10-Q 1 vrns-20220331.htm 10-Q vrns-20220331
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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 March 31, 2022
 
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)
____________________
 
Delaware57-1222280
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
1250 Broadway, 29th FloorNew YorkNY10001
(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 classTrading Symbol(s)Name of each exchange on which registered
Common Stock, par value $0.001 per shareVRNSThe 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 filerýAccelerated 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 April 29, 2022, there were 109,569,674 shares of common stock, par value $0.001 per share, outstanding.

 




TABLE OF CONTENTS
   
  
  
  
  
  
   
   
   
  
   
   
   
  
  




PART I.FINANCIAL INFORMATION

Item 1.Financial Statements

VARONIS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
 March 31, 2022December 31, 2021
 (unaudited)
Assets  
Current assets:  
Cash and cash equivalents$775,719 $805,761 
Marketable securities28,372  
Short-term deposits 1,850 
Trade receivables (net of allowances of $3,575 and $2,754 at March 31, 2022 and December 31, 2021, respectively)
63,604 117,179 
Prepaid expenses and other current assets35,812 34,417 
Total current assets903,507 959,207 
Long-term assets:  
Operating lease right-of-use asset61,351 63,749 
Property and equipment, net39,495 38,298 
Intangible assets, net3,931 4,313 
Goodwill23,135 23,135 
Other assets20,143 19,835 
Total long-term assets148,055 149,330 
Total assets$1,051,562 $1,108,537 
Liabilities and stockholders’ equity  
Current liabilities:  
Trade payables$4,771 $5,324 
Accrued expenses and other short-term liabilities92,560 102,226 
Deferred revenues98,763 104,221 
Total current liabilities196,094 211,771 
Long-term liabilities:  
Convertible senior notes, net247,846 225,330 
Operating lease liability65,786 68,694 
Deferred revenues2,378 2,566 
Other liabilities3,680 3,583 
Total long-term liabilities319,690 300,173 
Stockholders’ equity:  
Share capital  
Common stock of $0.001 par value - Authorized: 200,000,000 shares at March 31, 2022 and December 31, 2021; Issued and outstanding: 109,566,197 shares at March 31, 2022 and 107,509,096 shares at December 31, 2021
110 108 
1


Accumulated other comprehensive income2,894 6,083 
Additional paid-in capital1,000,493 1,018,005 
Accumulated deficit(467,719)(427,603)
Total stockholders’ equity535,778 596,593 
Total liabilities and stockholders’ equity$1,051,562 $1,108,537 
The accompanying notes are an integral part of these consolidated financial statements.
2


VARONIS SYSTEMS, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data) 
 Three Months Ended
March 31,
 20222021
Revenues:  
Subscriptions$68,985 $45,114 
Maintenance and services27,276 29,671 
Total revenues96,261 74,785 
Cost of revenues17,809 13,482 
Gross profit78,452 61,303 
Operating expenses:  
Research and development43,570 30,062 
Sales and marketing64,787 51,493 
General and administrative18,180 13,823 
Total operating expenses126,537 95,378 
Operating loss(48,085)(34,075)
Financial income (expenses), net736 (1,022)
Loss before income taxes(47,349)(35,097)
Income taxes(1,414)(559)
Net loss$(48,763)$(35,656)
Net loss per share of common stock, basic and diluted$(0.45)$(0.36)
Weighted average number of shares used in computing net loss per share of common stock, basic and diluted108,204,960 100,246,972 
 
The accompanying notes are an integral part of these consolidated financial statements.
3


VARONIS SYSTEMS, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
 
 Three Months Ended
March 31,
 20222021
Net loss$(48,763)$(35,656)
Other comprehensive loss:
Unrealized income (loss) on marketable securities, net of tax(10)4 
Income on marketable securities reclassified into earnings, net of tax 1 
(10)5 
Unrealized loss on derivative instruments, net of tax(2,759)(3,149)
Income on derivative instruments reclassified into earnings, net of tax(420)(2,036)
(3,179)(5,185)
Total other comprehensive loss(3,189)(5,180)
Comprehensive loss$(51,952)$(40,836)

The accompanying notes are an integral part of these consolidated financial statements.
4


VARONIS SYSTEMS, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(in thousands, except share data)
 
 Common stockAdditional
paid-in capital
Accumulated
other
comprehensive income (loss)
Accumulated deficitTotal
stockholders’ equity
 NumberAmount
Balance as of December 31, 202095,456,862 95 $395,347 $9,371 $(310,742)$94,071 
Issuance of Common stock in connection with follow-on offering, net of issuance costs of $17,466
7,961,538 8 500,026 500,034 
Stock-based compensation expense— — 21,379 — — 21,379 
Common stock issued under employee stock plans2,728,995 3 4,670 — — 4,673 
Taxes paid related to net share settlement of equity awards— — (731)— — (731)
Unrealized loss on derivative instruments— — — (5,185)— (5,185)
Unrealized income on available for sale securities— — — 5 — 5 
Net loss— — — — (35,656)(35,656)
Balance as of March 31, 2021106,147,395 106 920,691 4,191 (346,398)578,590 

 Common stockAdditional
paid-in capital
Accumulated
other
comprehensive income (loss)
Accumulated deficitTotal
stockholders’ equity
 NumberAmount
Balance as of December 31, 2021107,509,096 $108 $1,018,005 $6,083 $(427,603)$596,593 
Effect of adoption of ASU 2020-06— — (30,794)— 8,647 (22,147)
Stock-based compensation expense— — 35,998 — — 35,998 
Common stock issued under employee stock plans2,057,101 2 6,109 — — 6,111 
Taxes paid related to net share settlement of equity awards— — (28,825)— — (28,825)
Unrealized loss on derivative instruments— — — (3,179)— (3,179)
Unrealized loss on available for sale securities— — — (10)— (10)
Net loss— — — — (48,763)(48,763)
Balance as of March 31, 2022109,566,197 110 1,000,493 2,894 (467,719)535,778 

The accompanying notes are an integral part of these consolidated financial statements.
5


VARONIS SYSTEMS, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 Three Months Ended
March 31,
 20222021
Cash flows from operating activities:  
Net loss$(48,763)$(35,656)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization2,679 2,349 
Stock-based compensation35,998 21,379 
Amortization of deferred commissions6,120 4,157 
Noncash operating lease costs2,326 2,242 
Amortization of debt discount and issuance costs370 1,689 
Changes in assets and liabilities:  
Trade receivables53,575 42,927 
Prepaid expenses and other current assets(2,575)(1,673)
Deferred commissions(6,942)(3,873)
Other long-term assets359 900 
Trade payables(553)(213)
Accrued expenses and other short-term liabilities(12,502)(5,029)
Deferred revenues(5,646)(7,618)
Other long-term liabilities96 (1,198)
Net cash provided by operating activities24,542 20,383 
Cash flows from investing activities:  
Proceeds from sales and maturities of marketable securities 6,036 
Investment in marketable securities(28,372) 
Proceeds from short-term and long-term deposits1,850 50,235 
Investment in short-term and long-term deposits(1,853)(60,000)
Purchases of property and equipment(3,495)(1,116)
Net cash used in investing activities(31,870)(4,845)
Cash flows from financing activities:  
Proceeds from employee stock plans6,111 4,673 
Taxes paid related to net share settlement of equity awards(28,825)(731)
Proceeds from follow-on offering, net 500,034 
Net cash provided by (used in) financing activities(22,714)503,976 
Increase (decrease) in cash and cash equivalents(30,042)519,514 
Cash and cash equivalents at beginning of period805,761 234,092 
Cash and cash equivalents at end of period$775,719 $753,606 
Supplemental disclosure of cash flow information:  
Cash paid for income taxes$507 $2,822 
Cash paid for interest$1,582 $1,582 
Lease liabilities arising from obtaining right-of-use assets$248 $7,785 

The accompanying notes are an integral part of these consolidated financial statements.
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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1:     GENERAL
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 products and services allow enterprises to manage, analyze, alert and secure enterprise data. Varonis focuses on protecting enterprise data including: 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 Varonis Data Security Platform detects cyberthreats from both internal and external actors by analyzing data, account activity and user behavior; prevents and limits disaster by locking down sensitive and stale data; and efficiently sustains a secure state with automation. Varonis products address additional important use cases including data protection, data governance, Zero Trust, cybercrime, compliance, data privacy, classification and threat detection and response.

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 2021 consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for its fiscal year ended December 31, 2021 filed with the SEC on February 8, 2022 (the “2021 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, 2021 included in the 2021 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 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. In the second half of 2021, the Company launched its cloud offering that allows customers to use hosted software. Maintenance and services primarily consist of fees for maintenance and 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 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.

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. As we have successfully transitioned to a subscription model which has resulted in an immaterial amount of perpetual license revenues, these revenues are included within the subscriptions line of the
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consolidated statements of operations. Maintenance associated with subscription licenses is recognized ratably over the term of the agreement. In 2021, the Company launched its cloud offering that allows customers to use hosted software, and its revenue is recognized ratably over the associated contract period. As the Company only introduced these licenses in the second half of 2021, the total associated revenues have not yet been material.

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 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 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 $39,029 for the three months ended March 31, 2022.
 
The Company does not grant a right of return to its customers, except for one of its resellers. In 2021 and for the three months ended March 31, 2022, there were no returns from this reseller.

For information regarding disaggregated revenues, refer to Note 7.

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 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 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”).
8



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 or speculative purposes.

Derivative instruments measured at fair value and their classification on the consolidated balance sheets are presented in the following table (in thousands):
 
 Assets (liabilities) as of March 31, 2022 (unaudited)Assets (liabilities) as of December 31, 2021
 Notional
Amount
Fair
Value
Notional
Amount
Fair
Value
Foreign exchange forward contract derivatives in cash flow hedging relationships included in prepaid expenses and other current assets$97,165 $2,904 $115,710 $6,083 
Foreign exchange forward contract derivatives for monetary items included in accrued expenses and other short-term liabilities$29,414 $(30)$42,056 $(62)
 
The unaudited consolidated statements of operations reflect a gain of $420 and $547 for the three months ended March 31, 2022 and 2021, respectively, related to the effective portion of the cash flow hedges. No material ineffective hedges were recognized for the three months ended March 31, 2022 and 2021 in operating expenses in the consolidated statement of operations.

For the three months ended March 31, 2022 and 2021, the unaudited consolidated statements of operations reflect a gain of $741 and $771, respectively, in financial income (expenses), net, related to the Fair Value Hedging Program.

f.Income Taxes:
 
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. To date, on a consolidated basis, the Company has incurred accumulated net losses and has not recorded any U.S. federal tax provision.

Because of its history of U.S. net operating losses, the Company has established a full valuation allowance against potential future benefits for deferred tax assets, including loss carryforwards, in that jurisdiction.

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 2022 annual effective rate differs from the U.S. statutory rate primarily due to the valuation allowance recorded on its U.S. losses. For the three months ended March 31, 2022 and 2021, the Company recorded income tax expense of $1,414 and $559, respectively, comprised primarily of foreign income taxes.

The Company's income tax provision could be significantly impacted by estimates surrounding its uncertain tax positions and changes to its valuation allowance in future periods. 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 March 31, 2022, the Company's federal tax returns for the years 2010
9


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 various deposit accounts.

The Company considers all high-quality investments purchased with original maturities at the date of purchase greater than three months but less than one year to be short-term. Cash equivalents, marketable securities and 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, 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 deposits consist of the following (in thousands):
 
 As of March 31, 2022
(unaudited)
 Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized Losses
Fair
Value
Cash and cash equivalents    
Money market funds$384,062 $ $ $384,062 
Corporate bonds2,454  *)2,454 
Total$386,516 $ $ *)$386,516 
Marketable securities
US Treasury securities$14,005 $ $(8)$13,997 
Commercial paper9,573   9,573 
Corporate bonds4,804 *)(2)4,802 
Total$28,382 $ *)$(10)$28,372 
Long-term deposits
Term bank deposits$1,850 $ $ $1,850 
Total$1,850 $ $ $1,850 

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*) Represents an amount lower than $1 

 As of December 31, 2021
 Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized Losses
Fair
Value
Cash and cash equivalents    
Money market funds$414,942 $ $ $414,942 
Total$414,942 $ $ $414,942 
Short-term deposits
Term bank deposits$1,850 $ $ $1,850 
Total$1,850 $ $ $1,850 

All the marketable securities have a stated effective maturity of less than 12 months as of March 31, 2022.
 
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 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. As of March 31, 2022, 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.

h.Revolving Credit Facility:

On August 21, 2020, the Company entered into a credit and security agreement with KeyBank National Association (the “Credit and Security Agreement”), for a three-year secured revolving credit facility of $70,000 (the “Credit Facility”). The Credit Facility maturity date is the earlier of August 21, 2023 or 90 days prior to the scheduled maturity of any convertible debt securities. The fees incurred in connection with entering into the Credit and Security Agreement 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 and the Credit and Security Agreement contains customary covenants and customary events of default provisions.

As of March 31, 2022, the Company had no balance outstanding on the Credit Facility and was in compliance with all financial covenants and non-financial covenants.

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 in an aggregate principal amount of $253,000 (the "2025 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 9,194,862 and 8,913,594 potentially dilutive shares from the conversion of 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 March 31, 2022 and 2021, respectively. Additionally, 8,239,254 shares underlying the conversion option of the 2025 Notes are not considered in the calculation of diluted net loss per share as the effect would be anti-dilutive. The Company intends to settle the principal amount of the 2025 Notes in cash, shares or a combination thereof. As a result of the adoption of ASU 2020-06, the Company uses the if-converted method for calculating any potential dilutive effect on diluted net income per share, if applicable.
11



j.Recently Adopted Accounting Pronouncements:

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 simplified the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. Additionally, ASU 2020-06 requires the application of the if-converted method to calculate the impact of convertible instruments on earnings per share. The Company adopted this standard on January 1, 2022 using a modified retrospective basis which resulted in a decrease to accumulated deficit of $8,647, a decrease in additional paid-in capital of $30,794 and an increase in liabilities of $22,147 on its consolidated balance sheets. For more information, refer to Note 5.

n.Recently Issued Accounting Pronouncements Not Yet Adopted:

The Company has reviewed recent accounting pronouncements and concluded that they are either not applicable to its business or that no material effect is expected on the consolidated financial statements as a result of their future adoption.

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 three months ended March 31, 2022.
 
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.
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The following table sets forth the Company’s assets and liabilities that were measured at fair value as of March 31, 2022 and December 31, 2021 by level within the fair value hierarchy (in thousands):
 
As of March 31, 2022
 (unaudited)As of December 31, 2021
 Level ILevel
II
Level IIITotalLevel ILevel
II
Level IIITotal
Financial assets:
Cash equivalents:
Money market funds$384,062 $ $ $384,062 $414,942 $ $ $414,942 
Corporate bonds 2,454  2,454     
Marketable securities:
US Treasury securities13,997   13,997     
Commercial paper 9,573  9,573     
Corporate bonds 4,802  4,802     
Prepaid expenses and other current assets:
Forward foreign exchange contracts 2,904  2,904  6,083  6,083 
Financial liabilities:
Accrued expenses and other short-term liabilities:
Forward foreign exchange contracts (30) (30) (62) (62)
Total financial assets (liabilities)$398,059 $19,703 $ $417,762 $414,942 $6,021 $ $420,963 

See Note 5 “Convertible Senior Notes and Capped Call Transactions” for the carrying amount and estimated fair value of the Company's 2025 Notes as of March 31, 2022.

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):
March 31, 2022
(unaudited)
Operating right-of-use assets$61,351 
Operating lease liabilities, current$(9,240)
Operating lease liabilities, long-term(65,786)
Total operating lease liabilities$(75,026)

Operating lease liabilities, current are included within accrued expenses and other short-term liabilities in the 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. New lease modifications result in remeasurement of the right-of-use asset and lease liability.

13


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 March 31, 2022, are as follows (in thousands):
March 31, 2022
 (unaudited)
2022$8,329 
202311,527 
20249,729 
20259,767 
20269,879 
Thereafter34,296 
Total undiscounted lease payments$83,527 
Less: Imputed interest(8,501)
Present value of lease liabilities$75,026 

The weighted average remaining lease terms and discount rates for all operating leases were as follows as of March 31, 2022:
Remaining lease term and discount rate:
Weighted average remaining lease term (years)7.99
Weighted average discount rate2.87 %

Total operating lease cost for the three months ended March 31, 2022 was $2,309, inclusive of sublease income of $100. Total operating lease cost for the three months ended March 31, 2021 was $1,440.

NOTE 4:    GOODWILL AND INTANGIBLE ASSETS

On October 29, 2020, the Company completed the acquisition of the share capital of Polyrize Security Ltd. ("Polyrize"), a provider of software that maps and analyzes relationships between users and data across a number of cloud applications and services.
 
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 months ended March 31, 2022 or during prior periods.

Intangible Assets

Total cost and amortization of intangible assets is comprised of the following (in thousands, except useful life):
14


Estimated Useful LifeMarch 31, 2022
Intangible assets, net(in years)(unaudited)
Developed technology & trademarks4$6,110 
Total intangible assets6,110 
Less: Accumulated amortization2,179 
Total intangible assets, net$3,931 

Intangible assets are expensed on a straight-line basis over the useful life of the asset. The Company recorded amortization expense of $381 and $384 for the three months ended March 31, 2022 and 2021.

The following table summarizes estimated future amortization expense of our intangible assets as of March 31, 2022 (in thousands):
Years ending December 31,Amount
(unaudited)
20221,143 
20231,525 
20241,263 
Total future amortization expense$3,931 

NOTE 5:    CONVERTIBLE SENIOR NOTES AND CAPPED CALL TRANSACTIONS

On May 11, 2020, the Company issued the 2025 Notes pursuant to an Indenture dated May 11, 2020 (the “Indenture”), between the Company and U.S. Bank National Association, as trustee. The offering consisted of $220,000 aggregate principal amount plus the full exercise of the initial purchasers’ option to purchase up to an additional $33,000 aggregate principal amount. The net proceeds to the Company after the initial purchaser discount and 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, beginning on August 15, 2020, 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. During the three months ended March 31, 2022, 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 April 1, 2022 through June 30, 2022. Whether the 2025 Notes will be convertible following such period will depend on the continued satisfaction of this condition or another conversion condition. The Company has not received any conversion notices through the issuance date of our consolidated financial statements. Since the Company may elect to repay the 2025 Notes in cash, shares of our common stock, or a combination of both, it has continued to classify the 2025 Notes as long-term debt on its consolidated balance sheet as of March 31, 2022.

The 2025 Notes are not redeemable at the Company’s option prior to August 20, 2023. The Company may redeem the 2025 Notes for cash, at its option, subject to the terms and conditions provided in the Indenture.

Prior to the adoption of ASU 2020-06 on January 1, 2022, the Company separated the 2025 Notes into liability and equity components. The carrying amounts of the liability components of the 2025 Notes were calculated by measuring the fair value of similar debt instruments that do not have an associated convertible feature. The carrying amounts of the equity components, representing the conversion option, were determined by deducting the fair value of the liability components from the par value of the 2025 Notes. This difference represented the debt discount that was amortized to interest expense using the effective interest rate method. The carrying amount of the equity components representing the conversion option was approximately
15


$31,779 for the 2025 Notes and were recorded in additional paid-in capital. In addition, the Company allocated transaction costs related to the issuance of the 2025 Notes to the liability and equity components using the same proportions as the initial carrying value of the Notes. Transaction costs attributable to the liability component were approximately $6,857 and were being amortized to interest expense at an effective interest method rate of 4.51%. Transaction costs attributable to the equity component were approximately $985 and were netted with the equity component of the 2025 Notes in additional paid-in capital.

Following the adoption of ASU 2020-06 on January 1, 2022, which the Company elected to adopt using a modified retrospective approach, the Company no longer separates the 2025 Notes into liability and equity components. The cumulative effect of the accounting change as of January 1, 2022 was a decrease to accumulated deficit of $8,647, a decrease in additional paid-in capital of $30,794 and an increase in liabilities of $22,147 on its consolidated balance sheets. Comparative prior year periods were not adjusted. In connection with the adoption, the Company calculated an effective interest rate of 1.87%.

The net carrying amount of the 2025 Notes was as follows (in thousands):
March 31, 2022
(unaudited)
Principal$253,000 
Unamortized issuance costs(5,154)
Net carrying amount$247,846 

The interest expense recognized related to the 2025 Notes for the three months ended March 31, 2022 and 2021 was as follows (in thousands):
Three Months Ended
March 31,
20222021
(unaudited)
Contractual interest expense$791 $790 
Amortization of debt discount 1,389 
Amortization of debt issuance costs369 300 
Total$1,160 $2,479 

As of March 31, 2022, the total estimated fair value of the 2025 Notes was approximately $418,080. The fair value was determined based on the closing trading price per $100 of the 2025 Notes as of the last day of trading for the period. The fair value of the 2025 Notes is primarily affected by the trading price of our common stock and market interest rates. The fair value of the 2025 Notes is considered a Level 2 within the fair value hierarchy and was 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 2025 Notes in an over-the-counter market.

Capped Call Transactions

In May 2020, in connection with the pricing of the 2025 Notes, 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 2025 Notes and/or offset any cash payments the Company is required to make in excess of the principal amount of converted 2025 Notes, as the case may be, with such reduction and/or offset subject to a cap initially equal to $47.24 (the "Cap Price").

The Capped Call Transactions are separate transactions, and are not part of the terms of the 2025 Notes and will not change the holders’ rights under the 2025 Notes. 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 consolidated balance sheet and are not accounted for as derivatives. The cost of the Capped Call Transactions was approximately $29,348 and was recorded as a reduction to additional paid-in capital.

NOTE 6:    STOCKHOLDERS’ EQUITY

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a. Stock plans:

On December 30, 2005, the Company’s board of directors adopted the Varonis Systems, Inc. 2005 Stock Plan (the “2005 Plan”). As of December 31, 2013, the Company had reserved 14,139,957 shares of common stock available for issuance to employees, directors, officers and consultants of the Company and its subsidiaries. The awards generally vest over four years. No awards were granted under the 2005 Plan subsequent to December 31, 2013, and no further awards will be granted under the 2005 Plan.

On November 14, 2013, the Company’s board of directors adopted the Varonis Systems, Inc. 2013 Omnibus Equity Incentive Plan (the “2013 Plan”) which was subsequently approved by the Company’s stockholders. The Company initially reserved 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. The number of shares of common stock available for issuance under the 2013 Plan was increased on January 1, 2016 and has been, and will be, increased on each January 1 thereafter by four percent (4%) of the number of shares of common stock issued and outstanding on each December 31 immediately prior to the date of increase (rounded down to the nearest whole share), but the amount of each increase will be limited to the number of shares of common stock necessary to bring the total number of shares of Common Stock available for grant and issuance under the 2013 Plan to five percent (5%) of the number of shares of common stock issued and outstanding on each December 31. Since January 1, 2016, the share reserve under the 2013 Plan has been automatically increased by an aggregate of 24,217,741 shares. Awards granted under the 2013 Plan generally vest over four years. Any award that is forfeited or canceled before expiration becomes available for future grants under the 2013 Plan.

On October 22, 2020, and as part of the 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”).

A summary of employees’ stock options activities during the three months ended March 31, 2022 is as follows:
 
 Three Months Ended
March 31, 2022 (unaudited)
 NumberWeighted
average
exercise price
Aggregate
intrinsic value
(in thousands)
Weighted average
remaining
contractual life
(years)
Options outstanding as of January 1, 2022803,870 $7.077 $33,524 2.747
Granted $ 
Exercised(3,208)$7.123 
Forfeited and expired $ 
Options outstanding as of March 31, 2022
800,662 $7.077 $32,397 2.501
Options exercisable as of March 31, 2022
786,922 $7.101 $31,822 2.407
 
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 three months ended March 31, 2022 was $111. As of March 31, 2022, there was $418 of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the 2005 Plan, 2013 Plan and Polyrize Plan. This cost is expected to be recognized over a weighted-average period of approximately 1.594 years.

b. The options outstanding as of March 31, 2022 (unaudited) have been separated into ranges of exercise price as follows:
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Range of exercise price
Options outstanding
as of
March 31, 2022
Weighted average remaining contractual life (years)Weighted average exercise price of options outstanding
Options exercisable as of
March 31, 2022
Weighted average remaining contractual life (years)Weighted average exercise price of options exercisable
$4.157 5.682224,661 2.712 $4.883 210,921 2.377 $4.821 
$6.503 8.077430,099 2.311 $7.111 430,099 2.311 $7.111 
 $9.960120,180 2.896 $9.960 120,180 2.896 $9.960 
 $13.28725,722 1.975 $13.287 25,722 1.975 $13.287 
   800,662 2.501 $7.077 786,922 2.407 $7.101 

c.Options issued to consultants:

The Company’s outstanding options granted to consultants for services as of March 31, 2022 (unaudited) were as follows:
 
Number of options outstanding and exercisable as of March 31, 2022
Exercise price
per share
Exercisable
through
August 20134,500 $7.047 August 2023
March 20144,650 $13.287 March 2024
May 20143,000 $7.337 May 2024
November 20147,500 $7.220 November 2024
February 20163,000 $5.623 February 2026
 22,650   

d.Restricted stock units ("RSUs") and performance stock units ("PSU"):

A summary of RSUs and PSUs for employees, consultants and non-employee directors of the Company for the three months ended March 31, 2022 (unaudited) is as follows:
 
 Number of
shares underlying
outstanding
RSUs and PSUs
Weighted-
average
grant date
fair value
Unvested balance - January 1, 20227,726,125 $42.53 
Granted3,366,541 $43.20 
Vested(2,548,923)$32.66 
Forfeited(172,193)$46.28 
Unvested balance – March 31, 2022
8,371,550 $45.73 
 
As of March 31, 2022, there was $344,959 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 2.696 years.

e.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
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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 3,004,765 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.

f.Stock-based compensation expense for employees and consultants:
 
The Company recognized stock-based compensation expense in the consolidated statements of operations as follows (in thousands):
 
 Three Months Ended
March 31,
 20222021
(unaudited)
Cost of revenues$3,087 $1,589 
Research and development12,600 7,158 
Sales and marketing13,096 7,742 
General and administrative7,215 4,890 
Total$35,998 $21,379 

g.Common stock split:
 
On February 8, 2021, the Company announced a three-for-one split of its common stock to stockholders of record as of the close of business on March 12, 2021. Trading of the Company's common stock began on a split-adjusted basis on March 15, 2021.

h.Follow-on offering:
 
On February 16, 2021, the Company completed a registered public offering of 7,961,538 shares of the Company's common stock, which included 1,038,459 additional optional shares, at a price of $65.00 per share, before underwriting discounts and commissions. The common stock offering generated net proceeds to the Company of approximately $500,034, after deducting $17,466 in underwriting discounts and commissions and offering costs, which have been recorded against the proceeds received from the offering.

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 from licensing of software and sales of professional services, maintenance and technical support (see Note 1 above for a brief description of the Company’s business). The following is a summary of revenues within geographic areas (in thousands):
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 Three Months Ended
March 31,
 20222021
 (unaudited)
Revenues based on customer’s location:  
North America$69,141 $52,806 
EMEA (*)24,209 20,234 
Rest of World2,911 1,745 
Total revenues$96,261 $74,785 
 
(*)       Sales to customers in France did not exceed 10% of total revenues for the three months ended March 31, 2022 and accounted for 10.3% of total revenues for the three months ended March 31, 2021.

For the three months ended March 31, 2022 and 2021, respectively, there were no sales to a single customer exceeding 10% of total revenues.

The following is a summary of long-lived assets, including property and equipment, net and operating lease right-of-use assets, within geographic areas (in thousands):
As ofAs of
 March 31, 2022December 31, 2021
 (unaudited) 
Long-lived assets by geographic region:  
United States$42,142 $43,317 
Israel40,854 40,169 
Ireland