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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________
FORM 10-Q
____________________
(Mark One) | | | | | |
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2024
or
| | | | | |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 001-36324
____________________
VARONIS SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
____________________
| | | | | | | | | | | | | | |
Delaware | | 57-1222280 | |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) | |
| |
1250 Broadway, 28th Floor | New York | NY | 10001 | |
(Address of principal executive offices) | | (Zip Code) | |
(877) 292-8767
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: | | | | | | | | |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, par value $0.001 per share | VRNS | The NASDAQ Stock Market LLC |
____________________
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 and 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. ý 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 and post such files). ý 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 | ý | Accelerated filer | ¨ |
| | | |
Non-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 Exchange Act). ☐
Yes ý No
As of October 25, 2024, there were 112,470,921 shares of common stock, par value $0.001 per share, outstanding.
| | | | | |
PART I. | FINANCIAL INFORMATION |
| | | | | |
Item 1. | Financial Statements |
VARONIS SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data) | | | | | | | | | | | |
| September 30, 2024 | | December 31, 2023 |
| (unaudited) | | |
Assets | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 282,218 | | | $ | 230,740 | |
Marketable securities | 562,568 | | | 253,175 | |
Short-term deposits | 34,174 | | | 49,800 | |
Trade receivables (net of allowances of $1,970 and $1,487 at September 30, 2024 and December 31, 2023, respectively) | 119,203 | | | 169,116 | |
Prepaid expenses and other short-term assets | 76,206 | | | 64,326 | |
Total current assets | 1,074,369 | | | 767,157 | |
| | | |
Long-term assets: | | | |
Long-term marketable securities | 332,329 | | | 211,063 | |
Operating lease right-of-use assets | 45,390 | | | 51,838 | |
Property and equipment, net | 28,908 | | | 33,964 | |
Intangible assets, net | 119 | | | 1,263 | |
Goodwill | 23,135 | | | 23,135 | |
Other assets | 16,904 | | | 15,490 | |
Total long-term assets | 446,785 | | | 336,753 | |
Total assets | $ | 1,521,154 | | | $ | 1,103,910 | |
| | | |
Liabilities and stockholders’ equity | | | |
Current liabilities: | | | |
Trade payables | $ | 1,489 | | | $ | 672 | |
Accrued expenses and other short-term liabilities | 123,256 | | | 125,057 | |
Convertible senior notes, net | 251,625 | | | — | |
Deferred revenues | 217,605 | | | 181,049 | |
Total current liabilities | 593,975 | | | 306,778 | |
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Long-term liabilities: | | | |
Convertible senior notes, net | 449,759 | | | 250,477 | |
Operating lease liabilities | 43,654 | | | 51,313 | |
Deferred revenues | 1,530 | | | 886 | |
Other liabilities | 3,676 | | | 4,808 | |
Total long-term liabilities | 498,619 | | | 307,484 | |
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Stockholders’ equity: | | | |
Share capital | | | |
| | | | | | | | | | | |
Common stock of $0.001 par value - Authorized: 200,000,000 shares at September 30, 2024 and December 31, 2023; Issued and outstanding: 112,422,071 shares at September 30, 2024 and 109,103,721 shares at December 31, 2023 | 112 | | | 109 | |
Accumulated other comprehensive loss | (4,381) | | | (8,649) | |
Additional paid-in capital | 1,159,990 | | | 1,142,578 | |
Accumulated deficit | (727,161) | | | (644,390) | |
Total stockholders’ equity | 428,560 | | | 489,648 | |
Total liabilities and stockholders’ equity | $ | 1,521,154 | | | $ | 1,103,910 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
VARONIS SYSTEMS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2024 | | 2023 | | 2024 | | 2023 |
Revenues: | | | | | | | |
Term license subscriptions | $ | 68,751 | | | $ | 83,963 | | | $ | 187,460 | | | $ | 250,306 | |
SaaS | 57,805 | | | 13,716 | | | 136,575 | | | 21,437 | |
Maintenance and services | 21,512 | | | 24,629 | | | 68,401 | | | 73,318 | |
Total revenues | 148,068 | | | 122,308 | | | 392,436 | | | 345,061 | |
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Cost of revenues | 24,007 | | | 17,381 | | | 67,792 | | | 52,404 | |
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Gross profit | 124,061 | | | 104,927 | | | 324,644 | | | 292,657 | |
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Operating expenses: | | | | | | | |
Research and development | 53,459 | | | 44,818 | | | 146,219 | | | 135,694 | |
Sales and marketing | 71,378 | | | 68,610 | | | 212,646 | | | 207,324 | |
General and administrative | 22,864 | | | 20,646 | | | 65,878 | | | 61,618 | |
Total operating expenses | 147,701 | | | 134,074 | | | 424,743 | | | 404,636 | |
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Operating loss | (23,640) | | | (29,147) | | | (100,099) | | | (111,979) | |
Financial income, net | 10,245 | | | 8,634 | | | 27,039 | | | 24,872 | |
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Loss before income taxes | (13,395) | | | (20,513) | | | (73,060) | | | (87,107) | |
Income taxes | (4,938) | | | (2,504) | | | (9,711) | | | (12,911) | |
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Net loss | $ | (18,333) | | | $ | (23,017) | | | $ | (82,771) | | | $ | (100,018) | |
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Net loss per share of common stock, basic and diluted | $ | (0.16) | | | $ | (0.21) | | | $ | (0.74) | | | $ | (0.92) | |
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Weighted average number of shares used in computing net loss per share of common stock, basic and diluted | 112,268,210 | | | 109,429,722 | | | 111,382,582 | | | 109,187,063 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
VARONIS SYSTEMS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2024 | | 2023 | | 2024 | | 2023 |
Net loss | $ | (18,333) | | | $ | (23,017) | | | $ | (82,771) | | | $ | (100,018) | |
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Other comprehensive income (loss): | | | | | | | |
Unrealized income (loss) on marketable securities, net | 2,664 | | | (66) | | | (136) | | | (562) | |
Income (loss) on marketable securities reclassified into earnings, net of tax | (134) | | | 6 | | | (146) | | | 11 | |
| 2,530 | | | (60) | | | (282) | | | (551) | |
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Unrealized income (loss) on derivative instruments, net of tax | 4,736 | | | (1,495) | | | 11,960 | | | (3,516) | |
Loss on derivative instruments reclassified into earnings, net of tax | (1,022) | | | (3,546) | | | (7,410) | | | (9,496) | |
| 3,714 | | | (5,041) | | | 4,550 | | | (13,012) | |
Total other comprehensive income (loss) | 6,244 | | | (5,101) | | | 4,268 | | | (13,563) | |
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Comprehensive loss | $ | (12,089) | | | $ | (28,118) | | | $ | (78,503) | | | $ | (113,581) | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
VARONIS SYSTEMS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(in thousands, except share data)
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| Common stock | | Additional paid-in capital | | Accumulated other comprehensive income (loss) | | Accumulated deficit | | Total stockholders’ equity |
| Number | | Amount | | | | |
Balance as of December 31, 2022 | 107,673,052 | | | $ | 108 | | | $ | 1,055,048 | | | $ | (9,557) | | | $ | (543,474) | | | $ | 502,125 | |
Stock-based compensation expense | — | | | — | | | 35,811 | | | — | | | — | | | 35,811 | |
Common stock issued under employee stock plans | 2,218,811 | | | 2 | | | 5,851 | | | — | | | — | | | 5,853 | |
Taxes paid related to net share settlement of equity awards | — | | | — | | | (16,864) | | | — | | | — | | | (16,864) | |
Repurchase of common stock | (100,000) | | | — | | | (2,519) | | | — | | | — | | | (2,519) | |
Unrealized loss on derivative instruments, net of tax | — | | | — | | | — | | | (4,980) | | | — | | | (4,980) | |
Unrealized income on available for sale securities, net of tax | — | | | — | | | — | | | 156 | | | — | | | 156 | |
Net loss | — | | | — | | | — | | | — | | | (38,304) | | | (38,304) | |
Balance as of March 31, 2023 | 109,791,863 | | | $ | 110 | | | $ | 1,077,327 | | | $ | (14,381) | | | $ | (581,778) | | | $ | 481,278 | |
Stock-based compensation expense | — | | | — | | | 39,385 | | | — | | | — | | | 39,385 | |
Common stock issued under employee stock plans | 233,974 | | | — | | | 36 | | | — | | | — | | | 36 | |
Taxes paid related to net share settlement of equity awards | — | | | — | | | (2,575) | | | — | | | — | | | (2,575) | |
Repurchase of common stock | (207,278) | | | — | | | (5,080) | | | — | | | — | | | (5,080) | |
Unrealized loss on derivative instruments, net of tax | — | | | — | | | — | | | (2,991) | | | — | | | (2,991) | |
Unrealized loss on available for sale securities, net of tax | — | | | — | | | — | | | (647) | | | — | | | (647) | |
Net loss | — | | | — | | | — | | | — | | | (38,697) | | | (38,697) | |
Balance as of June 30, 2023 | 109,818,559 | | | $ | 110 | | | $ | 1,109,093 | | | $ | (18,019) | | | $ | (620,475) | | | $ | 470,709 | |
Stock-based compensation expense | — | | | — | | | 32,980 | | | — | | | — | | | 32,980 | |
Common stock issued under employee stock plans | 327,868 | | | — | | | 5,457 | | | — | | | — | | | 5,457 | |
Taxes paid related to net share settlement of equity awards | — | | | — | | | (532) | | | — | | | — | | | (532) | |
Repurchase of common stock | (1,193,369) | | | (1) | | | (35,922) | | | — | | | — | | | (35,923) | |
Unrealized loss on derivative instruments, net of tax | — | | | — | | | — | | | (5,041) | | | — | | | (5,041) | |
Unrealized loss on available for sale securities, net of tax | — | | | — | | | — | | | (60) | | | — | | | (60) | |
Net loss | — | | | — | | | — | | | — | | | (23,017) | | | (23,017) | |
Balance as of September 30, 2023 | 108,953,058 | | | $ | 109 | | | $ | 1,111,076 | | | $ | (23,120) | | | $ | (643,492) | | | $ | 444,573 | |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
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| Common stock | | Additional paid-in capital | | Accumulated other comprehensive income (loss) | | Accumulated deficit | | Total stockholders’ equity |
| Number | | Amount | | | | |
Balance as of December 31, 2023 | 109,103,721 | | | $ | 109 | | | $ | 1,142,578 | | | $ | (8,649) | | | $ | (644,390) | | | $ | 489,648 | |
Stock-based compensation expense | — | | | — | | | 32,093 | | | — | | | — | | | 32,093 | |
Common stock issued under employee stock plans | 2,485,389 | | | 3 | | | 6,411 | | | — | | | — | | | 6,414 | |
Taxes paid related to net share settlement of equity awards | — | | | — | | | (34,860) | | | — | | | — | | | (34,860) | |
Unrealized income on derivative instruments, net of tax | — | | | — | | | — | | | 1,797 | | | — | | | 1,797 | |
Unrealized loss on available for sale securities, net of tax | — | | | — | | | — | | | (2,253) | | | — | | | (2,253) | |
Net loss | — | | | — | | | — | | | — | | | (40,490) | | | (40,490) | |
Balance as of March 31, 2024 | 111,589,110 | | | $ | 112 | | | $ | 1,146,222 | | | $ | (9,105) | | | $ | (684,880) | | | $ | 452,349 | |
Stock-based compensation expense | — | | | — | | | 30,089 | | | — | | | — | | | 30,089 | |
Common stock issued under employee stock plans | 590,312 | | | — | | | 3,378 | | | — | | | — | | | 3,378 | |
Taxes paid related to net share settlement of equity awards | — | | | — | | | (1,748) | | | — | | | — | | | (1,748) | |
Unrealized loss on derivative instruments, net of tax | — | | | — | | | — | | | (961) | | | — | | | (961) | |
Unrealized loss on available for sale securities, net of tax | — | | | — | | | — | | | (559) | | | — | | | (559) | |
Common stock issued for debt conversion | 195 | | | — | | | 6 | | | — | | | — | | | 6 | |
Net loss | — | | | — | | | — | | | — | | | (23,948) | | | (23,948) | |
Balance as of June 30, 2024 | 112,179,617 | | | $ | 112 | | | $ | 1,177,947 | | | $ | (10,625) | | | $ | (708,828) | | | $ | 458,606 | |
Stock-based compensation expense | — | | | — | | | 31,931 | | | — | | | — | | | 31,931 | |
Common stock issued under employee stock plans | 242,454 | | | — | | | 6,290 | | | — | | | — | | | 6,290 | |
Taxes paid related to net share settlement of equity awards | — | | | — | | | (656) | | | — | | | — | | | (656) | |
Unrealized income on derivative instruments, net of tax | — | | | — | | | — | | | 3,714 | | | — | | | 3,714 | |
Unrealized income on available for sale securities, net of tax | — | | | — | | | — | | | 2,530 | | | — | | | 2,530 | |
Purchase of capped calls related to Convertible senior notes | — | | | — | | | (55,522) | | | — | | | — | | | (55,522) | |
Net loss | — | | | — | | | — | | | — | | | (18,333) | | | (18,333) | |
Balance as of September 30, 2024 | 112,422,071 | | | $ | 112 | | | $ | 1,159,990 | | | $ | (4,381) | | | $ | (727,161) | | | $ | 428,560 | |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
VARONIS SYSTEMS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) | | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2024 | | 2023 |
Cash flows from operating activities: | | | |
Net loss | $ | (82,771) | | | $ | (100,018) | |
Adjustments to reconcile net loss to net cash provided by operating activities: | | | |
Depreciation and amortization | 8,543 | | | 8,736 | |
Stock-based compensation | 94,113 | | | 108,176 | |
Amortization of deferred commissions | 19,906 | | | 17,547 | |
Non-cash operating lease costs | 7,050 | | | 7,087 | |
Amortization of debt issuance costs | 1,264 | | | 1,133 | |
Amortization of premium and accretion of discount on marketable securities | (11,288) | | | (5,557) | |
Acquired in-process research and development | 6,653 | | | — | |
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Changes in assets and liabilities: | | | |
Trade receivables | 49,913 | | | 24,895 | |
Prepaid expenses and other short-term assets | (10,889) | | | (11,118) | |
Deferred commissions | (23,846) | | | (18,338) | |
Other long-term assets | (129) | | | (963) | |
Trade payables | 817 | | | (1,634) | |
Accrued expenses and other short-term liabilities | (5,882) | | | (17,652) | |
Deferred revenues | 37,200 | | | 33,555 | |
Other long-term liabilities | 272 | | | 3,120 | |
Net cash provided by operating activities | 90,926 | | | 48,969 | |
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Cash flows from investing activities: | | | |
Proceeds from maturities of marketable securities | 157,100 | | | 28,850 | |
Investment in marketable securities | (576,753) | | | (331,651) | |
Proceeds from short-term and long-term deposits | 25,038 | | | 170,925 | |
Investment in short-term and long-term deposits | (9,233) | | | (118,605) | |
Purchase of in-process research and development | (6,653) | | | — | |
Purchases of property and equipment | (2,342) | | | (2,945) | |
Net cash used in investing activities | (412,843) | | | (253,426) | |
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Cash flows from financing activities: | | | |
Proceeds from issuance of convertible senior notes, net of issuance costs | 450,099 | | | — | |
Purchases of capped calls | (55,522) | | | — | |
Proceeds from employee stock plans | 16,082 | | | 11,346 | |
Taxes paid related to net share settlement of equity awards | (37,264) | | | (19,971) | |
Repurchase of common stock | — | | | (43,522) | |
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Net cash provided by (used in) financing activities | 373,395 | | | (52,147) | |
Increase (decrease) in cash and cash equivalents | 51,478 | | | (256,604) | |
Cash and cash equivalents at beginning of period | 230,740 | | | 367,800 | |
Cash and cash equivalents at end of period | $ | 282,218 | | | $ | 111,196 | |
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Supplemental disclosure of cash flow information: | | | |
Cash paid for income taxes | $ | 10,115 | | | $ | 6,231 | |
Cash paid for interest | $ | 3,184 | | | $ | 3,195 | |
Supplemental disclosure of non-cash activities: | | | |
Lease liabilities arising from obtaining right-of-use assets | $ | 573 | | | $ | 1,945 | |
Issuance of common stock for debt conversion | $ | 6 | | | $ | — | |
Issuance costs included in accrued expenses and other short-term liabilities | $ | 450 | | | $ | — | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: GENERAL
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a. | Description of Business: |
Varonis Systems, Inc. ("VSI" and together with its subsidiaries, collectively, the “Company” or "Varonis") was incorporated under the laws of the State of Delaware on November 3, 2004, commenced operations on January 1, 2005 and has twelve wholly-owned subsidiaries.
The Company's software specializes in data security, threat detection and response and data privacy and compliance. Varonis software enables enterprises of all sizes and industries to protect data stored in the cloud and on-premises including: sensitive files and emails; confidential personal data belonging to customers, patients and employees; financial records; source code, strategic and product plans; and other intellectual property. Recognizing the challenge of protecting data with growing volume, velocity, and variety, the Company has built an integrated platform to simplify and streamline data security, threat detection and response, and data privacy and compliance.
The Company offers coverage for more than 40 of the most mission-critical cloud and on-premises data stores, SaaS applications and cloud infrastructure environments. In 2022, Varonis announced the availability of its flagship Varonis Data Security Platform as a SaaS, which offers simpler deployment, faster time-to-value, and groundbreaking new automation capabilities that help customers prevent data breaches.
The Varonis Data Security Platform helps enterprises protect data against cyberattacks from both external and internal threats. The Company's products enable enterprises to analyze data, application and account activity and user behavior to detect and prevent attacks. Its software platform prevents or limits unauthorized use of sensitive information, detects and prevents potential cyberattacks and limits potential damage by automatically locking down data, allowing access to only those who need it and automating the removal of stale data when it is no longer useful.
The broad applicability of the Company's technology has resulted in its customers deploying its software for numerous use cases. These use cases include: automatic discovery and classification of high-risk, sensitive data; data security posture management; SaaS security posture management; automated remediation of over-exposed data; centralized visibility and risk analysis of enterprise data and monitoring of user behavior and file activity; security monitoring and risk reduction; data breach, insider threat, malware and ransomware detection with Managed Data Detection and Response (MDDR); automatic response to ransomware and other severe incidents to limit exposure and reduce recovery times; data ownership identification, assignment, and automatic involvement; forensics, reporting and auditing with searchable logs; meeting security policy and compliance regulation; automatic data migration; cloud migration; automation of retention and disposition policies; automatic data quarantine; intelligent archiving; and automated indexing for data subject requests related to privacy and compliance requirements.
The accompanying unaudited condensed 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 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 condensed 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 condensed financial statements and accompanying notes should be read in conjunction with the 2023 consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for its fiscal year ended December 31, 2023 filed with the SEC on February 6, 2024 (the “2023 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, 2023 included in the 2023 Form 10-K, unless otherwise stated.
The Company generates revenues primarily in the form of term license subscriptions, SaaS revenues and maintenance and services fees. Term license subscription revenues are sold on-premises and are comprised of time-based licenses whereby customers use the Company's software (including support and unspecified upgrades and enhancements when and if they are available) for a specified period. SaaS revenues, including SaaS with Managed Data Detection and Response, are provided on a subscription basis and allow customers to use hosted software. Over the last few years, the Company has introduced new products and support for cloud applications and infrastructure, including the Varonis Data Security Platform delivered as a SaaS, which was previously only sold as a self-hosted solution. Maintenance and services primarily consist of fees for maintenance of past 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 its customers to fully leverage the use of the Company's products, although the user can benefit from the software without its assistance. The Company sells its products worldwide to a network of distributors and value-added resellers, 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.
Term license subscription software sold on-premises is recognized at the point in time when the software license has been delivered and the benefit of the asset has transferred. Maintenance associated with term license subscription software is recognized ratably over the term of the agreement.
SaaS revenue is recognized ratably over the associated contract period, beginning when access is provided and the benefit of the service is available. Conversions from a license sold on-premises to the Company’s SaaS offering during the original subscription period are accounted for on a pro-rata prospective basis.
The Company recognizes revenues from maintenance agreements 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 contract 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 included in term license subscriptions, the Company determines the standalone selling prices based on the price at which it separately sells a renewal contract. For professional services, the Company determines the standalone selling prices based on the price at which it separately sells those services. For software licenses included in term license subscriptions, 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 receivables are generally recorded at the invoice amount mostly for a one-year period, net of an allowance for credit losses.
Deferred revenues represent mostly unrecognized fees billed or collected for SaaS and maintenance contracts. Deferred revenues are recognized as (or when) the Company performs under the contract. Pursuant to these contracts, customers are generally 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 $158,380 for the nine months ended September 30, 2024.
Revenues allocated to remaining performance obligations represent contracted revenues that have not yet been recognized, which includes deferred revenues and non-cancelable amounts that will be invoiced in the future. The Company's remaining performance obligations were $581,449 as of September 30, 2024, of which it expects to recognize approximately 52% as revenue over the next 12 months and the remainder thereafter.
For information regarding disaggregated revenues, refer to Note 7.
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 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 included in sales and marketing expenses in the accompanying condensed consolidated statements of operations.
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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 revenues and 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 revenues and operating expenditures are incurred in or exposed to other currencies, specifically, Euro and Pound Sterling for revenues and the New Israeli Shekel, Euro and Pound Sterling for operating expenses.
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. In addition, the Company has previously entered into forward contracts to hedge a portion of its monetary items in the balance sheet, such as trade receivables and payables, denominated in Euro and Pound Sterling 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 or speculative purposes.
Derivative instruments measured at fair value and their classification on the condensed consolidated balance sheets are presented in the following table (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Assets (liabilities) as of September 30, 2024 (unaudited) | | Assets (liabilities) as of December 31, 2023 |
| Notional Amount | | Fair Value | | Notional Amount | | Fair Value |
Foreign exchange forward contract derivatives in cash flow hedging relationships for operating expenses included in prepaid expenses and other short-term assets | $ | 48,946 | | | $ | 837 | | | $ | 128,411 | | | $ | 3,372 | |
Foreign exchange forward contract derivatives in cash flow hedging relationships for operating expenses included in accrued expenses and other short-term liabilities | $ | 98,387 | | | $ | (501) | | | $ | — | | | $ | — | |
Foreign exchange forward contract derivatives in cash flow hedging relationships for operating expenses included in long-term other assets | $ | 91,709 | | | $ | 1,570 | | | $ | 33,233 | | | $ | 519 | |
Foreign exchange forward contract derivatives in cash flow hedging relationships for operating expenses included in long-term other liabilities | $ | 32,976 | | | $ | (219) | | | $ | 102,216 | | | $ | (1,624) | |
| | | | | | | |
Foreign exchange forward contract derivatives in cash flow hedging relationships for revenues included in accrued expenses and other short-term liabilities | $ | 48,653 | | | $ | (1,407) | | | $ | — | | | $ | — | |
Foreign exchange forward contract derivatives for monetary items included in prepaid expenses and other short-term assets | $ | — | | | $ | — | | | $ | 39,155 | | | $ | 36 | |
Foreign exchange forward contract derivatives for monetary items included in accrued expenses and other short-term liabilities | $ | — | | | $ | — | | | $ | 5,213 | | | $ | (7) | |
The unaudited condensed consolidated statements of operations reflect a loss of $1,022 and $7,410 for the three and nine months ended September 30, 2024, respectively, and a loss of $3,546 and $9,496 for the three and nine months ended September 30, 2023, respectively, related to the cash flow hedges.
For the three months ended September 30, 2024, the Company did not have any forward contracts related to the Fair Value hedging program. For the nine months ended September 30, 2024 the unaudited condensed consolidated statements of operations reflect a gain of $728 in financial income, net, related to the Fair Value Hedging Program. For the three and nine months ended September 30, 2023, the unaudited condensed consolidated statements of operations reflect a gain of $584 and $429, respectively, in financial income, net, related to the Fair Value Hedging Program.
The Company operates in the U.S. and in foreign jurisdictions and is subject to taxes in each country or jurisdiction in which it conducts business. Earnings from its non-U.S. activities are subject to local country income tax and may be subject to U.S. income tax.
Because of its history of operating losses, the Company has established a full valuation allowance against potential future benefits for deferred tax assets, including loss carryforwards.
Accounting for income taxes for interim periods generally requires the provision for income taxes to be determined by applying an estimate of the annual effective tax rate for the full fiscal year to “ordinary” income or loss (pretax income or loss excluding unusual or infrequently occurring discrete items) for the reporting period. For the three and nine months ended September 30, 2024, a discrete effective tax rate method was used in jurisdictions where a small change in estimated ordinary income has a significant impact on the annual effective tax rate.
In some foreign tax jurisdictions, the Company bases its interim tax accruals on the annual estimated effective tax rate applicable to the Company and its subsidiaries, adjusted for items which are considered discrete to the period. In each quarter, the Company updates its calculation and makes a year-to-date adjustment to its tax provision as necessary.
The Company's fiscal 2024 annual effective rate differs from the U.S. statutory rate primarily due to R&D capitalization under the terms of Section 174, tax deduction for stock based compensation, and generation or utilization of carry forward net
operating loss (“NOL”) and research and development tax credits resulting in a current provision expense without an offset to deferred expense as the Company remains in a valuation allowance on its U.S. deferred tax assets. For the three months ended September 30, 2024 and 2023, the Company recorded income tax expense of $4,938 and $2,504, respectively, and $9,711 and $12,911 for the nine months ended September 30, 2024 and 2023, respectively.
The Company's income tax provision could be significantly impacted by estimates surrounding its uncertain tax positions and changes to its valuation allowance. The Company reevaluates the judgments surrounding its estimates and make adjustments as appropriate each reporting period.
The Company remains open to federal and state examination to the extent net carry-over unused operating losses and tax credit attributable to those years remain unutilized. As of September 30, 2024, the Company's federal tax returns for the years 2010 through the current period, excluding the 2016 tax year which was audited by the Internal Revenue Service, and most state tax returns for the years 2009 through the current period, are still open to examination.
In addition, the Company is subject to the regular examinations of its income tax returns by different tax authorities. The Company regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of its provision for income taxes.
| | | | | |
g. | 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 other securities.
The Company considers all investments and marketable securities purchased with maturities at the date of purchase greater than three months but less than one year to be short-term. Investments and marketable securities purchased with maturities at the date of purchase greater than one year are classified as long-term assets. Marketable securities are classified as available for sale and are, therefore, recorded at fair value on the condensed consolidated balance sheet, with any unrealized gains and losses reported in accumulated other comprehensive loss, which is reflected as a separate component of stockholders’ equity in the Company’s condensed consolidated balance sheets, until realized. 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 condensed consolidated statement of operations. Cash equivalents, marketable securities and deposits consist of the following (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| As of September 30, 2024 |
| (unaudited) |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
Cash equivalents | | | | | | | |
Money market funds | $ | 110,679 | | | $ | — | | | $ | — | | | $ | 110,679 | |
| | | | | | | |
| | | | | | | |
Total | $ | 110,679 | | | $ | — | | | $ | — | | | $ | 110,679 | |
| | | | | | | |
Marketable securities | | | | | | | |
US Treasury securities | $ | 551,058 | | | $ | 1,504 | | | $ | — | | | $ | 552,562 | |
US Government Agency securities | 9,994 | | | 12 | | | — | | | 10,006 | |
| | | | | | | |
| | | | | | | |
Total | $ | 561,052 | | | $ | 1,516 | | | $ | — | | | $ | 562,568 | |
| | | | | | | |
Short-term deposits | | | | | | | |
Term bank deposits | $ | 34,174 | | | $ | — | | | $ | — | | | $ | 34,174 | |
Total | $ | 34,174 | | | $ | — | | | $ | — | | | $ | 34,174 | |
| | | | | | | |
Long-term marketable securities | | | | | | | |
US Treasury securities | $ | 332,455 | | | $ | 3 | | | $ | (129) | | | $ | 332,329 | |
| | | | | | | |
Total | $ | 332,455 | | | $ | 3 | | | $ | (129) | | | $ | 332,329 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2023 |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
Cash equivalents | | | | | | | |
Money market funds | $ | 164,848 | | | $ | — | | | $ | — | | | $ | 164,848 | |
| | | | | | | |
| | | | | | | |
Total | $ | 164,848 | | | $ | — | | | $ | — | | | $ | 164,848 | |
| | | | | | | |
Marketable securities | | | | | | | |
US Treasury securities | $ | 242,633 | | | $ | 530 | | | $ | (1) | | | $ | 243,162 | |
US Government Agency securities | 9,972 | | | 41 | | | — | | | 10,013 | |
| | | | | | | |
| | | | | | | |
Total | $ | 252,605 | | | $ | 571 | | | $ | (1) | | | $ | 253,175 | |
| | | | | | | |
Short-term deposits | | | | | | | |
Term bank deposits | $ | 49,800 | | | $ | — | | | $ | — | | | $ | 49,800 | |
Total | $ | 49,800 | | | $ | — | | | $ | — | | | $ | 49,800 | |
| | | | | | | |
Long-term marketable securities | | | | | | | |
US Treasury securities | $ | 209,961 | | | $ | 1,102 | | | $ | — | | | $ | 211,063 | |
Total | $ | 209,961 | | | $ | 1,102 | | | $ | — | | | $ | 211,063 | |
Unrealized losses associated with investments in available for sale securities have all been in a continuous unrealized loss position of less than one year as of September 30, 2024 and December 31, 2023.
The gross unrealized gains and losses related to these investments were 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 credit losses model for marketable securities 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, net on the condensed consolidated statements of operations. As of September 30, 2024 and December 31, 2023, the Company did not recognize an allowance for credit losses on available for sale marketable securities.
| | | | | |
h. | Concentration 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, Luxembourg, Australia and Singapore. 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 reputable 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 value-added resellers (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 credit losses based upon a specific review of all significant outstanding invoices, historical collection experience, customer creditworthiness, current, and future economic and market conditions. The Company writes off receivables when they are deemed uncollectible and having exhausted all collection efforts.
| | | | | |
i. | Basic and Diluted Net Loss Per Share: |
Basic net loss per share is computed by dividing 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 potentially dilutive securities, including stock options, restricted stock units, performance stock units and the shares related to the conversion of the 1.25% Convertible Senior Notes issued by the Company on May 11, 2020 and due August 2025 (the "2025 Notes") and the 1.00% Convertible Senior Notes issued by the Company on September 10, 2024 and due September 2029 (the "2029 Notes" and, together with the 2025 Notes, the "Notes"), 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 7,646,682 and 9,012,612 potentially dilutive shares from outstanding stock options, restricted stock units and performance stock units that were not included in the calculation of diluted net loss per share for the period ending September 30, 2024 and 2023, respectively. Additionally, 15,020,709 and 8,239,254 shares underlying the conversion option of the Notes are not considered in the calculation of diluted net loss per share as the effect would be anti-dilutive for the period ending September 30, 2024 and 2023, respectively.
| | | | | |
j. | Contractual Purchase Obligations: |
The Company has a contractual minimum purchase commitment with a service provider through August 31, 2027 totaling $9,930 due in the next 12 months and $21,000 due thereafter and an additional $43,021 contractual minimum purchase commitment with another service provider through December 31, 2026 with no specified annual commitments.
On August 16, 2024, the Company entered into an asset purchase agreement with an unrelated third party. Substantially all of the fair value of the gross assets acquired was concentrated in the single in-process research and development ("IPR&D") asset. Total cash considerations were $6,500, subject to potential adjustments for any indemnity claims and inclusive of approximately $3,250 related to contingent payments that are estimated based upon the probability of the contingencies being satisfied. Additionally, the Company incurred approximately $153 in direct transaction costs related to the asset acquisition.
The $6,653 consideration related to the IPR&D asset was expensed in the period ending September 30, 2024 and included in the Company's condensed consolidated statements of operations under research and development expenses, as the IPR&D asset had no alternative future use.
| | | | | |
l. | Recently Issued Accounting Pronouncements Not Yet Adopted: |
In November 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2023-07, Segment Reporting (Topic 280), Improvements to Reportable Segment Disclosures to improve reportable segment disclosure requirements through enhanced disclosures about significant segment expenses on an interim and annual basis. All disclosure requirements of ASU 2023-07 are required for entities with a single reportable segment. ASU 2023-07 is effective for fiscal years beginning after December 15, 2023, and interim periods for the fiscal years beginning after December 15, 2024, and should be applied on a retrospective basis to all periods presented. Early adoption is permitted. Adoption of this ASU will not have a material effect on the consolidated financial statements and the Company is currently evaluating the effect on its disclosures.
In December 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2023-09, Income Taxes (Topic 740) - Improvements to Income Tax Disclosures. The ASU requires that an entity disclose specific categories in the effective tax rate reconciliation as well as provide additional information for reconciling items that meet a quantitative threshold. Further, the ASU requires certain disclosures of state versus federal income tax expense and taxes paid. The amendments in this ASU are required to be adopted for fiscal years beginning after December 15, 2024. Early adoption is permitted and the amendments should be applied on a prospective basis. The Company is currently evaluating the effect of adopting the ASU on its disclosures.
NOTE 2: FAIR VALUE MEASUREMENTS
The Company evaluates assets and liabilities subject to fair value measurements on a recurring basis to determine the appropriate level to classify them for each reporting period. There have been no transfers between fair value measurements levels during the periods presented. 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.
The authoritative guidance on fair value measurements establishes a consistent framework for measuring fair value on either a recurring or nonrecurring basis whereby inputs, used in valuation techniques, are assigned a hierarchical level. The following are the hierarchical levels of inputs to measure 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 the Company’s 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 following table sets forth the Company’s assets and liabilities that were measured at fair value as of September 30, 2024 and December 31, 2023 by level within the fair value hierarchy (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of September 30, 2024 | | |
| (unaudited) | | As of December 31, 2023 |
| Level I | | Level II | | Level III | | Total | | Level I | | Level II | | Level III | | Total |
Financial assets: | | | | | | | | | | | | | | | |
Cash equivalents: | | | | | | | | | | | | | | | |
Money market funds | $ | 110,679 | | | $ | — | | | $ | — | | | $ | 110,679 | | | $ | 164,848 | | | $ | — | | | $ | — | | | $ | 164,848 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Marketable securities: | | | | | | | | | | | | | | | |
US Treasury securities | — | | | 552,562 | | | — | | | 552,562 | | | — | | | 243,162 | | | — | | | 243,162 | |
US Government Agency securities | — | | | 10,006 | | | — | | | 10,006 | | | — | | | 10,013 | | | — | | | 10,013 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Prepaid expenses and other short-term assets: | | | | | | | | | | | | | | | |
Forward foreign exchange contracts | — | | | 837 | | | — | | | 837 | | | — | | | 3,408 | | | — | | | 3,408 | |
Long-term marketable securities: | | | | | | | | | | | | | | | |
US Treasury securities | — | | | 332,329 | | | — | | | 332,329 | | | — | | | 211,063 | | | — | | | 211,063 | |
| | | | | | | | | | | | | | | |
Long-term other assets: | | | | | | | | | | | | | | | |
Forward foreign exchange contracts | — | | | 1,570 | | | — | | | 1,570 | | | — | | | 519 | | | — | | | 519 | |
Financial liabilities: | | | | | | | | | | | | | | | |
Accrued expenses and other short-term liabilities: | | | | | | | | | | | | | | | |
Forward foreign exchange contracts | — | | | (1,908) | | | — | | | (1,908) | | | — | | | (7) | | | — | | | (7) | |
Long-term other liabilities: | | | | | | | | | | | | | | | |
Forward foreign exchange contracts | — | | | (219) | | | — | | | (219) | | | — | | | (1,624) | | | — | | | (1,624) | |
Total financial assets (liabilities), net | $ | 110,679 | | | $ | 895,177 | | | $ | — | | | $ | 1,005,856 | | | $ | 164,848 | | | $ | 466,534 | | | $ | — | | | $ | 631,382 | |
See Note 5 “Convertible Senior Notes and Capped Call Transactions” for the carrying amount and estimated fair value of the Company's 2025 Notes and 2029 Notes as of September 30, 2024.
NOTE 3: LEASES
The Company has various operating leases for office space, vehicles and office equipment that expire through 2032. The lease agreements generally do not contain any material residual value guarantees or material restrictive covenants. Below is a summary of the Company's operating right-of-use assets and operating lease liabilities (in thousands):
| | | | | | | |
| September 30, 2024 | | |
| (unaudited) | | |
Operating lease right-of-use assets | $ | 45,390 | | | |
| | | |
Operating lease liabilities, current | $ | 10,412 | | | |
Operating lease liabilities, long-term | 43,654 | | | |
Total operating lease liabilities | $ | 54,066 | | | |
Operating lease liabilities, current are included within accrued expenses and other short-term liabilities in the condensed consolidated balance sheet.
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. Lease modifications result in remeasurement of the right-of-use assets and lease liabilities.
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 deposit guarantees issued by a financial institution to secure various operating lease agreements in connection with its office space.
Minimum lease payments for the Company's right-of-use assets over the remaining lease periods as of September 30, 2024, are as follows (in thousands):
| | | | | |
| September 30, 2024 |
| (unaudited) |
2024 | $ | 2,954 | |
2025 | 11,810 | |
2026 | 10,070 | |
2027 | 9,610 | |
2028 | 9,557 | |
Thereafter | 14,091 | |
Total undiscounted lease payments | $ | 58,092 | |
| |
Less: Imputed interest | $ | (4,026) | |
Present value of lease liabilities | $ | 54,066 | |
As of September 30, 2024, the Company had an additional operating lease that had not yet commenced of $2,454. This operating lease will commence in the fourth quarter of 2024 with a lease term through 2028.
The weighted average remaining lease terms and discount rates for all operating leases were as follows as of September 30, 2024: | | | | | |
Remaining lease term and discount rate: | |
Weighted average remaining lease term (years) | 5.68 |
| |
Weighted average discount rate | 2.84 | % |
Total operating lease cost for the three and nine months ended September 30, 2024 was $2,432 and $7,333, respectively, inclusive of sublease income of $170 and $981, respectively. Total operating lease cost for the three and nine months ended September 30, 2023 was $2,530 and $7,232, respectively, inclusive of sublease income of $435 and $1,336, respectively.
NOTE 4: GOODWILL AND INTANGIBLE ASSETS
Goodwill
Goodwill represents the excess of the purchase price over the identifiable tangible and intangible assets acquired less liabilities assumed arising from business combinations. The Company believes the goodwill represents the synergies expected from expanded market opportunities when integrating with its offerings.
There were no additions, impairments or any other changes to the carrying amount of goodwill during the three and nine months ended September 30, 2024 or during prior periods.
Intangible Assets
Total cost and amortization of intangible assets is comprised of the following (in thousands, except useful life):
| | | | | | | | | | | | | |
| Estimated Useful Life | | September 30, 2024 | | |
Intangible assets, net | (in years) | | (unaudited) | | |
Developed technology & trademarks | 4 | | $ | 6,110 | | | |
| | | | | |
Total intangible assets | | | 6,110 | | | |
Less: Accumulated amortization | | | 5,991 | | | |
Total intangible assets, net | | | $ | 119 | | | |
Intangible assets are expensed on a straight-line basis over the useful life of the asset. The Company recorded amortization expense of $381 and $382 for the three months ended September 30, 2024 and 2023, respectively and $1,143 and $1,144 for the nine months ended September 30, 2024, and 2023, respectively.
The following table summarizes estimated future amortization expense of our intangible assets as of September 30, 2024 (in thousands): | | | | | |
Years ending December 31, | Amount (unaudited) |
2024 | $ | 119 | |
| |
| |
| |
| |
Total future amortization expense | $ | 119 | |
NOTE 5: CONVERTIBLE SENIOR NOTES AND CAPPED CALL TRANSACTIONS
2025 Notes
The Company issued the 2025 Notes pursuant to an Indenture dated May 11, 2020 (the “2025 Indenture”). The offering totaled $253,000 aggregate principal amount. The net proceeds to the Company after issuance costs were approximately $245,158. The Company used $29,348 of the net proceeds from the offering to pay the cost of the capped call transactions described below.
The 2025 Notes will mature on August 15, 2025, unless earlier converted, redeemed or repurchased. Interest will be payable semi-annually in arrears on February 15 and August 15 of each year, at a rate of 1.25% per year.
The initial conversion rate for the 2025 Notes is 32.5668 shares of the Company’s common stock for each $1,000 principal amount of the 2025 Notes, which is equivalent to an initial conversion price of approximately $30.71 per share. The conversion rate is subject to adjustment in specified events. The 2025 Notes are convertible into shares of the Company’s common stock, at the option of a holder, prior to the close of business on the business day immediately preceding February 15, 2025, under certain conditions.
In addition, on or after February 15, 2025, a holder may convert all or any portion of its 2025 Notes at any time. As of September 30, 2024, the conversion feature of the 2025 Notes was triggered and therefore the 2025 Notes are currently convertible, in whole or in part, at the option of the holders from October 1, 2024 through December 31, 2024. Whether the 2025 Notes will be convertible following such period will depend on the continued satisfaction of this condition or another conversion condition. Since the issuance of the 2025 Notes, the Company has received and settled an immaterial amount of conversion notices from the holders. Upon conversion, the Company may elect to repay the 2025 Notes in cash, shares of common stock, or a combination of both. As of September 30, 2024, the 2025 Notes mature in less than one year, as such, the 2025 Notes were classified as short-term on the Company's condensed consolidated balance sheet.
Effective August 20, 2023, the Company may redeem the 2025 Notes for cash, at its option, subject to the terms and conditions provided in the 2025 Indenture.
2029 Notes
The Company issued $460,000 aggregate principal amount of 1.00% Convertible Senior Notes due September 2029 pursuant to an Indenture dated September 10, 2024 (the “2029 Indenture”), between the Company and U.S. Bank Trust Company, as trustee. The offering consisted of $400,000 aggregate principal amount plus the full exercise of the initial purchasers’ option to purchase up to an additional $60,000 aggregate principal amount. The net proceeds to the Company after issuance costs were approximately $449,649. Separately, the Company entered into privately negotiated capped call transactions and used $55,522 of the net proceeds from the offering to pay the cost of the capped call transactions as described below.
The 2029 Notes will mature on September 15, 2029, unless earlier converted, redeemed or repurchased. Interest will be payable semi-annually in arrears on March 15 and September 15 of each year, beginning on March 15, 2025, at a rate of 1.00% per year.
The initial conversion rate for the 2029 Notes is 14.7419 shares of the Company’s common stock for each $1,000 principal amount of the 2029 Notes which is equivalent to an initial conversion price of approximately $67.83 per share. The conversion rate is subject to adjustment in specified events. The 2029 Notes are convertible into shares of the Company’s common stock, par value $0.001 per share, at the option of a holder, prior to the close of business on the business day immediately preceding March 15, 2029, only under the following circumstances:
(1) during any calendar quarter commencing after the calendar quarter ending on December 31, 2024 (and only during such calendar quarter), if the last reported sale price of the common stock for at least 20 trading days (whether or not consecutive) during the 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day;
(2) during the five consecutive business day period immediately after any five consecutive trading day period (the “measurement period”) in which the “trading price” (as defined in the 2029 Indenture) per $1,000 principal amount of the 2029 Notes, as determined following a request by a holder of the 2029 Notes in the manner described in the 2029 Indenture, for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the Company’s common stock and the conversion rate on each such trading day;
(3) if the Company calls any or all of the 2029 Notes for redemption, at any time prior to the close of business on the scheduled trading day immediately preceding the redemption date; or
(4) upon the occurrence of certain corporate events specified in the 2029 Indenture.
In addition, regardless of the foregoing circumstances, on or after March 15, 2029 until the close of business on the second scheduled trading day immediately preceding the maturity date, a holder may convert all or any portion of its 2029 Notes at any time. Upon conversion, the Company may elect to repay the 2029 Notes in cash, shares of common stock, or a combination of both. As of September 30, 2024, the 2029 Notes were classified as long-term on the Company's condensed consolidated balance sheet.
The 2029 Notes are not redeemable at the Company’s option prior to September 20, 2027. The Company may redeem the 2029 Notes for cash, at its option, on a redemption date occurring on or after September 20, 2027, and on or prior to the 41st scheduled trading day immediately preceding the maturity date, if the last reported sale price of the Company’s common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive), including the trading day immediately preceding the date on which the Company provides notice of redemption, during any 30 consecutive trading day period ending on and including the trading day immediately preceding the date on which the Company provides notice of redemption at a redemption price equal to 100% of the principal amount of the 2029 Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date.
If the Company undergoes a “fundamental change” (as defined in the 2029 Indenture), subject to certain conditions, holders may require the Company to repurchase for cash all or part of their 2029 Notes at a fundamental change repurchase price equal to 100% of the principal amount of the 2029 Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date. If the Company is required to repurchase the 2029 Notes due to a fundamental change, it remains at the Company’s discretion to determine whether the settlement is in cash, shares of the Company’s common stock, or a combination of cash and shares of the Company’s common stock.
The 2029 Indenture includes customary terms, including certain events of default after which the 2029 Notes may be due and payable immediately. The 2029 Notes are the Company’s unsecured obligations and rank senior in right of payment to all of the
Company’s indebtedness that is expressly subordinated in right of payment to the 2029 Notes, and equal in right of payment with all of the Company’s liabilities that are not so subordinated, including the Company’s 2025 Notes.
The Company accounts for the 2029 Notes as a single liability measured at it amortized cost. The carrying value of the liability is represented by the face amount of the 2029 Notes, less debt issuance costs. The total offering costs upon issuance of the 2029 Notes were $10,351 and are amortized as interest expense over the term of the 2029 Notes, using the effective interest rate method.
The net carrying amount of the Notes were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2024 | | December 31, 2023 |
| (unaudited) | | | | | | |
| 2025 Notes | | 2029 Notes | | Total | | 2025 Notes | | 2029 Notes | | Total |
Principal | $ | 252,994 | | | $ | 460,000 | | | $ | 712,994 | | | $ | 253,000 | | | $ | — | | | $ | 253,000 | |
| | | | | | | | | | | |
Unamortized issuance costs | (1,369) | | | (10,241) | | | (11,610) | | | (2,523) | | | — | | | (2,523) | |
Net carrying amount | $ | 251,625 | | | $ | 449,759 | | | $ | 701,384 | | | $ | 250,477 | | | $ | — | | | $ | 250,477 | |
The effective interest rate for the three and nine months ended September 30, 2024 was 1.87% and 1.46% for the 2025 and 2029 Notes, respectively. The interest expense recognized related to the Notes for the three and nine months ended September 30, 2024 and 2023 was as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | |
| 2024 | | 2023 | | | | |
| 2025 Notes | | 2029 Notes | | Total | | 2025 Notes | | 2029 Notes | | Total | | | | |
| (unaudited) | | |
Contractual interest expense | $ | 791 | | | $ | 256 | | | $ | 1,047 | | | $ | 791 | | | $ | — | | | $ | 791 | | | | | |
Amortization of debt issuance costs | 386 | | | 110 | | | 496 | | | 379 | | | — | | | 379 | | | | | |
Total | $ | 1,177 | | | $ | 366 | | | $ | 1,543 | | | $ | 1,170 | | | $ | — | | | $ | 1,170 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, | | |
| 2024 | | 2023 | | | | |
| 2025 Notes | | 2029 Notes | | Total | | 2025 Notes | | 2029 Notes | | Total | | | | |
| (unaudited) | | |
Contractual interest expense | $ | 2,372 | | | $ | 256 | | | $ | 2,628 | | | $ | 2,372 | | | $ | — | | | $ | 2,372 | | | | | |
Amortization of debt issuance costs | 1,154 | | | 110 | | | 1,264 | | | 1,133 | | | — | | | 1,133 | | | | | |
Total | $ | 3,526 | | | $ | 366 | | | $ | 3,892 | | | $ | 3,505 | | | $ | — | | | $ | 3,505 | | | | | |
As of September 30, 2024 and December 31, 2023, the total estimated fair value of the 2025 Notes was approximately $465,630 and $386,201, respectively. As of September 30, 2024, the total estimated fair value of the 2029 Notes was approximately $496,158. The fair values were determined based on the closing trading price per $100 of the Notes as of the last day of trading for the period. The fair values of the Notes are primarily affected by the trading price of our common stock and market interest rates. The fair values of the Notes are considered a Level 2 within the fair value hierarchy and were determined based on inputs that are observable in the market or that could be derived from, or corroborated with, observable market data, quoted price of the Notes in an over-the-counter market.
Capped Call Transactions
In May 2020 and September 2024, in connection with the pricing of the 2025 Notes and 2029 Notes, respectively, the Company entered into privately negotiated capped call transactions (the “Capped Call Transactions”). The Capped Call Transactions are generally expected to reduce the potential dilution to the Company’s common stock upon any conversion of the Notes and/or offset any cash payments the Company is required to make in excess of the principal amount of converted Notes, as the case may be, with such reduction and/or offset subject to a cap initially equal to $47.24 and $104.36, for the 2025 and 2029 Notes, respectively (the "Cap Price").
The Capped Call Transactions are considered a freestanding instrument in accordance with ASC No. 480, "Distinguishing Liabilities from Equity", as they were entered into separately and apart from the convertible notes and since the conversion or redemption of the convertible notes does not automatically result in the exercise of the capped call. As the Capped Call Transactions are considered indexed to the Company's stock and are considered equity classified, they are recorded in stockholders’ equity on the condensed consolidated balance sheet and are not accounted for as derivatives. The cost of the Capped Call Transactions for the 2025 and 2029 Notes were approximately $29,348 and $55,522, respectively, and were recorded as a reduction to additional paid-in capital.
NOTE 6: STOCKHOLDERS’ EQUITY
a. Stock plans:
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 5,713,899 shares of common stock for issuance under the 2013 Plan to employees, directors, officers and consultants of the Company and its subsidiaries. Since January 1, 2016, the share reserve under the 2013 Plan has been automatically increased by an aggregate of 27,579,672 shares. Awards granted under the 2013 Plan generally vest over four years. No awards were granted under the 2013 Plan subsequent to June 5, 2023, and no further awards will be granted under the 2013 Plan.
On October 22, 2020, and as part of the Polyrize Security Ltd. ("Polyrize") acquisition, the Company’s board of directors approved the assumption of a certain portion of Polyrize Options pursuant to the terms and conditions of the Polyrize 2019 Share Incentive (“Polyrize Plan”). No further awards were or will be granted under the Polyrize Plan.
On April 20, 2023, the Company’s board of directors adopted the Varonis Systems, Inc. 2023 Omnibus Equity Incentive Plan (the “2023 Plan”), subject to approval by our stockholders. On June 5, 2023, the Company’s stockholders approved the 2023 Plan which became effective and replaced the 2013 Plan. The Company initially reserved 5,500,000 shares of common stock for issuance under the 2023 Plan to employees, directors, officers and consultants of the Company and its subsidiaries. On June 3, 2024, the Company’s stockholders approved an additional 4,400,000 shares under the 2023 Plan.
b. A summary of employees’ stock options activities during the nine months ended September 30, 2024 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2024 (unaudited) |
| Number | | Weighted average exercise price | | Aggregate intrinsic value (in thousands) | | Weighted average remaining contractual life (years) |
Options outstanding as of January 1, 2024 | 573,430 | | | $ | 7.564 | | | $ | 21,627 | | | 0.962 |
Granted | — | | | $ | — | | | | | |
Exercised | (570,064) | | | $ | 7.575 | | | | | |
Forfeited and expired | — | | | $ | — | | | | | |
Options outstanding and exercisable as of September 30, 2024 | 3,366 | | | $ | 5.682 | | | $ | 171 | | | 5.368 |
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 nine months ended September 30, 2024 was $22,174. As of September 30, 2024, there was no unrecognized compensation cost related to employees and non-employees unvested stock options as all options have vested.
| | | | | |
c. | Restricted stock units ("RSUs") and performance stock units ("PSUs"): |
A summary of RSUs and PSUs for employees, consultants and non-employee directors of the Company for the nine months ended September 30, 2024 (unaudited) is as follows:
| | | | | | | | | | | |
| Number of shares underlying outstanding RSUs and PSUs | | Weighted- average grant date fair value |
Unvested balance - January 1, 2024 | 8,234,171 | | | $ | 36.83 | |
Granted | 3,642,369 | | | $ | 42.95 | |
Vested | (3,124,657) | | | $ | 40.12 | |
Forfeited | (1,108,567) | | | $ | 38.79 | |
Unvested balance – September 30, 2024 | 7,643,316 | | | $ | 38.12 | |
As of September 30, 2024, there was $198,011 of total unrecognized compensation cost related to employees and non-employees unvested restricted stock units and performance stock units which is expected to be recognized over a weighted-average period of 2.262 years.
| | | | | |
d. | 2015 Employee Stock Purchase Plan: |
On May 5, 2015, the Company’s stockholders approved the Varonis Systems, Inc. 2015 Employee Stock Purchase Plan (the “ESPP”), which 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 1,500,000 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) 1,200,000 shares of common stock. Since January 1, 2016, the share reserve under the ESPP has been automatically increased by an aggregate of 3,908,910 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.
| | | | | |
e. | Stock-based compensation expense for employees and consultants: |
The Company recognized stock-based compensation expense in the condensed consolidated statements of operations as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, | | |
| 2024 | | 2023 | | 2024 | | 2023 | | | | |
| (unaudited) | | (unaudited) | | |
Cost of revenues | $ | 1,357 | | | $ | 1,416 | | | $ | 4,017 | | | $ | 5,946 | | | | | |
Research and development | 10,442 | | | 11,323 | | | 31,057 | | | 37,480 | | | | | |
Sales and marketing | 9,860 | | | 11,201 | | | 30,985 | | | 37,861 | | | | | |
General and administrative | 10,272 | | | 9,040 | | | 28,054 | | | 26,889 | | | | | |
Total | $ | 31,931 | | | $ | 32,980 | | | $ | 94,113 | | | $ | 108,176 | | | | | |
NOTE 7: GEOGRAPHIC INFORMATION AND MAJOR CUSTOMER 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 unit and derives revenues mainly from subscription licensing, SaaS revenues and maintenance and services fees (see Note 1 for a brief description of the Company’s business). The following is a summary of revenues within geographic areas (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, | | |
| 2024 | | 2023 | | 2024 | | 2023 | | | | |
| (unaudited) | | (unaudited) | | |
|