). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as ofDecember 31, 2017, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), theconsolidated balance sheets of the Company as of December 31, 2017 and 2016 and the related consolidated statements of operations, statements ofcomprehensive loss, Changes in Stockholders’ Equity and cash flows for each of the three years in the period ended December 31, 2017 of the Company andour report dated February 13, 2018 expressed an unqualified opinion thereon. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of theeffectiveness of internal control over financial reporting included in the accompanying Management's Annual Report on Internal Control over FinancialReporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a publicaccounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securitieslaws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtainreasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testingand evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considerednecessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’sinternal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded asnecessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of thecompany are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assuranceregarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on thefinancial statements. 49  Kost Forer Gabbay & Kasierer144 Menachem Begin Road, Building ATel-Aviv 6492102, IsraelTel: +972-3-6232525Fax: +972-3-5622555ey.com Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of anyevaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degreeof compliance with the policies or procedures may deteriorate. /s/ KOST FORER GABBAY & KASIERERA Member of Ernst & Young Global We have served as the Company’s auditor since 2007.Tel-Aviv, IsraelFebruary 13, 2018 50  VARONIS SYSTEMS, INC. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS(in thousands) December 31, 2017 2016Assets Current assets: Cash and cash equivalents $56,689 $48,315 Short-term investments 79,868 65,493 Trade receivables (net of allowance for doubtful accounts of $ 433 and $ 372 at December 31, 2017 andat December 31, 2016, respectively) 75,596 53,861 Prepaid expenses and other current assets 7,130 3,650 Total current assets 219,283 171,319 Long-term assets: Other assets 973 609 Property and equipment, net 11,896 9,910 Total long-term assets 12,869 10,519 Total assets $232,152 $181,838 The accompanying notes are an integral part of these consolidated financial statements. 51  VARONIS SYSTEMS, INC. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS(in thousands, except share data) December 31, 2017 2016Liabilities and stockholders’ equity Current liabilities: Trade payables $635 $1,288 Accrued expenses and other short term liabilities 42,453 28,479 Deferred revenues 73,891 58,478 Total current liabilities 116,979 88,245 Long-term liabilities: Deferred revenues 7,034 3,562 Other liabilities 6,561 7,292 Total long-term liabilities 13,595 10,854 Stockholders’ equity: Share capital Common stock of $ 0.001 par value—Authorized: 200,000,000 shares at December 31, 2017 and2016; Issued and outstanding: 28,146,162 shares at December 31, 2017 and 26,821,762 sharesat December 31, 2016 28 27 Accumulated other comprehensive income (loss) 136 (479)Additional paid-in capital 223,868 189,335 Accumulated deficit (122,454) (106,144)Total stockholders’ equity 101,578 82,739 Total liabilities and stockholders’ equity $232,152 $181,838 The accompanying notes are an integral part of these consolidated financial statements. 52  VARONIS SYSTEMS, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONS(in thousands, except share and per share data) Year endedDecember 31, 2017 2016 2015Revenues: Licenses $123,610 $92,873 $71,273 Maintenance and services 93,754 71,583 55,937 Total revenues 217,364 164,456 127,210 Cost of revenues 20,873 15,843 12,019 Gross profit 196,491 148,613 115,191 Operating costs and expenses: Research and development 47,369 36,660 31,792 Sales and marketing 135,896 107,825 86,367 General and administrative 26,823 19,822 16,106 Total operating expenses 210,088 164,307 134,265 Operating loss (13,597) (15,694) (19,074)Financial income (expenses), net 2,362 (885) (1,523)Loss before income taxes (11,235) (16,579) (20,597)Income taxes (2,459) (1,131) (686)Net loss $(13,694) $(17,710) $(21,283)Net loss per share of common stock, basic and diluted $(0.50) $(0.67) $(0.84)Weighted average number of shares used in computing net loss per share of commonstock, basic and diluted 27,467,440 26,406,312 25,198,546 The accompanying notes are an integral part of these consolidated financial statements. 53  VARONIS SYSTEMS, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS(in thousands) 2017 2016 2015Net loss $(13,694) $(17,710) $(21,283)Other comprehensive income (loss): Unrealized losses on short-term investments (27) - - Unrealized gains (losses) on derivative instruments 642 (148) (5)Total other comprehensive income (loss) 615 (148) (5)Comprehensive loss $(13,079) $(17,858) $(21,288) The accompanying notes are an integral part of these consolidated financial statements. 54  VARONIS SYSTEMS, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY(in thousands, except share data) Common stock Additionalpaid-in Accumulatedothercomprehensive Accumulated Totalstockholders’ Number Amount capital loss deficit equity Balance as of January 1, 2015 24,685,604 25 162,478 (326) (67,151) 95,026 Stock-based compensation expense — — 7,794 — — 7,794 Exercise of stock options 1,350,162 1 2,054 — — 2,055 Exercise of restricted stock units 33,388 *) — — — — Unrealized loss on derivative instruments — — — (5) — (5)Net loss — — — — (21,283) (21,283)Balance as of December 31, 2015 26,069,154 26 172,326 (331) (88,434) 83,587 Stock-based compensation expense — — 12,938 — — 12,938 Common stock issued under employee stock plans,net 752,608 1 4,071 — — 4,072 Unrealized loss on derivative instruments — — — (148) — (148)Net loss — — — — (17,710) (17,710)Balance as of December 31, 2016 26,821,762 $27 $189,335 $(479) $(106,144) $82,739 Effect of adoption of ASU 2016-09 — — 2,616 — (2,616) — Stock-based compensation expense — — 19,835 — — 19,835 Common stock issued under employee stock plans,net 1,324,400 1 12,082 — — 12,083 Unrealized gain on derivative instruments — — — 642 — 642 Unrealized gains and losses on available for salesecurities — — — (27) — (27)Net loss — — — — (13,694) (13,694)Balance as of December 31, 2017 28,146,162 $28 $223,868 $136 $(122,454) $101,578 ___________________*)Represents an amount lower than $ 1. The accompanying notes are an integral part of these consolidated financial statements. 55  VARONIS SYSTEMS, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands) Year EndedDecember 31, 2017 2016 2015Cash flows from operating activities: Net loss $(13,694) $(17,710) $(21,283)Adjustments to reconcile net loss to net cash provided by (used in) operatingactivities: Depreciation 3,328 2,180 1,615 Stock-based compensation 19,835 12,938 7,794 Capital gain from disposal of fixed assets (20) (2) (4)Changes in assets and liabilities: Trade receivables (21,735) (6,425) (9,567)Prepaid expenses and other current assets (3,317) (1,028) 796 Trade payables (653) (1,324) (91)Accrued expenses and other short term liabilities 14,453 5,302 6,270 Deferred revenues 18,885 13,269 11,554 Other long term liabilities (731) 147 187 Net cash provided by (used in) operating activities 16,351 7,347 (2,729) Cash flows from investing activities: Increase in short-term investments (14,402) (8,390) (22,001)Decrease (increase) in long-term deposits (305) (111) 11 Proceeds from sale of property and equipment 20 2 4 Purchase of property and equipment (5,314) (3,825) (4,536)Net cash used in investing activities (20,001) (12,324) (26,522) Cash flows from financing activities: Proceeds from employee stock plans, net 12,083 4,072 2,055 Net cash provided by financing activities 12,083 4,072 2,055 Increase (decrease) in cash, cash equivalents and restricted cash 8,433 (905) (27,196)Cash, cash equivalents and restricted cash at beginning of period 48,803 49,708 76,904 Cash, cash equivalents and restricted cash at end of period $57,236 $48,803 $49,708 Supplemental disclosures of non-cash flow information Deferred rent fixed asset additions $- $583 $1,355 Supplemental disclosure of cash flow information: Cash paid for income taxes $469 $246 $354 The accompanying notes are an integral part of these consolidated financial statements. 56  VARONIS SYSTEMS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(in thousands, except share and per share data)NOTE 1:- GENERAL Varonis Systems, Inc. (“VSI” and together with its subsidiaries, collectively, the “Company”) was incorporated under the laws of the State of Delawareon November 3, 2004 and commenced operations on January 1, 2005. VSI has seven wholly-owned subsidiaries: Varonis Systems Ltd. (“VSL”) incorporated under the laws of Israel on November 24, 2004; Varonis (UK)Limited (“VSUK”) incorporated under the laws of England on March 14, 2007; Varonis Systems (Deutschland) GmbH (“VSG”) incorporated under thelaws of Germany on July 6, 2011; Varonis France SAS (“VSF”) incorporated under the laws of France on February 22, 2012; Varonis Systems Corp.(“VSC”) incorporated under the laws of British Columbia, Canada on February 19, 2013; Varonis Systems (Ireland) Limited (“VIRE”) incorporatedunder the laws of Ireland on November 11, 2016; and Varonis Systems (Australia) Pty Ltd (“VAUS”) incorporated under the laws of Victoria, Australiaon February 28, 2017. The Company’s software products and services allow enterprises to manage, analyze and secure enterprise data. Varonis focuses on protectingenterprise data: sensitive files and emails; confidential customer, patient and employee data; financial records; strategic and product plans; and otherintellectual property. Through its products DatAdvantage (including DatAlert, the Automation Engine and Varonis Edge), DataPrivilege, DataClassification Engine (including GDPR Patterns), Data Transport Engine, DatAnswers and DatAnywhere, the software platform allows enterprises toprotect sensitive data from insider threats and cyberattacks, and realize the value of their enterprise data in ways that are not resource-intensive and easyto implement. VSI markets and sells products and services mainly in the United States. VSUK, VSG, VSF, VSC, VIRE and VAUS resell the Company’s products andservices mainly in the UK, Germany, France and rest of Europe, Canada, Ireland and Australia, respectively. The Company primarily sells its productsand services to a global network of distributors and Value Added Resellers (VARs), which sell the products to end user customers. NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES The consolidated financial statements are prepared according to United States generally accepted accounting principles (“U.S. GAAP”), applied on aconsistent basis, as follows: a.Use of Estimates: The preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management tomake estimates, judgments and assumptions. The Company’s management believes that the estimates, judgments and assumptions used are reasonablebased upon information available at the time they are made. These estimates, judgments and assumptions can affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the dates of the financial statements, and the reported amounts of revenues and expensesduring the reporting period. Actual results could differ from those estimates. On an ongoing basis, the Company’s management evaluates estimates,including those related to accounts receivable and sales allowances, fair values of stock-based awards, deferred taxes and income tax uncertainties, andcontingent liabilities. Such estimates are based on historical experience and on various other assumptions that are believed to be reasonable, the resultsof which form the basis for making judgments about the carrying values of assets and liabilities. b.Financial Statements in U.S. Dollars: Most of the revenues and costs of VSI are denominated in United States dollars (“dollars”). Some of the subsidiaries’ revenues and costs are primarilyincurred in Euros, the Pound Sterling, Canadian dollars, Australian dollars and NIS; however, the Company’s management believes that the dollar is theprimary currency of the economic environment in which VSI and each of its subsidiaries operate. Thus, the dollar is the Company’s functional andreporting currency. Accordingly, transactions denominated in currencies other than the functional currency are re-measured to the functional currency in accordance withASC No. 830, “Foreign Currency Matters” at the exchange rate at the date of the transaction or the average exchange rate in the quarter. At the end ofeach reporting period, financial assets and liabilities are re-measured to the functional currency using exchange rates in effect at the balance sheet date.Non-financial assets and liabilities are re-measured at historical exchange rates. Gains and losses related to re-measurement are recorded as financialincome (expense) in the consolidated statements of operations as appropriate. 57  c.Principles of Consolidation: The consolidated financial statements include the accounts of VSI and its wholly-owned subsidiaries, VSL, VSUK, VSG, VSF, VSC, VIRE and VAUS.All intercompany transactions and balances have been eliminated upon consolidation. d.Cash, Cash Equivalents and Short-Term Investments: The Company accounts for investments in marketable securities in accordance with ASC No. 320, “Investments—Debt and Equity Securities”. TheCompany considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Cash and cashequivalents consist of cash on hand, highly liquid investments in money market funds and various deposit accounts. The Company considers all high quality investments purchased with original maturities at the date of purchase greater than three months to be short-term investments. Investments are available to be used for current operations and are, therefore, classified as current assets even though maturities mayextend beyond one year. Cash equivalents and short-term investments are classified as available for sale and are, therefore, recorded at fair value on theconsolidated balance sheet, with any unrealized gains and losses reported in accumulated other comprehensive income (loss), which is reflected as aseparate component of stockholders’ equity in the Company’s consolidated balance sheets, until realized. The Company uses the specificidentification method to compute gains and losses on the investments. The amortized cost of securities is adjusted for amortization of premiums andaccretion of discounts to maturity. Such amortization and accretion is included as a component of financial income, net in the consolidated statementof operations. Cash, cash equivalents and short-term investments consist of the following (in thousands): As of December 31, 2017 Amortized Cost Gross Unrealized Gains Gross UnrealizedLoss Fair Value Cash and cash equivalents Cash $49,819 $- $- $49,819 Money market funds 6,870 - - 6,870 Total $56,689 $- $- $56,689 Short-term investments US Treasury securities $39,758 $*) $(27) $39,731 Term bank deposits 40,137 - - 40,137 Total $79,895 $- $(27) $79,868 *) Represents an amount lower than $1. All the US Treasury securities in short-term investments have a stated effective maturity of less than 12 months as of December 31, 2017. As of December 31, 2016 Amortized Cost Gross Unrealized Gains Gross UnrealizedLoss Fair Value Cash and cash equivalents Cash $42,175 $- $- $42,175 Money market funds 6,140 - - 6,140 Total $48,315 $- $- $48,315 Short-term investments Term bank deposits $65,493 - - $65,493 Total $65,493 $- $- $65,493 58  The gross unrealized loss related to these short-term investments was due primarily to changes in interest rates. The Company reviews its short-terminvestments on a regular basis to evaluate whether or not any security has experienced an other than temporary decline in fair value. The Companyconsiders factors such as length of time and extent to which the market value has been less than the cost, the financial condition and near-term prospectsof the issuer and its intent to sell, or whether it is more likely than not the Company will be required to sell the investment before recovery of theinvestment’s amortized cost basis. If the Company believes that an other than temporary decline exists in one of these securities, the Company writesdown these investments to fair value. For debt securities, the portion of the write-down related to credit loss would be recorded to other income(expense), net in the Company’s consolidated statements of operations. Any portion not related to credit loss would be recorded to accumulated othercomprehensive income (loss), which is reflected as a separate component of stockholders’ equity in the Company’s condensed consolidated balancesheets. During the year ended December 31, 2017, the Company did not consider any of its investments to be other-than-temporarily impaired. A short-term bank deposit is a deposit with a maturity of more than three months but less than one year. Deposits in U.S. dollars bear interest at ratesranging from 0.60% - 1.35% and 0.55%-1.11%, per annum, as of December 31, 2017 and 2016, respectively. Deposits in NIS bear interest at rates of0.03% and 0.15% per annum as of December 31, 2017 and 2016, respectively. Short-term investments are presented at cost which approximates marketvalue due to their short maturities. e.Restricted Cash: Restricted cash is primarily invested in certificates of deposit and is used mostly as security for the Company’s lease commitments. The Company had no short-term restricted cash as of December 31, 2017 and 2016, respectively. The Company had long-term restricted cash in theamount of $547 and $488 as of December 31, 2017 and 2016, respectively. f.Property and Equipment: Property and equipment are stated at cost, net of accumulated depreciation. Depreciation is calculated using the straight-line method over the estimateduseful lives of the assets at the following annual rates: %Computer equipment 33 Office furniture and equipment 14-15 Leasehold improvements Over the shorter of the expected lease term or estimated useful life g.Impairment of Long-Lived Assets: The Company’s long-lived assets are reviewed for impairment in accordance with ASC No. 360 “Property, Plant and Equipment” whenever events orchanges in circumstances indicate that the carrying amount of an asset (or asset group) may not be recoverable. Recoverability of assets (or asset group)to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted cash flows expected to be generated bythe assets. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of theassets exceeds the fair value of the assets. During the years ended December 31, 2017, 2016 and 2015, no impairment losses have been recorded. h.Long-Term Lease Deposits: Long-term lease deposits include long-term deposits for offices. i.Revenue Recognition: The Company generates revenues in the form of software license fees and related maintenance and services fees. Maintenance and services primarilyconsist of fees for maintenance services (including support and unspecified upgrades and enhancements when and if they are available) andprofessional services (including training) that are not essential to functionality of the Company’s software. The Company sells its products worldwidedirectly to a network of distributors and VARs. The Company accounts for the sale of perpetual software in accordance with ASC No. 985-605, “Software Revenue Recognition”. As required by ASC985-605, the Company determines the value of the software component of its multiple-element arrangements using the residual method when vendorspecific objective evidence (VSOE) of fair value exists for the undelivered elements of maintenance, and professional services agreements. VSOE isbased on the price charged when an element is sold separately or renewed. Under the residual method, the fair value of the undelivered elements isdeferred, and the remaining portion of the arrangement fee is allocated to the delivered elements and is recognized as revenue, when all ASC 985-605criteria for revenue recognition are met. 59  The Company determines the fair value based on the stand alone sales price charged for maintenance, and professional services. The Company hasdefined classes of transactions, based on the value of licensed software products purchased from the Company. The Company prices renewals for eachclass of transaction as a fixed percentage of the total gross value of licensed software products the customer purchased. Software license revenues are recognized when persuasive evidence of an arrangement exists, the software license has been delivered, there are nouncertainties surrounding product acceptance, there are no significant future performance obligations, the license fees are fixed or determinable andcollection of the license fee is considered probable. Fees for arrangements with payment terms extending beyond customary payment terms areconsidered not to be fixed or determinable, in which case revenue is deferred and recognized when payments become due from the customer providedthat all other revenue recognition criteria have been met. The Company recognizes revenues from the sale of term license arrangements, ratably, on a straight-line basis, over the term of the underlying contract,and is typically up to one year. The Company recognizes revenues from maintenance ratably over the term of the underlying maintenance contract term. The term of the maintenancecontract is usually one year. Revenues from professional services consist mostly of time and material services and, accordingly, are generally recognized as the services areperformed or when the service term has expired. Professional services bundled with licensed software and other software related elements are not essential to the functionality of the other elements ofthe arrangement. Revenues allocable to the services are recognized as the services are performed or when the service term has expired, using VSOE forsuch services. Deferred revenues represent mostly unrecognized fees billed or collected for maintenance and professional services. The Company does not grant a right of return to its customers, except for one of its resellers. During the years ended December 31, 2017, 2016 and2015, there were no returns from this reseller. j.Cost of Revenues: Cost of revenues consists of the cost of maintenance and services, resulting from costs associated with support, and professional services. k.Accounting for Stock-Based Compensation: The Company accounts for stock-based compensation in accordance with ASC No. 718, “Compensation-Stock Compensation”. ASC No. 718 requirescompanies to estimate the fair value of equity-based payment awards on the date of grant using an Option-Pricing Model (“OPM”). The value of theportion of the award that is ultimately expected to vest is recognized as an expense over the requisite service periods in the Company’s consolidatedstatements of operations. The Company recognizes compensation expenses for the value of its awards granted based on the straight-line method over the requisite service periodof each of the awards. The Company applies ASC 718 and ASC 505-50, “Equity-Based Payments to Non-Employees” with respect to options issued to non-employeeconsultants. Accordingly, the Company uses option valuation models to measure the fair value of the options at the measurement date as defined inASC 505-50. The Company selected the Black-Scholes-Merton option pricing model as the most appropriate fair value method for its stock options awards, whereasthe fair value of restricted stock units is based on the market value of the underlying shares at the date of grant. The fair value of options granted to employees and non-employee directors is estimated at the date of grant using the following weighted averageassumptions: For the year ended December 31, 2017, there were no stock options granted. For the years ended December 31, 2016 and 2015, dividend yield was 0%,expected volatility was 62.1% and 65.0%, respectively, risk-free interest was 1.42% and 1.94% - 2.00%, respectively, and expected life was 6.25. The Company used its historical volatility in accordance with ASC 718. The computation of volatility uses historical volatility derived from theCompany’s exchange traded shares. Expected term of options granted is calculated based on the simplified method, in accordance with SAB 110, (i.e.,as the average between the vesting period and the contractual term of the options). The risk free interest rate assumption is the implied yield currentlyavailable on United States treasury zero-coupon issues with a remaining term equal to the expected life of the Company’s options. The dividend yieldassumption is based on the Company’s historical experience and expectation of no future dividend payouts and may be subject to substantial changein the future. The Company has historically not paid cash dividends and has no foreseeable plans to pay cash dividends in the future. 60  The non-cash compensation expenses related to employees and consultants for the years ended December 31, 2017, 2016 and 2015 amounted to$19,835, $12,938 and $7,794, respectively. Effective as of January 1, 2017, the Company adopted Accounting Standards Update 2016-09, “Compensation—Stock Compensation (Topic 718)”(“ASU 2016-09”) on a modified, retrospective basis. ASU 2016-09 permits entities to make an accounting policy election related to how forfeitures willimpact the recognition of compensation cost for stock-based compensation: to estimate the total number of awards for which the requisite serviceperiod will not be rendered or to account for forfeitures as they occur. Upon adoption of ASU 2016-09, the Company elected to change its accountingpolicy to account for forfeitures as they occur. The change was applied on a modified, retrospective basis with a cumulative-effect adjustment toretained earnings of $2,616 (which increased the accumulated deficit) as of January 1, 2017. ASU 2016-09 also eliminates the requirement that excess tax benefits be realized as a reduction in current taxes payable before the associated taxbenefit can be recognized as an increase in paid in capital. Approximately $7,131 of federal net operating losses and $718 of state net operating losses,neither of which was included in the deferred tax assets recognized in the statement of financial position as of December 31, 2016, have been attributedto tax deduction for stock-based compensation in excess of the related book expense. Under ASU 2016-09, these previously unrecognized deferred taxassets will be recognized on a modified, retrospective basis as of the start of the year in which the ASU 2016-09 is adopted; in this case as of January 1,2017. The U.S. federal and state net operating losses and credits that were recognized as of January 1, 2017 have been offset by a valuation allowance.As a result, there is no cumulative-effect adjustment to retained earnings as of January 1, 2017. Additionally, ASU 2016-09 addresses the presentation of excess tax benefits and employee taxes paid on the statement of cash flows. The Company isnow required to present excess tax benefits as an operating activity on the statement of cash flows rather than as a financing activity. The Companyadopted this change prospectively. l.Research and Development Costs: Research and development costs are charged to the statement of operations as incurred. ASC No. 985-20, “Software-Costs of Software to Be Sold,Leased, or Marketed,” requires capitalization of certain software development costs subsequent to the establishment of technological feasibility. Based on the Company’s product development process, technological feasibility is established upon the completion of a working model. TheCompany does not incur material costs between the completion of the working model and the point at which the product is ready for general release.Therefore, research and development costs are charged to the statement of operations as incurred. m.Income Taxes: The Company accounts for income taxes in accordance with ASC No. 740, using the liability method whereby deferred tax assets and liability accountbalances are determined based on the differences between financial reporting and the tax basis for assets and liabilities and are measured using theenacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company provides a valuation allowance, if necessary,to reduce deferred tax assets to the amounts that are more likely-than-not to be realized. ASC 740 contains a two-step approach to recognizing and measuring a liability for uncertain tax positions. The first step is to evaluate the tax positiontaken or expected to be taken in a tax return by determining if the weight of available evidence indicates that it is more likely than not that, on anevaluation of the technical merits, the tax position will be sustained on audit, including resolution of any related appeals or litigation processes. Thesecond step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. The Companyaccrues interest and penalties related to unrecognized tax provisions in its taxes on income. n.Derivative Instruments: The Company’s primary objective for holding derivative instruments is to reduce its exposure to foreign currency rate changes. The Company reducesits exposure by entering into forward foreign exchange contracts with respect to operating expenses that are forecast to be incurred in currencies otherthan the U.S. dollar. A majority of the Company’s revenues and operating expenditures are transacted in U.S. dollars. However, certain operatingexpenditures are incurred in or exposed to other currencies, primarily the NIS. The Company has established forecasted transaction currency risk management programs to protect against fluctuations in fair value and the volatilityof future cash flows caused by changes in exchange rates. The Company’s currency risk management program includes forward foreign exchangecontracts designated as cash flow hedges. These forward foreign exchange contracts generally mature within 12 months. The Company does not enterinto derivative financial instruments for trading purposes. 61  Derivative instruments measured at fair value and their classification on the consolidated balance sheets are presented in the following table (inthousands): Assets as ofDecember 31, 2017 Liabilities as ofDecember 31, 2016 NotionalAmount FairValue NotionalAmount FairValueForeign Exchange Forward Contract Derivatives in cash flowhedging relationships—included in other current assets andaccrued expenses and other short term liabilities $1,746 $163 $46,116 $(479) For the years ended December 31, 2017 and 2016, the consolidated statements of operations reflect a gain of approximately $2,649 and $332,respectively, related to the effective portion of foreign currency forward contracts. There was no ineffective portion for the years ended December 31,2017 and 2016. o.Concentrations of Credit Risks: Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash, cash equivalents, short-terminvestments and trade receivables. The Company’s cash, cash equivalents and short-term investments are invested in major banks mainly in the United States but also in the UnitedKingdom, France, Germany, Israel, Canada, Ireland and Australia. Such deposits in the United States may be in excess of insured limits and are notinsured in other jurisdictions. The Company maintains cash and cash equivalents with diverse financial institutions and monitors the amount of creditexposure to each financial institution. The Company’s trade receivables are geographically diversified and derived primarily from sales to a network of distributors and VARs mainly in theUnited States and Europe. Concentration of credit risk with respect to trade receivables is limited by credit limits, ongoing credit evaluation andaccount monitoring procedures. The Company performs ongoing credit evaluations of its channel partners and establishes an allowance for doubtfulaccounts based upon a specific review of all significant outstanding invoices. The Company writes off receivables when they are deemed uncollectibleand having exhausted all collection efforts. p.Retirement and Severance Pay: VSI makes available to its employees a retirement plan (the “U.S. Plan”) that qualifies as a deferred salary arrangement under Section 401(k) of theInternal Revenue Code of 1986, as amended (“the Code”). Participants in the U.S. Plan may elect to defer a portion of their pre-tax earnings, up to theInternal Revenue Service annual contribution limit. VSI matches 100% of each participant’s contributions up to a maximum of 3% of the participant’stotal pay and 50% of each participant’s contributions on contributions between 3% and 5% of the participant’s total pay. Each participant maycontribute up to 80% of total remuneration up to the Internal Revenue Service’s annual contribution limit. Contributions to the U.S. Plan are recordedduring the year contributed as an expense in the consolidated statements of income. Pursuant to Israel’s Severance Pay Law, Israeli employees are entitled to severance pay equal to one month’s salary for each year of employment, or aportion thereof. The employees of the Israeli subsidiary elected to be included under section 14 of the Severance Pay Law, 1963 (“section 14”).According to this section, these employees are entitled only to monthly deposits, at a rate of 8.33% of their monthly salary, made in their name withinsurance companies. Payments in accordance with section 14 release the Company from any future severance payments (under the above IsraeliSeverance Pay Law) in respect of those employees; therefore, related assets and liabilities are not presented in the balance sheet. The Company’s liability for severance pay for the employees of its French subsidiary is calculated pursuant to French law, according to which Frenchemployees are entitled to an indemnity (a statutory redundancy). The law provides for the payment of severance payment to any employee working forthe French subsidiary for at least a year. VSUK makes available to certain eligible employees a pension plan whereby participants in the plan may elect to defer a portion of their earnings.VSUK matches 100% of each participant’s contributions up to a maximum of 3% of the participant’s net pay. 62  Total Company expenses related to retirement and severance pay amounted to $4,801, $3,775 and $3,085 for the years ended December 31, 2017, 2016and 2015, respectively. The amount of severance payable included in other liabilities as of December 31, 2017 and 2016 is $1,781 and $1,664,respectively. q.Fair Value of Financial Instruments: Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction betweenmarket participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants woulduse in pricing an asset or a liability. A three tier fair value hierarchy is established as a basis for considering such assumptions and for inputs used in the valuation methodologies inmeasuring fair value: •Level 1: Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets. •Level 2: Observable inputs that reflect quoted prices for identical assets or liabilities in markets that are not active; quoted prices forsimilar assets or liabilities in active markets; inputs other than quoted prices that are observable for the assets or liabilities; or inputs thatare derived principally from or corroborated by observable market data by correlation or other means. •Level 3: Unobservable inputs reflecting our own assumptions incorporated in valuation techniques used to determine fair value. Theseassumptions are required to be consistent with market participant assumptions that are reasonably available. The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuringfair value. The carrying amounts of cash and cash equivalents, trade receivables, short-term investments and trade payables approximate their fair value due to theshort-term maturity of such instruments. r.Basic and Diluted Net Loss Per Share: Basic net loss per share is computed by dividing the net loss by the weighted-average number of shares of common stock outstanding during theperiod. Diluted net loss per share is computed by giving effect to all potential shares of common stock, including stock options, to the extent dilutive. Basic and diluted net loss per share was the same for each period presented as the inclusion of all potential shares of common stock outstanding wouldhave been anti-dilutive. s.Contingent Liabilities: The Company accounts for its contingent liabilities in accordance with ASC No. 450 “Contingencies”. A provision is recorded when it is both probablethat a liability has been incurred and the amount of the loss can be reasonably estimated. With respect to legal matters, provisions are reviewed and adjusted to reflect the impact of negotiations, estimated settlements, legal rulings, advice oflegal counsel and other information and events pertaining to a particular matter. As of December 31, 2017 and 2016, the Company was not a party toany litigation that could have a material adverse effect on the Company’s business, financial position, results of operations or cash flows. t.Reclassification: Certain amounts in prior years' financial statements have been reclassified to conform to the current year's presentation. u.Recently Issued Accounting Pronouncements: In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers”, an updated standard on revenue recognition and issuedsubsequent amendments to the initial guidance in March 2016, April 2016, May 2016 and December 2016 within ASU 2016-08, 2016-10, 2016-12 and2016-20, respectively. The new standards provide enhancements to the quality and consistency of how revenue is reported while also improvingcomparability in the financial statements of companies reporting using IFRS and US GAAP. The core principle of the new standard is for companies torecognize revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration (that is, payment) to which thecompany expects to be entitled in exchange for those goods or services. The new standard also will result in enhanced disclosures about revenue,provide guidance for transactions that were not previously addressed comprehensively (for example, service revenue and contract modifications) andimprove guidance for multiple-element arrangements. ASU 2014-09 was initially scheduled to be effective for annual and interim reporting periodsbeginning after December 15, 2016 and may be adopted either on a full retrospective or modified retrospective approach. However, on July 9, 2015, theFASB approved a one year deferral of the effective date of ASU 2014-09. The revised effective date is for annual reporting periods beginning afterDecember 15, 2017 and interim periods thereafter, with an early adoption permitted as of the original effective date. The Company has decided to adoptthis standard effective January 1, 2018 using the full retrospective method which will require each prior reporting period presented to be recast in futureissuances of the Company’s financial statements. In preparation for adoption of the standard, the Company has implemented internal controls and keysystem functionality to enable the preparation of financial information and have reached conclusions on key accounting assessments related to thestandard, including the assessment of the impact. 63  The most significant impact of the new standard relates to the way the Company accounts for term agreements and commission expense. Specifically,under the current revenue standard, the Company recognizes both the term license and maintenance revenues ratably over the contract period whereasunder the new revenue standard it would recognize term license revenues upfront and the associated maintenance revenues over the contract period.The Company has also considered the impact of the guidance in ASC 340-40, “Other Assets and Deferred Costs” under the new standard. Under ASC340-40, it may be required to capitalize and amortize certain incremental costs of obtaining a contract such as the maintenance portion of salescommissions over the life of the license. Under the Company’s current accounting policy, it does not capitalize sales commission costs but ratherrecognizes these costs when the purchase order is received. Adoption of the standard will result in a reduction of revenues of $1,974 for the year ended December 31, 2017 and recognition of additional revenuesof $1,407 for the year ended December 31, 2016, primarily due to the net change in term license revenue recognition. In addition, adoption of thestandard will result in an increase in prepaid expenses and other current assets and a decrease in deferred revenues of $9,865 and $97, respectively, as ofDecember 31, 2017, driven by the capitalization of sales commission costs and the upfront recognition of license revenues from term licenses. Thecumulative impact to the Company’s accumulated deficit as of January 1, 2016 is a reduction of $5,583. Adoption of the standard related to revenue recognition had no impact to cash from or used in operating, financing or investing activities on theCompany’s consolidated statements of cash flows. Select recast financial statement information, which reflects the preliminary effect of the adoption of this standard, is set forth below. Year endedDecember 31, 2017 As Reported Adjustments Recast for Adoption of ASC 606Total revenues $217,364 $(1,974) $215,390 Operating loss $(13,597) $178 $(13,419)Income taxes $(2,459) $(328) $(2,787)Net loss $(13,694) $(151) $(13,845) Year endedDecember 31, 2016 As Reported Adjustments Recast for Adoption of ASC 606Total revenues $164,456 $1,407 $165,863 Operating loss $(15,694) $3,699 $(11,995)Income taxes $(1,131) $(182) $(1,313)Net loss $(17,710) $3,517 $(14,193) 64  December 31, 2017Balance Sheet Data As Reported Adjustments Recast for Adoption of ASC 606Assets Current assets: Prepaid expenses and other current assets $7,130 $9,865 $16,995 Liabilities and stockholders’ equity Current liabilities: Accrued expenses and other short term liabilities $42,453 $1,014 $43,467 Deferred revenues $73,891 $(227) $73,664 Long-term liabilities: Deferred revenues $7,034 $130 $7,164 In January 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses on Financial Instruments”, which requires that expected creditlosses relating to financial assets measured on an amortized cost basis and available for sale debt securities be recorded through an allowance for creditlosses. ASU 2016-13 limits the amount of credit losses to be recognized for available for sale debt securities to the amount by which carrying valueexceeds fair value and also requires the reversal of previously recognized credit losses if fair value increases. The new standard will be effective forinterim and annual periods beginning after January 1, 2020, and early adoption is permitted. The Company is currently evaluating whether to earlyadopt this standard and the potential effect on its consolidated financial statements. In February 2016, the FASB issued ASU 2016-02, “Leases”, on the recognition, measurement, presentation and disclosure of leases for both parties to acontract (i.e., lessees and lessors). The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leasesbased on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether leaseexpense is recognized based on an effective interest method or on a straight line basis over the term of the lease, respectively. A lessee is also requiredto record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a termof 12 months or less will be accounted for in a manner similar to the accounting under existing guidance for operating leases today. The new standardrequires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leasesand operating leases. ASC 842 supersedes the previous leases standard, ASC 840, "Leases". The guidance is effective for the interim and annual periodsbeginning on or after December 15, 2018, and early adoption is permitted. The Company is currently evaluating whether to early adopt this standardand the potential effect of the guidance on its consolidated financial statements. In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash”, which requires companies to includeamounts generally described as restricted cash and restricted cash equivalents in cash and cash equivalents when reconciling beginning-of-period andend-of-period total amounts shown on the statement of cash flows. This ASU is effective for annual and interim periods beginning after December 15,2017. The Company has decided to adopt this standard effective December 31, 2017 using the retrospective transition method, as required by the newstandard. The adoption of this standard has an immaterial impact on the Company’s consolidated statements of cash flows. The following table provides a reconciliation of cash and cash equivalents, and long term restricted cash reported within the consolidated balancesheets that sum to the total of such amounts in the consolidated statements of cash flows: December 31. 2017 December 31. 2016 December 31. 2015Cash and cash equivalents $56,689 $48,315 $49,241 Long term restricted cash included in other assets 547 488 467 Cash, cash equivalents and long term restricted cash shown in theconsolidated statement of cash flows $57,236 $48,803 $49,708 In January 2018, the FASB released guidance on the accounting for tax on the GILTI provisions of the TCJA. The GILTI provisions impose a tax on foreignincome in excess of a deemed return on tangible assets of foreign corporations. The guidance indicates that either (i) accounting for deferred taxes related toGILTI inclusions, or (ii) to treat any taxes on GILTI inclusions as period cost, are both acceptable methods subject to an accounting policy election. Inaccordance with SEC Staff Accounting Bulletin No. 118, and as the Company is not yet able to reasonably estimate the effect of the GILTI tax, as describedin note 9 of the consolidated financial statements, the Company has not yet adopted an accounting policy with respect to the GILTI tax. 65  NOTE 3:- PREPAID EXPENSES AND OTHER CURRENT ASSETS December 31, 2017 2016Prepaid expenses $6,044 $2,871 Government institutions & other receivables 542 369 Deferred charges - 256 Foreign currency forward contracts derivatives 163 - Short-term deposits 374 122 Other 7 32 $7,130 $3,650 NOTE 4:- PROPERTY AND EQUIPMENT, NET December 31, 2017 2016Cost: Computer equipment $8,473 $7,800 Office furniture and equipment 2,263 2,094 Leasehold improvements 9,163 7,459 19,899 17,353 Accumulated depreciation 8,003 7,443 Property and equipment, net $11,896 $9,910 Depreciation expenses for the years ended December 31, 2017, 2016 and 2015 were $3,328, $2,180 and $1,615, respectively. NOTE 5:- ACCRUED EXPENSES AND OTHER SHORT TERM LIABILITIES December 31, 2017 2016Employees $17,748 $12,306 Accrued expenses 9,507 6,777 Government authorities and other 14,006 8,293 Foreign exchange forward contract derivatives - 479 Other short term liabilities 1,192 624 $42,453 $28,479 NOTE 6:- COMMITMENTS AND CONTINGENT LIABILITIES a.Liens: The Company has several liens granted to financial institutions mainly to secure various operating lease agreements in connection with its office space. 66  b.Lease Commitments: The Company rents its facilities in all locations under operating leases with lease periods expiring from 2018-2026. The lease agreements of VSLinclude extension options. VSL leases cars for its employees under operating lease agreements expiring at various dates from 2018-2020. Aggregate minimum rental commitments under non-cancelable leases as of December 31, 2017 for the upcoming years were as follows: Payments Due ByPeriod 2018 $6,418 2019 5,561 2020 4,335 2021 4,561 2022 4,587 Thereafter 21,063 $46,525 Total rent expenses for the years ended December 31, 2017, 2016 and 2015 were $4,075, $3,258 and $4,296, respectively. The total minimum rent tobe received in the future under the non-cancelable sublease as of December 31, 2017 was $732. For leases that contain predetermined fixed escalations of the minimum rent, the Company recognizes the related rent expense on a straight-line basisfrom the date of possession of the property to the end of the initial lease term. The Company records any differences between the straight-line rentamounts and amounts payable under the leases as part of deferred rent, in accrued liabilities or long-term liabilities, as appropriate. Cash or leaseincentives received upon entering into certain leases (“tenant allowances”) are recognized on a straight-line basis as a reduction to rent from the date ofpossession of the property through the end of the initial lease term. The Company records the unamortized portion of tenant allowances as a part ofdeferred rent, in current liabilities or other long-term liabilities, as appropriate. As of December 31, 2017 and 2016, deferred rent included $941 and$624, respectively, in current liabilities in the Company’s consolidated balance sheets, and deferred rent included $4,780 and $5,377, respectively, inlong-term liabilities in the Company’s consolidated balance sheets. On March 31, 2014, the Company entered into a promissory note and related security documents with Bank Leumi USA. The Company may borrow upto $7,000 against certain of its accounts receivable outstanding amount, based on several conditions, at an annual interest rate of the Wall StreetJournal Prime Rate less 0.15%, provided that the annual interest rate applicable to advances will not be lower than 4.10%. As of December 31, 2017,that rate amounted to 4.35%. This promissory note enables the Company, among other things, to engage in foreign currency hedging transactions withBank Leumi USA to manage exposure to foreign currency risk without restricted cash requirements. The Company may borrow under the promissorynote until August 15, 2018 at which time the principal sum of each such loan, together with accrued and unpaid interest payable, will become due andpayable. As of December 31, 2017, the Company had no balance outstanding under the promissory note. As part of the transaction, the Companygranted the lender a security interest in its personal property, excluding intellectual property and other intangible assets. The promissory note alsocontains customary events of default. NOTE 7:- FAIR VALUE MEASUREMENTS The following table sets forth the Company’s liabilities that were measured at fair value as of December 31, 2017 and 2016 by level within the fairvalue hierarchy (in thousands): As of December 31, 2017 As of December 31, 2016 Level I LevelII Level III Fair Value Level I LevelII Level III Fair ValueFinancial assets: Cash equivalents: Money market funds 6,870 – – 6,870 6,140 – – 6,140 Short-term investments: US Treasury securities 39,731 – – 39,731 – – – – Term bank deposits 40,137 – – 40,137 65,493 – – 65,493 Other current assets: Forward foreign exchange contracts – 163 – 163 – – – – Financial liabilities: Forward foreign exchange contracts – – – – – (479) – (479)Total financial assets (liabilities) $86,738 $163 $– $86,901 $71,633 $(479) $– $71,154 67  NOTE 8:- STOCKHOLDERS’ EQUITY a.Composition of common stock capital: Authorized Issued and outstanding Number of shares December 31, December 31, 2017 2016 2017 2016Stock of $0.001 par value: Common stock 200,000,000 200,000,000 28,146,162 26,821,762 b.Common stock rights: The Company’s Amended and Restated Certificate of Incorporation authorizes the Company to issue 200,000,000 shares of common stock, par value$0.001 per share. The common stock confers upon its holders the right to participate in the general meetings of the Company, to vote at such meetings (each sharerepresents one vote), to elect board members and to participate in any distribution of dividends or any other distribution of the Company’s property,including the distribution of surplus assets upon liquidation. c.Stock option plans: On December 30, 2005, the Company’s board of directors adopted the Varonis Systems, Inc. 2005 Stock Plan (the “2005 Stock Plan”). As ofDecember 31, 2013, the Company had reserved 4,713,319 shares of common stock available for issuance to employees, directors, officers andconsultants of the Company and its subsidiaries. The options generally vest over four years. No awards were granted under the 2005 Stock Plansubsequent to December 31, 2013, and no further awards will be granted under the 2005 Stock Plan. On November 14, 2013, the Company’s board of directors adopted the Varonis Systems, Inc. 2013 Omnibus Equity Incentive Plan (the “2013 Plan”)which was subsequently approved by the Company’s stockholders. The Company initially reserved 1,904,633 shares of common stock for issuanceunder the 2013 Plan to employees, directors, officers and consultants of the Company and its subsidiaries. The number of shares of common stockavailable for issuance under the 2013 Plan was increased on January 1, 2016 and will be increased on each January 1 thereafter by four percent (4%) ofthe number of shares of common stock issued and outstanding on each December 31 immediately prior to the date of increase (rounded down to thenearest whole share), but the amount of each increase will be limited to the number of shares of common stock necessary to bring the total number ofshares of Common Stock available for grant and issuance under the 2013 Plan to five percent (5%) of the number of shares of common stock issued andoutstanding on each December 31. On January 1, 2018, 2017 and 2016, the share reserve under the 2013 Plan was automatically increased by1,125,846, 1,072,870 and 1,042,766 shares, respectively. Awards granted under the 2013 Plan generally vest over four years. Any award that is forfeitedor canceled before expiration becomes available for future grants under the 2013 Plan. A summary of employees’ stock options activities during the year ended December 31, 2017 is as follows: Year endedDecember 31, 2017 Number Weightedaverageexerciseprice Aggregateintrinsicvalue(in thousands) Weightedaverageremainingcontractuallife (years)Options outstanding at the beginning of the year 2,388,348 $15.243 $30,025 5.861 Granted - $- Exercised (832,270) $13.031 Forfeited (99,793) $19.930 Options outstanding at the end of the period 1,456,285 $16.172 $47,152 4.906 Vested and expected to vest 1,456,285 $16.172 $47,152 4.906 Options exercisable at the end of the period 1,262,206 $15.052 $42,282 4.595 68  A summary of employees’ stock options activities during the years ended December 31, 2016 and 2015 is as follows: Year endedDecember 31, 2016 Number Weightedaverageexerciseprice Aggregateintrinsicvalue(in thousands) Weightedaverageremainingcontractuallife (years)Options outstanding at the beginning of the year 2,782,560 $14.026 $21,337 6.246 Granted 135,000 $16.870 Exercised (445,535) $5.901 Forfeited (83,677) $27.126 Options outstanding at the end of the period 2,388,348 $15.243 $30,025 5.861 Vested and expected to vest 2,331,800 $15.074 $29,689 5.806 Options exercisable at the end of the period 1,752,416 $12.583 $26,473 5.119 Year endedDecember 31, 2015 Number Weightedaverageexerciseprice Aggregateintrinsicvalue(in thousands) Weightedaverageremainingcontractuallife (years)Options outstanding at the beginning of the year 4,080,611 $9.697 $95,855 6.092 Granted 191,200 $28.253 Exercised (1,334,351) $1.521 Forfeited (154,900) $25.265 Options outstanding at the end of the period 2,782,560 $14.026 $21,337 6.246 Vested and expected to vest 2,677,503 $13.623 $21,284 6.156 Options exercisable at the end of the period 1,794,249 $8.841 $20,496 5.035 There were no options granted in 2017. The weighted average grant date fair values of options granted during the year ended December 31, 2016and 2015 were $16.870 and $28.637, respectively. The aggregate intrinsic value in the table above represents the total intrinsic value that would have been received by the option holders had alloption holders exercised their options on the last date of the period. Total intrinsic value of options exercised for the years ended December 31,2017, 2016 and 2015 was $22,382, $9,418 and $27,885, respectively. As of December 31, 2017 and 2016, there was $2,208 and $3,380, respectively,of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the 2005 Stock Plan and 2013Plan. This cost is expected to be recognized over a period of approximately 0.887 and 1.774 years, respectively. 69  The options outstanding as of December 31, 2017 have been separated into ranges of exercise price as follows: Range ofexercise price Optionsoutstandingas ofDecember 31,2017 Weightedaverageremainingcontractuallife (years) Weightedaverageexerciseprice Optionsexercisableas ofDecember 31,2017 Weightedaverageremainingcontractuallife (years) Weightedaverageexerciseprice ofoptionsexercisable$1.039-1.576 401,476 1.383 $1.295 401,476 1.383 $1.295 $6.230-8.800 55,929 3.908 $7.125 55,929 3.908 $7.125 $12.470-16.870 228,001 5.820 $13.435 200,917 5.508 $12.972 $19.510-21.660 374,257 6.606 $21.207 284,671 6.567 $21.201 $22.010-24.230 170,815 6.193 $22.292 144,967 6.182 $22.342 $29.880 117,829 7.145 $29.880 74,758 7.145 $29.880 $39.860 107,978 6.225 $39.860 99,488 6.225 $39.860 1,456,285 4.906 $16.172 1,262,206 4.595 $15.052 The options outstanding as of December 31, 2016 have been separated into ranges of exercise price as follows: Range ofexercise price Optionsoutstandingas ofDecember 31,2016 Weightedaverageremainingcontractuallife (years) Weightedaverageexerciseprice Optionsexercisableas ofDecember 31,2016 Weightedaverageremainingcontractuallife (years) Weightedaverageexerciseprice ofoptionsexercisable$0.901-1.576 710,562 2.482 $1.317 710,562 2.482 $1.317 $6.230-8.800 89,373 4.963 $6.953 89,373 4.963 $6.953 $12.470-16.870 442,507 7.078 $13.812 279,863 6.163 $12.470 $19.510-21.660 546,959 7.622 $21.205 307,302 7.558 $21.200 $22.010-24.230 295,513 7.299 $22.278 191,891 7.289 $22.316 $29.880 154,200 8.145 $29.880 70,684 8.145 $29.880 $39.860 149,234 7.225 $39.860 102,741 7.225 $39.860 2,388,348 5.861 $15.243 1,752,416 5.119 $12.583 d.Options issued to consultants: The Company’s outstanding options granted to consultants for services as of December 31, 2017 were as follows: Issuance date Options forshares ofcommon stock Exercise priceper share Optionsexercisable Exercisablethrough (number) (number) February 2013 1,500 $12.470 1,500 February 2023August 2013 4,188 $21.140 4,083 August 2023March 2014 7,953 $39.860 7,163 March 2024May 2014 6,075 $22.010 5,317 May 2024November 2014 7,107 $21.660 4,897 November 2024May 2015 2,000 $19.510 1,292 May 2025February 2016 2,500 $16.870 1,145 February 2026 31,323 25,397 70  The Company’s outstanding options granted to consultants for services as of December 31, 2016 were as follows: Issuance date Options forshares ofcommon stock Exercise priceper share Optionsexercisable Exercisablethrough (number) (number) February 2013 1,500 $12.470 1,344 February 2023August 2013 4,188 $21.140 3,104 August 2023October 2013 750 $24.230 547 October 2023March 2014 13,100 $39.860 8,187 March 2024May 2014 6,850 $22.010 3,704 May 2024November 2014 10,246 $21.660 4,364 November 2024May 2015 5,250 $19.510 1,750 May 2025February 2016 2,500 $16.870 — February 2026 44,384 23,000 e.Restricted stock units: The following provides a summary of the restricted stock unit activity for the Company for the year ended December 31, 2017: Number ofSharesUnderlyingOutstandingRestricted StockUnits Weighted-AverageGrant DateFair ValueOutstanding as of January 1, 2017 1,399,127 $19.96 Granted 1,295,653 $31.58 Vested (407,458) $21.89 Forfeited (269,201) $22.75 Unvested as of December 31, 2017 2,018,121 $27.32 The following provides a summary of the restricted stock unit activity for the Company for the year ended December 31, 2016: Number ofSharesUnderlyingOutstandingRestricted StockUnits Weighted-AverageGrant DateFair ValueOutstanding as of January 1, 2016 643,506 $23.38 Granted 1,038,044 $19.67 Vested (199,074) $22.82 Forfeited (83,349) $20.21 Unvested as of December 31, 2016 1,399,127 $19.96 f.2015 Employee Stock Purchase Plan On May 5, 2015, the Company’s stockholders approved the Varonis Systems, Inc. 2015 Employee Stock Purchase Plan (the “ESPP”), which theCompany’s board of directors had adopted on March 19, 2015. The ESPP became effective as of June 30, 2015. The ESPP allows eligible employees topurchase shares of the Company’s common stock at a discount through payroll deductions of up to 15% of their eligible compensation, at not less than85% of the fair market value of the Company’s common stock on the first day or last trading day in the offering period, subject to any plan limitations.The Company initially reserved 500,000 shares of common stock for issuance under the ESPP. The number of shares available for issuance under theESPP was increased on January 1, 2016, and will increase each January 1 thereafter, by an amount equal to the lesser of (i) one percent (1%) of thenumber of shares of common stock issued and outstanding on each December 31 immediately prior to the date of increase, except that the amount ofeach such increase will be limited to the number of shares of common stock necessary to bring the total number of shares of common stock available forissuance under the ESPP to two percent (2%) of the number of shares of common stock issued and outstanding on each such December 31, or (ii)400,000 shares of common stock. On January 1, 2018, 2017 and 2016, the share reserve under the ESPP was automatically increased by 188,813,158,695 and 21,383 shares, respectively. The ESPP will continue in effect until the earlier of (i) the date when no shares of common stock are availablefor issuance thereunder or (ii) June 30, 2025; unless terminated prior thereto by the Company’s board of directors or compensation committee, each ofwhich has the right to terminate the ESPP at any time. 71  g.Stock-based compensation expense for employees and consultants: The Company recognized non-cash stock-based compensation expense in the consolidated statements of operations as follows (in thousands): Year endedDecember 31, 2017 2016 2015Cost of revenues $1,078 $699 $419 Research and development 5,209 3,052 1,954 Sales and marketing 8,542 6,104 3,041 General and administrative 5,006 3,083 2,380 Total $19,835 $12,938 $7,794 NOTE 9:- INCOME TAXES a.Tax Reform: On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “TCJA”).The TCJA makes broad and complex changes to the Code. The changes include, but are not limited to: ·A corporate income tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017 (“Rate Reduction”);· The transition of U.S international taxation from a worldwide tax system to a territorial system by providing a 100 percent deduction to aneligible U.S. shareholder on foreign sourced dividends received from a foreign subsidiary (“100% Dividend Received Deduction”);· A one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017; and· Taxation of GILTI earned by foreign subsidiaries beginning after December 31, 2017. The GILTI tax imposes a tax on foreign income in excessof a deemed return on tangible assets of foreign corporations. The Company has not completed its accounting for the income tax effects of the TCJA. Where the Company has not yet been able to make reasonableestimates of the impact of certain elements, the Company has not recorded any amounts related to those elements and has continued accounting for them inaccordance with ASC 740 on the basis of the tax laws in effect immediately prior to the enactment of the TCJA, pursuant to SEC Staff Accounting BulletinNo. 118. The Company has calculated its best estimate of the impact of the TCJA for its year end income tax provision in accordance with its understanding ofthe TCJA and guidance available as of the date of this filing. As a result: Rate Reduction The TCJA reduces the U.S. federal corporate income tax rate from 35% to 21% for tax years beginning after December 31, 2017. In addition, the TCJAmakes certain changes to the depreciation rules and implements new limits on the deductibility of certain executive compensation. The Company estimates that after it utilizes its $23,992 net operating losses carryforwards for Federal income tax purposes, available as of December31, 2017, the Rate Reduction is expected to positively impact the Company’s future US after tax earnings. However, the ultimate impact is subject to theeffect of other complex provisions in the TCJA, including the GILTI tax, which the Company is currently reviewing, and it is possible that any impact ofGILTI tax could significantly reduce the benefit of the Rate Reduction. Due to the uncertain practical and technical application of many of these provisions,it is currently not possible to reliably estimate whether GILTI will apply and if so, how it would impact the Company. 72  Deemed Repatriation Transition Tax The Deemed Repatriation Transition Tax is a tax on previously untaxed accumulated and current earnings and profits (“E&P”) of certain of our foreignsubsidiaries. To determine the amount of the Transition Tax, the Company must determine, in addition to other factors, the amount of post-1986 E&P of itsforeign subsidiaries, as well as the amount of non-U.S. income taxes paid on such earnings. Due to the aggregate accumulated deficits of our foreignsubsidiaries, the Company will not be subject to any transition tax under this provision of the TCJA. 100% Dividend Received Deduction and Indefinite Reinvestment Assertion Effective for tax years beginning after December 31, 2017, the TCJA provides a 100% dividend received deduction, subject to a one-year holdingperiod, to a U.S. corporate shareholder for the foreign source portion of dividends received from a “specified 10-percent owned foreign corporation.” Prior to enactment of the TCJA, the Company had asserted indefinite reinvestment of the earnings of its foreign subsidiaries. Under the TCJA, however,these earnings are no longer subject to U.S. tax as a result of the transition tax. Nevertheless, a distribution of the earnings from our foreign subsidiaries maystill be subject to withholding taxes imposed by the local country from which the earnings would be distributed. Because the Company did not havesufficient information as of year-end to evaluate how the TCJA would impact the Company’s existing position that its foreign earnings are permanentlyreinvested, the Company has not included a provisional amount for this item in its financial statements for fiscal year 2017. The Company will recordamounts as needed for this item beginning in the first reporting period within the measurement period in which the Company obtains the necessaryinformation and is able to analyze and use to prepare a reasonable estimate. GILTI Tax The TCJA creates a new requirement that certain income (i.e., GILTI) earned by controlled foreign corporations (“CFCs”) must be included currently inthe gross income of the CFCs’ U.S. shareholder. GILTI is the excess of the shareholder’s “net CFC tested income” over the net deemed tangible income return,which is currently defined as the excess of (1) 10 percent of the aggregate of the U.S. shareholder’s pro rata share of the qualified business asset investment ofeach CFC with respect to which it is a U.S. shareholder, over (2) the amount of certain interest expense taken into account in the determination of net CFC-tested income. Because of the complexity of the new GILTI tax rules, the Company is continuing to evaluate this provision of the TCJA and the application of ASC740. Under U.S. GAAP, the Company is permitted to make an accounting policy election to either treat taxes due on future inclusions in U.S. taxable incomerelated to GILTI as a current-period expense when incurred or to factor such amounts into the Company’s measurement of its deferred taxes. Whether the Company is expected to have future U.S. inclusions in taxable income related to GILTI depends on not only its current structure andestimated future results of global operations but also its intent and ability to modify its structure and/or business, The Company has not yet completed itsanalysis of the GILTI tax rules and is not yet able to reasonably estimate the effect of this provision of the TCJA or make an accounting policy election forthe ASC 740 treatment of the GILTI tax. Therefore, the Company has not recorded any amounts related to potential GILTI tax in its financial statements andhas not yet made a policy decision regarding whether to record deferred taxes on GILTI. b.The Company: The Company is taxed in accordance with U.S. tax laws. As of December 31, 2017, the Company had net operating loss carry-forward for federal, state and foreign tax purposes of approximately $23,992,$10,646 and $534, respectively. If not utilized, these carryforwards will expire starting in 2028, 2020 and indefinitely for federal, state and foreign taxpurposes, respectively. In addition, as of December 31, 2017, the Company had federal research credit, retention credit and foreign tax credit carryforwards ofapproximately $1,412, $24 and $195, respectively. If not utilized, the federal tax carryforwards will begin to expire in 2033, 2032 and 2026, respectively.The Company also has credits in Israel totaling approximately $344. These credits have no expiration date. Utilization of U.S. net operating losses andcredits may be subject to substantial annual limitations due to the “change in ownership” provisions of the Code and similar state provisions. The annuallimitation may result in the expiration of net operating losses before utilization and, in the event the Company undergoes a change of ownership, utilizationof the carryforwards could be restricted. 73  c.Loss before taxes on income is comprised as follows: Year endedDecember 31, 2017 2016 2015Domestic $(18,234) $(16,898) $(20,098)Foreign 6,999 319 (499) $(11,235) $(16,579) $(20,597) d.Taxes on income (loss) are comprised as follows: Year endedDecember 31, 2017 2016 2015Current: Domestic: Federal $(92) $92 $— State 191 109 85 Foreign 2,516 930 601 Total current income tax $2,615 $1,131 $686 Deferred: Foreign $(156) $— $— Total deferred income tax $(156) $— $— Income tax expense $2,459 $1,131 $686 e.Deferred income taxes: Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reportingpurposes and the amounts used for income tax purposes. The Company’s deferred tax assets are derived from its U.S. net operating loss carry forwardsand other temporary differences. In assessing the realization of deferred tax assets, the Company considers whether it is more likely than not that all or some portion of the deferred taxassets will not be realized. Based on the Company’s history of losses in the US and Israel, the Company established a valuation allowance on its US andIsraeli deferred tax assets. December 31, 2017 2016Carry forward losses and credits $7,407 $6,294 Deferred revenues 14,226 16,774 Accrued payroll, commissions, vacation 1,105 2,078 Allowance for doubtful accounts 633 43 Accrued severance pay 239 372 Other 2,668 2,939 Net deferred tax assets before valuation allowance 26,278 28,500 Valuation allowance (26,122) (28,500)Net deferred tax assets $156 $— Valuation allowance decreased by $2,378 during 2017, which included the impact of the Company’s adoption of ASU 2016-09, Improvements toEmployee Share-Based Payment Accounting, on January 1, 2017. ASU 2016-09 simplifies several aspects of accounting for employee share-basedpayment transactions, including the accounting for income taxes, forfeitures, statutory tax withholding requirements and classification in thestatements of cash flows. Upon adoption, the Company recognized the previously unrecognized excess tax benefits using the modified retrospectivetransition method. The adoption resulted in an increase to deferred tax assets of $7,849 and a decrease to retained earnings of the same amount with anoffsetting entry to valuation allowance which was also recorded to retained earnings. As a result, the adoption of this standard did not have an impacton our consolidated balance sheet, results of operations, cash flows or statement of stockholders’ equity. Without the valuation allowance, theCompany’s deferred tax assets would have increased by $7,849. 74  f.Reconciliation of the theoretical tax expenses: A reconciliation between the theoretical tax expense, assuming all income is taxed at the statutory tax rate applicable to income of the Company, andthe actual tax expense (benefit) as reported in the consolidated statements of operations is as follows: Year ended December 31, 2017 2016 2015Loss before taxes, as reported in the consolidated statements of operations $(11,235) $(16,579) $(20,597)Statutory tax rate 34% 34% 34% Theoretical tax benefits on the above amount at the US statutory tax rate $(3,820) $(5,637) $(7,003)Income tax at rate other than the U.S. statutory tax rate (934) 68 333 Tax advances and non-deductible expenses including equity based compensationexpenses 3,123 4,298 1,061 Operating losses and other temporary differences for which valuation allowance wasprovided (10,203) 3,001 6,558 Research and Development Tax Credit 1,126 (1,182) - State tax (563) (536) (477)Impact of rate change 12,121 (360) (82)Change in tax reserve for uncertain tax positions 1,576 1,209 320 Other individually immaterial income tax items 33 270 (24)Actual tax expense $2,459 $1,131 $686 g.A reconciliation of the beginning and ending amounts of unrecognized tax benefits in the years ended December 31, 2016 and 2015 are as follows: Gross unrecognized tax benefits as of January 1, 2016 $897 Increase/decrease in tax position for current year 992 Increase/decrease in tax position for prior years 217 Gross unrecognized tax benefits as of December 31, 2016 $2,106 Increase/decrease in tax position for current year 1,752 Increase/decrease in tax position for prior years (176)Gross unrecognized tax benefits as of December 31, 2017 $3,682 There was $3,682 of unrecognized income tax benefits that, if recognized, approximately $3,400 would impact the effective tax rate in the period inwhich each of the benefits is recognized. The Company includes interest and penalties related to unrecognized tax benefits within the provision for incometaxes on the consolidated statements of operations. The total amount of penalties and interest is approximately $172 as of December 31, 2017. 75  h.Foreign taxation: 1. Israeli tax benefits under the Law for the Encouragement of Capital Investments, 1959 (the “Investment Law”): Conditions for entitlement to the benefits: The benefits available to a Beneficiary Enterprise relate only to taxable income attributable to the specific investment program and areconditioned upon terms stipulated in the Investment Law and the related regulations and the criteria set forth in the applicable certificate ofapproval (for a Beneficiary Enterprise). If VSL does not fulfill these conditions, in whole or in part, the benefits can be cancelled, and VSL may berequired to refund the benefits, in an amount linked to the Israeli consumer price index plus interest. The Office of the Chief Scientist at Israel’s Ministry of Industry, Trade and Labor approved the Israeli subsidiary as an R&D-incentive enterprisefor a foreign resident company in accordance with the Encouragement of Capital Investments (Consolidated Version) Law. If cash dividends are distributed out of tax exempt profits in a manner other than upon complete liquidation, VSL will then become liable for taxat the rate of 10%-25% (depending on the level of foreign investments in VSL) in respect of the amount distributed. 2. Undistributed earnings of foreign subsidiaries: As of December 31, 2017, approximately $3,401 of undistributed earnings from non-U.S. operations held by the Company’s foreign subsidiaries and theBeneficiary Enterprise of VSL are designated as indefinitely reinvested outside the U.S. Accordingly, no additional U.S. income taxes or additional foreignwithholding taxes have been provided thereon. Determination of the amount of unrecognized deferred tax liability related to these earnings is notpracticable. i.Tax assessments: The Company has not been audited by the Internal Revenue Service but are under current audit in various states for tax years 2013 through 2016. As ofDecember 31, 2016, our federal returns for the years ended 2012 through the current period and most state returns for the years ended 2009 through thecurrent period are still open to examination. In addition, all of the net operating losses and research and development credit carryforwards that may beused in future years are still subject to adjustment. In January 2017, the Israeli Tax Authorities initiated a tax assessment audit on VSL for the years 2013-2015. The Company believes it has validarguments to support its positions and intends to defend against any tax assessment. The Company has recorded a provision with respect to itsuncertain tax positions in accordance with ASC 740. The Company has final tax assessments for VSL in Israel through 2012, VSUK in UK through 2012 and VSF in France through 2012. VSG in Germany, VSC in Canada, VIRE in Ireland and VAUS in Australia do not have final tax assessments since their respective inceptions. NOTE 10:- FINANCIAL EXPENSES, NET Year endedDecember 31, 2017 2016 2015Financial income: Interest on bank deposits, net $747 $520 $330 Foreign currency transactions gains, net 1,773 — — Other 27 — — 2,547 520 330 Financial expenses: Bank charges 185 149 95 Foreign currency transactions losses, net — 1,224 1,711 Other — 32 47 (185) (1,405) (1,853) $2,362 $(885) $(1,523) 76  NOTE 11:- GEOGRAPHIC INFORMATION AND MAJOR CUSTOMER AND PRODUCT DATA Summary information about geographic areas: ASC 280, “Segment Reporting,” establishes standards for reporting information about operating segments. Operating segments are defined ascomponents of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker indeciding how to allocate resources and in assessing performance. The Company manages its business on the basis of one reportable segment, andderives revenues from licensing of software, sale of professional services, maintenance and technical support (see Note 1 for a brief description of theCompany’s business). The following is a summary of revenues within geographic areas: Year endedDecember 31, 2017 2016 2015Revenues based on customer’s location: United States $134,438 $100,281 $73,343 EMEA (*) 70,128 52,410 44,994 Rest of the World 12,798 11,765 8,873 Total revenues $217,364 $164,456 $127,210 (*)Sales to customers in France accounted for $22,762, $17,129 and $13,570 for the years ended December 31, 2017, 2016 and 2015, respectively. During the years ended December 31, 2017, 2016 and 2015, there were no sales to a single customer exceeding 10% of the Company’s revenues. December 31, 2017 2016Long-lived assets by geographic region: United States $7,072 $7,664 Israel 2,944 1,827 France 1,426 207 Other 454 212 $11,896 $9,910 Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure There have been no changes in our independent registered public accounting firm, Kost Forer Gabbay & Kasierer, a member of Ernst & Young Global, ordisagreements with our accountants on matters of accounting and financial disclosure. Item 9A.Controls and Procedures Evaluation of Disclosure Controls and Procedures Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls andprocedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the period covered by this report. Based on that evaluation, ourChief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this reportwere effective at a reasonable assurance level in ensuring that information required to be disclosed by us in reports that we file or submit under the ExchangeAct is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. We believe that a control system, nomatter how well designed and operated, cannot provide absolute assurance that the objectives of the control system are met, and no evaluation of controlscan provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. The effectiveness of our internalcontrol over financial reporting as of December 31, 2017 has been audited by Kost Forer Gabbay & Kasierer, a member of Ernst & Young Global and anindependent registered public accounting firm, as stated in their report which is included in Part II, Item 8 of this Annual Report on Form 10-K. 77  Management’s Annual Report on Internal Control Over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act). Our management conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31,2017 based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of theTreadway Commission. Based on the results of its evaluation, management concluded that our internal control over financial reporting was effective as of December 31, 2017. Changes in Internal Control over Financial Reporting There was no change in our internal control over financial reporting that occurred during the three months ended December 31, 2017 that has materiallyaffected, or is reasonably likely to materially affect, our internal control over financial reporting. Item 9B.Other Information None. PART III Item 10.Directors, Executive Officers and Corporate Governance The information required by this item (other than the information set forth in the next paragraph in this Item 10) will be included in our definitive proxystatement with respect to our 2018 Annual Meeting of Stockholders to be filed with the SEC and is incorporated herein by reference. We have adopted a code of business conduct and ethics that is applicable to all of our employees, officers and directors, including our chief executive andsenior financial officers. The code of business conduct and ethics is available on our website at www.varonis.com. We expect that any amendment to thecode, or any waivers of its requirements, will be disclosed on our website. The inclusion of our website in this Form 10-K does not include or incorporate byreference the information on our website into this Form 10-K. Item 11.Executive Compensation The information called for by this item will be included in our definitive proxy statement with respect to our 2018 Annual Meeting of Stockholders to befiled with the SEC and is incorporated herein by reference. Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The information called for by this item will be included in our definitive proxy statement with respect to our 2018 Annual Meeting of Stockholders to befiled with the SEC and is incorporated herein by reference. Item 13.Certain Relationships and Related Transactions, and Director Independence The information called for by this item will be included in our definitive proxy statement with respect to our 2018 Annual Meeting of Stockholders to befiled with the SEC and is incorporated herein by reference. Item 14.Principal Accounting Fees and Services The information called for by this item will be included in our definitive proxy statement with respect to our 2018 Annual Meeting of Stockholders to befiled with the SEC and is incorporated herein by reference. PART IV Item 15.Exhibits and Financial Statement Schedules (a) Financial Statements Our consolidated financial statements are listed in the “Index to Consolidated Financial Statements” under Part II, Item 8 of this Annual Report onForm 10-K. All schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. 78  (b) Exhibits ExhibitNumberDescription of the Document 3.1(1)Amended and Restated Certificate of Incorporation 3.2(2)Amended and Restated Bylaws 4.1(3)Third Amended and Restated Investors’ Rights Agreement, dated as of February 24, 2011, by and among the Company and certain holders ofthe Company’s capital stock named therein 10.1(4)†Form of Indemnification Agreement between the Company and its directors and officers 10.2(5)†2005 Stock Plan, as amended May 7, 2013 10.3(6)†2013 Omnibus Equity Incentive Plan 10.4(7)†Forms of Restricted Stock Unit Award Grant Notice and Restricted Stock Unit Award Agreement under the 2013 Omnibus Equity IncentivePlan 10.5(8)†2015 Employee Stock Purchase Plan 10.6(9)†Employment Agreement by and between the Company and Yakov Faitelson, dated as of February 10, 2014 10.7(10)†Employment Agreement by and between the Company and Ohad Korkus, dated as of February 10, 2014 10.8(11)†Employment Agreement by and between the Company and Guy Melamed, dated as of February 7, 2017 10.9(12)†Amendment to Employment Agreement by and between the Company and Guy Melamed, dated as of February 8, 2018 10.10(13)†Employment Agreement by and between the Company and James O’Boyle, dated as of February 10, 2014 10.11(14)New York Office Lease, dated as of December 19, 2011 by and between JT MH 1250 Owner LP and the Company 10.12(15)First Modification of Lease Agreement, dated as of June 18, 2014, between JT MH 1250 Owner LP and the Company 10.13(16)*EMC Select Distributor Agreement for Software, dated January 24, 2007, by and between EMC Corporation and the Company 10.14(17)*Amendment No. 1 to the EMC Select Distributor Agreement for Software, dated July 2011, by and between EMC Corporation and theCompany 21.1List of Subsidiaries 23.1Consent of Kost Forer Gabbay & Kasierer, a member of Ernst & Young Global 31.1Rule 13a-14(a) Certification of Chief Executive Officer and President of the Company in accordance with Section 302 of the Sarbanes-OxleyAct of 2002 31.2Rule 13a-14(a) Certification of Chief Financial Officer of the Company in accordance with Section 302 of the Sarbanes-Oxley Act of 2002 32.1**Section 1350 Certification of Chief Executive Officer and President of the Company in accordance with Section 906 of the Sarbanes-OxleyAct of 2002 32.2**Section 1350 Certification of Chief Financial Officer of the Company in accordance with Section 906 of the Sarbanes-Oxley Act of 2002 101The following materials from the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, formatted in XBRL(eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) theConsolidated Statements of Comprehensive Loss, (iv) the Consolidated Statements of Cash Flows and (v) related notes to these consolidatedfinancial statements, tagged as blocks of text and in detail____________________________________†Indicates management contract or compensatory plan or arrangement.*Confidential treatment for portions of this exhibit has been granted by the Securities and Exchange Commission. 79  **Document has been furnished, is not deemed filed and is not to be incorporated by reference into any of the Company’s filings under the SecuritiesAct of 1933, as amended, or the Securities Exchange Act of 1934, as amended, irrespective of any general incorporation language contained in anysuch filing.(1)Filed as Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on May 8, 2014 (the “Company’s First Quarter 2014 Form10-Q”) and incorporated herein by reference.(2)Filed as Exhibit 3.2 to the Company’s First Quarter 2014 Form 10-Q and incorporated herein by reference.(3)Filed as Exhibit 4.2 to the Company’s Registration Statement on Form S-1 (Registration No. 333-191840) (the “IPO Registration Statement”) withthe SEC on October 22, 2013 and incorporated herein by reference.(4)Filed as Exhibit 10.1 to the IPO Registration Statement with the SEC on February 18, 2014 and incorporated herein by reference.(5)Filed as Exhibit 10.2 to the IPO Registration Statement with the SEC on October 22, 2013 and incorporated herein by reference.(6)Filed as Exhibit 99.2 to the Company’s Registration Statement on Form S-8 (Registration No. 333-194657) with the SEC on March 18, 2014 andincorporated herein by reference.(7)Filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on August 6, 2014 (the “Company’s Third Quarter 2014Form 10-Q”) and incorporated herein by reference.(8)Filed as Exhibit A of the Proxy Statement on Form DEF 14A with the SEC on March 26, 2015 and incorporated herein by reference.(9)Filed as Exhibit 10.8 to the IPO Registration Statement with the SEC on February 18, 2014 and incorporated herein by reference.(10)Filed as Exhibit 10.9 to the IPO Registration Statement with the SEC on February 18, 2014 and incorporated herein by reference.(11)Filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on February 13, 2017 and incorporated herein by reference.(12)Filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on February 12, 2018 and incorporated herein by reference.(13)Filed as Exhibit 10.11 to the IPO Registration Statement with the SEC on February 18, 2014 and incorporated herein by reference.(14)Filed as Exhibit 10.11 to the IPO Registration Statement with the SEC on October 22, 2013 and incorporated herein by reference.(15)Filed as Exhibit 10.2 to the Company’s Third Quarter 2014 Form 10-Q and incorporated herein by reference.(16)Filed as Exhibit 10.12 to the IPO Registration Statement with the SEC on October 22, 2013 and incorporated herein by reference.(17)Filed as Exhibit 10.13 to the IPO Registration Statement with the SEC on October 22, 2013 and incorporated herein by reference. Item 16.Form 10-K Summary None. 80  SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned thereunto duly authorized. VARONIS SYSTEMS, INC. February 13, 2018 By:/s/ Yakov Faitelson Yakov Faitelson Chief Executive Officer and President February 13, 2018 By:/s/ Guy Melamed Guy Melamed Chief Financial Officer (Principal Financial Officerand Principal Accounting Officer)  POWER OF ATTORNEY Each person whose signature appears below constitutes and appoints Yakov Faitelson and Guy Melamed, and each of them, his true and lawfulattorneys-in-fact and agents, each with full power of substitution and resubstitution, severally, for him and in his name, place and stead, in any and allcapacities, to sign any and all amendments (including post-effective amendments) to this Annual Report on Form 10-K, and to file the same, with all exhibitsthereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, andeach of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fullyto all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them or theiror his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act, this report has been signed below by the following persons in the capacities and on the datesindicated below. Signature Title Date /s/ Yakov Faitelson Chief Executive Officer, President February 13, 2018Yakov Faitelson and Chairman of the Board(Principal Executive Officer) /s/ Ohad Korkus Chief Technology Officer and February 13, 2018Ohad Korkus Director /s/ Guy Melamed Chief Financial Officer (Principal February 13, 2018Guy Melamed Financial Officer) and PrincipalAccounting Officer /s/ Kevin Comolli Director February 13, 2018Kevin Comolli /s/ John J. Gavin, Jr. Director February 13, 2018John J. Gavin, Jr. /s/ Gili Iohan Director February 13, 2018Gili Iohan /s/ Thomas F. Mendoza Director February 13, 2018Thomas F. Mendoza /s/ Ofer Segev Director February 13, 2018Ofer Segev /s/ Rona Segev-Gal Director February 13, 2018Rona Segev-Gal /s/ Fred Van Den Bosch Director February 13, 2018Fred Van Den Bosch  EXHIBIT INDEX ExhibitNumberDescription of the Document 3.1(1)Amended and Restated Certificate of Incorporation 3.2(2)Amended and Restated Bylaws 4.1(3)Third Amended and Restated Investors’ Rights Agreement, dated as of February 24, 2011, by and among the Company and certain holders ofthe Company’s capital stock named therein 10.1(4)†Form of Indemnification Agreement between the Company and its directors and officers 10.2(5)†2005 Stock Plan, as amended May 7, 2013 10.3(6)†2013 Omnibus Equity Incentive Plan 10.4(7)†Forms of Restricted Stock Unit Award Grant Notice and Restricted Stock Unit Award Agreement under the 2013 Omnibus Equity IncentivePlan 10.5(8)†2015 Employee Stock Purchase Plan 10.6(9)†Employment Agreement by and between the Company and Yakov Faitelson, dated as of February 10, 2014 10.7(10)†Employment Agreement by and between the Company and Ohad Korkus, dated as of February 10, 2014 10.8(11)†Employment Agreement by and between the Company and Guy Melamed, dated as of February 7, 2017 10.9(12)†Amendment to Employment Agreement by and between the Company and Guy Melamed, dated as of February 8, 2018 10.10(13)†Employment Agreement by and between the Company and James O’Boyle, dated as of February 10, 2014 10.11(14)New York Office Lease, dated as of December 19, 2011 by and between JT MH 1250 Owner LP and the Company 10.12(15)First Modification of Lease Agreement, dated as of June 18, 2014, between JT MH 1250 Owner LP and the Company 10.13(16)*EMC Select Distributor Agreement for Software, dated January 24, 2007, by and between EMC Corporation and the Company 10.14(17)*Amendment No. 1 to the EMC Select Distributor Agreement for Software, dated July 2011, by and between EMC Corporation and theCompany 21.1List of Subsidiaries 23.1Consent of Kost Forer Gabbay & Kasierer, a member of Ernst & Young Global 31.1Rule 13a-14(a) Certification of Chief Executive Officer and President of the Company in accordance with Section 302 of the Sarbanes-OxleyAct of 2002 31.2Rule 13a-14(a) Certification of Chief Financial Officer of the Company in accordance with Section 302 of the Sarbanes-Oxley Act of 2002 32.1**Section 1350 Certification of Chief Executive Officer and President of the Company in accordance with Section 906 of the Sarbanes-OxleyAct of 2002 32.2**Section 1350 Certification of Chief Financial Officer of the Company in accordance with Section 906 of the Sarbanes-Oxley Act of 2002 101The following materials from the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, formatted in XBRL(eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) theConsolidated Statements of Comprehensive Loss, (iv) the Consolidated Statements of Cash Flows and (v) related notes to these consolidatedfinancial statements, tagged as blocks of text and in detail____________________________________†Indicates management contract or compensatory plan or arrangement.*Confidential treatment for portions of this exhibit has been granted by the Securities and Exchange Commission.**Document has been furnished, is not deemed filed and is not to be incorporated by reference into any of the Company’s filings under the SecuritiesAct of 1933, as amended, or the Securities Exchange Act of 1934, as amended, irrespective of any general incorporation language contained in anysuch filing.(1)Filed as Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on May 8, 2014 (the “Company’s First Quarter 2014 Form10-Q”) and incorporated herein by reference.  (2)Filed as Exhibit 3.2 to the Company’s First Quarter 2014 Form 10-Q and incorporated herein by reference.(3)Filed as Exhibit 4.2 to the Company’s Registration Statement on Form S-1 (Registration No. 333-191840) (the “IPO Registration Statement”) withthe SEC on October 22, 2013 and incorporated herein by reference.(4)Filed as Exhibit 10.1 to the IPO Registration Statement with the SEC on February 18, 2014 and incorporated herein by reference.(5)Filed as Exhibit 10.2 to the IPO Registration Statement with the SEC on October 22, 2013 and incorporated herein by reference.(6)Filed as Exhibit 99.2 to the Company’s Registration Statement on Form S-8 (Registration No. 333-194657) with the SEC on March 18, 2014 andincorporated herein by reference.(7)Filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on August 6, 2014 (the “Company’s Third Quarter 2014Form 10-Q”) and incorporated herein by reference.(8)Filed as Exhibit A of the Proxy Statement on Form DEF 14A with the SEC on March 26, 2015 and incorporated herein by reference.(9)Filed as Exhibit 10.8 to the IPO Registration Statement with the SEC on February 18, 2014 and incorporated herein by reference.(10)Filed as Exhibit 10.9 to the IPO Registration Statement with the SEC on February 18, 2014 and incorporated herein by reference.(11)Filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on February 13, 2017 and incorporated herein by reference.(12)Filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on February 12, 2018 and incorporated herein by reference.(13)Filed as Exhibit 10.11 to the IPO Registration Statement with the SEC on February 18, 2014 and incorporated herein by reference.(14)Filed as Exhibit 10.11 to the IPO Registration Statement with the SEC on October 22, 2013 and incorporated herein by reference.(15)Filed as Exhibit 10.2 to the Company’s Third Quarter 2014 Form 10-Q and incorporated herein by reference.(16)Filed as Exhibit 10.12 to the IPO Registration Statement with the SEC on October 22, 2013 and incorporated herein by reference.(17)Filed as Exhibit 10.13 to the IPO Registration Statement with the SEC on October 22, 2013 and incorporated herein by reference. Exhibit 21.1 VARONIS SYSTEMS, INC. SUBSIDIARIES Subsidiary State/Country of Incorporation/FormationVaronis Systems Ltd. IsraelVaronis (UK) Limited EnglandVaronis Systems (Deutschland) GmbH GermanyVaronis France SAS FranceVaronis Systems Corp. Canada (British Columbia)Varonis Systems (Ireland) Limited IrelandVaronis Systems (Australia) Pty Ltd Australia Exhibit 23.1 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-215617, 333-209312, 333-205582 and 333-194657) ofour report relating to the consolidated financial statements of Varonis Systems, Inc. (the “Company”), appearing in this Annual Report on Form 10-K of theCompany for the year ended December 31, 2017. /s/ KOST FORER GABBAY & KASIERER A Member of Ernst & Young Global Tel-Aviv, IsraelFebruary 13, 2018 Exhibit 31.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER I, Yakov Faitelson, certify that: 1.I have reviewed this annual report on Form 10-K of Varonis Systems, Inc.; 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 registrant as of, and for, the periods presented in this report; 4.The registrant’s other certifying officer 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 Exchange Act Rules 13a-15(f) and 15d-15(f))for the registrant and have: (a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, toensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within thoseentities, 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 oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles; (c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the 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 registrant’s internal control over financial reporting that occurred during the registrant’s most recentfiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materiallyaffect, the registrant’s internal control over financial reporting; and 5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of the registrant’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 reasonablylikely to adversely affect the registrant’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 registrant’s internal controlover financial reporting. Date: February 13, 2018By:/s/ Yakov Faitelson Yakov Faitelson Chief Executive Officer and PresidentExhibit 31.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER I, Guy Melamed, certify that: 1.I have reviewed this annual report on Form 10-K of Varonis Systems, Inc.; 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 registrant as of, and for, the periods presented in this report; 4.The registrant’s other certifying officer 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 Exchange Act Rules 13a-15(f) and 15d-15(f))for the registrant and have: (a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, toensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within thoseentities, 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 oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles; (c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the 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 registrant’s internal control over financial reporting that occurred during the registrant’s most recentfiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materiallyaffect, the registrant’s internal control over financial reporting; and 5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of the registrant’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 reasonablylikely to adversely affect the registrant’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 registrant’s internal controlover financial reporting. Date: February 13, 2018By:/s/ Guy Melamed Guy Melamed Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)Exhibit 32.1 CERTIFICATION OF CEO PURSUANT TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report on Form 10-K of Varonis Systems, Inc. (the “Company”) for the year ended December 31, 2017 as filedwith the Securities and Exchange Commission on the date hereof (the “Report”), Yakov Faitelson, as Chief Executive Officer and President of the Company,hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of hisknowledge: (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 results of operations of theCompany. By:/s/ Yakov Faitelson Yakov Faitelson Chief Executive Officer and President Date: February 13, 2018 This certification accompanies the Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent requiredby the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.Exhibit 32.2 CERTIFICATION OF CFO PURSUANT TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report on Form 10-K of Varonis Systems, Inc. (the “Company”) for the year ended December 31, 2017 as filedwith the Securities and Exchange Commission on the date hereof (the “Report”), Guy Melamed, as Chief Financial Officer of the Company, hereby certifies,pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of his knowledge: (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 results of operations of theCompany. By:/s/ Guy Melamed Guy Melamed Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) Date: February 13, 2018 This certification accompanies the Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent requiredby the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended. 

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