UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________
(Mark One)
☒
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FORM 10-K
_____________________
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
for the Fiscal Year Ended December 31, 2019
or
for the transition period from to
Commission file number: 001-36324
________________________
VARONIS SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
_____________________________
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
Delaware
57-1222280
1250 Broadway, 29th Floor
New 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 share
Trading Symbol(s)
(Title of class)
VRNS
The NASDAQ Stock Market LLC
(Name of exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act: None
_____________________________
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ 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 ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of
Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such
files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an
emerging 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 Filer
Non-accelerated Filer
☒
☐
Accelerated Filer
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 any new 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 ☒
The aggregate market value of voting stock held by non-affiliates of the registrant as of June 28, 2019 was approximately $1.84 billion based on the closing
sale price of $61.94 as reported by the NASDAQ Global Select Market. Shares of common stock held by each officer and director and by each person who owns 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. This determination
of affiliate status is not necessarily a conclusive determination for other purposes.
As of February 7, 2020, the registrant had 30,608,217 shares of common stock, par value $0.001 per share, outstanding.
Portions of the Registrant’s Proxy Statement to be used in connection with the solicitation of proxies for the Registrant’s 2020 Annual Meeting of
Stockholders are incorporated by reference in Part III of this Annual Report on Form 10-K.
DOCUMENTS INCORPORATED BY REFERENCE
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 the forward-
looking statements. The statements contained in this report that are not purely historical are forward-looking statements within the meaning of Section 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 variations intended to identify forward-
looking statements. These statements are based on the beliefs and assumptions of our management based on information currently available to management. Such
forward-looking statements are subject to risks, uncertainties and other important factors that could cause actual results and the timing of certain events to differ
materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are
not limited to, those identified below and those discussed in the section titled “Risk Factors” included under 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 no obligation 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-K
For The Fiscal Year Ended December 31, 2019
TABLE OF CONTENTS
PART I
Item 1
Item 1A
Item 1B
Item 2
Item 3
Item 4
PART II
Item 5
Item 6
Item 7
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A
Quantitative and Qualitative Disclosures About Market Risk
Item 8
Item 9
Item 9A
Item 9B
PART III
Item 10
Item 11
Item 12
Item 13
Item 14
PART IV
Item 15
Item 16
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Exhibits and Financial Statement Schedules
Form 10-K Summary
ii
Page
1
9
30
30
30
31
32
34
35
52
54
86
86
86
87
87
87
87
87
87
88
Item 1.
Business
PART I
We were incorporated under the laws of the State of Delaware on November 3, 2004 and commenced operations on January 1, 2005. Our principal executive
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 over a
decade ago, we recognized that enterprise capacity to create and share data far exceeded its capacity to protect it. We believed the vast movement of information
from analog to digital mediums combined with increasing information dependence would change both the global economy and the risk profiles of corporations and
governments. Since then our focus has been on using innovation to address the cyber-implications of this movement, creating software that provides new ways to
track and protect data wherever it is stored.
Our software specializes in data protection, threat detection and response and compliance. Varonis software enables enterprises to protect data stored on
premises and in the cloud: sensitive files and emails; confidential personal data belonging to customers, patients and employees; financial records; strategic and
product plans; and other intellectual property. Recognizing the complexities of securing data, we have built a single integrated platform for security and analytics
to simplify and streamline security and data management.
The Varonis Data Security Platform, built on patented technology, helps enterprises protect data against insider threats and cyberattacks. Our products
enable enterprises to analyze data, account activity and user behavior to detect attacks. Our Data Security Platform prevents or limits unauthorized use of sensitive
information, prevents potential cyberattacks and limits others by locking down sensitive and stale data. Our products efficiently sustain a secure state with
automation and address additional important use cases including data protection, governance, compliance, privacy, classification and threat detection and response.
Our Data Security Platform is driven by a proprietary technology, our Metadata Framework, that extracts critical metadata, or data about data, from an enterprise’s
information technology ("IT") infrastructure. Our Data Security Platform uses this contextual information to map functional relationships among employees, data
objects, content and usage.
The revolution in internet search occurred when search engines began to mine internet metadata, such as the links between pages, in addition to page content,
thereby making the internet’s content more usable and consequently more valuable. Similarly, our Data Security Platform creates advanced searchable data
structures out of available content and metadata, providing real-time intelligence about an enterprise’s massive volumes of data, making it more secure, accessible
and manageable.
We believe that the technology underlying our Data Security Platform is our primary competitive advantage. The strength of our solution is driven by several
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:
•
•
•
•
•
•
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 executing tasks that are normally
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 account behavior and unusual file and email activity using deep analysis of metadata, machine learning and user behavior analytics;
generate meaningful, actionable alerts when security-related incidents are detected;
1
•
•
•
enable security teams to investigate and respond to cyber threats more efficiently and conclusively;
determine relevant metadata and security information to capture;
capture that metadata without imposing strains or latencies on the enterprise’s computing infrastructure;
• modify and enrich 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; and
use those functional relationships to create a graphical depiction, or map, of the data that will endure as enterprises add large volumes of data to their
network and storage resources on a daily basis.
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; automated remediation of over-exposed data; centralized visibility into enterprise data and monitoring of user
behavior and file activity; security monitoring and risk 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, which we
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 and
professional sales force, has and will continue to play a major role in our ability to grow and to successfully deliver our unique value proposition for enterprise
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 on targeting
organizations with 1,000 users or more who can make larger initial purchases with us and, over time, have a greater potential lifetime value. As of December 31,
2019, we had approximately 7,100 customers, spanning leading firms in the financial services, public, healthcare, industrial, insurance, energy and utilities,
consumer and retail, technology, media and entertainment and education sectors. We believe our existing customers represent significant future revenue
opportunities for us. We will continue our focus on targeting organizations with 1,000 users or more who can make larger purchases with us initially and over time.
Prior to 2019, an insignificant amount of our revenues had been sold pursuant to on-premises, subscription-based license arrangements ("subscription
licenses"). In these arrangements, the customer has the right to use the software over a designated period of time. In the first quarter of 2019, we announced our
transition to a subscription-based business model, and, as we have substantially completed our transition, our subscription revenues have significantly increased, a
trend we expect to continue, ultimately leading to subscription revenues becoming the majority of our total revenues.
Size of Our Market Opportunity
The International Data Corporation’s Data Age 2025: The Digitization of the World from Edge to Core study estimates that the amount of data created in the
world will grow from 33 Zettabytes in 2018 to 175 Zettabytes (or 175 trillion gigabytes) in 2025, representing an approximately 27% compound annual growth
rate. Every enterprise will almost certainly require technologies to protect and manage their data and centralize data management, analytics, data security and
privacy.
We believe that the diverse functionalities offered by our platform position us at the intersection of several powerful trends in the digital enterprise data
universe. We further believe that the business intelligence and functionalities delivered by our platform define a new market, and we are not aware of any third
party studies that accurately define our addressable market. The functionality of our software platform overlaps with portions of several established and growing
enterprise software markets as defined by Gartner, Inc. in 2019, including security software ($36.3 billion), IT operations management ($28.3 billion),
infrastructure software ($16.1 billion), storage management ($14.5 billion) and data integration ($5.3 billion). We believe that our comprehensive product offering
will attract a meaningful portion of this overall spend, estimating that our total addressable market is 20% of these combined markets, or more than $20.0 billion.
Our Technology
Our proprietary technology extracts critical information about an enterprise’s data and uses this contextual information, or metadata, to create a functional
map of an enterprise’s data and underlying file systems. Our Metadata Framework
2
technology has been architected to process large volumes of enterprise data and the related metadata at a massive scale with minimal demands on the existing IT
infrastructure. All of our products utilize our Data Security Platform and a core single codebase, thereby streamlining our product development initiatives as well
as deployment to customers.
Key Benefits of Our Technology
Data Protection
Comprehensive Solution for Managing and Protecting Enterprise Data. Our products enable a broad range of functionality, including data governance and
intelligent retention, all from one core technology platform. Moreover, our platform is applicable across most major enterprise data stores (Windows, UNIX/Linux,
Intranets, email systems, Office365 and Box).
Actionable Insight and Automation. Our products help customers identify and prioritize risks to their data and automatically remediate exposures, so that
they are less vulnerable to internal and external threats, more compliant and consistently following a least privilege model.
Visibility and Data Monitoring Capabilities All in One Place. Our solutions focus on protecting enterprise data on-premises and in the cloud in a single
view. As data storage becomes more fragmented, functioning in a hybrid space, our Data Security Platform provides customers with a single pane of glass to
monitor and protect enterprise data regardless of where it is stored.
Fast Time to Value and Low Total Cost of Ownership. Our solutions do not require custom implementations or long deployment cycles. Our Data Security
Platform can be installed and ready for use within hours and allows customers to realize real value once used. We designed our platform to operate on commodity
hardware on premises or in the cloud, 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, intuitive interface.
Our software is accessible through either a local client or a standard web browser and requires limited training, saving time and cost and making it accessible to a
broader set of non-technical users.
Highly Scalable and Flexible Data Engine. Our metadata analysis technology is built to be highly scalable and flexible, allowing our customers to analyze
vast amounts of enterprise data. Moreover, our proprietary Metadata Framework is built with a modular architecture, allowing customers to grow into the full
capabilities of our solutions over time.
Threat Detection and Response
Threat Detection and Response with User, Data and System Context. Our solutions combine classification and data access governance with User and Entity
Behavior Analytics (UEBA) on data stores, directory services and perimeter devices, including DNS, VPN and web proxy, for accurate detection and risk
reduction. Our solutions reduce risk relating to unauthorized use and cyberattacks.
Protect Data from Insider Threats, Data Breaches, Malware and Cyberattacks. Our solutions analyze how employee accounts, service accounts and admin
accounts use and access data, profile employees’ roles and file contents, baseline “normal” behavior patterns, and alert on significant deviations from profiled
behaviors. Our customers are able to detect rogue insiders, attackers that have compromised internal systems and employee accounts, malware and other significant
threats.
Compliance
Discover and Identify Regulated Data. Our solutions discover, identify and classify sensitive, critical and regulated data to help meet compliance
requirements.
Monitor and Detect Security Vulnerabilities. Our solutions analyze, monitor, detect and report on potential security vulnerabilities: helping companies
achieve compliance by enabling full audit trails, achieving a least privilege model and locking down sensitive data to only those who need it, and facilitate breach
notification and security investigations.
Fulfill Data Subject Access Requests and Protect Consumer Data. Our solutions help fulfill data subject access requests. Customers can find relevant files,
pinpoint who has access and enforce policies to move and quarantine regulated data.
3
Our Growth Strategy
Our objective is to be the primary vendor to which enterprises turn to protect their data. In the first quarter of 2019, we made the strategic shift to a
subscription-based business model, which should allow customers to better unleash the power of our platform through faster adoption of our integrated products.
The following are key elements of our growth strategy.
Extend Our Technological Capabilities Through Innovation. We intend to increase, in absolute dollars, our current level of investment in product
development in order to enhance existing products to address new use cases and deliver new products. We believe that the flexibility, sophistication and broad
applicability of our Metadata Framework will allow us to use this framework as the core of numerous future products built on our same core technology. Our
ability to leverage our research and development resources has enabled us to create a new product development engine that we believe can proactively identify and
solve enterprise needs and help us further penetrate and grow our addressable markets.
Grow Our Customer Base. The unabated rise in enterprise data, ubiquitous reliance on digital collaboration and increased cybersecurity concerns will
continue to drive demand for data protection, compliance and threat detection and response solutions. We intend to capitalize on this demand by targeting new
customers, vertical markets and use cases for our solutions. Our solutions address the needs of customers of all sizes ranging from small and medium businesses to
large multinational companies with thousands of employees and petabytes of data. Although our solutions are applicable to organizations of all sizes, we will
continue our focus on targeting larger organizations who can make larger purchases with us initially and 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 data stores, and enterprises want to standardize solutions that help them manage, protect and extract more value
from their data, wherever it is stored. We will continue to cultivate incremental sales from our existing customers by driving increased use of our software within
our installed base by expanding footprint and usage. We currently have six product families, and, as of December 31, 2019, approximately 76% of our customers
had purchased two or more product families and approximately 45% of our customers had purchased three or more product families. We believe our existing
customer base serves as a strong source of incremental revenues given the broad platform of products we have and the growing volumes and complexity of
enterprise data that our customers have. As we 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. We continue to introduce additional licenses to existing products to support new functionalities. In 2019, we
announced Version 7 of our Data Security Platform, which included new dashboards to assess compliance and Active Directory risk, as well as performance
enhancements, such as the usage of SOLR for faster, more scalable event retrieval and investigation. We also added functionality to identify personal data covered
by the California Consumer Privacy Act, or CCPA, prompting us to rename our GDPR Patterns product to Data Classification Policy Pack. In 2018, we released
Varonis Edge, which analyzes perimeter devices like DNS, VPN and Web Proxies to detect attacks like malware, APT intrusion and data exfiltration. Varonis
Edge enables enterprises to correlate events and alerts to track potential data leaks and spot vulnerabilities at the point of entry. We also released support for Box
events and Data Classification Labels, integrating with Microsoft Information Protection (MIP) to help enterprises better classify, track and secure files across
enterprise data stores. We enhanced DatAnswers to address data privacy and compliance use cases, enabling customers to fulfill data subject access requests and
protect personally identifiable information. We have enhanced our products to provide even more value to our customers including: an updated user interface for
DataPrivilege, additional data store support, new geolocation support, enhanced threat detection and security monitoring and new threat models to protect sensitive
and regulated data against security breaches, malware, ransomware and insider threats. We believe these new additions to our 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 our
approach to introducing products to the market have been key to our successful growth in the past and will be central to our growth plan in the future. While our
products serve customers of all sizes, in all industries and all geographies, the marketing focus and majority of our sales focus is on targeting organizations with
1,000 users or more who can make larger initial purchases with us and, over time, generate a greater potential lifetime value. The ability of our sales teams to
support our channel partners to efficiently identify leads, perform risk assessments and convert them to satisfied customers will continue to impact our ability 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, or NAS,
hybrid cloud storage, including Dell/EMC, IBM, NetApp, HP, Hitachi and Nasuni in order
4
to expand our market reach and deliver enhanced functionality to our 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 such collaborations wherever they advance our strategic goals, thereby expanding our reach and establishing our product
user interface as the de facto 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 regulations such as
the European Union's ("EU") General Data Protection Regulation ("GDPR"). Revenues from Europe, the Middle East and Africa (“EMEA") accounted for
approximately 30% of our revenues in 2019. Europe represented the substantial majority of revenues outside the United States. Although quarterly growth rates
have fluctuated over the last few years in our European market, we believe that international expansion will be a key component of our growth strategy, and we
will continue to market our products and services overseas.
Our Products
We have six product families in our platform of products that utilize our core Metadata Framework technology to deliver features and functionality that
allow enterprises to fully understand, secure and benefit from the value of their data. This architecture gives our clients the flexibility to select the features they
require for their business needs and the flexibility to expand their usage simply by adding a license. The fully-integrated nature of our products allows individual
products to enhance the functionality of the others.
•
•
•
DatAdvantage. DatAdvantage, our flagship product, launched in 2006, builds on our Metadata Framework and captures, aggregates, normalizes and
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 intuitive graphical interface,
DatAdvantage presents insights from massive volumes of data using normal computing infrastructure. It is also our presentation layer for IT
departments, which provides an interactive map of relevant users, groups and data objects, usage and content, facilitating analysis from multiple vectors.
IT departments can pinpoint areas of interest starting with any metadata object, simulate changes measuring potential impact against historical access
patterns, and easily execute changes on all data stores through a unified interface. DatAdvantage identifies where users have unnecessary access based
on user behavior and machine learning.
•
The Automation Engine, a module introduced in 2017, helps customers accelerate the enforcement of least privilege by limiting broad access
without substantial manual effort. It automatically repairs and maintains file systems, helping reduce customers’ risk profiles and decreasing
their overhead and resources required to achieve a least privilege model.
DatAlert. Introduced in 2013, DatAlert profiles users and their behaviors with respect to systems and data, detects and alerts on meaningful deviations to
established baselines, and provides a web-based dashboard and investigative interface. DatAlert helps enterprises detect suspicious activity, prevents
data breaches and cyberattacks, performs security forensics, visualizes risk and prioritizes investigation.
•
Varonis Edge, introduced in 2018, analyzes perimeter devices like DNS, VPN and Web Proxy to detect attacks like malware, APT intrusion
and exfiltration and enables enterprises to correlate events and alerts at the perimeter with alerts and events concerning data to better spot
attacks at the point of entry and egress.
Data Classification Engine. As the volume of an enterprise’s information grows, enterprises struggle to find and tag different types of sensitive data,
such as intellectual property, regulated content, including Personally Identifiable Information, and medical records. Furthermore, content by itself does
not provide adequate context to determine ownership, relevance, or protection requirements. Data Classification Engine identifies and tags data based on
criteria set in multiple metadata dimensions and provides business and IT personnel with actionable intelligence about this data, including a prioritized
list of folders and files containing the most sensitive data and with the most inadequate permissions. For the identified folders and files, it also identifies
who has access to that data, who is using it, who owns it, and recommendations for how to restrict access without disrupting workflow. Data
Classification Engine provides visibility into the content of data across file systems and Intranet sites and combines it with other metadata, including
usage and accessibility.
5
•
•
Data Classification Policy Pack, introduced as GDPR Patterns in 2017, builds upon the Data Classification Engine with over 400 patterns for
identifying and classifying personal information specific to GDPR and CCPA.
Data Classification Labels, introduced in 2018, integrates with Microsoft Information Protection (MIP) to protect sensitive data across customer
environments regardless of where it lives or how it is shared. Data Classification Labels allows users to automatically apply classification labels
and encrypt files that it has identified as sensitive.
•
•
•
DataPrivilege. DataPrivilege, introduced in 2006 and designed for use by business unit personnel, provides a self-service web portal that allows users to
request access to data necessary for their business functions, and owners to grant access without IT intervention. DataPrivilege enhances data protection
and compliance by enabling business users to make access decisions based on queries, user requests and metadata analytics information, rather than
static IT policies. DataPrivilege provides a presentation layer for business users to review accessibility, sensitivity and usage of their data assets and
grant and revoke access.
Data Transport Engine. We introduced Data Transport Engine in 2012 to provide an execution engine that unifies the manipulation of data and
metadata, translating business decisions and instructions into technical commands such as data migration or archiving. Data Transport 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. Data Transport Engine ensures that data migrations automatically synchronize source and destination
data with incremental copying even if the source data is still in use, translates access permissions across data stores and domains and provides reporting
capabilities for data migration status. Moreover, it also provides IT personnel the flexibility to schedule recurring migrations to automatically find and
move certain types of data such as sensitive or stale data and to perform active migrations, dispositions and archiving safely and efficiently.
DatAnswers. DatAnswers was introduced in 2014 to provide secure, relevant and timely search functionality for enterprise data. In 2018, we enhanced
DatAnswers to help meet growing demands to comply with data privacy regulations and eDiscovery requests, and to facilitate Data Subject Access
Requests (DSARs). As data privacy laws are becoming more prevalent across the globe, meeting subject access requests is a primary requirement in data
regulation. As companies continue to generate and store data in numerous enterprise data stores, relevant files become harder to find and manage, and
compliance officers, controllers, and administrators need to identify and locate relevant content related to a data subject. DatAnswers provides elevated
search for compliance and e-discovery, helping solve the growing problem of being able to fulfill subject access requests to meet data privacy laws.
Our Customers
We have approximately 7,100 customers in over 80 countries as of December 31, 2019. Our customers span numerous industries and vary greatly in size,
ranging from small and medium businesses to large multinational enterprises with hundreds of thousands of employees and hundreds of terabytes of data.
Services
Maintenance and Support of Perpetual Licenses
Our customers typically purchase one year of software maintenance and support as part of their initial purchase of our perpetual license products, with an
option to renew their maintenance agreements. These maintenance agreements provide customers the right to receive support and unspecified upgrades and
enhancements when and if they become available 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 and support
services receive guaranteed response times, direct telephonic support and access to online support portals. Our customer support organization has global
capabilities with expertise in both our software and complex IT environments and associated third-party infrastructure.
Professional Services
6
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 network design, product configuration and implementation,
automating and customizing reports and tuning policies and configuration of our products for the particular characteristics of the customer’s environment.
Sales and Marketing
Sales
We sell the vast majority of our products and services to a global network of resellers and distributors that we refer to as our channel partners. Our channel
partners, in turn, sell the products they purchase from us to customers. In addition, we maintain a highly trained professional sales force that is responsible for
overall market development, including the management of the relationships with our channel partners and supporting channel partners in winning customers
through operating demonstrations and risk assessments. Our channel partners identify potential sales targets, maintain relationships 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 are generally 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. A termination of the agreement has no effect on orders already
placed. Payment to us from the channel partner is typically due within 30 to 60 calendar days of the invoice date.
Marketing
Our marketing strategy focuses on building our brand and product awareness, increasing customer adoption and demand, communicating advantages and
business benefits and generating leads for our channel partners and sales force. We market our software as a Data Security Platform, a solution for securing and
managing file systems and enterprise data and transforming that data into actionable intelligence. We execute our marketing strategy by leveraging a combination
of internal marketing professionals, external marketing partners and a network of regional and global channel partners. Our internal marketing organization is
responsible for branding, content generation, demand generation, field marketing and product marketing and works with our business operations team to support
channel marketing and sales support programs. We provide one on one and community education and awareness and promote the expanded use of our software.
We host in-person Varonis Connect! customer events annually across sales regions, as well as free, online monthly or bi-weekly technical webinars in multiple
regions. We focus our efforts on events, campaigns, tools and activities that can be leveraged by our channel partners worldwide to extend our marketing reach,
such as sales tools, information regarding product awards and technical certifications, training, regional seminars and conferences, webinars, podcasts and various
other demand-generation activities. Our marketing efforts also include public relations in multiple regions, analyst relations, customer marketing, account-based
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, as well as developing new products, features
and functionality. Use of our products has expanded from data governance into areas such as data security, privacy, accessibility and retention, and we anticipate
that customers and innovation will drive functionality into additional areas. We regularly release new versions of our products which incorporate new features and
enhancements to existing ones. We conduct substantially all of our research and development activities in Israel, and we believe this provides us with access to
world-class engineering talent.
Our research and development expense was $80.8 million, $70.0 million and $47.4 million in 2019, 2018 and 2017, respectively.
Intellectual Property
We rely on patent, trademark, copyright and trade secret laws, confidentiality procedures and contractual provisions to protect our technology and the related
intellectual property. The nature and extent of legal protection of our intellectual
7
property rights depends on, among other things, its type and the jurisdiction in which it arises. As of January 31, 2020, we had 69 issued patents and 31 pending
patent applications in the United States. Our issued U.S. patents expire between 2025 and 2039. We also had 35 patents issued and 71 applications pending for
examination in non-U.S. jurisdictions, and two pending Patent Cooperation Treaty (“PCT”) patent applications, all of which are counterparts of our U.S. patent
applications. Certain of our patents are owned by our Israeli subsidiary. The claims for which we have sought patent protection relate primarily to inventions we
have developed for incorporation into our products. 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 our products
or obtain and use our trade secrets or other confidential information. We generally enter into confidentiality agreements with our employees, consultants, service
providers, vendors and customers and generally limit internal and external access to, and distribution of, our proprietary information and proprietary technology
through certain procedural safeguards. These agreements may not effectively prevent unauthorized use or disclosure of our intellectual property or technology and
may not provide an adequate remedy in the event of unauthorized use or disclosure of our intellectual property or technology. We cannot provide assurance that the
steps taken by us will prevent misappropriation of our trade secrets or technology or infringement of our intellectual property. In addition, the laws of some foreign
countries 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.
Our industry is characterized by the existence of a large number of relevant patents and frequent claims and related litigation regarding patents and other
intellectual property rights. From time to time, third-parties have asserted and may assert their patent, copyright, trademark and other intellectual property rights
against us, our channel partners or customers. Successful claims of infringement or misappropriation by a third party could prevent us from distributing certain
products, performing certain services or could require us to pay substantial damages (including, for example, treble damages if we are found to have willfully
infringed patents and increased statutory damages if we are found to have willfully infringed copyrights), royalties or other fees. Such claims also could require us
to cease making, licensing or using solutions that are alleged to infringe or misappropriate the intellectual property of others, or to expend additional development
resources to attempt to redesign our products or services or otherwise to develop non-infringing technology. Even if third parties may offer a license to their
technology, the terms of any offered license may not be acceptable, and the failure to obtain a license or the costs associated with any license could cause our
business, results of operations or financial condition to be materially and adversely affected. In some cases, we indemnify our channel partners and customers
against claims that our products infringe the intellectual property of third parties.
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 in certain
use cases, we believe that we do not currently compete with a company that offers the same breadth of functionalities that we offer in a single integrated solution.
Nevertheless, we do compete against a select group of software vendors, such as Veritas Technologies LLC and Quest Software, that provide standalone solutions,
similar to those found in our comprehensive software suite, in the specific markets in which we operate. We also face direct competition with respect to certain of
our products, specifically 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 to better serve compliance needs with new regulations, like GDPR,
CCPA and other data privacy laws, we may face increased perceived and real competition from other security and classification technologies. In the future, as
customer requirements evolve and new technologies are introduced, we may experience increased competition if established or emerging companies develop
solutions that address the enterprise data market. Furthermore, because we operate in an evolving market, we anticipate 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 and
effectiveness of our products’ functionalities; the breadth and completeness of our solutions’ features; the scalability of our solutions; and the ease of deployment
and use of our products. We believe that we generally compete favorably in each of these categories. We also believe that we distinguish ourselves from others by
delivering a single, integrated solution to address our customers’ needs regarding access, governance, security, privacy and retention with 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 compete favorably 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 greater name
recognition, larger sales, marketing, research and acquisition resources, access to larger customer bases and channel partners, a longer operating history and lower
labor and development costs, which may
8
enable them to respond more quickly to new or emerging technologies and changes in customer requirements or devote greater resources to the development,
promotion and sale of their products than we do. Increased competition could result in us failing to attract customers or maintain renewals and licenses at the same
rate. It could also lead to price cuts, alternative pricing structures or the introduction of products available for free or a nominal price, reduced gross margins,
longer sales cycles and loss of market share.
In addition, our current or prospective channel partners may establish cooperative relationships with any future competitors. These relationships may allow
future competitors to rapidly gain significant market share. These developments could also limit our ability to generate revenues from existing and new customers.
If we are unable to compete successfully against current and future competitors our business, results of operations and financial condition may be harmed.
Employees
As of December 31, 2019, we had 1,574 employees and independent contractors, of which 706 were in the United States, 514 were in Israel and 354 were in
other countries. Our employees in France are represented by an internal labor committee which is affiliated with an external trade union. None of our other
employees is represented by a labor union with respect to his or her employment with us. Employees in certain European countries have the benefits of collective
bargaining arrangements at the national level. We have not experienced any work stoppages, and we consider our relations with our employees to be good.
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 website is
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-K and
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 relations website as
soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (the “SEC"). You may also
access all of our public filings through the SEC’s website at www.sec.gov.
Investors and other interested parties should note that we use our media and investor relations website and our social media channels to publish important
information about us, including information that may be deemed material to investors. We encourage investors and other interested parties to review the
information we may publish through our media and investor relations website and the social media channels listed on our media and investor relations 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 described below
are not the only ones we face. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, also may become important
factors that affect us. If any of the following risks materialize, our business, financial condition and results of operations could be materially harmed. In that case,
the trading price of our common stock could decline, and you may lose some or all of your investment.
Risks Related to Our Business and Industry
9
The market for software that analyzes, secures, manages and migrates enterprise data is new and unproven and may not grow.
We believe our future success depends in large part on the growth of the market for software that enables enterprises to analyze, secure, manage and migrate their
data. In order for us to market and sell our products, we must successfully demonstrate to enterprise IT, security and business personnel the potential value of their
data 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 to
protect, secure, manage and extract value from this resource. We cannot provide any assurance that enterprises will recognize the need for our products or, if they
do, that they will decide that they need a solution that offers the range of functionalities that we offer. Software solutions focused on enterprise data may not yet be
viewed as a necessity, and accordingly, our sales effort is and will continue to be focused in large part on explaining the need for, and value offered by, our
solution. We can provide no assurance that the market for our solution will continue to grow at its current rate or at all. The failure of the market to develop would
materially adversely impact our results of operations.
Our quarterly results of operations have fluctuated and may fluctuate significantly due to variability in our revenues which could adversely impact our stock
price.
Our revenues and other results of operations have fluctuated from quarter to quarter in the past and could continue to fluctuate in the future. As a result, comparing
our revenues and results of operations on a period-to-period basis may not be meaningful, and you should not rely on any particular past quarter or other period
results. Our revenues depend in part on the conversion of enterprises that have undergone risk assessments into paying customers. In this regard, most of our sales
are typically made during the last three weeks of every quarter. We may fail to meet market expectations for that quarter if we are unable to close the number of
transactions that we expect during this short period and closings are deferred to a subsequent quarter. In addition, our sales cycle from initial contact to delivery of
and payment for the software license generally becomes longer and less predictable with respect to large transactions and often involves multiple meetings or
consultations at a substantial cost and time commitment to us. The closing of a large transaction in a particular quarter may raise our revenues in that quarter and
thereby make it more difficult for us to meet market expectations in subsequent quarters and our failure to close a large transaction in a particular quarter may
adversely impact our revenues in that quarter. Moreover, we base our current and future expense levels on our revenue forecasts and operating plans, and our
expenses are relatively fixed in the short term. Accordingly, we would likely not be able to reduce our costs sufficiently to compensate for an unexpected shortfall
in revenues and even a relatively small decrease in revenues could disproportionately and adversely affect our financial results for that quarter.
The variability and unpredictability of these and other factors, many of which are outside of our control, could result in our failing to meet or exceed financial
expectations for a given period. If our revenues or results of operations fall below the expectations of investors or any securities analysts that cover our stock, the
price of our common stock could decline substantially.
10
A failure to hire and integrate additional sales and marketing personnel or maintain their productivity could adversely affect our results of operations and
growth prospects.
Our business requires intensive sales and marketing activities. Our sales and marketing personnel are essential to attracting new customers and expanding sales to
existing customers, both of which are key to our future growth. We face a number of challenges in successfully expanding our sales force. Following our transition
to a subscription-based model and the additional demands involved in selling multiple products, it has become even more difficult to hire and retain qualified sales
force members. We must locate and hire a significant number of qualified individuals, and competition for such individuals is intense. In addition, as we expand
into new markets with which we have less familiarity and grow existing territories, we will need to recruit individuals who have skills particular to a certain
geography or territory, and it may be difficult to find candidates with those qualifications. We may be unable to achieve our hiring or integration goals due to a
number of factors, including, but not limited to, the number of individuals we hire, challenges in finding individuals with the correct background due to increased
competition for such hires and increased attrition rates among new hires and existing personnel as well as the necessary experience to sell our Data Security
Platform rather than individual software products. Furthermore, based on our past experience in mature territories, it often can take up to 12 months before a new
sales force member is trained and operating at a level that meets our expectations. We invest significant time and resources in training new members of our sales
force, and we may be unable to achieve our target performance levels with new sales personnel as rapidly as we have done in the past due to larger numbers of
hires or lack of experience training sales personnel to operate in new jurisdictions. Our failure to hire a sufficient number of qualified individuals, to integrate new
sales force members within the time periods we have achieved historically or to keep our attrition rates at levels comparable to others in our industry may
materially impact our projected growth rate.
Failure to attract, recruit and retain highly qualified engineers could adversely affect our results of operations and growth prospects.
Our future success and growth depend, in part, on our ability to continue to recruit and retain highly skilled personnel, particularly engineers. Any of our
employees may terminate their employment at any time, and we face intense competition for highly skilled engineering personnel, especially in Israel, where we
have a substantial presence and need for qualified engineers, from numerous other companies, including other software and technology companies, many of whom
have greater financial and other resources than we do. Moreover, to the extent we hire personnel from other companies, we may be subject to allegations that they
have been improperly solicited or may have divulged proprietary or other confidential information to us. If we are unable to attract or retain qualified engineers,
our ability to innovate, introduce new products and compete would be adversely impacted, and our financial condition and results of operations may suffer.
If the transition to a subscription-based business model fails to yield the benefits that we expect, our results of operations could be negatively impacted.
We are currently completing our transition to a subscription-based business model. It is uncertain whether this transition will prove successful. Market acceptance
of our products is dependent on our ability to include functionality and usability that address certain customer requirements. Additionally, we must optimally price
our products in light of marketplace conditions, our costs and customer demand. This transition has had and may continue to have negative revenue and earnings
implications, including on our quarterly results of operations. If we are unable to respond to these competitive threats, our business could be harmed.
This subscription strategy may give rise to a number of risks, including the following:
•
•
•
•
•
•
our revenues and cash flows may fluctuate more than anticipated over the short-term as a result of this strategy;
if new or current customers desire only perpetual licenses our subscription sales may lag behind our expectations;
the shift to a subscription strategy may raise concerns among our customer base, including concerns regarding changes to pricing over time
and access to data once a subscription has expired;
we may be unsuccessful in maintaining or implementing our target pricing or new pricing models, product adoption and projected renewal
rates, or we may select a target price or new pricing model that is not optimal and could negatively affect our sales or earnings;
our shift to a subscription licensing model may result in confusion among new or existing customers (which can slow adoption rates), resellers
and investors;
if our customers do not renew their subscriptions or do not renew them on a timely basis, our revenues may decline and our business may suffer;
11
•
•
•
our relationships with existing partners that resell perpetual license products may be damaged;
we may incur sales compensation costs at a higher than forecasted rate if the pace of our subscription transition is faster than anticipated; and
our sales force may struggle with the transition which may lead to increased turnover rates and lower headcount.
We have been growing and expect to continue to invest in our growth for the foreseeable future. If we fail to manage this growth effectively, our business and
results of operations will be adversely affected.
We intend to continue to grow our business and plan to continue to hire new employees. If we cannot adequately train these new employees, including our sales
force, engineers and customer support staff, our sales may not grow at the rates we project, our customers might decide not to renew or reduce the scope of their
original purchases, or our customers may lose confidence in the knowledge and capability of our employees. In addition, we are expanding our current operations,
and we intend to make investments to continue our expansion efforts. We must successfully manage our growth to achieve our objectives. Although our business
has experienced significant growth in the past, we cannot provide any assurance that our business will continue to grow at the same rate, or at all.
Our ability to effectively manage any significant growth of our business will depend on a number of factors, including our ability to do the following:
•
•
•
•
•
•
•
effectively recruit, integrate, train and motivate a large number of new employees, including our sales force and engineers, while retaining
existing employees, maintaining the beneficial aspects of our corporate culture and effectively executing our business plan;
satisfy existing customers and attract new customers;
transition from perpetual licenses to a subscription-based business model;
successfully introduce new products and enhancements;
effectively manage existing channel partnerships and expand to new ones;
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 can
effectively 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.
These activities will require significant investments and allocation of valuable management and employee resources, and our growth will continue to place
significant demands on our management and our operational and financial infrastructure. There are no guarantees we will be able to grow our business in an
efficient or timely manner, or at all. Moreover, if we do not effectively manage the growth of our business and operations, the quality of our software could suffer,
which could negatively affect our brand, results of operations and overall business.
Our failure to continually enhance and improve our technology could adversely affect sales of our products.
The market is characterized by the exponential growth in enterprise data, rapid technological advances, changes in customer requirements, including customer
requirements driven by changes to legal, regulatory and self-regulatory compliance mandates, frequent new product introductions and enhancements and evolving
industry standards in computer hardware and software technology. As a result, we must continually change and improve our products in response to changes in
operating systems, application software, computer and communications hardware, networking software, data center architectures, programming tools, computer
language technology and various regulations. Moreover, the technology in our products is especially complex because it needs to effectively identify and respond
to a user’s data retention, security and governance needs, while minimizing the impact on database and file system performance. Our products must also
successfully interoperate with products from other vendors.
We cannot guarantee that we will be able to anticipate future market needs and opportunities or be able to extend our technological expertise and develop new
products or expand the functionality of our current products in a timely manner or at all. Even if we are able to anticipate, develop and introduce new products and
expand the functionality of our current products, there can be no assurance that enhancements or new products will achieve widespread market acceptance.
Our product enhancements or new products could fail to attain sufficient market acceptance for many reasons, including:
12
•
•
•
•
•
failure to accurately predict market demand in terms of product functionality and to supply products that meet this demand in a timely fashion;
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 the
functionality of our current products or convince our customers and potential customers of the value of our solutions in light of new technologies. Accordingly, our
business, results of operations and financial condition could be materially and adversely affected.
We may not be able to predict subscription renewal rates and their impact on our future revenues and operating results.
Although our subscription solutions are designed to increase the number of customers that purchase our solutions and create a recurring revenue stream that
increases and is more predictable over time, our customers are not required to renew their subscriptions for our solutions and they may elect not to renew when or
as we expect or elect to reduce the scope of their original purchases. Customer renewal rates may decline or fluctuate due to a number of factors, including offering
pricing, competitive offerings, customer satisfaction and reductions in customer spending levels or customer activity due to economic downturns, the adverse
impact of import tariffs or other market uncertainty. If our customers do not renew their subscriptions when or as we expect, or if they renew on less favorable
terms, our revenues and earnings may decline, and our business may suffer.
We are dependent on the continued services and performance of our co-founder, Chief Executive Officer and President, the loss of whom could adversely
affect our business.
Much of our future performance depends in large part on the continued services and continuing contributions of our co-founder, Chief Executive Officer and
President, Yakov Faitelson, to successfully manage our company, to execute on our business plan and to identify and pursue new opportunities and product
innovations. The loss of Mr. Faitelson's services could significantly delay or prevent the achievement of our development and strategic objectives and adversely
affect our business.
Due to our growth, we have a limited operating history at our current scale, which makes it difficult to evaluate and predict our future prospects and may
increase the risk that we will not be successful.
We have a relatively short history operating our business at its current scale. For example, we have increased the number of our employees and have expanded our
operations and product offerings. This limits our ability to forecast our future operating results and subjects us to a number of uncertainties, including our ability to
plan for and model future growth. We have encountered and will continue to encounter risks and uncertainties frequently experienced by growing companies in
new markets that may not develop as expected. Because we depend in part on the market’s acceptance of our products, it is difficult to evaluate trends that may
affect our business. If our assumptions regarding these trends and uncertainties, which we use to plan our business, are incorrect or change in reaction to changes in
our markets, or if we do not address these risks successfully, our operating and financial results could differ materially from our expectations and our business
could suffer. Moreover, although we have experienced significant growth historically, we may not continue to grow as quickly in the future.
Our future success will depend in large part on our ability to, among other things:
complete the transition to a subscription-based model successfully;
•
• maintain and expand our business, including our customer base and operations, to support our growth, both domestically and internationally;
hire, integrate, train and retain skilled talent, including members of our sales force and engineers;
•
develop new products and services and bring products and services in beta to market;
•
•
renew subscription and maintenance and support agreements with, and sell additional products to, existing customers;
• maintain high customer satisfaction and ensure quality and timely releases of our products and product enhancements;
•
• maintain compliance with applicable governmental regulations and other legal obligations, including those related to intellectual property,
increase market awareness of our products and enhance our brand; and
international sales and taxation.
13
If we fail to address the risks and difficulties that we face, including those associated with the challenges listed above as well as those described elsewhere in this
“Risk Factors” section, our business will be adversely affected, and our results of operations will suffer.
If we are unable to attract new customers and expand sales to existing customers, both domestically and internationally, our growth could be slower than we
expect, and our business may be harmed.
Our future growth depends in part upon increasing our customer base, particularly those customers with potentially high customer lifetime values. Our ability to
achieve significant growth in revenues in the future will depend, in large part, upon the effectiveness of our sales and marketing efforts, both domestically and
internationally, and our ability to attract new customers. If we fail to attract new customers and maintain and expand those customer relationships, our revenues
may be adversely affected, and our business will be harmed.
Our future growth also depends upon expanding sales of our products to existing customers and their organizations and receiving subscription and maintenance
renewals. If our customers do not purchase additional licenses or capabilities, our revenues may grow more slowly than expected, may not grow at all or may
decline. There can be no assurance that our efforts would result in increased sales to existing customers ("upsells") and additional revenues. If our efforts to upsell
to our customers are not successful, our business would suffer. Additionally, although as a result of our transition to a subscription-based model a majority of our
software is currently licensed and sold under subscription license agreements, we also enter into perpetual license agreements with our customers. Due to the
differences in average annual spending per customer, applied to perpetual licenses versus subscription sales, shifts in the mix of subscription licenses could
produce significant variation in the revenues we recognize in a given period.
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 $78.8 million, $28.6 million and $13.8 million in each of the years ended
December 31, 2019, 2018 and 2017, respectively. Because the market for our software is rapidly evolving and has still not yet reached widespread adoption, it is
difficult for us to predict our future results of operations. We expect our operating expenses to increase over the next several years as we hire additional personnel,
expand and improve the effectiveness of our distribution channels, and continue to develop features and applications for our software.
Prolonged economic uncertainties or downturns could materially adversely affect our business.
Our business depends on our current and prospective customers’ ability and willingness to invest money in information technology services, including
cybersecurity projects, which in turn is dependent upon their overall economic health. Negative conditions in the general economy both in the United States and
abroad, including conditions resulting from changes in gross domestic product growth, potential future government shutdowns, the federal government's failure to
raise the debt ceiling, financial and credit market fluctuations, the imposition of trade barriers and restrictions such as tariffs, political deadlock, natural
catastrophes, warfare and terrorist attacks, could cause a decrease in business investments, including corporate spending on enterprise software in general and
negatively affect the rate of growth of our business.
Uncertainty in the global economy, particularly in EMEA, which accounted for approximately 30% of our revenues in 2019, and where we have experienced
inconsistent quarterly growth rates over the last few years, makes it extremely difficult for our customers and us to forecast and plan future business activities
accurately. This could cause our customers to reevaluate decisions to purchase our product or to delay their purchasing decisions, which could lengthen our sales
cycles.
We have a significant number of customers in the financial services, public sector, healthcare and industrial industries. A substantial downturn in any of these
industries, or a reduction in public sector spending, may cause enterprises to react to worsening conditions by reducing their capital expenditures in general or by
specifically reducing their spending on information technology. Customers may delay or cancel information technology projects, choose to focus on in-house
development efforts or seek to lower their costs by renegotiating maintenance and support agreements. To the extent purchases of licenses for our software are
perceived by customers and potential customers to be discretionary, our revenues may be disproportionately affected by delays or reductions in general information
technology spending. In addition, the increased pace of consolidation in certain industries may result in reduced overall spending on our software. If the economic
conditions of the general economy or industries in which we operate worsen from present levels, our business, results of operations and financial condition could
be adversely affected.
14
If our technical support, customer success or professional services are not satisfactory to our customers, they may not renew their subscription licenses or
maintenance and support agreements or buy future products, which could adversely affect our future results of operations.
Our business relies on our customers’ satisfaction with the technical support and professional services we provide to support our products. Our customers have no
obligation to renew their subscription licenses or maintenance and support agreements with us after the initial terms have expired. Our perpetual license customers
typically purchase one year of software maintenance and support as part of their initial purchase of our products, with an option to renew their maintenance
agreements. In order for us to maintain and improve our results of operations, it is important that our existing customers renew their subscription licenses and
maintenance and support agreements, if applicable, when the initial contract term expires. For example, our perpetual license maintenance renewal rate for each of
the years ended December 31, 2019, 2018 and 2017 was over 90%. Customer satisfaction will become even more important as most of our licensing has shifted to
subscription license agreements.
If we fail to provide technical support services that are responsive, satisfy our customers’ expectations and resolve issues that they encounter with our products and
services, then they may elect not to purchase or renew subscription licenses or annual maintenance and support contracts and they may choose not to purchase
additional products and services from us. Accordingly, our failure to provide satisfactory technical support or professional services could lead our customers not to
renew their agreements with us or renew on terms less favorable to us, and therefore have a material and adverse effect on our business and results of operations.
Breaches in our security, cyberattacks 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 contractual
obligations to protect the confidentiality and appropriate use of customer data. Despite our security measures, our information technology and infrastructure may
be vulnerable to attacks as a result of third party action, employee error or misconduct. Security risks, including, but not limited to, unauthorized use or disclosure
of customer data, theft of proprietary information, loss or corruption of customer data and computer hacking attacks or other cyberattacks, could expose us to
substantial litigation expenses and damages, indemnity and other contractual obligations, government fines and penalties, mitigation expenses and other liabilities.
We are continuously working to improve our information technology systems, together with creating security boundaries around our critical and sensitive assets.
We provide advanced 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 or attack. However, because techniques used
to obtain unauthorized access or to sabotage systems change frequently and generally are not recognized until successfully launched against a target, we may be
unable to anticipate these techniques or to implement adequate preventative measures. If an actual or perceived breach of our security occurs, the market
perception of the effectiveness of our security measures and our products could be harmed, we could lose potential sales and existing customers, our ability to
operate our business could be impaired, and we may incur significant liabilities.
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 and to perform
some of our professional services. In 2019, our channel partners fulfilled substantially all of our sales, and we expect that sales to channel partners will continue to
account for substantially all of our revenues for the foreseeable future. Our ability to achieve revenue growth in the future will depend in part on our success in
maintaining successful relationships with our channel partners.
Our agreements with our channel partners are generally non-exclusive, meaning our channel partners may offer customers the products of several different
companies. If our channel partners do not effectively market and sell our software, choose to use greater efforts to market and sell their own products or those of
others, or fail to meet the needs of our customers, including through the provision of professional services for our software, our ability to grow our business, sell
our software and maintain our reputation may be adversely affected. Our contracts with our channel partners generally allow them to terminate their agreements for
any reason upon 30 days’ notice. A termination of the agreement has no effect on orders already placed. The loss of a substantial number of our channel partners,
our possible inability to replace them, or the failure to recruit additional channel partners could materially and adversely affect our results of operations. If we are
unable to maintain our relationships with these channel partners, our business, results of operations, financial condition or cash flows could be adversely affected.
15
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 the
platform to satisfy customers or to achieve increased market acceptance would adversely affect our business.
In 2019, we generated substantially all of our revenues from sales of licenses from five of our current product families, DatAdvantage, DatAlert, Data
Classification Engine, DataPrivilege and Data Transport Engine. We expect to continue to derive a majority of our revenues from license sales relating to this
platform of products in the future. As such, market acceptance of this platform of products is critical to our continued success. Demand for licenses for our
platform of products is affected by a number of factors, some of which are outside of our control, including continued market acceptance of our software by
referenceable accounts for existing and new use cases, technological change and growth or contraction in our market. We expect the proliferation of enterprise data
to lead to an increase in the data analysis demands, and data security and retention concerns, of our customers, and our software, including the software underlying
our Data 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 achieve
more widespread market acceptance of our software, our business, operations, financial results and growth prospects will be materially and adversely affected.
Failure to protect our proprietary technology and intellectual property rights could substantially harm our business.
The success of our business depends on our ability to obtain, protect and enforce our trade secrets, trademarks, copyrights, patents and other intellectual property
rights. We attempt to protect our intellectual property under patent, trademark, copyrights and trade secret laws, and through a combination of confidentiality
procedures, contractual provisions and other methods, all of which offer only limited protection.
As of January 31, 2020, we had 69 issued patents in the United States and 31 pending U.S. patent applications. We also had 35 patents issued and 71 applications
pending for examination in non-U.S. jurisdictions, and two pending PCT patent applications, all of which are counterparts of our U.S. patent applications. We may
file additional patent applications in the future. The process of obtaining patent protection is expensive and time-consuming, and we may not be able to prosecute
all necessary or desirable patent applications at a reasonable cost or in a timely manner all the way through to the successful issuance of a patent. We may choose
not to seek patent protection for certain innovations and may choose not to pursue patent protection in certain jurisdictions. Furthermore, it is possible that our
patent applications may not issue as granted patents, that the scope of our issued patents will be insufficient or not have the coverage originally sought, that our
issued patents will not provide us with any competitive advantages, and that our patents and other intellectual property rights may be challenged by others or
invalidated through administrative process or litigation. In addition, issuance of a patent does not guarantee that we have an absolute right to practice the patented
invention. Our policy is to require our employees (and our consultants and service providers that develop intellectual property included in our products) to execute
written agreements in which they assign to us their rights in potential inventions and other intellectual property created within the scope of their employment (or,
with respect to consultants and service providers, their engagement to develop such intellectual property), but we cannot assure you that we have adequately
protected our rights in every such agreement or that we have executed an agreement with every such party. Finally, in order to benefit from patent and other
intellectual property protection, we must monitor, detect and pursue infringement claims in certain circumstances in relevant jurisdictions, all of which is costly
and time-consuming. As a result, we may not be able to obtain adequate protection or to enforce our issued patents or other intellectual property effectively.
In addition to patented technology, we rely on our unpatented proprietary technology and trade secrets. Despite our efforts to protect our proprietary technologies
and our intellectual property rights, unauthorized parties, including our employees, consultants, service providers or customers, may attempt to copy aspects of our
products or obtain and use our trade secrets or other confidential information. We generally enter into confidentiality agreements with our employees, consultants,
service providers, vendors, channel partners and customers, and generally limit access to and distribution of our proprietary information and proprietary technology
through certain procedural safeguards. These agreements may not effectively prevent unauthorized use or disclosure of our intellectual property or technology and
may not provide an adequate remedy in the event of unauthorized use or disclosure of our intellectual property or technology. We cannot provide assurance that the
steps taken by us will prevent misappropriation of our trade secrets or technology or infringement of our intellectual property. In addition, the laws of some foreign
countries where we operate do not protect our proprietary rights to as great an extent as the laws of the United States, and many foreign countries do not enforce
these laws as diligently as government agencies and private parties in the United States.
16
Moreover, industries in which we operate, such as data security, cybersecurity, compliance, data retention and data governance are characterized by the existence
of a large number of relevant patents and frequent claims and related litigation regarding patent and other intellectual property rights. From time to time, third
parties have asserted and may assert their patent, copyright, trademark and other intellectual property rights against us, our channel partners or our customers.
Successful claims of infringement or misappropriation by a third party could prevent us from distributing certain products, performing certain services or could
require us to pay substantial damages (including, for example, treble damages if we are found to have willfully infringed patents and increased statutory damages if
we are found to have willfully infringed copyrights), royalties or other fees. Such claims also could require us to cease making, licensing or using solutions that are
alleged to infringe or misappropriate the intellectual property of others or to expend additional development resources to attempt to redesign our products or
services or otherwise to develop non-infringing technology. Even if third parties may offer a license to their technology, the terms of any offered license may not
be acceptable, and the failure to obtain a license or the costs associated with any license could cause our business, results of operations or financial condition to be
materially and adversely affected. In some cases, we indemnify our channel partners and customers against claims that our products infringe the intellectual
property of third parties. Defending against claims of infringement or being deemed to be infringing the intellectual property rights of others could impair our
ability to innovate, develop, distribute and sell our current and planned products and services. If we are unable to protect our intellectual property rights and ensure
that we are not violating the intellectual property rights of others, we may find ourselves at a competitive disadvantage to others who need not incur the additional
expense, time and effort required to create the innovative products that have enabled us to be successful to date.
We may face increased competition in our market.
While there are some companies which offer certain features similar to those embedded in our solutions, as well as others with whom we compete in certain
tactical use cases, we believe that we do not currently compete with a company that offers the same breadth of functionalities that we offer in a single integrated
solution. Nevertheless, we do compete against a select group of software vendors, such as Veritas Technologies LLC and Quest Software that provide standalone
solutions, similar to those found in our comprehensive software suite, in the specific markets in which we operate. We also face direct competition with respect to
certain of our products, specifically 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 to better serve compliance needs with new regulations, like
GDPR and other data privacy laws, we may face increased perceived and real competition from other security and classification technologies. As we expand our
coverage and penetration in the cloud, we may face increased perceived and real competition from other cloud-focused technologies. In the future, as customer
requirements evolve and new technologies are introduced, we may experience increased competition if established or emerging companies develop solutions that
address the enterprise data market. Furthermore, because we operate in a relatively new and evolving area, we anticipate that competition will increase based on
customer demand for these types of products.
In particular, if a more established company were to target our market, we may face significant competition. They may have competitive advantages, such as
greater name recognition, larger sales, marketing, research and acquisition resources, access to larger customer bases and channel partners, a longer operating
history and lower labor and development costs, which may enable them to respond more quickly to new or emerging technologies and changes in customer
requirements or devote greater resources to the development, promotion and sale of their products than we do. Increased competition could result in us failing to
attract customers or maintain licenses at the same rate. It could also lead to price cuts, alternative pricing structures or the introduction of products available for
free or a nominal price, reduced gross margins, longer sales cycles and loss of market share.
In addition, our current or prospective channel partners may establish cooperative relationships with any future competitors. These relationships may allow future
competitors to rapidly gain significant market share. These developments could also limit our ability to obtain revenues from existing and new customers.
Our ability to compete successfully in our market will also depend on a number of factors, including ease and speed of product deployment and use, the quality and
reliability of our customer service and support, total cost of ownership, return on investment and brand recognition. Any failure by us to successfully address
current or future competition in any one of these or other areas may reduce the demand for our products and adversely affect our business, results of operations and
financial condition.
17
Interruptions or performance problems, including associated with our website or support website or any caused by cyberattacks, may adversely affect our
business.
Our continued growth depends in part on the ability of our existing and potential customers to quickly access our website and support website. Access to our
support website is also imperative to our daily operations and interaction with customers, as it allows customers to download our software, fixes and patches, as
well as open and respond to support tickets and register license keys for evaluation or production purposes. We have experienced, and may in the future
experience, website disruptions, outages and other performance problems due to a variety of factors, including technical failures, cyberattacks, natural disasters,
infrastructure changes, human or software errors, capacity constraints due to an overwhelming number of users accessing our website simultaneously and denial of
service or fraud. In some instances, we may not be able to identify the cause or causes of these website performance problems within an acceptable period of time.
It may become increasingly difficult to maintain and improve the performance of our websites, especially during peak usage times and as our software becomes
more complex and our user traffic increases. If our websites are unavailable or if our users are unable to download our software, patches or fixes within a
reasonable amount of time or at all, we may suffer reputational harm and our business would be negatively affected.
Real or perceived errors, failures or bugs in our software could adversely affect our growth prospects.
Because our software uses complex technology, undetected errors, failures or bugs may occur. Our software is often installed and used in a variety of computing
environments with different operating system management software, and equipment and networking configurations, which may cause errors or failures of our
software or other aspects of the computing environment into which it is deployed. In addition, deployment of our software into computing environments may
expose undetected errors, compatibility issues, failures or bugs in our software. Despite testing by us, errors, failures or bugs may not be found in our software until
it is released to our customers. Moreover, our customers could incorrectly implement or inadvertently misuse our software, which could result in customer
dissatisfaction and adversely impact the perceived utility of our products as well as our brand. Any of these real or perceived errors, compatibility issues, failures
or bugs in our software could result in negative publicity, reputational harm, loss of or delay in market acceptance of our software, loss of competitive position or
claims by customers for losses sustained by them. In such an event, we may be required, or may choose, for customer relations or other reasons, to expend
additional resources in order to help correct the problem.
18
If our software is perceived as not being secure, customers may reduce the use of or stop using our software, and we may incur significant liabilities.
Our software involves the transmission of data between data stores, and between data stores and desktop and mobile computers, and may in the future involve the
storage of data. Any security breaches with respect to such data could result in the loss of this information, litigation, indemnity obligations and other liabilities.
While we have taken steps to protect the confidential information that we have access to, including confidential information we may obtain through our customer
support services or customer usage of our products, we have no direct control over the substance of the content. Therefore, if customers use our software for the
transmission of personally identifiable information and our security measures are breached as a result of third-party action, employee error, malfeasance or
otherwise, our reputation could be damaged, our business may suffer and we could incur significant liability. Because techniques used to obtain unauthorized
access or sabotage systems change frequently and generally are not identified until they are launched against a target, we may be unable to anticipate these
techniques or to implement adequate preventative measures. While we maintain insurance coverage for some of the above events, the potential liabilities associated
with these events could exceed the insurance coverage we maintain. Any or all of these issues could tarnish our reputation, negatively impact our ability to attract
new customers or sell additional products to our existing customers, cause existing customers to elect not to renew their maintenance and support agreements or
subject us to third-party lawsuits, regulatory fines or other action or liability, thereby adversely affecting our results of operations.
We are subject to a number of legal requirements, contractual obligations and industry standards regarding security, data protection and privacy, and any
failure to comply with these requirements, obligations or standards could have an adverse effect on our reputation, business, financial condition and operating
results.
Privacy and data information security have become a significant issue in the United States and in many other countries where we have employees and operations
and where we offer licenses to our products. The regulatory framework for privacy and personal information security issues worldwide is rapidly evolving and is
likely to remain uncertain for the foreseeable future. The U.S. federal and various state and foreign government bodies and agencies have adopted or are
considering adopting laws and regulations limiting, or laws and regulations regarding, the collection, distribution, use, disclosure, storage and security of personal
information. For example, California recently enacted the CCPA, which went into effect on January 1, 2020, that requires, among other things, covered companies
to provide new disclosures to California consumers and afford such consumers new abilities to opt-out of certain sales of personal information.
Internationally, virtually every jurisdiction in which we operate has established its own data security and privacy legal framework with which we or our customers
must comply. Laws and regulations in these jurisdictions apply broadly to the collection, use, storage, disclosure and security of data that identifies or may be used
to identify or locate an individual, such as names, email addresses and, in some jurisdictions, Internet Protocol addresses. These laws and regulations often are
more restrictive than those in the United States and are rapidly evolving. For example, the EU data protection regime, the GDPR became enforceable on May 25,
2018. Additionally, the United Kingdom enacted legislation in May 2018 that substantially implements the GDPR, but the United Kingdom’s exit from the EU
(which formally occurred on January 31, 2020), commonly referred to as “Brexit," has created uncertainty with regard to the regulation of data protection in the
United Kingdom. In particular, it is unclear how data transfers to and from the United Kingdom will be regulated following Brexit. Complying with the GDPR or
other laws, regulations or other obligations relating to privacy, data protection or information security may cause us to incur substantial operational costs or require
us to modify our data handling practices. Non-compliance could result in proceedings against us by governmental entities or others, could result in substantial fines
or other liability and may otherwise adversely impact our business, financial condition and operating results.
Some statutory requirements, both in the United States and abroad, include obligations of companies to notify individuals of security breaches involving particular
personal information, which could result from breaches experienced by us or our service providers. Even though we may have contractual protections with our
service providers, a security breach could impact our reputation, harm our customer confidence, hurt our sales or cause us to lose existing customers and could
expose us to potential liability or require us to expend significant resources on data security and in responding to such breach.
In addition to government regulation, privacy advocates and industry groups may propose new and different self-regulatory standards that either legally or
contractually apply to us. We also expect that there will continue to be new proposed laws and regulations concerning privacy, data protection and information
security, and we cannot yet determine the impact such future laws, regulations and standards may have on our business. New laws, amendments to or re-
interpretations of existing laws and regulations, industry standards, contractual obligations and other obligations may require us to incur additional costs and
restrict our business operations. Because the interpretation and application of laws and other obligations relating to privacy and data protection are still uncertain, it
is possible that these laws and other obligations may be interpreted and applied in a manner that is inconsistent with our existing data management practices or the
features of our software. If so, in addition to the
19
possibility of fines, lawsuits and other claims, we could be required to fundamentally change our business activities and practices or modify our software, which
could have an adverse effect on our business. We may be unable to make such changes and modifications in a commercially reasonable manner or at all, and our
ability to develop new features could be limited. Any inability to adequately address privacy concerns, even if unfounded, or comply with applicable privacy or
data protection laws, regulations and policies, could result in additional cost and liability to us, damage our reputation, inhibit sales and adversely affect our
business.
Furthermore, the costs of compliance with, and other burdens imposed by, the laws, regulations and policies that are applicable to the businesses of our customers
may limit the use and adoption of, and reduce the overall demand for, our products. Privacy and personal information security concerns, whether valid or not valid,
may inhibit market adoption of our products particularly in certain industries and foreign countries.
Our long-term growth depends, in part, on being able to continue to expand internationally on a profitable basis, which subjects us to risks associated with
conducting international operations.
Historically, we have generated a majority of our revenues from customers in North America. For the year ended December 31, 2019, approximately 70% of our
total revenues were derived from sales in North America. Nevertheless, we have operations across the globe, and we plan to continue to expand our international
operations as part of our long-term growth strategy. The further expansion of our international operations will subject us to a variety of risks and challenges,
including:
•
•
•
•
•
•
•
•
•
•
•
•
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, payment cycles,
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 a potential reverse or renegotiation of international trade agreements and partnerships under the administration of U.S.
President Donald J. Trump;
the continued economic and legal uncertainty around how Brexit, will impact the United Kingdom’s access to the EU 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, the U.K.
Bribery Act of 2010, import and export control laws, tariffs, trade barriers, economic sanctions and other regulatory or contractual limitations on
our ability to sell our software in certain foreign markets, and the risks and costs of non-compliance;
heightened risks of unfair or corrupt business practices in certain geographies and of improper or fraudulent sales arrangements that may impact
financial results and result in restatements of financial statements and irregularities in financial statements;
reduced protection for intellectual property rights in certain countries and practical difficulties and costs of enforcing rights abroad; and
compliance with the laws of numerous foreign taxing jurisdictions and overlapping of different tax regimes.
Any of these risks could adversely affect our international operations, reduce our revenues from outside the United States or increase our operating costs, adversely
affecting our business, results of operations and financial condition and growth prospects. There can be no assurance that all of our employees, independent
contractors and channel partners will comply with the formal policies we have and will implement, or applicable laws and regulations. Violations of laws or key
control policies by our employees, independent contractors and channel partners could result in delays in revenue recognition, financial reporting misstatements,
fines, penalties or the prohibition of the importation or exportation of our software and services and could have a material adverse effect on our business and results
of operations.
20
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. The exchange rates
between the U.S. dollar and foreign currencies have fluctuated substantially in recent years and may continue to fluctuate substantially in the future. Furthermore, a
strengthening of the U.S. dollar could increase the cost in local currency of our software and our subscription licenses and 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 after the United Kingdom's recent exit from the EU. Although the United Kingdom has passed legislation regarding the immediate
impact of Brexit, it is still unclear what terms, if any, may be agreed within the United Kingdom and between the United Kingdom and other countries on many
aspects of fiscal policy, cross-border trade and international relations, both in the final outcome and for any transitional period. The United Kingdom's withdrawal
from the EU, as well as other member countries' public discussions about the possibility of withdrawing from the EU, may also create global economic and legal
uncertainty, which may impact, among other things, the demand for our products.
We incur expenses for employee compensation and other operating expenses at our non-U.S. locations in local currencies. The weakening of the U.S. dollar against
such currencies would cause the U.S. dollar equivalent of such expenses to increase which could have a negative impact on our reported results of operations. We
use forward foreign exchange contracts to hedge or mitigate the effect of changes in foreign exchange rates on our operating expenses denominated in certain
foreign currencies. However, this strategy might not eliminate our exposure to foreign exchange rate fluctuations and involves costs and risks of its own, such as
cash expenditures, ongoing management time and expertise, external costs to implement the strategy and potential accounting implications. Additionally, our
hedging activities may contribute to increased losses as a result of volatility in foreign currency markets and the difference between the interest rates of the
currencies being hedged.
We are exposed to collection and credit risks, which could impact our operating results.
Our accounts receivable and contract assets are subject to collection and credit risks. These assets may include upfront purchase commitments for multiple years of
subscription-based software licenses and maintenance services, which may be invoiced over multiple reporting periods increasing these risks. For example, our
operating results may be impacted by significant bankruptcies among customers, which could negatively impact our revenues and cash flows. Although we have
processes in place that are designed to monitor and mitigate these risks, we cannot guarantee these programs will be effective. If we are unable to adequately
control these risks, our business, operating results and financial condition could be harmed.
Our use of open source software could negatively affect our ability to sell our software and subject us to possible litigation.
We use open source software and expect to continue to use open source software in the future. Some open source software licenses require users who distribute
open source software as part of their own software product to publicly disclose all or part of the source code to such software product or to make available any
derivative works of the open source code on unfavorable terms or at no cost. We may face ownership claims of third parties over, or seeking to enforce the license
terms applicable to, such open source software, including by demanding the release of the open source software, derivative works or our proprietary source code
that was developed using such software. These claims could also result in litigation, require us to purchase a costly license or require us to devote additional
research and development resources to change our software, any of which would have a negative effect on our business and results of operations. In addition, if the
license terms for the open source code change, we may be forced to re-engineer our software or incur additional costs. Finally, we cannot assure you that we have
incorporated open source software into our own software in a manner that conforms with our current policies and procedures.
Our business is highly dependent upon our brand recognition and reputation, and the failure to maintain or enhance our brand recognition or reputation may
adversely affect our business.
We believe that enhancing the “Varonis” brand identity and maintaining our reputation in the information technology industry is critical to our relationships with
our customers and to our ability to attract new customers. Our brand recognition and reputation is dependent upon:
•
•
our ability to continue to offer high-quality, innovative and error- and bug-free products;
our ability to maintain customer satisfaction with our products;
21
•
•
•
•
•
•
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 our products,
as well as other products available in the market, and perception of our product in the marketplace may be significantly influenced by these reviews. If these
reviews are negative, or less positive than reviews about other products available in the market, our brand may be adversely affected. Furthermore, negative
publicity relating to events or activities attributed to us, our employees, our channel partners or others associated with any of these parties, may tarnish our
reputation and reduce the value of our brand. Damage to our reputation and loss of brand equity may reduce demand for our products and have an adverse effect on
our business, results of operations and financial condition. Any attempts to rebuild our reputation and restore the value of our brand may be costly and time
consuming, and such efforts may not ultimately be successful.
Moreover, it may be difficult to enhance our brand and maintain our reputation in connection with sales to channel partners. Promoting our brand requires us to
make significant expenditures, and we anticipate that the expenditures will increase as our market becomes more competitive, as we expand into new markets and
geographies and as more sales are generated to our channel partners. To the extent that these activities yield increased revenues, these revenues may not offset the
increased expenses we incur. If we do not successfully enhance our brand and maintain our reputation, our business may not grow, we may have reduced pricing
power relative to competitors with stronger brands, and we could lose customers, all of which would adversely affect our business, operations and financial results.
False detection of security breaches, false identification of malicious sources or misidentification of sensitive or regulated information could adversely affect
our business.
Our cybersecurity products may falsely detect threats that do not actually exist. For example, our DatAlert product may enrich metadata collected by our products
with information from external sources and third-party data providers. If the information from these data providers is inaccurate, the potential for false positives
increases. These false positives, while typical in the industry, may affect the perceived reliability of our products and solutions and may therefore adversely impact
market acceptance of our products. 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 restrict access to important systems,
files or applications based on falsely identifying legitimate use as an attack or otherwise unauthorized, then our customers’ businesses could be adversely affected.
Any such false identification of use and subsequent restriction could result in negative publicity, loss of customers and sales, increased costs to remedy any
problem and costly litigation.
Our success depends in part on maintaining and increasing our sales to customers in the public sector.
We derive a portion of our revenues from contracts with federal, state, local and foreign governments and government-owned or -controlled entities (such as public
health care bodies, educational institutions and utilities), which we refer to as the public sector herein. We believe that the success and growth of our business will
continue to depend on our successful procurement of public sector contracts. Selling to public sector entities can be highly competitive, expensive and time
consuming, often requiring significant upfront time and expense without any assurance that our efforts will produce any sales. Factors that could impede our ability
to maintain or increase the amount of revenues derived from public sector contracts include:
•
•
•
•
•
•
•
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.
22
Furthermore, we must comply with laws and regulations relating to public sector contracting, which affect how we and our channel partners do business in both the
United States and abroad. These laws and regulations may impose added costs on our business, and failure to comply with these or other applicable regulations and
requirements, including non-compliance in the past, could lead to claims for damages from our channel partners, penalties, termination of contracts, and temporary
suspension or permanent debarment from public sector contracting.
The occurrence of any of the foregoing could cause public sector customers to delay or refrain from purchasing licenses of our software in the future or otherwise
have an adverse effect on our business, operations and financial results.
We are subject to governmental export and import controls that could subject us to liability or impair our ability to compete in international markets.
We incorporate encryption technology into certain of our products and these products are subject to U.S. export control. We are also subject to Israeli export
controls on encryption technology since our product development initiatives are primarily conducted by our wholly-owned Israeli subsidiary. We have obtained the
required licenses to export our products outside of the United States. In addition, the current encryption means used in our products are listed in the “free means
encryption items” published by the Israeli Ministry of Defense, which means we are exempt from obtaining an encryption control license. If the applicable U.S. or
Israeli legal requirements regarding the export of encryption technology were to change or if we change the encryption means in our products, we may need to
apply for new licenses in the United States and may no longer be able to rely on our licensing exception in Israel. There can be no assurance that we will be able to
obtain the required licenses under these circumstances. Furthermore, various other countries regulate the import of certain encryption technology, including import
permitting and licensing requirements, and have enacted laws that could limit our ability to distribute our products or could limit our customers’ ability to
implement our products in those countries.
We are also subject to U.S. and Israeli export control and economic sanctions laws, which prohibit the shipment of certain products to embargoed or sanctioned
countries, governments and persons. Our products could be exported to these sanctioned targets by our channel partners despite the contractual undertakings they
have given us and any such export could have negative consequences, including government investigations, penalties and reputational harm. Moreover, the Trump
Administration may create further uncertainty regarding export or import regulations, economic sanctions or related legislation. It remains unclear what
specifically President Trump would or would not do with respect to the initiatives he has raised and what support he would have to implement any such potential
changes. Any change in export or import regulations, economic sanctions or related legislation, shift in the enforcement or scope of existing regulations, or change
in the countries, governments, persons or technologies targeted by such regulations, could result in decreased use of our products by, or in our decreased ability to
export or sell our products to, existing or potential customers with international operations. Any decreased use of our products or limitation on our ability to export
or sell our products would likely adversely affect our business, financial condition and results of operations.
Our business in countries with a history of corruption and transactions with foreign governments increase the risks associated with our international activities.
As we operate and sell internationally, we are subject to the FCPA and other laws that prohibit improper payments or offers of payments to foreign governments
and their officials and political parties for the purpose of obtaining or retaining business. We have operations, deal with and make sales to governmental customers
in countries known to experience corruption, particularly certain emerging countries in Eastern Europe, South and Central America, East Asia, Africa and the
Middle East. Our activities in these countries create the risk of unauthorized payments or offers of payments by one of our employees, consultants, channel
partners or sales agents that could be in violation of various anti-corruption laws, even though these parties may not be under our control. While we have
implemented safeguards to prevent these practices by our employees, consultants, channel partners and sales agents, our existing safeguards and any future
improvements may prove to be less than effective, and our employees, consultants, channel partners or sales agents may engage in conduct for which we might be
held responsible. Violations of the FCPA or other anti-corruption laws may result in severe criminal or civil sanctions, including suspension or debarment from
government contracting, and we may be subject to other liabilities, which could negatively affect our business, operating results and financial condition.
23
Our tax rate may vary significantly depending on our stock price.
The tax effects of the accounting for stock-based compensation may significantly impact our effective tax rate from period to period. In periods in which our stock
price is higher than the grant price of the stock-based compensation vesting in that period, we will recognize excess tax benefits that will decrease our effective tax
rate. In future periods in which our stock price is lower than the grant price of the stock-based compensation vesting in that period, our effective tax rate may
increase. The amount and value of stock-based compensation issued relative to our earnings in a particular period will also affect the magnitude of the impact of
stock-based compensation on our effective tax rate. These tax effects are dependent on our stock price, which we do not control, and a decline in our stock price
could significantly increase our effective tax rate and adversely affect our financial results.
Multiple factors may adversely affect our ability to fully utilize our net operating loss carryforwards.
A U.S. corporation's ability to utilize its federal net operating loss (“NOL”) carryforwards is limited under Section 382 of the Internal Revenue Code of 1986, as
amended (the “Code”), if the corporation undergoes an ownership change. We performed a Section 382 analysis (the “Analysis”) which concluded that our ability
to utilize our NOL and tax credit carryforwards is subject to an annual limitation, as we underwent a section 382 ownership change during 2017. The Analysis
further concluded that our NOL carryforwards should be available for our utilization before they expire. As of December 31, 2017, our NOL carryforwards were
$22.9 million.
Since January 1, 2018, we generated additional NOLs, which are not subject to the annual limitation described above. Future changes in our stock ownership,
including future offerings, as well as changes that may be outside of our control, could result in a subsequent ownership change under Section 382 of the Internal
Revenue Code of 1986, as amended (the "Code"), that would impose an annual limitation on NOLs generated after December 31, 2017. In addition, the cash tax
benefit from our NOLs is dependent upon our ability to generate sufficient taxable income. Accordingly, we may be unable to earn enough taxable income in order
to fully utilize our current NOLs.
Changes in our provision for income taxes or adverse outcomes resulting from examination of our income tax returns could adversely affect our results.
We are subject to income taxation in the United States, Israel and numerous other jurisdictions. Determining our provision for income taxes requires significant
management judgment. In addition, our provision for income taxes could be adversely affected by many factors, including, among other things, changes to our
operating structure, changes in the amounts of earnings in jurisdictions with different statutory tax rates, changes in the valuation of deferred tax assets and
liabilities and changes in tax laws. Significant judgment is required to determine the recognition and measurement attributes prescribed in Accounting Standards
Codification (“ASC 740-10-25”). ASC 740-10-25 applies to all income tax positions, including the potential recovery of previously paid taxes, which if settled
unfavorably could adversely impact our provision for income taxes. Our income in certain countries is subject to reduced tax rates provided we meet certain
ongoing employment and capital investment commitments. Failure to meet these commitments could adversely impact our provision for income taxes.
We are also subject to the regular examination of our income tax returns by the U.S. Internal Revenue Services and other tax authorities in various jurisdictions.
Tax authorities may disagree with our intercompany charges, cross-jurisdictional transfer pricing or other matters and assess additional taxes. While we regularly
assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes, there can be no
assurance that the outcomes from these regular examinations will not have a material adverse effect on our results of operations and cash flows. Further, we may be
audited in various jurisdictions, and such jurisdictions may assess additional taxes against us. Although we believe our tax estimates are reasonable, the final
determination of any tax audits or litigation could be materially different from our historical tax provisions and accruals, which could have a material adverse effect
on our results of operations or cash flows in the period or periods for which a determination is made.
24
The adoption of the U.S. tax reform and the enactment of additional legislation changes could materially impact our financial position and results of
operations.
On December 22, 2017, President Trump signed into law the Tax Cuts and Jobs Act (the "TCJA") that significantly reforms the Code. The TCJA, among other
things, includes changes to U.S. federal tax rates, imposes significant additional limitations on the deductibility of certain expenses, restricts the use of net
operating loss carryforwards arising after December 31, 2017, allows for the expensing of capital expenditures, and puts into effect the migration from a
“worldwide” system of taxation to a territorial system. Due to the expansion of our international business activities, any changes in the U.S. taxation of such
activities may increase our worldwide effective tax rate and adversely affect our financial position and results of operations. Further, foreign governments may
enact tax laws in response to the TCJA that could result in further changes to global taxation and materially affect our financial position and results of operations.
We conduct our operations in a number of jurisdictions worldwide and report our taxable income based on our business operations in those jurisdictions.
Therefore, our intercompany relationships are subject to transfer pricing regulations administered by taxing authorities in various jurisdictions. While we believe
that we are currently in material compliance with our obligations under applicable taxing regimes, the relevant taxing authorities may disagree with our
determinations as to the income and expenses attributable to specific jurisdictions and may seek to impose additional taxes on us, including for past sales. If such a
disagreement were to occur, and our position were not sustained, we could be required to pay additional taxes, interest and penalties, which could result in one-
time tax charges, higher effective tax rates, reduced cash flows and lower overall profitability of our operations.
The Organization for Economic Cooperation and Development (“OECD”) introduced the base erosion and profit shifting project which sets out a plan to address
international taxation principles in a globalized, digitized business world (the “BEPS Plan”). During 2018, as part of the BEPS Plan, more than 80 countries chose
to implement the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS (“MLI”). The MLI significantly changes the bilateral tax
treaties signed by any country that chose to implement the MLI. In addition, during 2019 the OECD, the EU and individual countries (e.g., France, Austria and
Italy) each published an initiative to tax digital transactions executed by a non-resident entity and a local end-user or local end consumer. Under each initiative, the
local payer is obligated to withhold a fixed percentage from the gross proceeds paid to the non-resident entity as a tax on executing a digital transaction in that
territory, provided the entity’s sales in that territory exceeds a certain threshold (“Digital Service Tax”). As a result of participating countries adopting the
international tax policies set under the BEPS Plan, MLI and Digital Service Tax, changes have been and continue to be made to numerous international tax
principles and local tax regimes. Due to the expansion of our international business activities, those modifications may increase our worldwide effective tax rate,
create tax and compliance obligations in jurisdictions in which we previously had none and adversely affect our financial position.
Changes in financial accounting standards may cause adverse and unexpected revenue fluctuations and impact our reported results of operations.
A change in accounting standards or practices could harm our operating results and may even affect our reporting of transactions completed before the change is
effective. New accounting pronouncements and varying interpretations of accounting pronouncements have occurred and may occur in the future. Changes to
existing rules or the questioning of current practices may harm our operating results or the way we conduct our business. Additionally, the adoption of new or
revised accounting principles may require that we make significant changes to our systems process and controls.
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 to
successfully 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 or
assume 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
not generate 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 any
company that we acquire, particularly if key personnel of the acquired company decide not to work for us;
25
•
•
•
•
•
•
•
•
•
•
•
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 uncertainty
about 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
have stronger 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 as
financial maintenance covenants;
the risk of impairment charges related to potential write-downs of acquired assets or goodwill in future acquisitions;
to the extent that we issue a significant amount of equity or convertible debt securities in connection with future acquisitions, existing
stockholders 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. The inability
to integrate successfully the business, technologies, products, personnel or operations of any acquired business, or any significant delay in achieving 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 to develop
new features or enhance our software, improve our operating infrastructure or acquire complementary businesses and technologies. Accordingly, we may need to
engage in equity or debt financing to secure additional funds. If we raise additional funds through future issuances of equity or convertible debt securities, our
existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of
holders of our common stock. Any debt financing that we may secure in the future could involve restrictive covenants relating to our capital raising activities and
other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including
potential acquisitions. We may not be able to obtain additional financing on terms favorable to us, if at all. If we are unable to obtain adequate financing on terms
satisfactory to us when we require it, our ability to continue to support our business growth and to respond to business challenges could be significantly impaired,
and our business may be adversely affected.
Our business is subject to the risks of fire, power outages, floods, earthquakes, pandemics and other catastrophic events, and to interruption by manmade
problems such as terrorism.
A significant natural disaster, such as a fire, flood or an earthquake, an outbreak of a pandemic disease or a significant power outage could have a material adverse
impact on our business, results of operations and financial condition. In the event our customers’ information technology systems or our channel partners’ selling
or distribution abilities are hindered by any of these events, we may miss financial targets, such as revenues and sales targets, for a particular quarter. Further, if a
natural disaster occurs in a region from which we derive a significant portion of our revenue, customers in that region may delay or forego purchases of our
products, which may materially and adversely impact our results of operations for a particular period. In addition, acts of terrorism could cause disruptions in our
business or the business of channel partners, customers or the economy as a whole. Given our typical concentration of sales at each quarter end, any disruption in
the business of our channel partners or customers that impacts sales at the end of our quarter could have a significant adverse impact on our quarterly results. All of
the aforementioned risks may be augmented if the disaster recovery plans for us and our channel partners prove to be inadequate. To the extent that any of the
above results in delays or cancellations of customer orders, or the delay in the manufacture, deployment or shipment of our products, our business, financial
condition and results of operations would be adversely affected.
26
Risks Related to our Operations in Israel
Conditions in Israel may limit our ability to develop and sell our products, which could result in a decrease of our revenues.
Our principal research and development facility, which also houses a portion of our support and general and administrative teams, is located in Israel. Since the
establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its neighboring countries, as well as incidents of
terror activities and other hostilities, and a number of state and non-state actors have publicly committed to its destruction. Political, economic and security
conditions in Israel could directly affect our operations. We could be adversely affected by hostilities involving Israel, including acts of terrorism or any other
hostilities involving or threatening Israel, the interruption or curtailment of trade between Israel and its trading partners, a significant increase in inflation or a
significant downturn in the economic or financial condition of Israel. Any on-going or future armed conflicts, terrorist activities, tension along the Israeli borders
or with other countries in the region, including Iran, or political instability in the region could disrupt international trading activities in Israel and may materially
and negatively affect our business and could harm our results of operations.
Certain countries, as well as certain companies and organizations, continue to participate in a boycott of Israeli companies, companies with large Israeli operations
and others doing business with Israel and Israeli companies. The boycott, restrictive laws, policies or practices directed towards Israel, Israeli businesses or Israeli
citizens could, individually or in the aggregate, have a material adverse effect on our business in the future.
Some of our officers and employees in Israel are obligated to perform routine military reserve duty in the Israel Defense Forces, depending on their age and
position in the armed forces. Furthermore, they have been and may in the future be called to active reserve duty at any time under emergency circumstances for
extended periods of time. Our operations could be disrupted by the absence, for a significant period, of one or more of our officers or key employees due to
military service, and any significant disruption in our operations could harm our business.
The tax benefits that are available to our Israeli subsidiary require it to continue to meet various conditions and may be terminated or reduced in the future,
which could increase its taxes.
Our Israeli subsidiary benefits from a status of a “Beneficiary Enterprise” under the Israeli Law for the Encouragement of Capital Investments, 5719-1959, or the
Investment Law. Based on an evaluation of the relevant factors under the Investment Law, including the level of foreign (i.e., non-Israeli) investment in our
company, we have determined that the effective tax rate to be paid by our Israeli subsidiary as a “Beneficiary Enterprise” has historically been approximately 10%.
If our Israeli subsidiary does not meet the requirements for maintaining this status, for example, if the Israeli subsidiary materially changes the nature of its
business or, if the level of foreign investment in our company decreases, it may no longer be eligible to enjoy this reduced tax rate. As a result, our Israeli
subsidiary would be subject to Israeli corporate tax at the standard rate, which, as of January 1, 2020 was set at 23%. Even if our Israeli subsidiary continues to
meet the relevant requirements, the tax benefits that the status of “Beneficiary Enterprise” provides are scheduled to terminate on December 31, 2020. If these tax
benefits were reduced or eliminated prior to this date, the amount of taxes that our Israeli subsidiary would pay would likely increase, as all of our Israeli
operations would consequently be subject to corporate tax at the standard rate, which could adversely affect our results of operations. Additionally, if our Israeli
subsidiary increases its activities outside of Israel, for example, through acquisitions, these activities may not be eligible for inclusion in Israeli tax benefit
programs. The tax benefit derived from the status of “Beneficiary Enterprise” is dependent upon the ability to generate sufficient taxable income. Accordingly, our
Israeli subsidiary may be unable to earn enough taxable income in order to fully utilize its tax benefits.
Risks Related to the Ownership of our Common Stock
Our stock price has been and will likely continue to be volatile.
The market price for our common stock has been, and is likely to continue to be, volatile for the foreseeable future. For example, since shares of our common stock
were sold in our initial public offering in March 2014 at a price of $22.00 per share, our common stock’s price on The Nasdaq Global Select Market has ranged
from $13.25 to $90.07 through February 7, 2020. On February 7, 2020, the closing price of our common stock was $89.95. The market price of our common stock
may fluctuate significantly in response to a number of factors, many of which we cannot predict or control, including the factors listed below and other factors
described in this “Risk Factors” section:
•
•
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;
27
•
•
•
•
•
•
•
•
•
•
•
•
•
•
failure of securities analysts to initiate or maintain coverage of our company, changes in financial estimates by any securities analysts who follow
our company, or our failure to meet these estimates or the expectations of investors;
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 in particular;
price and volume fluctuations in certain categories of companies or the overall stock market, including as a result of trends in the global
economy;
the trading volume of our common stock;
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;
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 equity
securities of many technology companies. Stock prices of many technology companies have fluctuated in a manner unrelated or disproportionate to the operating
performance of those companies. In the past, stockholders have instituted securities class action litigation following periods of market volatility. If we were to
become involved in securities litigation, it could subject us to substantial costs, divert resources and the attention of management from our business and adversely
affect our business, results of operations, financial condition and cash flows.
If securities or industry analysts do not publish research or reports about our business, or publish negative reports about our business, our stock price and
trading volume could decline.
The trading market for our common stock depends in part on the research and reports that securities or industry analysts publish about us or our business, our
market and our competitors. We do not have any control over these analysts or their expectations regarding our performance on a quarterly or annual basis. If one
or more of the analysts who cover us downgrade our stock or change their opinion of our stock, our stock price would likely decline. If we fail to meet one or more
of these analysts' published expectations regarding our performance on a quarterly basis, our stock price or trading volume could decline. If one or more of these
analysts cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which could cause our stock
price or trading volume to decline.
Substantial future sales of shares of our common stock could cause the market price of our common stock to decline.
Sales of a substantial number of shares of our common stock into the public market, or the perception that these sales might occur, could depress the market price
of our common stock and could impair our ability to raise capital through the sale of additional equity securities. We are unable to predict the effect that such sales
may have on the prevailing market price of our common stock.
As of December 31, 2019, we had options, restricted stock units (“RSUs”) and performance stock units ("PSUs") outstanding that, if fully vested and exercised,
would result in the issuance of approximately 3.0 million shares of our common stock. All of the shares of our common stock issuable upon exercise of options and
vesting of RSUs and PSUs have been registered for public resale under the Securities Act. Accordingly, these shares will be able to be freely sold in the public
market upon issuance as permitted by any applicable vesting requirements.
28
The requirements of being a public company may strain our resources, divert management’s attention and affect our ability to attract and retain executive
management and qualified board members.
As a public company, we are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act of 2002 (the "Sarbanes-Oxley Act"), the Dodd-
Frank Wall Street Reform and Consumer Protection Act of 2010, the listing requirements of The Nasdaq Global Select Market and other applicable securities rules
and regulations. Compliance with these rules and regulations have increased our legal and financial compliance costs, make some activities more difficult, time-
consuming or costly and increase demand on our systems and resources.
The Exchange Act requires, among other things, that we file annual, quarterly and current reports with respect to our business and results of operations. The
Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. In
order to maintain and, if required, improve our disclosure controls and procedures and internal control over financial reporting to meet this standard, significant
resources and management oversight is required. As a result, management’s attention may be diverted from other business concerns, which could adversely affect
our business and results of operations. We may need to hire more employees in the future or engage outside consultants, which will increase our costs and
expenses. In addition, changing laws, regulations and standards relating to corporate governance and public disclosure are creating uncertainty for public
companies, increasing legal and financial compliance costs and making some activities more time consuming. These laws, regulations and standards are subject to
varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is
provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing
revisions to disclosure and governance practices.
Being a public company, these rules and regulations have made it more expensive for us to obtain director and officer liability insurance, and in the future we may
be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and
retain qualified members of our board of directors, particularly to serve on our audit and compensation committees, and qualified executive officers.
As a result of disclosure of information in our filings with the SEC, our business and financial condition have become more visible, which we believe may result in
threatened or actual litigation, including by competitors and other third parties. If such claims are successful, our business and results of operations could be
adversely affected, and even if the claims do not result in litigation or are resolved in our favor, these claims, and the time and resources necessary to resolve them,
could divert the resources of our management and adversely affect our business and results of operations.
We are obligated to develop and maintain proper and effective internal control over financial reporting. These internal controls may not be determined to be
effective, which may adversely affect investor confidence in our company and, as a result, the value of our common stock.
We are required, pursuant to Section 404 of the Sarbanes–Oxley Act, to furnish a report by management on, among other things, the effectiveness of our internal
control over financial reporting on an annual basis. This assessment includes disclosure of any material weaknesses identified by our management in our internal
control over financial reporting. We are also required to have our independent registered public accounting firm issue an opinion on the effectiveness of our
internal control over financial reporting on an annual basis. During the evaluation and testing process, if we identify one or more material weaknesses in our
internal control over financial reporting, we will be unable to assert that our internal 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 to express
an opinion on the effectiveness of our internal control over financial reporting, we could lose investor confidence in the accuracy and completeness of 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 our
stockholders and could cause our stock price to decline.
Future sales and issuances of our capital stock or rights to purchase our capital stock could result in substantial dilution to our existing stockholders. We may sell
common stock, convertible securities and other equity securities in one or more transactions at prices and in a manner as we may determine from time to time. If
we sell any such securities in subsequent transactions, investors may be materially diluted. New investors in such subsequent transactions could gain rights,
preferences and privileges senior to those of holders of our common stock.
29
We do not intend to pay dividends on our common stock, so any returns will be limited to the value of our stock.
We have never declared or paid cash dividends on our common stock. We currently anticipate that we will retain any future earnings and do not expect to pay any
dividends in the foreseeable future. Any determination to pay dividends in the future will be at the discretion of our board of directors and will be dependent on a
number of factors, including our financial condition, results of operations, capital requirements, general business conditions and other factors that our board of
directors may deem relevant. In addition, the loan agreement for our credit facility contains a prohibition on the payment of cash dividends. Until such time that we
pay a dividend, investors must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any future gains on
their investments.
Anti-takeover provisions in our charter documents and under Delaware law could make an acquisition of us, which may be beneficial to our stockholders,
more difficult and may prevent attempts by our stockholders to replace or remove our current management.
Provisions in our amended and restated certificate of incorporation and amended and restated bylaws may delay or prevent an acquisition of us or a change in our
management. These provisions include:
•
•
•
•
•
•
authorizing “blank check” preferred stock, which could be issued by the board without stockholder approval and may contain voting, liquidation,
dividend and other rights superior to our common stock, which would increase the number of outstanding shares and could thwart a takeover
attempt;
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 can be 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.
In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which limits
the ability of stockholders owning in excess of 15% of our outstanding voting stock to merge or combine with us. Although we believe these provisions
collectively provide for an opportunity to obtain greater value for stockholders by requiring potential acquirers to negotiate with our board of directors, they would
apply even if an offer rejected by our board were considered beneficial by some stockholders. In addition, these provisions may frustrate or prevent any attempts
by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, which
is responsible for appointing the members of our management.
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 46,000 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. We also lease offices in North Carolina
consisting of approximately 68,500 square feet, which is our primary U.S. customer support and inside sales center. This lease expires in July 2030, although we
have an option to extend the lease for an additional 10 years. Additionally, we currently lease an office located in Herzliya, Israel, consisting of approximately
136,000 square feet, where we employ our research and development team and a portion of our support and general and administrative teams. The lease for this
office expires in December 2028, although we have the option to extend the lease for an additional five years. We also lease smaller offices in France, the United
Kingdom, Ireland, Oregon, Virginia, Australia, Germany, the Netherlands, Luxembourg, Belgium and Singapore (which serve as regional sales offices and some of
which are customer support centers). 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.
30
Item 4.
Mine Safety Disclosures
Not applicable.
31
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 initial public
offering.
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 our
business and do not intend to declare or pay any cash dividends in the foreseeable future. Any further determination to pay dividends on our common stock will be
at the discretion of our board of directors, subject to applicable laws, and will depend on our financial condition, results of operations, capital requirements, general
business conditions and other factors that our board of directors considers relevant.
Stockholders
As of February 7, 2020, there were five stockholders of record of our common stock, including The Depository Trust Company, which holds shares of our
common stock on behalf of an indeterminate number of beneficial owners.
32
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 filings under
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 December 31, 2014 in our common stock, the NASDAQ Composite Index and the NASDAQ Computer
Index, and assumes the reinvestment of any dividends. The stock price performance on the following graph is not necessarily indicative of future stock price
performance.
The closing price of our common stock on December 31, 2019, the last trading day of our 2019 fiscal year, was $77.71 per share.
Company/Index
Varonis Systems, Inc.
NASDAQ Composite
NASDAQ Computer
12/31/2014
12/31/2015
12/31/2016
12/31/2017
12/31/2018
12/31/2019
$
$
$
100.00 $
100.00 $
100.00 $
57.26 $
105.73 $
106.24 $
81.63 $
113.66 $
119.28 $
147.88 $
145.76 $
165.52 $
161.13 $
140.10 $
159.43 $
236.70
189.45
239.67
Sales of Unregistered Securities
None.
33
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 as of
December 31, 2019 and 2018 and the consolidated statement of operations data for the years ended December 31, 2019, 2018 and 2017 are derived from our
audited consolidated financial statements and related notes that are included elsewhere in this Annual Report on Form 10-K. The consolidated balance sheet data as
of December 31, 2017, 2016 and 2015 and the consolidated statement of operations for the years ended December 31, 2016 and 2015 are derived from our audited
consolidated financial statements and related notes which are not included in this Annual Report. The consolidated balance sheet data as of December 31, 2015 and
the consolidated statement of operations data for the year ended December 31, 2015 have not been adjusted for revenue recognition in accordance with ASC No.
606 “Revenue from Contracts with Customers.” The information set forth below is not necessarily indicative of our results of future operations and should be read
in conjunction with our historical financial statements, including the notes thereto, and “Management’s Discussion and Analysis of Financial Condition and Results
of Operations,” included elsewhere in this Annual Report.
Consolidated Statement of Operations Data:
Revenues:
Subscriptions
Perpetual licenses
Maintenance and services
Total revenues
Cost of revenues(1)
Gross profit
Operating costs and expenses:
Research and development(1)
Sales and marketing(1)
General and administrative(1)
Total operating expenses
Operating loss
Financial income (expenses), net
Loss before income taxes
Income taxes
Net loss
Net loss per share of common stock, basic and diluted(2)
Weighted average shares used to compute net loss per share
attributable to common stockholders, basic and diluted
(1) Includes non-cash stock-based compensation as follows:
Year Ended December 31,
2019
2018
2017
2016
2015
(in thousands, except share and per share data)
$
76,730 $
8,750 $
2,627 $
3,764 $
42,093
135,367
254,190
35,144
219,046
80,764
169,898
44,371
295,033
(75,987)
(389)
(76,376)
(2,388)
139,578
121,960
270,288
27,683
242,605
69,971
168,309
33,460
271,740
(29,135)
970
(28,165)
(413)
118,689
94,074
215,390
20,714
194,676
47,369
133,925
26,801
208,095
(13,419)
2,362
(11,057)
(2,787)
90,028
72,071
165,863
15,737
150,126
36,660
105,639
19,822
162,121
(11,995)
(885)
(12,880)
(1,313)
$
$
(78,764) $
(28,578) $
(13,844) $
(14,193) $
(2.60) $
(0.98) $
(0.50) $
(0.54) $
2,430
70,291
54,489
127,210
12,019
115,191
31,792
86,367
16,106
134,265
(19,074)
(1,523)
(20,597)
(686)
(21,283)
(0.84)
30,257,410
29,020,645
27,467,440
26,406,312
25,198,546
34
Cost of revenues
Research and development
Sales and marketing
General and administrative
Total
Year Ended December 31,
2019
2018
2017
2016
2015
(in thousands)
$
$
2,561 $
1,757 $
1,078 $
699 $
13,188
14,782
15,608
9,645
16,081
7,478
5,209
8,542
5,006
3,052
6,104
3,083
46,139 $
34,961 $
19,835 $
12,938 $
419
1,954
3,041
2,380
7,794
(2)
Basic and diluted net loss per share of common stock is computed based on the weighted average number of shares of common stock outstanding during
each period. For additional information, see Note 2.r to our consolidated financial statements included elsewhere in this Annual Report.
As of December 31,
2019
2018
2017
2016
2015
(in thousands)
Consolidated Balance Sheet Data:
Cash, cash equivalents, marketable securities and short-term deposits
$
120,460 $
158,915 $
136,557 $
113,808 $
106,344
Working capital
Total assets
Deferred revenues, current and long-term
Total stockholders’ equity
48,978
318,312
101,435
93,532
112,750
284,978
94,216
125,370
109,918
245,638
80,101
114,642
91,734
193,173
59,241
95,955
85,086
165,144
48,771
83,587
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 financial statements
and related notes appearing elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements that reflect our plans, estimates
and beliefs, and involve risks and uncertainties. Our actual results and the timing of certain events could differ materially from those anticipated in these forward-
looking statements as a result of several factors, including those discussed in the section titled “Risk Factors” included under Part 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 a decade
ago, we recognized that enterprise capacity to create and share data far exceeded its capacity to protect it. We believed the vast movement of information from
analog to digital mediums combined with increasing information dependence would change both the global economy and the risk profiles of corporations and
governments. Since then our focus has been on using innovation to address the cyber-implications of this movement, creating software that provides new ways to
track and protect data wherever it is stored.
Our software specializes in data protection, threat detection and response and compliance. Varonis software enables enterprises to protect data stored on premises
and in the cloud: sensitive files and emails; confidential personal data belonging to customers, patients and employees; financial records; strategic and product
plans; and other intellectual property. Recognizing the complexities of securing data, we have built a single integrated platform for security and analytics to
simplify and streamline security and data management.
The Varonis Data Security Platform, built on patented technology, helps enterprises protect data against insider threats and cyberattacks. Our products enable
enterprises to analyze data, account activity and user behavior to detect attacks. Our Data Security Platform prevents or limits unauthorized use of sensitive
information, prevents potential cyberattacks and limits others by locking down sensitive and stale data. Our products efficiently sustain a secure state with
automation and address additional
35
important use cases including data protection, governance, compliance, privacy, classification and threat detection and response. Our Data Security Platform is
driven by a proprietary technology, our Metadata Framework, that extracts critical metadata, or data about data, from an enterprise’s IT infrastructure. Our Data
Security Platform uses this contextual information to map functional relationships among employees, data objects, content and usage.
We started operations in 2005 with a vision to make enterprise data more accessible, manageable, secure and actionable. We began offering our flagship product,
DatAdvantage, which provides centralized visibility for enterprise data, in 2006. Since then we have continued to invest in innovation and have consistently
introduced new products and software features to our customers.
In 2017, we introduced the Automation Engine to allow customers to automatically repair and maintain file systems so that organizations are less vulnerable to
attacks and security breaches, more compliant and consistently meeting a least privilege model. We enhanced DatAlert, which was originally introduced in 2013 to
monitor and alert on sensitive data and file activity, with DatAlert Analytics Rewind to allow customers to analyze past user and data activity to identify security
breaches that may have occurred in the past and pre-emptively tune out false positives. We updated our web UI for DatAlert and added new threat models to detect
suspicious mailbox, Exchange and Exchange Online behaviors, password resets and unusual activity from personal devices. We introduced a new security
dashboard in DatAlert, along with enhanced behavioral analytics, geolocation and more to make it easier than ever to perform security investigations and forensics.
In 2017, we also released GDPR Patterns, part of the Data Classification Engine family, to help enterprises identify data that falls under the GDPR and expanded
our offerings that can help enterprises meet compliance and regulation requirements.
In 2018, we introduced Varonis Edge to extend our proactive security approach, enabling customers to spot signs of attack at the perimeter by analyzing telemetry
from DNS, VPN and Web Proxies. We introduced Data Classification Labels to integrate with Microsoft Information Protection (MIP) and enable customers to
better classify, track and secure files across enterprise data stores. We enhanced DatAnswers, a secure enterprise search solution for enterprise data that delivers
highly relevant and secure search results to enterprise employees and which was originally introduced in 2014, to address additional compliance requirements from
new data privacy laws and standards. We added classification categories to the Data Classification Engine, to better identify and analyze regulated data like GDPR,
PII, PCI and PHI. We updated the DataPrivilege UI for improved usability and added classification categories making it easier to see who can access regulated
data. We updated our web UI and introduced new features to DatAlert, including new threat models to combat cyberattacks, support for more data stores and
optimizations to make DatAlert faster and more intuitive for security investigations.
In 2019, we introduced updates to our existing products to include new dashboards to highlight cloud, Active Directory and GDPR security risks so that customers
can more easily identify critical risk in their hybrid environments, including vulnerable user accounts, at-risk cloud data and potential compliance violations. We
extended our cloud support to include Box, added threat intelligence to our security insights, built incident response playbooks directly into the UI, and made
usability and performance improvements. We also added classification functionality to help enterprises automatically discover and classify data that falls under the
CCPA and renamed GDPR Patterns to Policy Pack to reflect this addition of CCPA functionality.
In the first quarter of 2019, we made the strategic shift to a subscription-based business model, which should allow customers to better unleash the power of our
platform of products. We currently have six product families, and, as of December 31, 2019 and 2018, approximately 76% and 73% of our customers, respectively,
had purchased products in two or more families, one of which was DatAdvantage for all of these customers. As of December 31, 2019 and 2018, approximately
45% and 40% of our customers, respectively, had purchased products in three or more families. We believe our existing customer base serves as a strong source of
incremental revenues given our broad platform of products, their growing volumes and complexity of enterprise data and associated security concerns. Our
perpetual license maintenance renewal rate for each of the years ended December 31, 2019, 2018 and 2017 was over 90%. Our key strategies to ensure a high
subscription license renewal rate and maintain our maintenance renewal rate include focusing on the quality and reliability of our customer service and support to
ensure our customers receive value from our products and providing software upgrades and enhancements when and if they are available.
We sell substantially all of our products and services to channel partners, including distributors and resellers, which sell to end-user customers, which we 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 and professional sales
force, has and will continue to play a major role in our ability to grow and to successfully deliver our unique value proposition for enterprise 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 on targeting organizations with
1,000 users or more who can make larger initial purchases with us and, over time, have a greater potential lifetime value. As of December 31, 2019, we had
approximately 7,100 customers, spanning leading firms in the financial services, public, healthcare, industrial, insurance, energy and utilities, consumer and retail,
technology, media and
36
entertainment and education sectors. We believe our existing customers represent significant future revenue opportunities for us. We will continue our focus on
targeting organizations with 1,000 users or more who can make larger purchases with us initially and over time.
We believe there is a significant long-term growth opportunity in both domestic and foreign markets, which could include any organization that uses file shares,
intranets and email for collaboration, regardless of region. For the year ended December 31, 2019, approximately 69% of our revenues were derived from North
America, while EMEA accounted for approximately 28% of our revenues and Rest of World (“ROW”) accounted for approximately 3% of our revenues.
Additionally, even with our subscription mix increasing from 6% for the year ended December 31, 2018 to 65% for the year ended December 31, 2019, we
continued to grow in North America. Growth in North America was 4% for the year ended December 31, 2019 as compared to the comparable period in the prior
year and, with the move to a subscription-based business, now includes revenues that are more predictable and recurring in nature. We expect sales growth in
North America and international expansion to be key components of our growth strategy.
We plan to continue to expand our international operations as part of our growth strategy. The expansion of our international operations depends in particular on
our ability to hire, integrate and retain local sales personnel in these international markets, acquire new channel partners and implement an effective marketing
strategy. Given the nominal amount of our ROW revenues, our ROW revenue growth rates have fluctuated in the past and may fluctuate in the future based on the
timing of deal closures. In addition, the further expansion of our international operations will increase our sales and marketing and general and administrative
expenses and will subject us to a variety of risks and challenges, including those related to economic and political conditions in each region, compliance with
foreign laws and regulations, and compliance with domestic laws and regulations applicable to our international operations.
We derive revenues from subscription sales and perpetual license sales of our products, services, including initial maintenance contracts associated with perpetual
licenses and professional services, and renewals. Subscription revenues are comprised of time-based licenses whereby new and existing customers use our software
with related maintenance for a specified period. Perpetual license revenues consist of the revenues recognized from sales of perpetual licenses to new and existing
customers. While prior to 2019 fees from subscription licenses comprised an insignificant amount of our revenues, as we have transitioned to a subscription-based
business throughout 2019, subscription licenses have become a larger portion of our total revenues. We continue to expect revenues from subscription licenses to
become an even more significant portion of our total revenues in the future, resulting in revenues that are more recurring and predictable.
Substantially all of our license sales are derived from a platform of products, consisting of DatAdvantage, DatAlert, Data Classification Engine, DataPrivilege and
Data Transport Engine. As of December 31, 2019, 2018 and 2017, 100.0%, 100.0% and 99.6% of our customers, respectively, had purchased DatAdvantage;
54.5%, 50.4% and 47.3% of our customers, respectively, had purchased DatAlert; 53.8%, 49.3% and 43.8% of our customers, respectively, had purchased Data
Classification Engine; 15.6%, 15.4% and 16.0% of our customers, respectively, had purchased DataPrivilege; 8.9%, 7.7% and 6.7% of our customers, respectively,
had purchased Data Transport Engine; and 2.5%, 1.8% and 1.5% of our customers, respectively, had purchased DatAnswers. As of December 31, 2019, 2018 and
2017, 24.1%, 27.0% and 30.2% of our customers, respectively, made standalone purchases of DatAdvantage. No other product families outside of DatAdvantage
can be sold on a standalone basis. Subscription licenses accounted for 43.5% and 30.2% of our total revenues for the three and twelve months ended December 31,
2019 compared to 4.4% and 3.2% of our total revenues for the three and twelve months ended December 31, 2018. Perpetual license sales accounted for 9.4% and
16.6% of our total revenues for the three and twelve months ended December 31, 2019 compared to 56.9% and 51.7% of our total revenues for the three and
twelve months ended December 31, 2018. Subscription licenses accounted for 82.3% and 64.6% of our license revenues for the three and twelve months ended
December 31, 2019 compared to 7.2% and 5.9% of our license revenues for the three and twelve months ended December 31, 2018. We expect that revenues from
subscription licenses will continue to become an even more significant portion of our total revenues as we complete our transition to a subscription-based business
model.
We have achieved significant growth and scale since inception under a perpetual business model. As we have transitioned to a subscription-based business model,
growth has slowed, but we do expect to continue to grow at higher rates once we complete the transition. For the years ended December 31, 2019, 2018 and 2017,
subscription revenues were $76.7 million, $8.8 million, and $2.6 million, respectively, representing year-over-year growth of 777% and 233%. For the years ended
December 31, 2019, 2018 and 2017, our total revenues were $254.2 million, $270.3 million and $215.4 million, respectively. For the years ended December 31,
2019, 2018 and 2017, we had operating losses of $76.0 million, $29.1 million and $13.4 million and net losses of $78.8 million, $28.6 million and $13.8 million,
respectively.
Key Performance Indicators and Recent Business Highlights
37
Transition to Subscription-Based Business Model
In the first quarter of 2019, we announced our transition to a subscription-based business model which, due to shifts in the mix of perpetual and subscription
licenses, has and may continue to produce significant variation in the reported revenues for a given period compared to the same period in the previous year.
Annual Recurring Revenues
Annual recurring revenues (“ARR”) is a key performance indicator defined as the annualized value of active term-based subscription license contracts and
maintenance contracts related to perpetual licenses in effect at the end of that period. Subscription license contracts and maintenance for perpetual license contracts
are annualized by dividing the total contract value by the number of days in the term and multiplying the result by 365. As of December 31, 2019, 2018 and 2017,
ARR was $210.5 million, $130.3 million and $97.9 million, respectively, an increase of 62% and 33% period over period. The annualized value of contracts is a
legal and contractual determination made by assessing the contractual terms with our customers. The annualized value of maintenance contracts is not determined
by reference to historical revenues, deferred revenues or any other GAAP financial measure over any period. ARR is not a forecast of future revenues, which can
be impacted by contract start and end dates and renewal rates. We expect ARR to continue to increase in absolute dollars as we complete our transition to a
subscription-based business model, but we could encounter significant variations in ARR in a given period due to the shifts in the mix of perpetual and subscription
licenses.
Components of Operating Results
Revenues
Our revenues consist of licenses and maintenance and services revenues.
Subscription Revenues. Subscription revenues are comprised of time-based licenses whereby customers use our software with related maintenance for a
specified period. Subscription licenses are sold on premises with the same functionality as the perpetual licenses and are recognized from sales of subscription
licenses (including the associated maintenance) to new and existing customers. Similar to perpetual license revenues, subscription license revenues are recognized
at the point of time when the software license has been delivered and the benefit of the asset has transferred. Maintenance associated with subscription licenses is
recognized ratably over the term of the agreement and is included as part of the subscription revenues line item. We expect revenues from subscription licenses to
become a larger percentage of our total license revenues. Due to the shifts in the mix of perpetual and subscription licenses, the timing of the renewals and the
subscription renewal rates, we could produce significant variation in the revenues we recognize in a given period. We are focused on acquiring new subscription
customers and increasing subscription revenues from our existing customers.
Perpetual License Revenues. Perpetual license revenues reflect the revenues recognized from sales of perpetual licenses to new customers and sales of
additional perpetual licenses to existing customers who purchase additional users for existing licenses or purchase new licenses. Our license revenues consist of
revenues from perpetual licenses, under which we generally recognize the license fee portion of the arrangement upon delivery as the benefit of the asset has
transferred.
38
Maintenance and Services Revenues. Maintenance and services revenues consist of revenues from maintenance agreements of perpetual license sales 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 a percentage of the license fee. Customers may renew, and generally have renewed, their maintenance agreements for a fee that is based upon a percentage
of the initial license fee paid. Customers with maintenance agreements are entitled to receive support and unspecified upgrades and enhancements when and if they
become available during the maintenance period. We have historically experienced growth in maintenance revenues primarily due to increased perpetual license
sales to new and existing customers and high annual retention of existing customers. However, due to our transition to a subscription-based model, we have seen
and expect to continue to see less perpetual license revenues in the future and, therefore, less associated maintenance revenues. We recognize the revenues
associated with maintenance ratably, on a straight-line basis, over the associated maintenance period. We measure the perpetual license maintenance renewal rate
for our customers over a 12-month period, based on a dollar maintenance renewal rate for contracts expiring during that time period. Our perpetual license
maintenance renewal rate for each of the years ended December 31, 2019, 2018 and 2017 has been over 90%. We also offer professional services focused on
training our customers in the use of our products, providing advice on deployment planning, network design, remediation, product configuration and
implementation, automating and customizing reports and tuning policies and configuration. We recognize the revenues associated with these professional services,
which are generally provided on a time and materials basis, as we deliver the services, provide the training or when the service term has expired. Although
professional services have always been a small percentage of our total revenues, we have recently seen, and expect to continue to see, that percentage decline as
many of our newer licenses can provide remediation in a more automated way. As a result of both the transition to a subscription-based model and the increased
automated remediation capabilities of our newer products, we do not expect maintenance and services revenues to show the same growth levels we have
historically experienced, if at all.
The following table sets forth the percentage of our revenues that have been derived from licenses and maintenance and services revenues for the periods
presented.
Revenues:
Subscriptions
Perpetual licenses
Maintenance and services
Total revenues
Year Ended December 31,
2019
2018
2017
(as a percentage of total revenues)
30.1%
16.6%
53.3%
100.0%
3.2%
51.7%
45.1%
100.0%
1.2%
55.1%
43.7%
100.0%
Year Ended December 31,
2019
2018
(as a percentage of total perpetual licenses and subscriptions
revenues)
2017
Subscriptions and Perpetual Licenses Revenues:
Subscriptions
Perpetual licenses
Total subscriptions and perpetual licenses revenues
64.6%
35.4%
100.0%
5.9%
94.1%
100.0%
2.2%
97.8%
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, 2019,
we had approximately 7,100 customers across a broad array of company sizes and industries located in over 80 countries.
Cost of Revenues, Gross Profit and Gross Margin
39
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-based compensation for
our maintenance and services employees; travel expenses; and allocated overhead costs for facilities, IT and depreciation. We recognize expenses related to
maintenance and services as they are incurred. We expect that our cost of maintenance and services revenues will increase in absolute dollars as we increase our
professional services and customer success teams that support our transition to a subscription-based business model.
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 will
fluctuate from period to period as a result of changes in the mix of perpetual and subscription licenses. Due to the seasonality of our business, the first quarter
typically results in the lowest gross margin as our first quarter revenues have historically been the lowest for the year and the majority of our expenses are
relatively fixed quarter over quarter. Conversely, the fourth quarter typically results in the highest gross margin as our 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 costs for facilities, IT
and depreciation. Allocated costs for facilities primarily consist of rent and office maintenance. Operating costs and expenses are generally recognized as incurred.
We expect personnel costs to continue to increase in absolute dollars as we hire new employees to continue to grow our business.
Research and Development. Research and development expenses primarily consist of personnel costs attributable to our research and development
personnel, as well as allocated overhead costs. We expense research and development costs as incurred. We expect that our research and development expenses
will continue to increase in absolute dollars as we increase our research and development headcount to further strengthen our technology platform and 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 personnel costs,
as well as marketing and business development costs, travel expenses, training and education and allocated overhead costs. We expect that sales and marketing
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 corporate expenses and
allocated overhead. We expect that general and administrative expenses 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 interest income. Foreign exchange gains or losses relate to our
business activities in foreign countries with different operational reporting currencies. As a result of our business activities in foreign countries, we expect that
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 as other member
countries' public discussions about the possibility of withdrawing from the EU, could also contribute to instability and volatility in the global financial and foreign
exchange markets, including volatility in the value of Pounds Sterling, Euros and other currencies. Interest income represents interest received on our cash, cash
equivalents, marketable securities and short-term deposits.
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.
40
To date, on a consolidated basis, we have incurred accumulated net losses and have not recorded any U.S. federal tax provisions.
Because of our history of U.S. net operating losses, we have established a full valuation allowance against potential future benefits for deferred tax assets,
including loss carryforwards, in that jurisdiction; however, we have recorded a net deferred tax asset of $0.2 million as of December 31, 2019 for foreign
jurisdictions. Our income tax provision could be significantly impacted by estimates surrounding our uncertain tax positions and changes to our valuation
allowance in future periods. We reevaluate the judgments surrounding our estimates and make adjustments as appropriate each reporting period.
Our Israeli subsidiary currently qualifies as a “Beneficiary Enterprise” which, upon fulfillment of certain conditions, allows it to qualify for a reduced tax
rate based on the beneficiary program guidelines.
In addition, we are subject to the regular examinations of our income tax returns by different tax authorities. For example, we are currently subject to a
withholding tax audit in Israel and a tax examination in France. We regularly assess the likelihood of adverse outcomes resulting from these examinations to
determine the adequacy of our provision for income taxes.
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.
Statement of Operations Data:
Revenues:
Subscriptions
Perpetual licenses
Maintenance and services
Total revenues
Cost of revenues
Gross profit
Operating costs and expenses:
Research and development
Sales and marketing
General and administrative
Total operating expenses
Operating loss
Financial income (expenses), net
Loss before income taxes
Income taxes
Net loss
Year Ended December 31,
2019
2018
(in thousands)
2017
$
76,730 $
8,750 $
42,093
135,367
254,190
35,144
219,046
80,764
169,898
44,371
295,033
(75,987)
(389)
(76,376)
(2,388)
139,578
121,960
270,288
27,683
242,605
69,971
168,309
33,460
271,740
(29,135)
970
(28,165)
(413)
$
(78,764) $
(28,578) $
41
2,627
118,689
94,074
215,390
20,714
194,676
47,369
133,925
26,801
208,095
(13,419)
2,362
(11,057)
(2,787)
(13,844)
Statement of Operations Data:
Revenues:
Subscriptions
Perpetual licenses
Maintenance and services
Total revenues
Cost of revenues
Gross profit
Operating costs and expenses:
Research and development
Sales and marketing
General and administrative
Total operating expenses
Operating loss
Financial income (expenses), net
Loss before income taxes
Income taxes
Net loss
Comparison of Years Ended December 31, 2019 and 2018
Revenues
Revenues:
Subscriptions
Perpetual licenses
Maintenance and services
Total revenues
Revenues:
Subscriptions
Perpetual licenses
Maintenance and services
Total revenues
Year Ended December 31,
2019
2018
2017
(as a percentage of total revenues)
30.1 %
3.2 %
1.2 %
16.6
53.3
100.0
13.8
86.2
31.8
66.8
17.5
116.1
(29.9)
(0.1)
(30.0)
(1.0)
51.7
45.1
100.0
10.2
89.8
25.9
62.3
12.4
100.6
(10.8)
0.4
(10.4)
(0.2)
55.1
43.7
100.0
9.6
90.4
22.0
62.2
12.4
96.6
(6.2)
1.1
(5.1)
(1.3)
(31.0)%
(10.6)%
(6.4)%
Year Ended
December 31,
2019
2018
% Change
(in thousands)
76,730 $
42,093
135,367
254,190 $
8,750
139,578
121,960
270,288
$
$
Year Ended December 31,
2019
2018
(as a percentage of total revenues)
30.1%
16.6%
53.3%
100.0%
776.9 %
(69.8)%
11.0 %
(6.0)%
3.2%
51.7%
45.1%
100.0%
42
Subscriptions and Perpetual Licenses Revenues:
Subscriptions
Perpetual licenses
Total subscriptions and perpetual licenses revenues
Year Ended December 31,
2019
2018
(as a percentage of total perpetual licenses
and subscriptions revenues)
64.6%
35.4%
100.0%
5.9%
94.1%
100.0%
Our transition to a subscription-based model has resulted in a decline in perpetual license revenues and total revenues for the year ended December 31, 2019;
however, our subscription revenues increased significantly from $8.8 million for the year ended December 31, 2018 to $76.7 million for the year
ended December 31, 2019. The increase in subscription revenues was a consequence of our transition to a subscription-based model which also resulted in our
customers’ demand for a higher number of subscription licenses than we historically sold with perpetual license sales. For the years ended December 31,
2019 and 2018, we added 672 and 873 new customers, respectively. ARR was $210.5 million and $130.3 million as of December 31, 2019 and 2018, respectively,
representing an increase of 62%. As of December 31, 2019 and 2018, we had approximately 7,100 and approximately 6,600 customers, respectively. The increase
in maintenance and services revenues was primarily due to an increase in the sale of maintenance agreements resulting from the growth of our installed customer
base but could show slower or no growth in the future due to our transition to a subscription business. In each of 2019 and 2018, our perpetual license maintenance
renewal rate was over 90%. Of the license and first year maintenance and services revenues recognized in the year ended December 31, 2019, 53% was attributable
to revenues from existing customers, and 47% was attributable to revenues from new customers. Of the license and first year maintenance and services revenues
recognized in the year ended December 31, 2018, 50% was attributable to revenues from existing customers, and 50% was attributable to revenues from new
customers. As of December 31, 2019 and 2018, 76% and 73% of our customers, respectively, had purchased two or more product families. As of December 31,
2019 and 2018, 45% and 40% of our customers, respectively, had purchased three or more product families.
Cost of Revenues and Gross Margin
Cost of revenues
$
35,144 $
27,683
27.0%
Year Ended
December 31,
2019
2018
% Change
(in thousands)
Total gross margin
Year Ended December 31,
2019
2018
(as a percentage of total revenues)
86.2%
89.8%
The increase in cost of revenues was primarily related to an increase of $5.7 million in salaries and benefits and stock based compensation expense due to
increased headcount for customer success personnel related to the transition to a subscription-based business and support personnel to support our revenues and
high renewal rate and a $1.3 million increase in facilities and allocated overhead costs.
Operating Costs and Expenses
43
Operating costs and expenses:
Research and development
Sales and marketing
General and administrative
Total operating expenses
Operating costs and expenses:
Research and development
Sales and marketing
General and administrative
Total operating expenses
Year Ended
December 31,
2019
2018
% Change
(in thousands)
80,764 $
169,898
44,371
295,033 $
69,971
168,309
33,460
271,740
$
$
Year Ended December 31,
2019
2018
(as a percentage of total revenues)
31.8%
66.8%
17.5%
116.1%
15.4%
0.9%
32.6%
8.6%
25.9%
62.3%
12.4%
100.6%
The increase in research and development expenses was primarily related to an increase of $8.2 million in salaries and benefits and stock based
compensation expense resulting from increased headcount as part of our focus on enhancing and developing our existing and new products. The remainder of the
increase was attributable to a $2.7 million increase in facilities and allocated overhead costs.
The increase in sales and marketing expenses was primarily related to a $2.8 million increase related to facilities and allocated overhead costs and $1.6
million increase related to marketing related expenses. This was partially offset by a $3.0 million decrease related to lower costs of salaries and benefits and stock
based compensation expense from the slower pace of hiring in the sales force due to the focus on transitioning to a subscription-based model.
The increase in general and administrative expenses was primarily related to an increase of $8.5 million in salaries and benefits and stock based
compensation expense that was impacted by certain changes that we made to the structure of the Chief Executive Officer's equity compensation in June 2019 and
other costs due to increased headcount to support our business. The remainder of the increase was attributable to a $2.3 million increase in other expenses
predominately relating to IT and general business expenses.
Financial Income (Expenses), Net
Financial income (expenses), net
Year Ended
December 31,
2019
2018
% Change
$
(in thousands)
(389) $
970
(140.1)%
Financial expenses, net for the year ended December 31, 2019 was primarily comprised of foreign currency losses compared to financial income, net for the
year ended December 31, 2018 that was primarily comprised of interest income partially offset by foreign currency losses.
Income Taxes
44
Income taxes
Year Ended
December 31,
2019
2018
% Change
$
(in thousands)
(2,388) $
(413)
(478.2)%
Income taxes for the years ended December 31, 2019 and 2018 were comprised primarily of foreign income taxes and state taxes.
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
were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to
do so could harm our business, financial condition and results of operations.
Comparison of Years Ended December 31, 2018 and 2017
For a comparison of our results of operations for the years ended December 31, 2018 and 2017, see “Part II, Item 7. Management’s Discussion and
Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year ended December 31, 2018, filed with the SEC on
February 12, 2019, which comparative information is herein incorporated by reference.
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, 2019. The
data presented below has been prepared on the same basis as the audited consolidated financial statements included elsewhere in this Annual Report and, in the
opinion of management, reflects all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of this data. 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.
45
Revenues:
Subscriptions
Perpetual licenses
Maintenance and services
Total revenues
Cost of revenues (1)
Gross profit
Operating costs and expenses:
Research and development (1)
Sales and marketing (1)
General and administrative (1)
Total operating expenses
Operating income (loss)
Dec. 31,
2019
Sept. 30,
2019
June 30,
2019
March 31,
2019
Dec. 31,
2018
Sept. 30,
2018
June 30,
2018
March 31,
2018
Three Months Ended
(in thousands)
$
31,561 $
23,327 $
14,837 $
7,005 $
3,849 $
2,539 $
1,291 $
1,071
6,789
8,269
34,210
34,053
11,514
33,270
15,521
33,834
49,790
33,879
33,432
31,081
32,270
28,629
72,560
65,649
59,621
56,360
87,518
67,052
62,190
9,652
8,768
8,398
8,326
7,749
7,052
6,440
24,086
28,371
53,528
6,442
62,908
56,881
51,223
48,034
79,769
60,000
55,750
47,086
21,874
44,129
10,910
20,400
42,117
10,339
19,722
41,656
13,851
18,768
41,996
9,271
19,445
46,196
9,628
17,267
40,792
8,774
17,717
41,349
7,989
76,913
72,856
75,229
70,035
75,269
66,833
67,055
15,542
39,972
7,069
62,583
(14,005)
(15,975)
(24,006)
(22,001)
4,500
(6,833)
(11,305)
(15,497)
Financial income (expenses), net
156
(482)
65
(128)
Income (loss) before income taxes
(13,849)
(16,457)
(23,941)
(22,129)
Benefit (provision) for income taxes
(801)
(530)
(547)
(510)
704
5,204
1,264
99
(811)
978
(6,734)
(12,116)
(14,519)
(583)
(567)
(527)
Net income (loss)
$
(14,650) $ (16,987) $ (24,488) $ (22,639) $
6,468 $
(7,317) $ (12,683) $ (15,046)
Revenues:
Subscriptions
Perpetual licenses
Maintenance and services
Total revenues
Cost of revenues
Gross profit
Operating costs and expenses:
Research and development
Sales and marketing
General and administrative
Total operating expenses
Operating income (loss)
Financial income (expenses), net
Income (loss) before income taxes
Benefit (provision) for income taxes
Dec. 31,
2019
Sept. 30,
2019
June 30,
2019
March 31,
2019
Dec. 31,
2018
Sept. 30,
2018
June 30,
2018
March 31,
2018
(as a percentage of total revenues)
Three Months Ended
43.5 %
35.5 %
24.9 %
12.5 %
4.4%
3.8 %
2.1 %
2.0 %
9.4
47.1
100.0
13.3
86.7
30.1
60.8
15.1
106.0
(19.3)
0.2
(19.1)
(1.1)
12.6
51.9
100.0
13.4
86.6
31.1
64.1
15.7
110.9
(24.3)
(0.8)
(25.1)
(0.8)
19.3
55.8
100.0
14.1
85.9
33.1
69.9
23.2
126.2
(40.3)
0.1
(40.2)
(0.9)
27.5
60.0
100.0
14.8
85.2
33.3
74.5
16.4
124.2
(39.0)
(0.3)
(39.3)
(0.9)
56.9
38.7
100.0
8.9
91.1
22.2
52.8
11.0
86.0
5.1
0.8
5.9
1.5
49.9
46.3
100.0
10.5
89.5
25.8
60.8
13.1
99.7
(10.2)
0.2
(10.0)
(0.9)
51.9
46.0
100.0
10.4
89.6
28.5
66.5
12.8
107.8
(18.2)
(1.3)
(19.5)
(0.9)
45.0
53.0
100.0
12.0
88.0
29.1
74.7
13.2
117.0
(29.0)
1.9
(27.1)
(1.0)
Net income (loss)
(20.2)%
(25.9)%
(41.1)%
(40.2)%
7.4%
(10.9)%
(20.4)%
(28.1)%
46
(1)Includes non-cash stock-based compensation expense and payroll tax expense related to stock-based compensation as follows:
Three Months Ended
Dec. 31,
2019
Sept. 30,
2019
June 30,
2019
March 31,
2019
Dec. 31,
2018
Sept. 30,
2018
June 30,
2018
March 31,
2018
$
594 $
637 $
772 $
(in thousands)
558 $
457 $
470 $
468 $
3,514
3,767
3,485
3,476
3,932
2,977
3,520
3,640
6,864
2,678
3,443
2,282
2,465
5,732
2,133
2,097
3,600
2,232
2,978
3,648
1,754
362
2,105
3,101
1,359
$
11,360 $
11,022 $
14,796 $
8,961 $
10,787 $
8,399 $
8,848 $
6,927
Three Months Ended
Dec. 31,
2019
Sept. 30,
2019
June 30,
2019
March 31,
2019
Dec. 31,
2018
Sept. 30,
2018
June 30,
2018
March 31,
2018
$
16 $
10 $
26 $
(in thousands)
183 $
7 $
11 $
78 $
51
179
24
35
161
16
20
195
20
56
1,373
283
17
214
6
16
394
9
111
1,057
187
267
36
1,470
95
Cost of revenues
Research and development
Sales and marketing
General and administrative
Total non-cash stock-based compensation
expense related to employees and
consultants
Cost of revenues
Research and development
Sales and marketing
General and administrative
Total payroll tax expense related to
stock-based compensation
$
270 $
222 $
261 $
1,895 $
244 $
430 $
1,433 $
1,868
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 sales in the fourth
quarter. This trend makes it difficult to achieve sequential revenue growth in the first quarter of the following year. Because of purchasing trends, demand for our
products and services is typically slowest in the first quarter resulting in a decrease in quarterly revenues from the fourth quarter to the first quarter of the
subsequent fiscal year. We expect these seasonal patterns to continue in the future. Our gross margins and operating loss have been affected by these historical
trends because the majority of our expenses are relatively fixed quarter over quarter. Our expenses, which do not vary directly with revenues, and the seasonal
pattern described above have 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 of our 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 of expenses from period to period. Although these seasonal factors are common in
the technology industry, historical patterns should not be considered a reliable indicator of our future sales activity or performance.
In 2019, we announced our transition to a subscription-based business which, due to the shift in the mix of perpetual and subscription licenses, resulted in a
deviation from our historical pattern of having revenues increase each quarter as compared with the same quarter in the prior year but now includes revenues that
are more predictable and recurring in nature. We expect revenues from subscription licenses to become a larger percentage of our total license revenues moving
forward and for our revenues to once again increase compared with the same quarter in the prior year.
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 providing
maintenance and services to our expanding customer base and building our customer success team to support our transition to a subscription-based business.
Total operating costs and expenses increased in each quarter as compared with the same quarter in the prior year, primarily due to the addition of personnel
in connection with the expansion of our business.
47
Liquidity and Capital Resources
The following table shows our liquidity and capital resources as of and our cash flows from operating activities, investing activities and financing activities
for the years ended December 31, 2019 and 2018. For a discussion of our liquidity and capital resources as of and our cash flow activities for the fiscal year ended
December 31, 2017, see “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form
10-K for the year ended December 31, 2018, filed with the SEC on February 12, 2019, which discussion is herein incorporated by reference.
Net cash provided by (used in) operating activities
Net cash provided by (used in) investing activities
Net cash provided by (used in) financing activities
Increase (decrease) in cash, cash equivalents and restricted cash
Year Ended December 31,
2019
2018
(in thousands)
$
$
(10,683) $
33,303
(2,398)
20,222 $
23,545
(40,188)
8,114
(8,529)
On December 31, 2019, our cash and cash equivalents, marketable securities and short-term deposits of $120.5 million were held for working capital
purposes and were invested primarily in short-term deposits. Following investments we made in two leasehold improvement projects in 2019, we expect our
investments in capital expenditures in 2020 to decrease although we will still invest to support the growth in our business and operations as needed. We believe
that our existing cash and cash equivalents, marketable securities, short-term deposits and cash flow from operations will be sufficient to fund our operations and
capital expenditures for at least the next 12 months. Our future capital requirements will depend on many factors, including our rate of revenue growth, timing of
renewals and subscription renewal rates, the expansion of our sales and marketing activities, the timing and extent of spending to support product development
efforts and expansion into new geographic locations, the timing of introductions of new software products and enhancements to existing software products, the
continuing market acceptance of our software offerings and our use of cash to pay for acquisitions, if any.
Operating Activities
Net cash provided by (used in) operating activities is driven by sales of our products less costs and expenses, primarily payroll and related expenses, and
adjusted for certain non-cash items, mainly depreciation, stock-based compensation, amortization of deferred commissions and amortization of operating lease
right-of-use asset, and changes in operating assets and liabilities. Changes in operating assets and liabilities are driven mainly by collection of accounts receivable
from the sales of our software products and deferred revenues which represents unearned amounts billed to our channel partners, related to these sales.
For 2019, cash outflows from our operating activities were $10.7 million. We have observed two seasonal patterns that impact our net cash provided by
operating activities. First, a majority of our sales are made during the last three weeks of the quarter. Second, the highest dollar amount of sales of our products and
services occurs in the fourth quarter. Consequently, we end the fourth quarter with our highest accounts receivable balance of any quarter which in turn generates
the greatest amount of collections in the following quarter. In addition, there is a negative sequential revenue growth in the first quarter which results in a relatively
lower amount collected during the second quarter. These seasonal trends also impact our operating loss because the majority of our expenses are relatively fixed in
the short term. For 2019, net cash outflows from our operating activities reflect our net loss excluding non-cash charges of $3.6 million driven primarily by
increased headcount for customer success personnel related to the transition to a subscription-based business and research and development personnel. Additional
sources of cash outflows were from changes in our working capital, including a $20.4 million increase in prepaid expenses and other current assets (including
deferred commissions), a $1.6 million decrease in accounts payable due to timing of payments and a $0.9 million decrease in accrued expenses and other short
term liabilities. This was partially offset by a decrease of $8.2 million in accounts receivable, a $7.2 million increase in deferred revenues and an increase of $0.3
million in other long term liabilities. Our days’ sales outstanding (“DSO”) for both the three months and year ended December 31, 2019 was 75 days.
For 2018, cash inflows from our operating activities were $23.5 million, compared to cash inflows of $16.4 million for the prior year. Our $28.6 million net
loss, including non-cash charges of $52.3 million, was driven primarily by increased headcount of our sales force and research and development personnel. Net
loss was further offset by changes in our working capital, including a $14.1 million increase in deferred revenues, a $9.9 million increase in accrued expenses and
other short term liabilities and a $2.0 million increase in accounts payable due to timing of payments. This was partially offset by a $17.2 million increase in
prepaid expenses and other current assets (including deferred commissions), an increase of $7.6 million in
48
accounts receivable and a decrease of $1.0 million in other long term liabilities. This increase in working capital was impacted by the increased sales for the year
ended December 31, 2018 and consistent with the seasonal pattern discussed above. Our DSO for the three months and year ended December 31, 2018 was 74 and
66 days, respectively.
Investing Activities
Our investing activities consist primarily of capital expenditures to purchase property and equipment, leasehold improvements, sales and purchases of short-
term deposits and changes in our restricted cash. In the future, we expect to continue to incur capital expenditures to support our expanding operations.
During 2019, net cash provided by investing activities of $33.3 million was attributable to a $60.5 million decrease in deposits partially offset by a $1.8
million increase in marketable securities and $25.4 million in capital expenditures to support our growth including hardware, software, office equipment and
leasehold improvements mainly in connection with new office space.
During 2018, net cash used in investing activities of $40.2 million was attributable to an increase of $30.3 million in short-term deposits and capital
expenditures of $9.6 million to support our growth including hardware, software, office equipment and leasehold improvements.
Financing Activities
In 2019, net cash used in financing activities of $2.4 million was attributable to net withholdings from employee stock plans. In 2018, net cash provided by
financing activities of $8.1 million was attributable to net proceeds from employee stock plans.
Promissory Note
On March 31, 2014, we entered into a promissory note and related security documents with Bank Leumi USA, which we have extended a number of times.
We may borrow up to $7.0 million against certain of our accounts receivable outstanding amount, based on several conditions, at an annual interest rate of the Wall
Street Journal Prime Rate plus 0.05%, provided that the annual interest rate applicable to advances will not be lower than 4.10%. As of December 31, 2019, that
rate amounted to 4.80%. This promissory note enables us, among other things, to engage in foreign currency hedging transactions with Bank Leumi USA to
manage our exposure to foreign currency risk without restricted cash requirements. We may borrow under the promissory note until November 15, 2020 at which
time the principal sum of each such loan, together with accrued and unpaid interest payable, will become due and payable. As of December 31, 2019, we had no
balance outstanding under the promissory note. As part of the transaction, we granted the lender a security interest in our personal property, excluding intellectual
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 under non-
cancelable leases as of December 31, 2019 for the upcoming years were as follows:
Operating lease obligations
$
10,821 $
9,767 $
9,161 $
8,971 $
8,580 $
30,394 $
77,694
2020
2021
2022
2023
2024
Thereafter
Total
(in thousands)
Payments Due by Period
We have obligations related to unrecognized tax benefit liabilities totaling $2.7 million and others related to severance pay, which have been excluded from the
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, 2019, we did not have any off-balance sheet arrangements.
Critical Accounting Policies and Estimates
49
We prepare our consolidated financial statements in accordance with generally accepted accounting principles in the United States. The preparation of consolidated
financial statements also requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses and
related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances.
Actual results could differ significantly from the estimates made by our management. To the extent that there are differences between our estimates and actual
results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected. We believe that the accounting
policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving
management’s judgments and estimates. Critical accounting policies and estimates are those that we consider the most important to the portrayal of our financial
condition and results of operations because they require our most difficult, subjective or complex judgments, often as a result of 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. Subscription revenues are comprised of time-based licenses
whereby customers use our software with related maintenance (including support and unspecified upgrades and enhancements when and if they are available) for a
specified period. Subscription licenses are sold with the same functionality as the perpetual license and are recognized from sales of subscription licenses
(including the associated maintenance) to new and existing customers. When products are purchased as a subscription, the associated maintenance is included as
part of the subscription revenues. Perpetual license revenues consist of the revenues recognized from sales of perpetual licenses to new and existing customers.
Maintenance and services primarily consist of fees for maintenance services of perpetual license sales (including support and unspecified upgrades and
enhancements when and if they are available) and to a lesser extent professional services which focus on both operationalizing the software and training our
customers to fully leverage the use of our products although the user can benefit from the software without our assistance. We sell our products worldwide directly
to a network of distributors and VARs, and payment is typically due within 30 to 60 calendar days of the invoice date.
We recognize revenues in accordance with ASC No. 606, “Revenue from Contracts with Customers.” As such, we identify a contract with a customer, identify the
performance obligations in the contract, determine the transaction price, allocate the transaction price to each performance obligation in the contract and recognize
revenues when (or as) we satisfy a performance obligation.
Subscription software and perpetual license revenues are recognized at the point of time when the software license has been delivered and the benefit of the asset
has transferred.
We recognize revenues from maintenance of perpetual license sales ratably over the term of the underlying maintenance contract. The term of the maintenance
contract is usually one year. Renewals of maintenance contracts create new performance obligations that are satisfied over the term with the revenues recognized
ratably over the period.
Revenues from professional services consist mostly of time and material services. The performance obligations are satisfied, and revenues are recognized, when
the services are provided or once the service term has expired.
We enter into contracts that can include combinations of products and services, which are generally capable of being distinct and accounted for as separate
performance obligations. The license is distinct upon delivery as the customer can derive the economic benefit of the software without any professional services,
updates or technical support. We allocate the transaction price to each performance obligation based on our relative standalone selling price out of the total
consideration of the contract. For maintenance, we determine the standalone selling prices based on the price at which we separately sell a renewal contract. For
professional services, we determine the standalone selling prices based on the price at which we separately sell those services. For software licenses, we use the
residual approach to determine the standalone selling prices due to the lack of history of selling software license on a standalone basis and the highly variable sales
price.
Trade and other receivables are primarily comprised of trade receivables that are recorded at the invoice amount, net of an allowance for doubtful accounts.
Deferred revenues represent mostly unrecognized fees billed or collected for maintenance and professional services. Deferred revenues are recognized as (or when)
we perform under the contract. Pursuant to these contracts, customers are not invoiced for subsequent years until the annual renewal occurs. The amount of
revenues recognized in the period that was included in the opening deferred revenues balance was $88.0 million for the year ended December 31, 2019.
50
We do not grant a right of return to our customers, except for one of our resellers. During the years ended December 31, 2019 and 2018, there were no returns from
this reseller.
For information regarding disaggregated revenues, please refer to Note 11 to our consolidated financial statements.
Contract Costs:
We pay sales commissions to sales and marketing and certain management personnel based on their attainment of certain predetermined sales goals. Sales
commissions earned by our employees are considered incremental and recoverable costs of obtaining a contract with a customer. Sales commissions paid for initial
contracts, which are not commensurate with sales commissions paid for renewal contracts, are capitalized and amortized over an expected period of benefit. Based
on our technology, customer contracts and other factors, we have determined the expected period of benefit to be approximately four years. Sales commissions for
renewal contracts are capitalized and then amortized on a straight line basis. Amortization expenses related to these costs are mostly included in sales and
marketing expenses in the accompanying consolidated statements of operations.
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 to estimate
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 award that 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 of the
awards. Effective as of January 1, 2017, we adopted Accounting Standards Update 2016-09, “Compensation-Stock Compensation (Topic 718)” (“ASU 2016-09”)
on a modified, retrospective basis. Upon adoption of ASU 2016-09, we elected to change our accounting policy to account for forfeitures as they occur.
Recently Adopted Accounting Pronouncements
In November 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash”, which
requires companies to include amounts generally described as restricted cash and restricted cash equivalents in cash and cash equivalents when reconciling
beginning-of-period and end-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. We adopted this standard effective December 31, 2017 using the retrospective transition method, as required by the new standard. The
adoption of this standard had 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 that sum
to the total of such amounts in the consolidated statements of cash flows:
Cash and cash equivalents
Long term restricted cash included in other assets
December 31, 2019 December 31, 2018 December 31, 2017
56,689
$
68,929 $
48,707 $
—
—
547
Cash, cash equivalents and long term restricted cash shown in the consolidated statement of cash
flows
$
68,929 $
48,707 $
57,236
51
In February 2016, the FASB issued ASU 2016-02, “Leases” ("ASC 842"), on the recognition, measurement, presentation and disclosure of leases for both parties
to a contract (i.e., lessees and lessors). The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on
the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense 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 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 less will be accounted for in
a manner similar to the accounting under the prior guidance (ASC 840). The new standard requires lessors to account for leases using an approach that is
substantially equivalent to ASC 840 guidance for sales-type leases, direct financing leases and operating leases. The new standard supersedes the previous leases
standard, ASC 840, "Leases".
We adopted the new standard as of January 1, 2019, using the modified retrospective approach. Consequently, prior period balances and disclosures have not been
restated. We have elected to utilize the available package of practical expedients permitted under the transition guidance within the new standard which does not
require it to reassess the prior conclusions about lease identification, lease classification and initial direct costs. The adoption of ASC 842 resulted in the
elimination of deferred rent of $1,313 and $4,236 in current and long-term liabilities in our consolidated balance sheets, respectively. Additionally, we included in
our balance sheet at adoption an operating right-of-use assets, short term operating lease liabilities and long term operating lease liabilities of $53,274, $2,349 and
$55,676, respectively. The standard did not materially impact our net earnings and had no impact on cash flows. For additional information regarding our
accounting for leases, please refer to Note 6 to our consolidated financial statements.
In January 2018, the FASB issued Staff Q&A Topic 740, No. 5, “Accounting for Global Intangible Low Taxed Income.” Pursuant to that guidance, we are
permitted to make an accounting policy election to either treat taxes due on future inclusions in U.S. taxable income related to GILTI as a component of current
income tax expense when incurred or to factor such amounts into our measurement of our deferred tax expense. We have made an accounting policy election to
treat GILTI as a component of current income tax expense.
In June 2018, the FASB issued ASU No. 2018-07, “Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment
Accounting.” These amendments expand the scope of Topic 718, Compensation - Stock Compensation (which currently only includes share-based payments to
employees) to include share-based payments issued to nonemployees for goods or services. Consequently, the accounting for share-based payments to
nonemployees and employees will be substantially aligned. This ASU supersedes Subtopic 505-50, Equity - Equity-Based Payments to Non-Employees. Adoption
of this standard had an immaterial impact on our consolidated financial statements.
Recently Issued Accounting Pronouncements Not Yet Adopted
In August 2018, the FASB issued ASU 2018-15, “Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for
Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract,” which aligns the requirements for capitalizing implementation
costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-
use software. The new standard requires capitalized costs to be amortized on a straight-line basis generally over the term of the arrangement, and the financial
statement presentation for these capitalized costs would be the same as that of the fees related to the hosting arrangements. This new standard is effective for our
interim and annual periods beginning January 1, 2020, and earlier adoption is permitted. This standard could be applied either retrospectively or prospectively to all
implementation costs incurred after the date of adoption. We will adopt this standard on a prospective basis as of January 1, 2020 and do not expect this standard to
have a material effect on our consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses on Financial Instruments”, which requires that expected credit losses relating
to financial assets measured on an amortized cost basis and available for sale debt securities be recorded through an allowance for credit losses. ASU 2016-13
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 and also requires
the reversal of previously recognized credit losses if fair value increases. The new standard will be effective for interim and annual periods beginning after January
1, 2020, and early adoption is permitted. We do not expect this standard to have a material effect on our consolidated financial statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
52
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 risk exposure
is primarily a result of fluctuations in foreign currency exchange rates. We do not hold financial instruments for trading purposes.
Market Risk
We are exposed to certain financial risks, including fluctuations in foreign currency exchange rates and interest rates. We manage our exposure to these market
risks through internally established policies and procedures. Our policies do not allow speculation in derivative instruments for profit or execution of derivative
instrument contracts for which there are no underlying exposures. We do not use financial instruments for trading purposes, and we are not a party to any leveraged
derivatives. We monitor our underlying market risk exposures on an ongoing basis and, where appropriate, may use hedging strategies to mitigate these risks.
Foreign Currency Exchange Risk
Approximately one quarter of our revenues for the year ended December 31, 2019 and approximately 30% of our revenues for the year ended December 31, 2018
were earned in non-U.S. dollar denominated currencies, mainly in the Euro 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, Canadian dollar and Australian dollar. Our NIS-
denominated expenses consist primarily of personnel and overhead costs from our operations in Israel. Our consolidated results of operations and cash flow are,
therefore, subject to fluctuations due to changes in foreign currency exchange rates and may be adversely affected in the future due to changes in foreign exchange
rates. We enter into financial hedging strategies to reduce our exposure to foreign currency rate changes. During 2019, the effect of a hypothetical 10% change in
foreign currency exchange rates applicable to our business, after considering foreign currency hedges, would not have had a material impact on our 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 the balance
sheet date and local currency revenues and expenses are translated at the exchange rate at the date of the transaction or the average exchange rate dollar 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, by hedging a
portion of our forecasted expenses denominated in NIS expected to occur within 12 months. The effect of exchange rate changes on foreign currency forward
contracts is expected to offset the effect of exchange rate changes on the underlying hedged item. We also enter into forward contracts to hedge a portion of our
monetary items in the balance sheet, such as trade receivables and payables, denominated in Pound Sterling and Euro for short term periods to protect the fair value
of the monetary assets and liabilities from foreign exchange rate fluctuations. The effect of exchange rate changes on foreign currency forward contracts is
expected to offset the effect of exchange rate changes which impacts financial income (expenses), net. We do not use derivative financial instruments for
speculative or trading purposes.
Interest Rate Risk
We had cash and cash equivalents, marketable securities and short-term deposits of $120.5 million as of December 31, 2019. We hold our cash and cash
equivalents, marketable securities and short-term deposits for working capital purposes. Our cash and cash equivalents are held in cash deposits and money market
funds. Due to the short-term nature of 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 in interest rates. Declines in interest rates, however, would reduce our future interest income. The effect of a hypothetical 10%
change in interest rates would not have a material impact on our consolidated financial statements.
As of December 31, 2019, we had no outstanding obligations under our promissory note. To the extent we enter into other long-term debt arrangements in the
future, we would be subject to fluctuations in interest rates which could have a material impact on our future financial condition and results of operation.
53
Item 8.
Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Loss
Consolidated Statements of Changes in Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
54
Page
55
59
61
62
63
64
65
Kost Forer Gabbay & Kasierer
144 Menachem Begin Road, Building A
Tel-Aviv 6492102, Israel
Tel: +972-3-6232525
Fax: +972-3-5622555
ey.com
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of
VARONIS SYSTEMS, INC.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Varonis Systems, Inc. and subsidiaries (the "Company") as of December 31, 2019 and
2018 and the related consolidated statements of operations, statements of comprehensive loss, changes in stockholders’ equity and cash flows for each of the three
years in the period ended December 31, 2019 and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the
consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2019 and 2018 and the results of its
operations and its cash flows for each of the three years in the period ended December 31, 2019, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's
internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control-Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 11, 2020 expressed an unqualified opinion 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’s financial
statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to
assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such
procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the
accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe
that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current-period audit of the consolidated financial statements that was
communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements
and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matter does not alter in any way our opinion on
the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinion on the critical
audit matter or on the accounts or disclosures to which it relates.
55
Kost Forer Gabbay & Kasierer
144 Menachem Begin Road, Building A
Tel-Aviv 6492102, Israel
Tel: +972-3-6232525
Fax: +972-3-5622555
ey.com
Description of the
Matter
How We Addressed
the Matter in Our
Audit
Revenue Recognition
As described in Note 2.h to the consolidated financial statements, the Company generates revenues in the form of software license fees
and related maintenance and services fees. Software license revenues are recognized at the point of time when the software license has
been delivered and the benefit of the asset has transferred. The Company recognizes revenues from maintenance ratably over the term of
the underlying maintenance contract term. The term of the maintenance contract is usually one year. Renewals of maintenance contracts
create new performance obligations that are satisfied over the term with the revenues recognized ratably over the period.
Revenues from professional services consist mostly of time and material services. The performance obligations are satisfied, and revenues
are recognized, when the services are provided or once the service term has expired. The Company enters into contracts that can include
combinations of products and services, which are generally capable of being distinct and accounted for as separate performance
obligations.
To account for promised goods and services, the Company allocates the transaction price to the distinct performance obligations on a
relative standalone selling price basis and recognizes revenue when control of the distinct performance obligation is transferred.
Auditing the Company’s recognition of revenue was challenging and complex due to the effort required to evaluate determination of
whether products and services are considered distinct performance obligations that should be accounted for separately versus together,
such as software licenses and related services, the determination of stand-alone selling prices for each distinct performance obligation and
the timing of when revenue is recognized.
Given these factors, the related audit effort in evaluating management’s judgments in determining revenue recognition for these customer
agreements was extensive and required a high degree of auditor judgment.
We obtained an understanding, evaluated design and tested the operating effectiveness of internal controls related to the identification of
distinct performance obligations, the determination of the stand-alone selling prices and of the timing of revenue recognition.
Among the procedures we performed to test the identification and determination of distinct performance obligations, for a sample of
contracts, we read the executed contract to understand and evaluated management’s identification of significant terms for completeness,
including the identification of distinct performance obligations.
To test management’s determination of stand-alone selling price for each performance obligation, we performed procedures to evaluate
the methodology applied, tested the accuracy of the underlying data and calculations and the application of that methodology to the
sample of contracts.
We also tested the mathematical accuracy of management’s calculations of revenue and the associated timing of revenue recognized in
the financial statements. Finally, we assessed the appropriateness of the related disclosures in the consolidated financial statements.
/s/ KOST FORER GABBAY & KASIERER
A Member of Ernst & Young Global
We have served as the Company’s auditor since 2007.
Tel-Aviv, Israel
February 11, 2020
56
Kost Forer Gabbay & Kasierer
144 Menachem Begin Road, Building A
Tel-Aviv 6492102, Israel
Tel: +972-3-6232525
Fax: +972-3-5622555
ey.com
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of
VARONIS SYSTEMS, INC.
Opinion on Internal Control over Financial Reporting
We have audited Varonis Systems, Inc. (the “Company”) internal control over financial reporting as of December 31, 2019, based on criteria established in
Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the "COSO
Criteria"). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on
the COSO Criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated
balance sheets of the Company as of December 31, 2019 and 2018 and the related consolidated statements of operations, statements of comprehensive loss,
changes in stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2019 and the related notes of the Company, and our
report dated February 11, 2020 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 the effectiveness of
internal control over financial reporting included in the accompanying Management's Annual Report on Internal Control over Financial Reporting. Our
responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered
with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws 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 obtain reasonable
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, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary
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 financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal 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 as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
57
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with
the policies or procedures may deteriorate.
Kost Forer Gabbay & Kasierer
144 Menachem Begin Road, Building A
Tel-Aviv 6492102, Israel
Tel: +972-3-6232525
Fax: +972-3-5622555
ey.com
/s/ KOST FORER GABBAY & KASIERER
A Member of Ernst & Young Global
Tel-Aviv, Israel
February 11, 2020
58
VARONIS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
Assets
Current assets:
Cash and cash equivalents
Marketable securities
Short-term deposits
Trade receivables (net of allowance for doubtful accounts of $637 and $483 at December 31, 2019 and
December 31, 2018, respectively)
Prepaid expenses and other current assets
Total current assets
Long-term assets:
Other assets
Operating lease right-of-use asset
Property and equipment, net
Total long-term assets
Total assets
The accompanying notes are an integral part of these consolidated financial statements.
59
December 31,
2019
2018
68,929 $
41,531
10,000
75,050
13,047
208,557
18,360
55,057
36,338
109,755
318,312 $
48,707
39,770
70,438
83,223
16,952
259,090
8,565
—
17,323
25,888
284,978
$
$
VARONIS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
Liabilities and stockholders’ equity
Current liabilities:
Trade payables
Accrued expenses and other short-term liabilities
Deferred revenues
Total current liabilities
Long-term liabilities:
Deferred revenues
Operating lease liability
Other liabilities
Total long-term liabilities
Stockholders’ equity:
Share capital
Common stock of $0.001 par value - Authorized: 200,000,000 shares at December 31, 2019 and
December 31, 2018; Issued and outstanding: 30,583,311 shares at December 31, 2019 and 29,576,880
shares at December 31, 2018
Accumulated other comprehensive loss
Additional paid-in capital
Accumulated deficit
Total stockholders’ equity
Total liabilities and stockholders’ equity
The accompanying notes are an integral part of these consolidated financial statements.
60
December 31,
2019
2018
$
997 $
62,607
95,975
159,579
5,460
57,040
2,701
65,201
31
(449)
310,682
(216,732)
93,532
$
318,312 $
2,620
55,991
87,729
146,340
6,487
—
6,781
13,268
30
(3,633)
266,941
(137,968)
125,370
284,978
VARONIS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
Revenues:
Subscriptions
Perpetual licenses
Maintenance and services
Total revenues
Cost of revenues
Gross profit
Operating costs and expenses:
Research and development
Sales and marketing
General and administrative
Total operating expenses
Operating loss
Financial income (expenses), net
Loss before income taxes
Income taxes
Net loss
Net loss per share of common stock, basic and diluted
Weighted average number of shares used in computing net loss per share of common
Year ended
December 31,
2018
2017
2019
$
76,730 $
8,750 $
42,093
135,367
254,190
35,144
219,046
80,764
169,898
44,371
295,033
(75,987)
(389)
(76,376)
(2,388)
139,578
121,960
270,288
27,683
242,605
69,971
168,309
33,460
271,740
(29,135)
970
(28,165)
(413)
$
$
(78,764) $
(2.60) $
(28,578) $
(0.98) $
2,627
118,689
94,074
215,390
20,714
194,676
47,369
133,925
26,801
208,095
(13,419)
2,362
(11,057)
(2,787)
(13,844)
(0.50)
stock, basic and diluted
30,257,410
29,020,645
27,467,440
The accompanying notes are an integral part of these consolidated financial statements.
61
VARONIS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
Year ended
December 31,
2018
2017
2019
Net loss
$
(78,764) $
(28,578) $
(13,844)
Other comprehensive income (loss):
Unrealized income (loss) on marketable securities, net of tax
Gains (losses) on marketable securities reclassified into earnings, net of tax
Unrealized income (loss) on derivative instruments, net of tax
Losses (gains) on derivative instruments reclassified into earnings, net of tax
Total other comprehensive income (loss)
21
5
26
3,510
(352)
3,158
3,184
48
(27)
21
(7,531)
3,741
(3,790)
(3,769)
(27)
—
(27)
3,291
(2,649)
642
615
Comprehensive loss
$
(75,580) $
(32,347) $
(13,229)
The accompanying notes are an integral part of these consolidated financial statements.
62
VARONIS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(in thousands, except share data)
Common stock
Balance as of January 1, 2017
Effect of adoption of ASU 2016-09
Stock-based compensation expense
Common stock issued under employee stock
plans, net
Unrealized gains on derivative instruments
Unrealized losses on available for sale
securities
Net loss
Number
26,821,762
—
—
1,324,400
—
—
—
Balance as of December 31, 2017
28,146,162
Amount
Additional
paid-in capital
27
—
—
1
—
—
—
28
189,335
2,616
19,835
12,082
—
—
—
223,868
Stock-based compensation expense
—
—
34,961
Common stock issued under employee stock
plans, net
Unrealized losses on derivative instruments
Unrealized gains on available for sale
securities
Net loss
1,430,718
—
—
—
2
—
—
—
8,112
—
—
—
Accumulated
other
comprehensive
income (loss)
Accumulated
deficit
Total
stockholders’
equity
(479)
—
—
—
642
(27)
—
136
—
—
(3,790)
21
—
(92,930)
(2,616)
—
—
—
—
(13,844)
(109,390)
95,953
—
19,835
12,083
642
(27)
(13,844)
114,642
—
34,961
—
—
—
8,114
(3,790)
21
(28,578)
(28,578)
Balance as of December 31, 2018
29,576,880 $
30 $
266,941 $
(3,633)
$
(137,968) $
125,370
Stock-based compensation expense
—
—
46,139
Common stock issued under employee stock
plans, net
Unrealized gains on derivative instruments
Unrealized gains on available for sale
securities
Net loss
1,006,431
—
—
—
1
—
—
—
(2,398)
—
—
—
—
—
3,158
26
—
—
46,139
—
—
—
(78,764)
(2,397)
3,158
26
(78,764)
93,532
Balance as of December 31, 2019
30,583,311 $
31 $
310,682 $
(449)
$
(216,732) $
___________________
The accompanying notes are an integral part of these consolidated financial statements.
63
VARONIS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Cash flows from operating activities:
Net loss
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Year ended
December 31,
2018
2017
2019
$
(78,764) $
(28,578) $
(13,844)
Depreciation
Stock-based compensation
Amortization of deferred commissions
Amortization of operating lease right-of-use asset
Capital loss (gain) from sale of fixed assets
Changes in assets and liabilities:
Trade receivables
Prepaid expenses and other current assets
Deferred commissions
Other long term assets
Trade payables
Accrued expenses and other short-term liabilities
Deferred revenues
Other long term liabilities
Net cash provided by (used in) operating activities
Cash flows from investing activities:
Decrease (increase) in short-term deposits
Increase in marketable securities
Increase in long-term deposits
Proceeds from sale of property and equipment
Purchase of property and equipment
Net cash provided by (used in) investing activities
Cash flows from financing activities:
Proceeds (withholdings) from employee stock plans, net
Net cash provided by (used in) financing activities
Increase (decrease) in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash at beginning of period
Cash, cash equivalents and restricted cash at end of period
Supplemental disclosure of cash flow information:
Cash paid for income taxes
Net lease liabilities arising from obtaining right-of-use assets
The accompanying notes are an integral part of these consolidated financial statements.
64
6,321
46,139
13,630
9,023
45
8,173
(1,225)
(19,132)
81
(1,623)
(886)
7,219
316
(10,683)
60,466
(1,761)
(21)
11
(25,392)
33,303
(2,398)
(2,398)
20,222
48,707
4,156
34,961
13,185
—
(27)
(7,627)
(1,932)
(15,308)
(270)
1,985
9,910
14,115
(1,025)
23,545
(30,280)
(39)
(313)
27
(9,583)
(40,188)
8,114
8,114
(8,529)
57,236
$
$
$
68,929 $
48,707 $
3,955 $
10,252 $
710 $
— $
3,328
19,835
12,591
—
(20)
(21,735)
(3,317)
(14,742)
—
(653)
14,453
20,860
(405)
16,351
25,329
(39,731)
(305)
20
(5,314)
(20,001)
12,083
12,083
8,433
48,803
57,236
469
—
VARONIS SYSTEMS, INC. AND SUBSIDIARIES
NOTES 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 Delaware on
November 3, 2004 and commenced operations on January 1, 2005.
VSI has ten 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 the laws 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”) incorporated under the laws of
Ireland on November 11, 2016; Varonis Systems (Australia) Pty Ltd (“VAUS”) incorporated under the laws of Victoria, Australia on February 28, 2017;
Varonis Systems (Netherlands) B.V. ("VNL") incorporated under the laws of the Netherlands on March 13, 2018; Varonis U.S. Public Sector LLC ("VPS")
incorporated under the laws of the State of Delaware on May 14, 2018; and Varonis Systems (Luxemburg) S.à r.l. (“VLUX”) incorporated under the laws of
Luxembourg on August 5, 2019.
The Company’s software products and services allow enterprises to manage, analyze and secure enterprise data. Varonis focuses on protecting enterprise
data: sensitive files and emails; confidential customer, patient and employee data; financial records; strategic and product plans; and other intellectual
property. Through its products DatAdvantage (including the Automation Engine), DatAlert (including Varonis Edge), DataPrivilege, Data Classification
Engine (including Policy Pack and Data Classification Labels), Data Transport Engine and DatAnswers, the software platform allows enterprises to protect
sensitive data from insider threats and cyberattacks, and realize the value of their enterprise data in ways that are not resource-intensive and easy to
implement.
VSI and VPS market and sell products and services mainly in the United States. VSUK, VSG, VSF, VSC, VIRE, VAUS, VNL and VLUX resell the
Company’s products and services mainly in the United Kingdom, Germany, France, Canada, Ireland, Australia, the Netherlands and Belgium, and
Luxembourg, respectively. The Company primarily sells its products and 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 a
consistent 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 to make
estimates, judgments and assumptions. The Company’s management believes that the estimates, judgments and assumptions used are reasonable based upon
information available at the time they are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial statements, and the reported amounts of revenues and expenses during 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, and contingent liabilities. Such
estimates are based on historical experience and on various other assumptions that are believed to be reasonable, the results of 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 primarily
incurred in Euros, the Pound Sterling, Canadian dollars, Australian dollars and NIS;
65
however, the Company’s management believes that the dollar is the primary currency of the economic environment in which VSI and each of its subsidiaries
operate. Thus, the dollar is the Company’s functional and reporting currency.
Accordingly, transactions denominated in currencies other than the functional currency are re-measured to the functional currency in accordance with ASC
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 of each
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 financial income
(expense) in the consolidated statements of operations as appropriate.
c.
Principles of Consolidation:
The consolidated financial statements include the accounts of VSI and its wholly-owned subsidiaries, VSL, VSUK, VSG, VSF, VSC, VIRE, VAUS, VNL,
VPS and VLUX. All intercompany transactions and balances have been eliminated upon consolidation.
d.
Cash, Cash Equivalents, Marketable Securities and Short-Term Deposits:
The Company accounts for investments in marketable securities in accordance with ASC No. 320, “Investments—Debt and Equity Securities”. The
Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Cash and cash equivalents
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
deposits. Investments are available to be used for current operations and are, therefore, classified as current assets even though maturities may extend beyond
one year. Cash equivalents, marketable securities and short-term deposits are classified as available for sale and are, therefore, recorded at fair value on the
consolidated balance sheet, with any unrealized gains and losses reported in accumulated other comprehensive income (loss), which is reflected as a separate
component of stockholders’ equity in the Company’s consolidated balance sheets, until realized. The Company uses the specific identification method to
compute gains and losses on the investments. The amortized cost of securities is adjusted for amortization of premiums and accretion of discounts to
maturity. Such amortization and accretion is included as a component of financial income, net in the consolidated statement of operations. Cash, cash
equivalents, marketable securities and short-term deposits consist of the following (in thousands):
Cash and cash equivalents
Money market funds
Total
Marketable securities
US Treasury securities
Total
Short-term deposits
Term bank deposits
Total
Amortized
Cost
As of December 31, 2019
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
— $
— $
23 $
23 $
— $
— $
— $
— $
4,789
4,789
(2)
(2)
$
$
41,531
41,531
— $
— $
10,000
10,000
4,789 $
4,789 $
41,510 $
41,510 $
10,000 $
10,000 $
$
$
$
$
$
$
66
Cash and cash equivalents
Money market funds
Total
Marketable securities
US Treasury securities
Total
Short-term deposits
Term bank deposits
Total
*) Represents an amount lower than $1.
Amortized
Cost
As of December 31, 2018
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
$
$
$
$
$
$
2,594 $
2,594 $
39,776
39,776
70,438 $
70,438 $
— $
— $
*)
*)
$
$
— $
— $
— $
— $
2,594
2,594
(6)
(6)
$
$
39,770
39,770
— $
— $
70,438
70,438
All the US Treasury securities in short-term deposits have a stated effective maturity of less than 12 months as of December 31, 2019 and 2018.
The gross unrealized gains and losses related to these short-term deposits was due primarily to changes in interest rates. The Company reviews its short-term
deposits on a regular basis to evaluate whether or not any security has experienced an other than temporary decline in fair value. The Company considers
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 prospects of 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 the investment’s amortized
cost basis. If the Company believes that an other than temporary decline exists in one of these securities, the Company writes down 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 other comprehensive income (loss), which is
reflected as a separate component of stockholders’ equity in the Company’s consolidated balance sheets. During the year ended December 31, 2019 and
2018, 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 bore interest at a rate of
1.71% as of December 31, 2019 and rates ranging from 1.30% - 2.77%, per annum, as of December 31, 2018. Short-term deposits are presented at cost which
approximates market value due to their short maturities.
e.
Property and Equipment:
Property and equipment are stated at cost, net of accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful
lives of the assets at the following annual rates:
Computer equipment
Office furniture and equipment
Leasehold improvements
%
33%
—
15%
Over the shorter of the expected lease
term or estimated useful life
14%
67
f.
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 or
changes 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 by the 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 the assets exceeds the
fair value of the assets. During the years ended December 31, 2019, 2018 and 2017, no impairment losses have been recorded.
g.
Long-Term Lease Deposits:
Long-term lease deposits include long-term deposits for offices.
h.
Revenue Recognition:
The Company generates revenues in the form of software license fees and related maintenance and services fees. Subscription revenues are comprised of
time-based licenses whereby customers use the Company's software with related maintenance (including support and unspecified upgrades and enhancements
when and if they are available) for a specified period. Subscriptions are sold on premises with the same functionality as the perpetual license and are
recognized from sales of subscription licenses to new and existing customers. When products are purchased as a subscription, the associated maintenance is
included as part of the subscription revenues. Perpetual license revenues consist of the revenues recognized from sales of perpetual licenses to new and
existing customers. Maintenance and services primarily consist of fees for maintenance services of perpetual license sales (including support and unspecified
upgrades and enhancements when and if they are available) and to a lesser extent professional services which focus on both operationalizing the software and
training the Company’s customers to fully leverage the use of its products although the user can benefit from the software without the Company's assistance.
The Company sells its products worldwide directly to a network of distributors and VARs, and payment is typically due within 30 to 60 calendar days of the
invoice date.
The Company recognizes revenues in accordance with ASC No. 606, “Revenue from Contracts with Customers”. As such, the Company identifies a contract
with a customer, identifies the performance obligations in the contract, determines the transaction price, allocates the transaction price to each performance
obligation in the contract and recognizes revenues when (or as) the Company satisfies a performance obligation.
Subscription software and perpetual license revenues are recognized at the point of time when the software license has been delivered and the benefit of the
asset has transferred.
The Company recognizes revenues from maintenance of perpetual license sales ratably over the term of the underlying maintenance contract. The term of the
maintenance contract is usually one year. Renewals of maintenance contracts create new performance obligations that are satisfied over the term with the
revenues recognized ratably over the period.
Revenues from professional services consist mostly of time and material services. The performance obligations are satisfied, and revenues are recognized,
when the services are provided or once the service term has expired.
The Company enters into contracts that can include combinations of products and services, which are generally capable of being distinct and accounted for as
separate performance obligations. The license is distinct upon delivery as the customer can derive the economic benefit of the software without any
professional services, updates or technical support. The Company allocates the transaction price to each performance obligation based on its relative
standalone selling price out of the total consideration of the contract. For maintenance, the Company determines the standalone selling prices based on the
price at which the Company separately sells a renewal contract. For professional services, the Company determines the standalone selling prices based on the
price at which the Company separately sells those services. For software licenses, the Company uses the residual approach to determine the standalone
selling prices due to the lack of history of selling software license on a standalone basis and the highly variable sales price.
68
Trade and other receivables are primarily comprised of trade receivables that are recorded at the invoice amount, net of an allowance for doubtful accounts.
Deferred revenues represent mostly unrecognized fees billed or collected for maintenance and professional services. Deferred revenues are recognized as (or
when) the Company performs under the contract. Pursuant to these contracts, customers are not invoiced for subsequent years until the annual renewal
occurs. The amount of revenues recognized in the period that was included in the opening deferred revenues balance was $88,023 for the year ended
December 31, 2019.
The Company does not grant a right of return to its customers, except for one of its resellers. During the years ended December 31, 2019, 2018 and 2017,
there were no returns from this reseller.
For information regarding disaggregated revenues, please refer to Note 11.
i.
Contract Costs:
The Company pays sales commissions to sales and marketing and certain management personnel based on their attainment of certain predetermined sales
goals. Sales commissions earned by its employees are considered incremental and recoverable costs of obtaining a contract with a customer. Sales
commissions paid for initial contracts, which are not commensurate with sales commissions paid for renewal contracts, are capitalized and amortized over an
expected period of benefit. Based on its technology, customer contracts and other factors, the Company has determined the expected period of benefit to be
approximately four years. Sales commissions for renewal contracts are capitalized and then amortized on a straight line basis. Amortization expenses related
to these costs are mostly included in sales and marketing expenses in the accompanying consolidated statements of operations.
j.
Cost of Revenues:
Cost of revenues consists of the cost of maintenance and services, resulting from costs associated with support, customer success 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 requires
companies to estimate the fair value of equity-based payment awards on the date of grant using an OPM. The value of the portion of the award that is
ultimately expected to vest is recognized as an expense over the requisite service periods in the Company’s consolidated statements of operations.
The Company recognizes compensation expenses for the value of its equity awards granted based on the straight-line method over the requisite service period
of each of the awards. Upon adoption of ASU 2016-09, the Company elected to change its accounting policy to account for forfeitures as they occur.
For the years ended December 31, 2019, 2018 and 2017, there were no stock options granted.
The non-cash compensation expenses related to employees and consultants for the years ended December 31, 2019, 2018 and 2017 amounted to $46,139,
$34,961 and $19,835, respectively.
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. The Company does
not incur material costs between the completion of the working model and the point
69
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 account
balances are determined based on the differences between financial reporting and the tax basis for assets and liabilities and are measured using the enacted
tax rates and laws that will be in effect when the differences are expected to reverse. 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 position taken
or expected to be taken in a tax return by determining if the weight of available evidence indicates that it is more likely than not that, on an evaluation of the
technical merits, the tax position will be sustained on audit, including resolution of any related appeals or litigation processes. The second step is to measure
the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. The Company accrues 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 reduces its
exposure by entering into forward foreign exchange contracts with respect to operating expenses that are forecasted to be incurred in currencies other than the
U.S. dollar. A majority of the Company’s revenues and operating expenditures are transacted in U.S. dollars. However, certain operating expenditures 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 volatility of
future cash flows caused by changes in exchange rates. The Company’s currency risk management program includes forward foreign exchange contracts
designated as cash flow hedges. These forward foreign exchange contracts generally mature within 12 months. The Company does not enter into derivative
financial instruments for trading purposes. In addition, the Company enters into forward contracts to hedge a portion of its monetary items in the balance
sheet, such as trade receivables and payables, denominated in Pound Sterling and Euro for short term periods (the “Fair Value Hedging Program”). The
purpose of the Fair Value Hedging Program is to protect the fair value of the monetary assets from foreign exchange rate fluctuations. Gains and losses from
derivatives related to the Fair Value Hedging Program are not designated as hedging instruments.
Derivative instruments measured at fair value and their classification on the consolidated balance sheets are presented in the following table (in thousands):
Assets (liabilities) as of
December 31, 2019
Liabilities as of
December 31, 2018
Notional
Amount
Fair
Value
Notional
Amount
Fair
Value
Foreign exchange forward contract derivatives in cash flow hedging
relationships included in accrued expenses and other short-term
liabilities
Foreign exchange forward contract derivatives for monetary items
included in other current assets and accrued expenses and other short-
term liabilities
$
$
84,968 $
(470) $
75,153 $
(3,628)
26,995 $
5 $
29,162 $
(18)
For the years ended December 31, 2019 and 2018, the consolidated statements of operations reflect a gain of $352 and a loss of $3,741, respectively, related
to the effective portion of foreign currency forward contracts. Any ineffective portion of the cash flow hedges is recognized in financial income (expenses),
net in the consolidated statement of operations. No material ineffective hedges were recognized in financial income (expenses), net for the years ended
December 31, 2019 and 2018.
70
For the years ended December 31, 2019 and 2018, the consolidated statements of operations reflect a gain of $683 and $98, respectively, in financial income
(expenses), net, related to the Fair Value Hedging Program.
o.
Concentrations of Credit Risks:
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash, cash equivalents, marketable securities,
short-term deposits and trade receivables.
The Company’s cash, cash equivalents, marketable securities and short-term deposits are invested in major banks mainly in the United States but also in
Israel, France, Canada, the United Kingdom, Germany, the Netherlands, Ireland and Australia. Such deposits in the United States may be in excess of insured
limits and are not insured in other jurisdictions. The Company maintains cash and cash equivalents with diverse financial institutions and monitors the
amount of credit exposure 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 the United
States and Europe. Concentration of credit risk with respect to trade receivables is limited by credit limits, ongoing credit evaluation and account monitoring
procedures. The Company performs ongoing credit evaluations of its channel partners and establishes an allowance for doubtful accounts based upon a
specific review of all significant outstanding invoices. The Company writes off receivables when they are deemed uncollectible and having exhausted all
collection efforts.
p.
Retirement and Severance Pay:
VSI and VPS make available to its employees a retirement plan (the “U.S. Plan”) that qualifies as a deferred salary arrangement under Section 401(k) of the
Code. Participants in the U.S. Plan may elect to defer a portion of their pre-tax earnings, up to the Internal Revenue Service annual contribution limit. VSI
and VPS match 100% of each participant’s contributions up to a maximum of 3% of the participant’s total pay and 50% of each participant’s contributions on
contributions between 3% and 5% of the participant’s total pay. Each participant may contribute up to 80% of total remuneration up to the Internal Revenue
Service’s annual contribution limit. Contributions to the U.S. Plan are recorded during 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 a
portion 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 with insurance companies.
Payments in accordance with section 14 release the Company from any future severance payments (under the above Israeli Severance 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 French
employees are entitled to an indemnity (a statutory redundancy). The law provides for the payment of severance payment to any employee working for the
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.
VIRE makes available to its employees a pension plan whereby participants in the plan may elect to defer a portion of their earnings. VIRE matches 100% of
each participant’s contributions up to a maximum of 3% and 50% of the participant's contributions on contributions between 3% and 5% of the participant’s
net pay.
VNL makes available to all its employees a pension plan whereby the Company contributes 7.7% of the participant’s net pay.
Total expenses related to retirement and severance pay amounted to $6,390, $6,765 and $4,801 for the years ended December 31, 2019, 2018 and 2017,
respectively. The amount of severance payable included in other liabilities as of December 31, 2019 and 2018 is $2,554 and $2,391, respectively.
71
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 between
market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use 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 in measuring
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 for similar
assets or liabilities in active markets; inputs other than quoted prices that are observable for the assets or liabilities; or inputs that are 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. These
assumptions 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 measuring fair
value.
The carrying amounts of cash and cash equivalents, marketable securities, trade receivables, short-term deposits and trade payables approximate their fair
value due to the short-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 the period.
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 would have
been anti-dilutive. There were 3,033,718 and 3,173,188 potentially dilutive shares from the conversion of outstanding restricted stock units and stock options
that were not included in the calculation of diluted net loss per share as of December 31, 2019 and 2018, respectively.
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 probable that 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 of legal
counsel and other information and events pertaining to a particular matter. As of December 31, 2019 and 2018, the Company was not a party to any litigation
that could have a material adverse effect on the Company’s business, financial position, results of operations or cash flows.
t.
Basis of Presentation:
72
Certain amounts in prior years' financial statements have been recast and reclassified to conform to the current year's presentation.
u.
Credit Facility:
On March 31, 2014, the Company entered into a promissory note and related security documents with Bank Leumi USA, which the Company has extended a
number of times. The Company may borrow up to $7,000 against certain of its accounts receivable outstanding amount, based on several conditions, at an
annual interest rate of the Wall Street Journal Prime Rate plus 0.05%, provided that the annual interest rate applicable to advances will not be lower than
4.10%. As of December 31, 2019, that rate amounted to 4.80%. This promissory note enables the Company, among other things, to engage in foreign
currency hedging transactions with Bank Leumi USA to manage exposure to foreign currency risk without restricted cash requirements. The Company may
borrow under the promissory note until November 15, 2020 at which time the principal sum of each such loan, together with accrued and unpaid interest
payable, will become due and payable. As of December 31, 2019, the Company had no balance outstanding under the promissory note. As part of the
transaction, the Company granted the lender a security interest in its personal property, excluding intellectual property and other intangible assets. The
promissory note also contains customary events of default
v.
Recently Adopted Accounting Pronouncements:
In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash”, which requires companies to include amounts
generally described as restricted cash and restricted cash equivalents in cash and cash equivalents when reconciling beginning-of-period and end-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
adopted this standard effective December 31, 2017 using the retrospective transition method, as required by the new standard. The adoption of this standard
had 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 balance sheets that
sum to the total of such amounts in the consolidated statements of cash flows:
Cash and cash equivalents
Long term restricted cash included in other assets
Cash, cash equivalents and long term restricted cash shown in the consolidated
statement of cash flows
$
$
December 31, 2019 December 31, 2018 December 31, 2017
56,689
68,929 $
48,707 $
—
—
547
68,929 $
48,707 $
57,236
In February 2016, the FASB issued ASU 2016-02, “Leases” ("ASC 842"), on the recognition, measurement, presentation and disclosure of leases for both
parties to a contract (i.e., lessees and lessors). The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating
leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease
expense 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 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 less will be accounted for in a manner similar to the accounting under the prior guidance (ASC 840). The new standard requires lessors to account
for leases using an approach that is substantially equivalent to ASC 840 guidance for sales-type leases, direct financing leases and operating leases. The new
standard supersedes the previous leases standard, ASC 840, "Leases".
The Company adopted the new standard as of January 1, 2019, using the modified retrospective approach. Consequently, prior period balances and
disclosures have not been restated. The Company has elected to utilize the available package of practical expedients permitted under the transition guidance
within the new standard which does not require it to reassess the prior conclusions about lease identification, lease classification and initial direct costs. The
adoption of ASC 842 resulted in the elimination of deferred rent of $1,313 and $4,236 in current and long-term liabilities in the Company’s consolidated
balance sheets, respectively. Additionally, the Company included in its balance sheet at adoption an operating right-of-use assets, short term operating lease
liabilities and long term operating lease liabilities of $53,274,
73
$2,349 and $55,676, respectively. The standard did not materially impact the Company's net earnings and had no impact on cash flows. For additional
information regarding the Company's accounting for leases, please refer to Note 6.
In January 2018, the FASB issued Staff Q&A Topic 740, No. 5, “Accounting for Global Intangible Low Taxed Income.” Pursuant to that guidance, the
Company is permitted to make an accounting policy election to either treat taxes due on future inclusions in U.S. taxable income related to GILTI as a
component of current income tax expense when incurred or to factor such amounts into our measurement of its deferred tax expense. The Company has made
an accounting policy election to treat GILTI as a component of current income tax expense.
In June 2018, the FASB issued ASU No. 2018-07, “Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment
Accounting.” These amendments expand the scope of Topic 718, Compensation - Stock Compensation (which currently only includes share-based payments
to employees) to include share-based payments issued to nonemployees for goods or services. Consequently, the accounting for share-based payments to
nonemployees and employees will be substantially aligned. This ASU supersedes Subtopic 505-50, Equity - Equity-Based Payments to Non-Employees.
Adoption of this standard had an immaterial impact on the Company's consolidated financial statements.
w. Recently Issued Accounting Pronouncements Not Yet Adopted:
In August 2018, the FASB issued ASU 2018-15, “Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for
Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract,” which aligns the requirements for capitalizing
implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to
develop or obtain internal-use software. The new standard requires capitalized costs to be amortized on a straight-line basis generally over the term of the
arrangement, and the financial statement presentation for these capitalized costs would be the same as that of the fees related to the hosting arrangements.
This new standard is effective for our interim and annual periods beginning January 1, 2020, and earlier adoption is permitted. This standard could be applied
either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The Company will adopt this standard on a prospective
basis as of January 1, 2020 and does not expect this standard to have a material effect on its consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses on Financial Instruments”, which requires that expected credit losses
relating to financial assets measured on an amortized cost basis and available for sale debt securities be recorded through an allowance for credit losses. ASU
2016-13 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 and
also requires the reversal of previously recognized credit losses if fair value increases. The new standard will be effective for interim and annual periods
beginning after January 1, 2020, and early adoption is permitted. The Company does not expect this standard to have a material effect on its consolidated
financial statements.
NOTE 3:- PREPAID EXPENSES AND OTHER CURRENT ASSETS
Deferred commission
Prepaid expenses
Government institutions & other receivables
Short-term deposits & other
Prepaid expenses and other current assets
74
December 31,
2019
2018
3,725 $
7,648
1,357
317
13,047 $
8,055
6,857
1,874
166
16,952
$
$
NOTE 4:- PROPERTY AND EQUIPMENT, NET
Cost:
Computer equipment
Office furniture and equipment
Leasehold improvements
Accumulated depreciation
Property and equipment, net
December 31,
2019
2018
$
$
16,546 $
4,910
31,291
52,747
16,409
36,338 $
Depreciation expenses for the years ended December 31, 2019, 2018 and 2017 were $6,321, $4,156 and $3,328, respectively.
NOTE 5:- ACCRUED EXPENSES AND OTHER SHORT TERM LIABILITIES
Employees
Accrued expenses
Government authorities and other
Foreign exchange forward contract derivatives
Other short term liabilities
Accrued expenses and other short term liabilities
NOTE 6:- LEASES
December 31,
2019
2018
$
$
23,479 $
13,766
24,689
470
203
62,607 $
12,848
3,193
12,814
28,855
11,532
17,323
20,111
12,725
18,196
3,646
1,313
55,991
In February 2016, the FASB issued ASU 2016-02, “Leases”, on the recognition, measurement, presentation and disclosure of leases for both parties to a
contract (i.e., lessees and lessors). The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based
on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense 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 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.
The Company has elected the short-term lease exception for leases with a term of 12 months or less. As part of this election it will not recognize right-of-use
assets and lease liabilities on the balance sheet for leases with terms less than 12 months. The Company also elected the practical expedient to not separate
lease and non-lease components for all its leases. This will result in the initial and subsequent measurement of the balances of the right-of-use asset and lease
liability being greater than if the policy election was not applied.
Some leases include one or more options to renew. The exercise of lease renewal options is typically at the Company's sole discretion; therefore, the majority
of renewals to extend the lease terms are not included in our right of use assets and lease liabilities as they are not reasonably certain of exercise. The
Company regularly evaluates the renewal options, and, when it is reasonably certain of exercise, it will include the renewal period in its lease term. New lease
modifications result in remeasurement of the right of use asset and lease liability.
The right-of-use asset and lease liability are initially measured at the present value of the lease payments, discounted using the interest rate implicit in the
lease or, if that rate cannot be readily determined, the Company's incremental borrowing rate based on the information available at the date of adoption in
determining the present value of the lease payments. The Company's incremental borrowing rate is estimated to approximate the interest rate on similar terms
and payments and in economic environments where the leased asset is located.
75
Some of the real estate leases contain variable lease payments, including payments based on a Consumer Price Index ("CPI"). Variable lease payments based
on a CPI are initially measured using the index in effect at lease adoption. Additional payments based on the change in a CPI are recorded as a period
expense when incurred.
The Company has several liens granted to financial institutions mainly to secure various operating lease agreements in connection with its office space
The Company has various operating leases for office space, vehicles and office equipment that expire through 2030. Its lease agreements generally do not
contain any material residual value guarantees or material restrictive covenants. Below is a summary of our operating right-of-use assets and operating lease
liabilities as of December 31, 2019:
Operating right-of-use assets
Operating lease liabilities, current
Operating lease liabilities long-term
Total operating lease liabilities
December 31, 2019
$
$
$
55,057
8,269
57,040
65,309
Operating lease liabilities, current are included within accrued expenses and other short term liabilities in the consolidated balance sheet.
Minimum lease payments for our right of use assets over the remaining lease periods as of December 31, 2019, are as follows:
2020
2021
2022
2023
2024
Thereafter
Total undiscounted lease payments
Less: Interest
Present value of lease liabilities
December 31, 2019
$
$
$
10,821
9,767
9,161
8,971
8,580
30,394
77,694
(12,385)
65,309
As of December 31, 2019, the Company had an additional operating lease that had not yet commenced of $5,627. This operating lease will commence in the
third quarter of 2020 with a lease term through 2030.
The weighted average remaining lease terms and discount rates for all of operating leases were as follows as of December 31, 2019:
Remaining lease term and discount rate:
Weighted average remaining lease term (years)
Weighted average discount rate
5.71
4.03%
Total rent expenses for the years ended December 31, 2019, 2018 and 2017 were $8,912, $6,570 and $4,075, respectively.
76
NOTE 7:- FAIR VALUE MEASUREMENTS
The following table sets forth the Company’s liabilities that were measured at fair value as of December 31, 2019 and 2018 by level within the fair value
hierarchy (in thousands):
Financial assets:
Cash equivalents:
Money market funds
Marketable securities:
US Treasury securities
Other current assets:
As of December 31, 2019
As of December 31, 2018
Level I
Level
II
Level
III
Fair
Value
Level I
Level
II
Level
III
Fair
Value
4,789
—
—
4,789
2,594
—
—
2,594
41,531
—
—
41,531
39,770
—
—
39,770
Forward foreign exchange contracts
—
5
—
5
—
—
—
—
Financial liabilities:
Accrued expenses and other short term
liabilities:
Forward foreign exchange contracts
—
(470)
—
(470)
—
(3,647)
—
(3,647)
Total financial assets (liabilities)
$
46,320 $
(465) $
— $
45,855 $
42,364 $
(3,647) $
— $
38,717
NOTE 8:- STOCKHOLDERS’ EQUITY
a.
Composition of common stock capital:
Stock of $0.001 par value:
Common stock
b.
Common stock rights:
Authorized
Issued and outstanding
Number of shares
December 31,
December 31,
2019
2018
2019
2018
200,000,000
200,000,000
30,583,311
29,576,880
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 share represents
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 of December 31,
2013, the Company had reserved 4,713,319 shares of common stock available for issuance to employees, directors, officers and consultants of the Company
and its subsidiaries. The options generally vest over four years. No awards were granted under the 2005 Stock Plan subsequent to December 31, 2013, and no
further awards will be granted under the 2005 Stock Plan.
77
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 issuance under the 2013
Plan to employees, directors, officers and consultants of the Company and its subsidiaries. The number of shares of common stock available for issuance
under the 2013 Plan was increased on January 1, 2016 and has been, and will be, increased on each January 1 thereafter by four percent (4%) of the number
of shares of common stock issued and outstanding on each December 31 immediately prior to the date of increase (rounded down to the nearest 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 of shares 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 and outstanding on each
December 31. Since January 1, 2016, the share reserve under the 2013 Plan has been automatically increased by an aggregate of 5,530,555 shares. Awards
granted under the 2013 Plan generally vest over four years. Any award that is forfeited or 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, 2019 is as follows:
Options outstanding at the beginning of the year
709,668 $
17.941 $
24,810
4.513
Year ended
December 31, 2019
Weighted
average
exercise
price
Aggregate
intrinsic
value
(in thousands)
Number
Weighted
average
remaining
contractual
life (years)
Granted
Exercised
Forfeited
Options outstanding at the end of the period
Options exercisable at the end of the period
There were no options granted in 2019.
— $
(253,715) $
(1,605) $
454,348 $
452,264 $
—
13.068
27.512
20.628 $
20.645 $
25,935
25,808
4.343
4.335
The aggregate intrinsic value in the table above represents the total intrinsic value that would have been received by the option holders had all option holders
exercised their options on the last date of the period. Total intrinsic value of options exercised for the years ended December 31, 2019, 2018 and 2017 was
$12,453, $40,610 and $22,382, respectively. As of December 31, 2019 and 2018, there was $9 and $142, respectively, of total unrecognized compensation
cost related to non-vested share-based compensation arrangements granted under the 2005 Stock Plan and 2013 Plan. This cost is expected to be recognized
over a period of approximately 0.132 and 0.712 years, respectively.
The options outstanding as of December 31, 2019 have been separated into ranges of exercise price as follows:
Range of exercise price
1.576
$
$
$
$
$
6.230
12.470
19.510
22.010
—
—
—
—
8.800
16.870
21.660
24.230
$
$
29.880
39.860
Options
outstanding
as of
December 31,
2019
Weighted
average
remaining
contractual
life (years)
Weighted
average
exercise
price
Options
exercisable
as of
December 31,
2019
Weighted
average
remaining
contractual
life (years)
1,970
11,856
130,925
164,253
70,848
56,879
17,617
454,348
0.038 $
1.992 $
4.045 $
4.587 $
4.268 $
5.145 $
4.057 $
4.343 $
1.576
8.084
14.112
21.177
22.434
29.880
39.860
20.628
1,970
11,856
128,841
164,253
70,848
56,879
17,617
452,264
0.038 $
1.992 $
4.012 $
4.587 $
4.268 $
5.145 $
4.057 $
4.335 $
Weighted
average
exercise
price of
options
exercisable
1.576
8.084
14.057
21.177
22.434
29.880
39.860
20.645
78
d.
Options issued to consultants:
The Company’s outstanding options granted to consultants for services as of December 31, 2019 were as follows:
Issuance date
February 2013
August 2013
March 2014
May 2014
November 2014
May 2015
February 2016
e.
Restricted stock units:
Options for
shares of
common stock
(number)
Exercise price
per share
Options
exercisable
(number)
Exercisable
through
1,500 $
4,000 $
3,750 $
3,700 $
4,218 $
1,137 $
1,982 $
20,287
12.470
21.140
39.860
22.010
21.660
19.510
16.870
1,500
4,000
3,750
3,700
4,218
1,137
1,877
20,182
February 2023
August 2023
March 2024
May 2024
November 2024
May 2025
February 2026
The following provides a summary of the restricted stock unit activity for the Company for the year ended December 31, 2019:
Outstanding as of January 1, 2019
Granted
Vested
Forfeited
Unvested as of December 31, 2019
f.
2015 Employee Stock Purchase Plan
Number of
Shares
Underlying
Outstanding
Restricted Stock
Units
Weighted-
Average
Grant Date
Fair Value
2,440,027 $
1,307,134 $
(823,036) $
(365,042) $
2,559,083 $
40.00
58.22
36.45
46.37
49.58
On May 5, 2015, the Company’s stockholders approved the Varonis Systems, Inc. 2015 Employee Stock Purchase Plan (the “ESPP”), which the Company’s
board of directors had adopted on March 19, 2015. The ESPP became effective as of June 30, 2015. The ESPP allows eligible employees to purchase shares
of the Company’s common stock at a discount through payroll deductions of up to 15% of their eligible compensation, at not less than 85% 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 the ESPP was increased on
January 1, 2016 and has been, and will be, increased each January 1 thereafter, by an amount equal to the lesser of (i) one percent (1%) of the number of
shares of common stock issued and outstanding on each December 31 immediately prior to the date of increase, except that the amount of each 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 for issuance 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. Since January 1, 2016, the share reserve under the ESPP has been automatically increased by an aggregate of 702,163 shares. The ESPP will continue
in effect until the earlier of (i) the date when no shares of common stock are available for issuance thereunder or (ii) June 30, 2025; unless terminated prior
thereto by the Company’s board of directors or compensation committee, each of which has the right to terminate the ESPP at any time.
79
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):
Cost of revenues
Research and development
Sales and marketing
General and administrative
Total
NOTE 9:- INCOME TAXES
a.
Tax Reform:
Year ended
December 31,
2018
2019
$
$
2,561 $
1,757 $
13,188
14,782
15,608
9,645
16,081
7,478
46,139 $
34,961 $
2017
1,078
5,209
8,542
5,006
19,835
On December 22, 2017, the TCJA was signed into law. The TCJA makes broad and complex changes to the Code that impact the Company's provision for
income taxes. The changes include, but are not limited to:
• Decreasing the corporate income tax rate from 35% to 21% effective for tax years beginning after December 31, 2017 (“Rate Reduction”);
•
•
The Deemed Repatriation Transition Tax; and
Taxation of GILTI earned by foreign subsidiaries beginning after December 31, 2017. The GILTI tax imposes a tax on foreign income in excess of a
deemed return on tangible assets of foreign corporations.
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 foreign
subsidiaries. Because the Company has a net cumulative deficit on the E&P of its foreign subsidiaries, it should not be subject to the Deemed Repatriation
Transition Tax.
GILTI Tax
Certain income (i.e., GILTI) earned by controlled foreign corporations (“CFCs”) must be included currently in the 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 the excess of (1) 10 percent of
the aggregate of the U.S. shareholder’s pro rata share of the qualified business asset investment of each 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.
For 2019, the Company is not subject to tax on account of GILTI as it has net CFC tested loss on an aggregated basis.
Accounting for the TCJA
In January 2018, the FASB issued Staff Q&A Topic 740, No. 5, “Accounting for Global Intangible Low Taxed Income.” Pursuant to that guidance the
Company is permitted to make an accounting policy election to either treat taxes due on future inclusions in U.S. taxable income related to GILTI as a component
of current income tax expense when incurred or to factor such amounts into the Company’s measurement of its deferred tax expense. The Company has made an
accounting policy election to treat GILTI as a component of current income tax expense.
80
In March 2018, FASB issued Accounting Standards Update No. 2018-05, "Income Taxes Topic (740): Amendments to SEC Paragraphs Pursuant to SEC
Staff Accounting Bulletin No. 118" ("ASU 2018-05") to address the application of GAAP in situations when a registrant does not have the necessary information
available, prepared or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the TCJA.
As of December 31, 2018, the Company's analysis for the Transition Tax has been filed with its December 31, 2017 tax return, and the Company considered
its accounting for this area of the TCJA to be complete as of such date and did not make any measurement-period adjustments related to it. In addition, the
Company recognizes its accounting for changes in the US federal rate and deferred tax impact for the rate change to be complete. The Company also accounted for
the tax impact related to others areas of the TCJA and believe its analysis to be completed consistent with the guidance in ASU 2018-05. The Company recognizes
that the IRS is continuing to publish and finalize ongoing guidance which may modify accounting interpretation for the TCJA, the Company would look to account
for these impacts in the period of such change is enacted.
b.
The Company:
The Company is taxed in accordance with U.S. tax laws.
As of December 31, 2019, the Company had federal net operating loss ("NOL") carry-forwards of approximately $137,833, of which approximately $22,907
expire starting in 2032 and the remainder do not expire and can only be used to offset 80% of taxable income. As of December 31, 2019, the Company had NOL
carry-forwards for state and foreign income tax purposes of approximately $105,082 and $773, respectively. If not utilized, these carryforwards will expire starting
in 2020 and indefinitely for state and foreign tax purposes, respectively. In addition, as of December 31, 2019, the Company had federal research credit, retention
credit, foreign tax credit and Ireland Employment credit carryforwards of approximately $1,412, $24, $190 and $43, respectively. If not utilized, the federal tax
carryforwards will begin to expire in 2033, 2032 and 2026, respectively. Ireland has no expiration on the employment credit.
A U.S. corporation's ability to utilize its federal and state NOL and tax credit carryforwards to offset its taxable income is limited under Section 382 of the
Code if the corporation undergoes an ownership change (within the meaning of Code Section 382). In general, an “ownership change” occurs whenever the
percentage of the stock of a corporation owned by “5-percent shareholders” (within the meaning of Code Section 382) increases by more than 50 percentage points
over the lowest percentage of the stock of such corporation owned by such “5-percent shareholders” at any time over the testing period.
An ownership change under Code Section 382 would establish an annual limitation to the amount of NOL and tax credit carryforwards the Company could
utilize to offset its taxable income or income tax in any single year. The Company performed a Section 382 analysis (the “Analysis”) which concluded that its
ability to utilize its NOL and tax credit carryforwards is subject to an annual limitation as it underwent a section 382 ownership change during 2017. The Analysis
further concluded that the Company's NOL carryforwards should be available for utilization by the Company before they expire, starting in 2032. As of December
31, 2017, the Company's U.S. federal NOL carryforwards were $22,907.
c.
Loss before taxes on income is comprised as follows:
2019
(82,007) $
5,631
(76,376) $
$
$
Year ended
December 31,
2018
(25,557) $
(2,608)
(28,165) $
2017
(19,239)
8,182
(11,057)
Domestic
Foreign
d.
Taxes on income (loss) are comprised as follows:
81
Current:
Domestic:
Federal
State
Foreign
Total current income tax
Deferred:
Foreign
Total deferred income tax
Income tax expense
e.
Deferred income taxes:
Year ended
December 31,
2018
2017
2019
$
$
$
$
$
665 $
13
1,619
2,297 $
91 $
91 $
2,388 $
— $
169
1,498
1,667 $
(1,254) $
(1,254) $
413 $
(92)
191
2,516
2,615
172
172
2,787
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The Company’s deferred tax assets are derived from its U.S. NOL carry-forwards and other
temporary differences.
ASC 740 requires an assessment of both positive and negative evidence concerning the realizability of our deferred tax assets in each jurisdiction. After
considering evidence such as current and cumulative financial reporting incomes, the expected sources of future taxable income and tax planning strategies,
the Company's management concluded that a valuation allowance is required for US, state and Israel deferred tax assets. Future changes in these factors,
including the Company's anticipated results, could have a significant impact on the realization of the deferred tax assets which would result in an increase or
decrease to the valuation allowance and a corresponding charge to income tax expense.
Significant components of our deferred tax assets and liabilities as of December 31, 2019 and 2018 are as follows:
82
Deferred tax assets:
Carry forward losses and credits
Deferred revenues
Accrued payroll, commissions, vacation
Equity compensation
Allowance for doubtful accounts
Accrued severance pay
Operating lease liability
Other
Deferred tax assets before valuation allowance
Valuation allowance
Deferred tax assets
Deferred tax liability:
Accrued compensation and other accrued expense
Operating lease right-of-use asset
Deferred tax liability
Net deferred tax asset
December 31,
2019
2018
$
36,092 $
13,953
2,666
6,220
978
340
12,244
532
73,025
(62,379)
10,646 $
(187) $
(10,291) $
(10,478) $
168 $
$
$
$
$
$
15,547
13,995
1,912
5,737
940
297
—
1,346
39,774
(39,365)
409
(272)
—
(272)
137
The change in the valuation allowance was approximately an increase of $22,818 and $15,826 during 2019 and 2018, respectively.
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, and the
actual tax expense as reported in the consolidated statements of operations is as follows:
Loss before taxes, as reported in the consolidated statements of operations
Statutory tax rate
Theoretical tax benefits on the above amount at the US statutory tax rate
Income tax at rate other than the U.S. statutory tax rate
Tax advances and non-deductible expenses including equity based compensation
expenses
Operating losses and other temporary differences for which valuation allowance was
$
$
provided
Research and Development Tax Credit
State tax
Impact of rate change
Change in tax reserve for uncertain tax positions
Other individually immaterial income tax items
Actual tax expense
Year ended December 31,
2019
2018
2017
(76,376)
$
(28,165)
$
(11,057)
21%
21%
34%
(16,039)
$
(5,915)
$
(2,508)
(115)
22,818
—
(3,436)
401
1,247
20
692
(7,623)
15,826
—
(1,221)
—
(1,728)
382
413
$
(3,759)
(1,047)
3,123
(8,623)
1,126
(601)
10,920
1,576
72
2,787
$
2,388
$
83
g.
A reconciliation of the beginning and ending amounts of unrecognized tax benefits in the years ended December 31, 2019
and 2018 are as follows:
Gross unrecognized tax benefits as of January 1, 2018
Increase in tax position for current year
Increase in tax position for prior years
Decrease in tax position for prior years
Decrease for lapse of statute of limitations/settlements
Gross unrecognized tax benefits as of December 31, 2018
Increase in tax position for current year
Increase in tax position for prior years
Decrease for lapse of statute of limitations/settlements
Gross unrecognized tax benefits as of December 31, 2019
$
$
$
3,682
169
241
(720)
(1,418)
1,954
1,545
387
(685)
3,201
There was $3,201 of unrecognized income tax benefits that, if recognized, approximately $2,678 would impact the effective tax rate in the period in which
each of the benefits is recognized. The Company includes interest and penalties related to unrecognized tax benefits within the provision for income taxes on the
consolidated statements of operations. The total amount of penalties and interest is approximately $170 as of December 31, 2019.
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 are conditioned
upon terms stipulated in the Investment Law and the related regulations and the criteria set forth in the applicable certificate of approval (for a
Beneficiary Enterprise). If VSL does not fulfill these conditions, in whole or in part, the benefits can be cancelled, and VSL may be required 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 enterprise for 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 tax at 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:
In general, it is the Company’s practice and intention to reinvest the earnings of its non-U.S. subsidiaries in those operations. Undistributed earnings of foreign
subsidiaries are immaterial for all periods presented. Because the Company’s non-U.S. subsidiary earnings have previously been subject to the one-time Transition
Tax on foreign earnings required by the TCJA, any additional taxes due with respect to such earnings or the excess of the amount for financial reporting over the
tax basis of its foreign investments would generally be limited to foreign withholding taxes and/or U.S. state income taxes.
i.
Tax assessments:
The Company was audited by the Internal Revenue Service for tax year 2016. As of December 31, 2019, our federal returns for the years ended 2010 through
the current period and most state returns for the years ended 2009 through the current period are still open to examination due to the Company's net carry-
over unused operating losses and tax credit attributable to those years.
84
During 2019, the Israeli Tax Authorities initiated a withholding tax audit on VSL for the years 2015-2017, and the French Tax Authority initiated a tax audit
on VSF for the years 2016-2018. The Company believes it has valid arguments to support its positions and intends to defend against any tax assessment. The
Company has recorded a provision with respect to its uncertain tax positions in accordance with ASC 740.
The Company has final income tax assessments for VSL in Israel through 2015, VSUK in UK through 2016 and VSF in France through 2015.
All other foreign subsidiaries do not have final tax assessments since their respective inceptions.
NOTE 10:- FINANCIAL INCOME (EXPENSES), NET
Financial income:
Interest on bank deposits, net
Foreign currency transactions gains, net
Other
Financial expenses:
Bank charges
Foreign currency transactions losses, net
Other
Year ended
December 31,
2018
2017
2019
$
2,034 $
1,741 $
—
7
2,041
205
2,225
—
(2,430)
—
—
1,741
195
574
2
(771)
Financial income (expense), net
$
(389) $
970 $
747
1,773
27
2,547
185
—
—
(185)
2,362
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 as components of
an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. The Company manages its business on the basis of one reportable segment, and derives revenues from
licensing of software, sale of professional services, maintenance and technical support (see Note 1 above for a brief description of the Company’s business).
The following is a summary of revenues within geographic areas:
Revenues based on customer’s location:
North America
EMEA (*)
Rest of the World
Total revenues
Year ended
December 31,
2018
2019
$
$
174,607 $
167,361 $
70,208
9,375
93,816
9,111
254,190 $
270,288 $
2017
139,720
68,998
6,672
215,390
(*) Sales to customers in France did not exceed 10% of total revenues for the year ended December 31, 2019 and accounted for $31,532 and $22,658 of the
Company’s revenues for the years ended December 31, 2018 and 2017, respectively.
85
During the years ended December 31, 2019, 2018 and 2017, there were no sales to a single customer exceeding 10% of the Company’s revenues.
Long-lived assets by geographic region:
United States
Israel
France
Other
December 31,
2019
2018
$
$
16,100 $
18,354
1,023
861
36,338 $
7,612
7,834
1,243
634
17,323
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, or
disagreements 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 and
procedures (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, our
Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this report were
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 Exchange Act is
recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. We believe that a control system, no matter how
well designed and operated, cannot provide absolute assurance that the objectives of the control system are met, and no evaluation of controls can provide absolute
assurance that all control issues and instances of fraud, if any, within a company have been detected.
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, 2019 based
on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Based on the results of its evaluation, management concluded that our internal control over financial reporting was effective as of December 31, 2019.
The effectiveness of our internal control over financial reporting as of December 31, 2019 has been audited by Kost Forer Gabbay & Kasierer, a member of Ernst
& Young Global and an independent 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.
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, 2019 that has materially affected,
or is reasonably likely to materially affect, our internal control over financial reporting.
Item 9B.
Other Information
None.
86
Item 10.
Directors, Executive Officers and Corporate Governance
PART III
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 proxy statement
with respect to our 2020 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 and senior
financial officers. The code of business conduct and ethics is available on our website at www.varonis.com. We expect that any amendment to the code, 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 by reference 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 2020 Annual Meeting of Stockholders to be filed 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 2020 Annual Meeting of Stockholders to be filed 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 2020 Annual Meeting of Stockholders to be filed 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 2020 Annual Meeting of Stockholders to be filed with
the SEC and is incorporated herein by reference.
Item 15.
Exhibits and Financial Statement Schedules
(a) Financial Statements
PART IV
Our consolidated financial statements are listed in the “Index to Consolidated Financial Statements” under Part II, Item 8 of this Annual Report on Form 10-
K. All schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.
87
(b) Exhibits
The exhibits listed below in the accompanying “Index to Exhibits” are filed or incorporated by reference as part of this Annual Report on Form 10-K.
Item 16.
Form 10-K Summary
None.
88
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 its behalf by
the undersigned thereunto duly authorized.
SIGNATURES
VARONIS SYSTEMS, INC.
February 11, 2020
By:
/s/ Yakov Faitelson
Yakov Faitelson
Chief Executive Officer and President
(Principal Executive Officer)
February 11, 2020
By:
/s/ Guy Melamed
Guy Melamed
Chief Financial Officer and Chief Operating Officer (Principal Financial
Officer and Principal Accounting Officer)
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Yakov Faitelson and Guy
Melamed, jointly and severally, his or her attorneys-in-fact, each with the power of substitution, for him or her in any and all capacities, to sign any amendments to
this Annual Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant
in the capacities and on the dates indicated.
Signature
Title
Date
/s/ Yakov Faitelson
Yakov Faitelson
/s/ Guy Melamed
Guy Melamed
/s/ Kevin Comolli
Kevin Comolli
/s/ John J. Gavin, Jr.
John J. Gavin, Jr.
/s/ Gili Iohan
Gili Iohan
/s/ Ohad Korkus
Ohad Korkus
/s/ Thomas F. Mendoza
Thomas F. Mendoza
/s/ Ofer Segev
Ofer Segev
/s/ Rona Segev-Gal
Rona Segev-Gal
/s/ Fred Van Den Bosch
Fred Van Den Bosch
Chief Executive Officer, President
and Chairman of the Board
(Principal Executive Officer)
Chief Financial Officer and Chief Operating
Officer
(Principal Financial Officer and Principal
Accounting Officer)
Director
Director
Director
Director
Director
Director
Director
Director
February 11, 2020
February 11, 2020
February 11, 2020
February 11, 2020
February 11, 2020
February 11, 2020
February 11, 2020
February 11, 2020
February 11, 2020
February 11, 2020
EXHIBIT INDEX
Description of the Document
Amended and Restated Certificate of Incorporation
Amended and Restated Bylaws
Description of Securities Registered under Section 12 of the Securities Exchange Act of 1934
Exhibit
Number
3.1(1)
3.2(2)
4.1
10.1(3)†
Form of Indemnification Agreement between the Company and its directors and officers
10.2(4)†
2005 Stock Plan, as amended May 7, 2013
10.3(5)†
2013 Omnibus Equity Incentive Plan
10.4(6)†
10.5(7)†
Forms of Restricted Stock Unit Award Grant Notice and Restricted Stock Unit Award Agreement under the 2013 Omnibus Equity Incentive
Plan
Forms of Performance-Based Restricted Stock Unit Award Grant Notice and Performance-Based Restricted Stock Unit Award Agreement
under the 2013 Omnibus Equity Incentive Plan
10.6(8)†
2015 Employee Stock Purchase Plan
10.7(9)†
Employment Agreement by and between the Company and Yakov Faitelson, dated as of February 10, 2014
10.8(10)†
Amendment to Employment Agreement, dated as of August 27, 2018, by and between the Company and Yakov Faitelson
10.9(11)†
Amended and Restated Performance-Based Restricted Stock Unit Award Grant Notice and Performance-Based Restricted Stock Unit Award
Agreement under the 2013 Omnibus Equity Incentive Plan, dated June 25, 2019, between Yakov Faitelson and the Company
10.10(12)†
Employment Agreement, dated as of February 7, 2017, by and between the Company and Guy Melamed
10.11(13)†
Amendment to Employment Agreement, dated as of February 8, 2018, by and between the Company and Guy Melamed
10.12(14)†
Amendment to Employment Agreement, dated as of August 27, 2018, by and between the Company and Guy Melamed
10.13(15)†
Employment Agreement, dated as of February 10, 2014, by and between the Company and James O’Boyle
10.14(16)†
Amendment to Employment Agreement, dated as of August 27, 2018, by and between the Company and James O’Boyle
10.15(17)†
Employment Agreement, dated as of February 8, 2018, by and between Varonis Systems Ltd. and David Bass
10.16(18)†
Employment Agreement, dated as of February 7, 2019, by and between the Company and Gilad Raz
10.17(19)
New York Office Lease, dated as of December 19, 2011 by and between JT MH 1250 Owner LP and the Company
10.18(20)
First Modification of Lease Agreement, dated as of June 18, 2014, between JT MH 1250 Owner LP and the Company
21.1
23.1
31.1
31.2
List of Subsidiaries
Consent of Kost Forer Gabbay & Kasierer, a member of Ernst & Young Global
Rule 13a-14(a) Certification of Chief Executive Officer and President of the Company in accordance with Section 302 of the Sarbanes-Oxley
Act of 2002
Rule 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-Oxley
Act 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
101
The following materials from the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, formatted in inline
XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii)
the Consolidated Statements of Comprehensive Loss, (iv) the Unaudited Consolidated Statements of Changes in Stockholders' Equity, (v) the
Consolidated Statements of Cash Flows and (vi) related notes to these consolidated financial statements, tagged as blocks of text and in detail
104
____________________________________
Cover Page Interactive Data File - (formatted as Inline XBRL and contained in Exhibit 101)
†
Indicates management contract or compensatory plan or arrangement.
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 Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, irrespective
of any general incorporation language contained in any such filing.
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 Form 10-Q”) and incorporated herein by reference.
Filed as Exhibit 3.2 to the Company’s First Quarter 2014 Form 10-Q and incorporated herein by reference.
Filed as Exhibit 10.1 to the Company's Registration Statement on Form S-1 (Registration No. 333-191840) (the "IPO
Registration Statement") with the SEC on February 18, 2014 and incorporated herein by reference.
Filed as Exhibit 10.2 to the IPO Registration Statement with the SEC on October 22, 2013 and incorporated herein by
reference.
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 and incorporated herein by reference.
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 2014 Form 10-Q”) and incorporated herein by reference.
Filed as Exhibit 10.4 to the Company’s Current Report on Form 8-K filed with the SEC on June 26, 2019 and
incorporated herein by reference.
Filed as Exhibit A of the Proxy Statement on Form DEF 14A with the SEC on March 26, 2015 and incorporated herein
by reference.
Filed as Exhibit 10.8 to the IPO Registration Statement with the SEC on February 18, 2014 and incorporated herein by
reference.
Filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on August 31, 2018 and
incorporated herein by reference.
Filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the SEC on June 26, 2019 and
incorporated herein by reference.
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.
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.
Filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC on August 31, 2018 and
incorporated herein by reference.
Filed as Exhibit 10.11 to the IPO Registration Statement with the SEC on February 18, 2014 and incorporated herein by
reference.
Filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the SEC on August 31, 2018 and
incorporated herein by reference.
Filed as Exhibit 10.13 to the Company’s Annual Report on Form 10-K filed with the SEC on February 12, 2019 (the
“Company’s 2018 Form 10-K”) and incorporated herein by reference.
Filed as Exhibit 10.14 to the Company’s 2018 Form 10-K and incorporated herein by reference.
Filed as Exhibit 10.11 to the IPO Registration Statement with the SEC on October 22, 2013 and incorporated herein by
reference.
Filed as Exhibit 10.2 to the Company’s Third Quarter 2014 Form 10-Q and incorporated herein by reference.
**
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
(12)
(13)
(14)
(15)
(16)
(17)
(18)
(19)
(20)
EXHIBIT 4.1
DESCRIPTION OF THE REGISTRANT'S SECURITIES REGISTERED PURSUANT TO SECTION 12 OF THE SECURITIES
EXCHANGE ACT OF 1934
The following is a description of the common stock, par value $0.001 per share, of Varonis Systems, Inc. (the “Company,” “we” or
“us”) registered under Section 12 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). This description is a summary
and is qualified in its entirety by reference to the amended and restated certificate of incorporation and amended and restated bylaws, copies
of which are filed as Exhibit 3.1 and 3.2, respectively, to the Annual Report on Form 10-K of the Company for the fiscal year ended
December 31, 2019 (the “2019 Annual Report”). We refer in this exhibit to our amended and restated certificate of incorporation as our
certificate of incorporation, and we refer to our amended and restated bylaws as our bylaws.
General
Our authorized capital stock consists of 200 million shares of common stock, par value $0.001 per share, and 5,000,000 shares of
preferred stock, par value $0.001 per share, all of which shares of preferred stock are undesignated.
As of December 31, 2019, 30,583,311 shares of our common stock were outstanding, and no shares of preferred stock were outstanding.
Common Stock
Voting Rights. The holders of our common stock are entitled to one vote for each share held on all matters properly submitted to a vote
of the stockholders. The holders of our common stock do not have any cumulative voting rights. Directors shall be elected by a plurality of
the votes of the shares present in person or represented by proxy at the meeting and entitled to vote on the election of directors. All other
matters, unless otherwise provided by applicable law, the rules or regulations of any stock exchange applicable to the Company, the
certificate of incorporation or the bylaws (as disclosed herein), shall be decided by the affirmative vote of the holders of a majority of the
voting power of the shares of stock entitled to vote thereon, regardless of whether such holders actually vote their shares on such matter or
abstain from doing so.
Dividend Rights and Liquidation Rights. Holders of our common stock are entitled to receive ratably any dividends declared by the
board of directors out of funds legally available for that purpose, subject to any preferential dividend rights of any outstanding preferred
stock. In the event of our liquidation, dissolution or winding up, holders of our common stock will be entitled to share ratably in all assets
remaining after payment of all debts and other liabilities and any liquidation preference of any outstanding preferred stock.
Other Rights and Preferences. Our common stock has no preemptive rights, conversion rights or other subscription rights or redemption
or sinking fund provisions. The outstanding shares are validly issued, fully paid and non-assessable. The rights and privileges of holders of
our common stock are subject to any series of preferred stock that we may issue, as described below.
Preferred Stock
Our board of directors is authorized, subject to any limitations prescribed by law, without stockholder approval, to issue from time to
time up to an aggregate of 5,000,000 shares of preferred stock, in one or more series, each series to have such rights and preferences,
including voting rights, dividend rights, conversion rights, redemption privileges and liquidation preferences as our board of directors
determines. The rights of the holders of common stock will be subject to, and may be adversely affected by, the rights of holders of any
preferred stock that may be issued in the future. As of the date of the filing of the 2019 Annual Report, we had no shares of preferred stock
outstanding.
Anti-Takeover Effects of our Certificate of Incorporation and Bylaws and Delaware Law
Our certificate of incorporation and bylaws include a number of provisions that may have the effect of delaying, deferring or preventing
another party from acquiring control of us and encouraging persons considering unsolicited tender offers or other unilateral takeover
proposals to negotiate with our board of directors rather than pursue non-negotiated takeover attempts. These provisions include the items
described below.
Board Composition and Filling Vacancies. Our certificate of incorporation provides for the division of our board of directors into three
classes serving staggered three-year terms, with one class being elected each year. Our certificate of incorporation also provides that directors
may be removed only for cause and then only by the affirmative vote of the holders of 75% or more of the shares then entitled to vote at an
election of directors. Furthermore, any vacancy on our board of directors, however occurring, including a vacancy resulting from an increase
in the size of our board, may only be filled by the affirmative vote of a majority of our directors then in office even if less than a quorum,
unless otherwise determined by our board to be filled by stockholders. The classification of directors, together with the limitations on removal
of directors and treatment of vacancies, has the effect of making it more difficult for stockholders to change the composition of our board of
directors.
No Written Consent of Stockholders. Our certificate of incorporation provides that all stockholder actions are required to be taken by a
vote of the stockholders at an annual or special meeting, and that stockholders may not take any action by written consent in lieu of a
meeting. This limit may lengthen the amount of time required to take stockholder actions and would prevent the amendment of our bylaws or
removal of directors by our stockholders without holding a meeting of stockholders.
Meetings of Stockholders. Our certificate of incorporation and bylaws provide that only the chairperson of our board, the lead
independent director, if any, the chief executive offer, the president or a majority of the total authorized number of directors may call special
meetings of stockholders and only those matters set forth in the notice of the special meeting may be considered or acted upon at a special
meeting of stockholders. Our bylaws limit the business that may be conducted at an annual meeting of stockholders to those matters properly
brought before the meeting.
Advance Notice Requirements. Our bylaws establish advance notice procedures with regard to stockholder proposals relating to the
nomination of candidates for election as directors or new business to be brought before meetings of our stockholders. These procedures
provide that notice of stockholder proposals must be timely given in writing to our corporate secretary prior to the meeting at which the
action is to be taken. Generally, to be timely, notice must be received at our principal executive offices not less than 75 days nor more than
105 days prior to the first anniversary date of the annual meeting for the preceding year. Our bylaws specify the requirements as to form and
content of all stockholders’ notices. These requirements may preclude stockholders from bringing matters before the stockholders at an
annual or special meeting.
Amendment to Certificate of Incorporation and Bylaws. Any amendment of our certificate of incorporation must first be approved by a
majority of our board of directors, and if required by law or our certificate of incorporation, must thereafter be approved by a majority of the
outstanding shares entitled to vote on the amendment and, if applicable, by a majority of the outstanding shares of each class entitled to vote
thereon as a class, except that the amendment of the provisions relating to stockholder action, the requirements for the amendment of our
bylaws, board composition (including size, classification, term, removal and vacancies), director liability and indemnification and the
requirements for the amendment of our certificate of incorporation must be approved by not less than 75% of the outstanding shares entitled
to vote on the amendment voting together as a single class.
Our bylaws may be amended by the affirmative vote of a majority of the directors then in office, subject to any limitations set forth in
the bylaws; and may also be amended by the affirmative vote of at least 75% of the outstanding shares entitled to vote on the amendment, or,
if our board of directors recommends that the stockholders approve the amendment, by the affirmative vote of the majority of the outstanding
shares entitled to vote on the amendment, in each case voting together as a single class.
Undesignated Preferred Stock. Our certificate of incorporation provides for 5,000,000 authorized shares of preferred stock. The
existence of authorized but unissued shares of preferred stock may enable our board of directors to render more difficult or to discourage an
attempt to obtain control of us by means of a merger, tender offer, proxy contest or otherwise. For example, if in the due exercise of its
fiduciary obligations, our board of directors were to determine that a takeover proposal is not in the best interests of our stockholders, our
board of directors could cause shares of preferred stock to be issued without stockholder approval in one or more private offerings or other
transactions that might dilute the voting or other rights of the proposed acquirer or insurgent stockholder or stockholder group. In this regard,
our certificate of incorporation grants our board of directors broad power to establish the rights and preferences of authorized and unissued
shares of preferred stock. The issuance of shares of preferred stock could decrease the amount of earnings and assets available for distribution
to holders of shares of common stock. The issuance may also adversely affect the rights and powers, including voting rights, of these holders
and may have the effect of delaying, deterring or preventing a change in control of us.
Section 203 of the Delaware General Corporation Law. We are subject to the provisions of Section 203 of the Delaware General
Corporation Law. In general, Section 203 prohibits a publicly held Delaware corporation from engaging in a “business combination” with an
“interested stockholder” (any entity or person beneficially owning 15% or more of the outstanding voting stock) for a three-year period
following the time that this stockholder becomes an interested stockholder, unless the business combination satisfies one of the following
conditions:
•
•
•
•
•
before the stockholder became interested, our board of directors approved either the business combination or the transaction which
resulted in the stockholder becoming an interested stockholder;
upon consummation of the transaction which resulted in the stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding
for purposes of determining the voting stock outstanding, shares owned by persons who are directors and also officers, and employee
stock plans, in some instances, but not the outstanding voting stock owned by the interested stockholder; or
at or after the time the stockholder became interested, the business combination was approved by our board of directors and
authorized at an annual or special meeting of the stockholders by the affirmative vote of at least two-thirds of the outstanding voting
stock which is not owned by the interested stockholder.
Section 203 defines a business combination to include:
any merger or consolidation involving the corporation and the interested stockholder;
any sale, transfer, lease, pledge or other disposition involving the interested stockholder of 10% or more of the assets of the
•
•
•
corporation;
subject to exceptions, any transaction that results in the issuance of transfer by the corporation of any stock of the corporation to the
interested stockholder;
subject to exceptions, any transaction involving the corporation that has the effect of increasing the proportionate share of the stock
of any class or series of the corporation beneficially owned by the interested stockholder; and
the receipt by the interested stockholder of the benefit of any loans, advances, guarantees, pledges or other financial benefits provided
by or through the corporation.
Market Listing
Our common stock is listed on The Nasdaq Global Select Market under the symbol “VRNS.”
1
VARONIS SYSTEMS, INC. SUBSIDIARIES
Exhibit 21.1
Subsidiary
Varonis Systems Ltd.
Varonis (UK) Limited
Varonis Systems (Deutschland) GmbH
Varonis France SAS
Varonis Systems Corp.
Varonis Systems (Ireland) Limited
Varonis Systems (Australia) Pty Ltd
Varonis Systems (Netherlands) B.V.
Varonis U.S. Public Sector LLC
Varonis Systems (Luxemburg) S.à r.l.
State/Country of Incorporation/Formation
Israel
England
Germany
France
Canada (British Columbia)
Ireland
Australia
Netherlands
United States (Delaware)
Luxembourg
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-235997, 333-229321, 333-222646, 333-215617, 333-209312,
333-205582 and 333-194657) of our report relating to the consolidated financial statements of Varonis Systems, Inc. (the "Company"), appearing in this Annual
Report on Form 10-K of the Company for the year ended December 31, 2019.
Exhibit 23.1
/s/ KOST FORER GABBAY & KASIERER
A Member of Ernst & Young Global
Tel-Aviv, Israel
February 11, 2020
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
Exhibit 31.1
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 the statements
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 the financial
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 in Exchange 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, to ensure
that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision,
to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes 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 the effectiveness
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 recent fiscal
quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect,
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 the registrant'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 reasonably likely 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 control over
financial reporting.
Date: February 11, 2020
By:
/s/ Yakov Faitelson
Yakov Faitelson
Chief Executive Officer and President
CERTIFICATION OF CHIEF FINANCIAL OFFICER
Exhibit 31.2
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 the statements
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 the financial
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 in Exchange 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, to ensure
that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision,
to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes 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 the effectiveness
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 recent fiscal
quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect,
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 the registrant'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 reasonably likely
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 control over
financial reporting.
Date: February 11, 2020
By:
/s/ Guy Melamed
Guy Melamed
Chief Financial Officer and Chief Operating Officer (Principal Financial
Officer and Principal Accounting Officer)
CERTIFICATION OF CEO PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
In connection with the Annual Report on Form 10-K of Varonis Systems, Inc. (the "Company") for the year ended December 31, 2019 as filed with
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 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 the Company.
By:
/s/ Yakov Faitelson
Yakov Faitelson
Chief Executive Officer and President
Date: February 11, 2020
This certification accompanies the Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by
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.
CERTIFICATION OF CFO PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.2
In connection with the Annual Report on Form 10-K of Varonis Systems, Inc. (the "Company") for the year ended December 31, 2019 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), Guy Melamed, as Chief Financial Officer and Chief Operating 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 the Company.
By:
/s/ Guy Melamed
Guy Melamed
Chief Financial Officer and Chief Operating Officer (Principal Financial
Officer and Principal Accounting Officer)
Date: February 11, 2020
This certification accompanies the Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by
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.