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General | 9 Months Ended
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Sep. 30, 2020
Organization, Consolidation and Presentation of Financial Statements [Abstract] |
General | GENERAL
a. | Description of Business:
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.
b. | Basis of Presentation:
The accompanying unaudited consolidated interim financial statements have been prepared in accordance with Article 10 of Regulation S-X, “Interim Financial Statements” and the rules and regulations for Form 10-Q of the Securities and Exchange Commission (the “SEC”). Pursuant to those rules and regulations, the Company has condensed or omitted certain information and footnote disclosure it normally includes in its annual consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). Certain amounts in prior periods' financial statements have been recast and reclassified to conform to the current year's presentation. In management’s opinion, the Company has made all adjustments (consisting only of normal, recurring adjustments, except as otherwise indicated) necessary to fairly present its consolidated financial position, results of operations and cash flows. The Company’s interim period operating results do not necessarily indicate the results that may be expected for any other interim period or for the full fiscal year. These financial statements and accompanying notes should be read in conjunction with the 2019 consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for its fiscal year ended December 31, 2019 filed with the SEC on February 11, 2020 (the “2019 Form 10-K”). There have been no changes in the significant accounting policies from those that were disclosed in the audited consolidated financial statements for the fiscal year ended December 31, 2019 included in the 2019 Form 10-K, unless otherwise stated.
c. | 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 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 licenses have the same functionality as subscriptions and 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. 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. 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 new 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. 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 $84,630 for the nine months ended September 30, 2020. The Company does not grant a right of return to its customers, except for one of its resellers. In 2019 and for the nine months ended September 30, 2020, there were no returns from this reseller. For information regarding disaggregated revenues, please refer to Note 6.
d. | 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.
e. | 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 New Israeli Shekel (“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. 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. The Company does not enter into derivative financial instruments for trading purposes. Derivative instruments measured at fair value and their classification on the consolidated balance sheets are presented in the following table (in thousands):
| Liabilities as of September 30, 2020 (unaudited) |  |  |  | Assets (liabilities) as of December 31, 2019 |  |
| 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 | $ | 77,369 |  |  | $ | (1,101) |  |  | $ | 84,968 |  |  | $ | (470) |
Foreign exchange forward contract derivatives for monetary items included in prepaid expenses and other current assets and accrued expenses and other short-term liabilities | $ | 15,160 |  |  | $ | (30) |  |  | $ | 26,995 |  |  | $ | 5 |
For the three and nine months ended September 30, 2020, the unaudited consolidated statements of operations reflect a gain of $128 and a loss of $176, respectively, related to the effective portion of the cash flow hedges. For the three and nine months ended September 30, 2019, the unaudited consolidated statements of operations reflect a gain of $361 and a loss of $170, respectively, related to the effective portion of the cash flow hedges. For the three and nine months ended September 30, 2020, the realized gains from these derivatives were $2,271 and $4,742, respectively. The cash flows associated with these derivatives are reflected as cash flows from operating activities in the consolidated statements of cash flows. Effective with our January 1, 2019 adoption of ASU No. 2017-12, ineffectiveness of cash flow hedges is no longer recognized in financial income (expenses), net in the consolidated statement of operations. No material ineffective hedges were recognized for the three and nine months ended September 30, 2020 and 2019 in operating expenses in the consolidated statement of operations. For the three and nine months ended September 30, 2020, the unaudited consolidated statements of operations reflect a loss of $876 and $244, respectively, in financial income (expenses), net, related to the Fair Value Hedging Program. For the three and nine months ended September 30, 2019, the unaudited consolidated statements of operations reflect gains of $951 and $1,404, respectively, in financial income (expenses), net, related to the Fair Value Hedging Program.
f. | Cash, Cash Equivalents, Marketable Securities and Short-Term Investments:
The Company accounts for investments in marketable securities in accordance with ASC No. 320, “Investments—Debt and Equity Securities” and ASC No. 326, “Financial Instruments—Credit Losses”. 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 but less than twelve months to be short-term deposits. 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 (expenses), net in the consolidated statement of operations. Cash, cash equivalents, marketable securities and short-term deposits consist of the following (in thousands):
| As of September 30, 2020 |  |  |  |  |  |
| (unaudited) |  |  |  |  |  |
| Amortized Cost |  | Gross Unrealized Gains |  | Gross Unrealized Losses |  | Fair Value
Cash and cash equivalents |  |  |  |  |  |  |
Money market funds | $ | 10,658 |  |  | $ | — |  |  | $ | — |  |  | $ | 10,658 |
Total | $ | 10,658 |  |  | $ | — |  |  | $ | — |  |  | $ | 10,658 |
Marketable securities |  |  |  |  |  |  |
US Treasury securities | $ | 34,087 |  |  | $ | 25 |  |  | $ *) |  | $ | 34,112 |
Total | $ | 34,087 |  |  | $ | 25 |  |  | $ *) |  | $ | 34,112 |
Short-term deposits |  |  |  |  |  |  |
Term bank deposits | $ | 60,000 |  |  | $ | — |  |  | $ | — |  |  | $ | 60,000 |
Total | $ | 60,000 |  |  | $ | — |  |  | $ | — |  |  | $ | 60,000 |
*) Represents an amount lower than $1
| As of December 31, 2019 |  |  |  |  |  |
| Amortized Cost |  | Gross Unrealized Gains |  | Gross Unrealized Losses |  | Fair Value
Cash and cash equivalents |  |  |  |  |  |  |
Money market funds | $ | 4,789 |  |  | $ | — |  |  | $ | — |  |  | $ | 4,789 |
Total | $ | 4,789 |  |  | $ | — |  |  | $ | — |  |  | $ | 4,789 |
Marketable securities |  |  |  |  |  |  |
US Treasury securities | $ | 41,510 |  |  | $ | 23 |  |  | $ | (2) |  |  | $ | 41,531 |
Total | $ | 41,510 |  |  | $ | 23 |  |  | $ | (2) |  |  | $ | 41,531 |
Short-term deposits |  |  |  |  |  |  |
Term bank deposits | $ | 10,000 |  |  | $ | — |  |  | $ | — |  |  | $ | 10,000 |
Total | $ | 10,000 |  |  | $ | — |  |  | $ | — |  |  | $ | 10,000 |
All the US Treasury securities in marketable securities have a stated effective maturity of less than 12 months as of September 30, 2020 and December 31, 2019. The gross unrealized gains and losses related to these short-term investments was due primarily to changes in interest rates. Available for sale debt securities with an amortized cost basis in excess of estimated fair value are assessed using the Current Expected Credit losses ("CECL") model to determine what portion of that difference, if any, is caused by expected credit losses. Expected credit losses on available for sale debt securities are recognized in financial income (expenses), net on the consolidated statements of operations. During the three and nine months ended September 30, 2020, the Company did not recognize an allowance for credit losses on available for sale marketable securities as any expected credit losses are not material to the consolidated financial statements.
g. | Revolving Credit Facility:
On August 21, 2020, the Company entered into a credit and security agreement with KeyBank National Association and other parties thereto (the “Credit and Security Agreement”), for a three-year secured revolving credit facility of $70,000, with a letter of credit sublimit of $15,000 and an accordion feature under which the Company can increase the credit facility to up to $90,000 (the “Credit Facility”). Borrowings and repayments under the Credit Facility may occur from time to time in the Company’s ordinary course of business through the maturity date, which is the earlier of August 21, 2023 or 90 days prior to the scheduled maturity of any Convertible Debt Securities (including the 1.25% Convertible Senior Notes issued by the Company on May 11, 2020 and due August 2025 in an aggregate principal amount of $253,000 (the "2025 Notes")), at which time any amounts outstanding are to be paid in full. The fees incurred in connection with entering into the Credit and Security Agreement were recorded in prepaid expenses and other current assets on the consolidated balance sheet and are amortized on a straight-line basis over the contractual term of the arrangement. Ongoing fees and interest paid on the used and unused portions of the Credit Facility are expensed as incurred and included within financial income (expenses), net on the consolidated statement of operations. The Credit Facility is secured by a first priority perfected security interest in substantially all tangible and intangible assets (excluding real property and other customary exceptions) of the Company and its domestic subsidiaries and a first priority perfected lien on the capital stock of domestic entities within the Company, and 65% of the voting capital stock of the foreign entities within the Company. The Credit and Security Agreement contains customary covenants, including a requirement of quarterly minimum recurring revenues and a minimum available liquidity of at least $25,000 at all times, and customary events of default provisions. Borrowings under the Credit and Security Agreement bear interest at the rate equal to, as related to Eurodollar loans, the London Interbank Offered Rate (“LIBOR”) (subject to a 1.00% floor), plus an applicable margin equal to 3.00% per annum (“Eurodollar Rate”), or, as related to all other loans, the alternate base rate plus an applicable margin equal to 0.5% per annum (“Base Rate”). Other than letters of credit, with respect to which the Eurodollar Rate shall apply, the Company shall be allowed to choose whether the Eurodollar Rate or Base Rate shall apply to a loan drawn under the Credit Facility. As of September 30, 2020, the Company had $2,439 outstanding on the Credit Facility relating to letters of credit issued on behalf of the Company in connection with certain leases. Such letters of credit were initially issued pursuant to the prior promissory note and related security documents with Bank Leumi USA, which allowed the Company to borrow up to $7,000 against certain of its outstanding accounts receivable. As Bank Leumi USA is one of the lenders under the Credit Facility, the standalone promissory note with Bank Leumi USA was terminated upon signing the Credit and Security Agreement, and the letters of credit are now deemed to be issued pursuant to the Credit Facility. The Company was in compliance with all financial covenants and non-financial covenants as of September 30, 2020.
h. | COVID-19:
In March 2020, the World Health Organization (”WHO”) declared the novel coronavirus COVID-19 ("COVID-19") a global pandemic. The pandemic, which has continued to spread, has adversely affected workforces, economies, and financial markets globally, leading to an economic downturn and is expected to continue to disrupt general business operations until the disease is contained. This had a negative impact on the Company's sales and results of operations, primarily in the first quarter of 2020, and might, in the future, negatively affect the Company's sales and results of operations. The Company is currently unable to predict the duration of that impact but has updated its accounting estimates of the carrying value of certain assets and liabilities relating to its leases and will continue to monitor these estimates as new events occur and additional information is obtained. Actual results could differ from our estimates and judgments, and any such differences may be material to our financial statements.
i. | Recently Adopted Accounting Pronouncements:
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 was adopted for our interim and annual periods beginning January 1, 2020 using the prospective adoption approach. Adoption of this standard had an immaterial impact on the Company's consolidated financial statements. In January 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. This standard requires entities to estimate an expected lifetime credit loss on financial assets ranging from short-term trade accounts receivable to long-term financings and report credit losses using an expected losses model rather than the incurred losses model that was previously used, and establishes additional disclosures related to credit risks. For available for sale debt securities with unrealized losses, the standard eliminates the concept of other-than-temporary impairments and requires allowances to be recorded instead of reducing the amortized cost of the investment. ASU 2016-13 also 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 was adopted for interim and annual periods beginning after January 1, 2020. Adoption of this standard had an immaterial impact on the Company's consolidated financial statements.
j. | Recently Issued Accounting Pronouncements Not Yet Adopted:
In August 2020, the FASB issued ASU 2020-06, ASC Subtopic 470-20 “Debt—Debt with “ Conversion and Other Options” and ASC subtopic 815-40 “Hedging—Contracts in Entity’s Own Equity”. The standard reduced the number of accounting models for convertible debt instruments and convertible preferred stock. Convertible instruments that continue to be subject to separation models are (1) those with embedded conversion features that are not clearly and closely related to the host contract, that meet the definition of a derivative, and that do not qualify for a scope exception from derivative accounting and (2) convertible debt instruments issued with substantial premiums for which the premiums are recorded as paid-in capital. The amendments in this update are effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The Company is currently assessing the impact of the adoption of this standard on its consolidated financial statements.

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