Document


 
 
 
 
 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________
 
FORM 10-Q
____________________
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2019
 
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, 29th Floor
New York, NY
10001
(Address of principal executive offices)
(Zip Code)
 
(877) 292-8767
(Registrant’s telephone number, including area code)
____________________
 
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 April 26, 2019, there were 30,256,905 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,
2019
 
December 31, 2018
 
(unaudited)
 

Assets
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
64,461

 
$
48,707

Marketable securities
37,842

 
39,770

Short-term deposits
61,328

 
70,438

Trade receivables (net of allowance for doubtful accounts of $517 and $483 at March 31, 2019 and December 31, 2018, respectively)
41,796

 
83,223

Prepaid expenses and other current assets
14,899

 
16,952

Total current assets
220,326

 
259,090

 
 
 
 
Long-term assets:
 

 
 

Other assets
12,180

 
8,565

Operating lease right-of-use asset
51,875

 

Property and equipment, net
21,065

 
17,323

Total long-term assets
85,120

 
25,888

Total assets
$
305,446

 
$
284,978

 
 
 
 
Liabilities and stockholders’ equity
 

 
 

Current liabilities:
 

 
 

Trade payables
$
624

 
$
2,620

Accrued expenses and other short term liabilities
50,301

 
55,991

Deferred revenues
81,844

 
87,729

Total current liabilities
132,769

 
146,340

 
 
 
 
Long-term liabilities:
 

 
 

Deferred revenues
6,988

 
6,487

Operating lease liability
52,697

 

Other liabilities
2,997

 
6,781

Total long-term liabilities
62,682

 
13,268

 
 
 
 
Stockholders’ equity:
 

 
 

Share capital
 

 
 

Common stock of $0.001 par value - Authorized: 200,000,000 shares at March 31, 2019 and December 31, 2018; Issued and outstanding: 30,263,237 shares at March 31, 2019 and 29,576,880 shares at December 31, 2018
30

 
30

Accumulated other comprehensive loss
(688
)
 
(3,633
)
Additional paid-in capital
271,260

 
266,941

Accumulated deficit
(160,607
)
 
(137,968
)
Total stockholders’ equity
109,995

 
125,370

Total liabilities and stockholders’ equity
$
305,446

 
$
284,978

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

1



VARONIS SYSTEMS, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data) 

 
Three Months Ended
March 31,
 
2019
 
2018
Revenues:
 

 
 

Perpetual licenses
$
15,521

 
$
24,086

Subscriptions
7,005

 
1,071

Maintenance and services
33,834

 
28,371

Total revenues
56,360

 
53,528

 
 
 
 
Cost of revenues
8,326

 
6,442

 
 
 
 
Gross profit
48,034

 
47,086

 
 
 
 
Operating costs and expenses:
 

 
 

Research and development
18,768

 
15,542

Sales and marketing
41,996

 
39,972

General and administrative
9,271

 
7,069

Total operating expenses
70,035

 
62,583

 
 
 
 
Operating loss
(22,001
)
 
(15,497
)
Financial income (expenses), net
(128
)
 
978

 
 
 
 
Loss before income taxes
(22,129
)
 
(14,519
)
Income taxes
(510
)
 
(527
)
 
 
 
 
Net loss
$
(22,639
)
 
$
(15,046
)
 
 
 
 
Net loss per share of common stock, basic and diluted
$
(0.76
)
 
$
(0.53
)
 
 
 
 
Weighted average number of shares used in computing net loss per share of common stock, basic and diluted
29,827,927

 
28,362,479

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

2



VARONIS SYSTEMS, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
 
 
Three Months Ended
March 31,
 
2019
 
2018
Net loss
$
(22,639
)
 
$
(15,046
)
 
 
 
 
Other comprehensive income (loss):
 
 
 
Unrealized income (loss) on marketable securities, net of tax
18

 
(9
)
Gains (losses) on marketable securities reclassified into earnings, net of tax
(8
)
 
1

 
10

 
(8
)
 
 
 
 
Unrealized income (loss) on derivative instruments, net of tax
2,484

 
(2,053
)
Losses (gains) on derivative instruments reclassified into earnings, net of tax
451

 
(48
)
 
2,935

 
(2,101
)
Total other comprehensive income (loss)
2,945

 
(2,109
)
 
 
 
 
Comprehensive loss
$
(19,693
)
 
$
(17,155
)

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

3



VARONIS SYSTEMS, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(in thousands, except share data)
 
 
Common stock
 
Additional
paid-in capital
 
Accumulated
other
comprehensive loss
 
Accumulated deficit
 
Total
stockholders’ equity
 
Number
 
Amount
 
 
 
 
Balance as of December 31, 2017
28,146,162

 
28

 
223,868

 
136

 
(109,390
)
 
114,642

Stock-based compensation expense

 

 
6,927

 

 

 
6,927

Common stock issued under employee stock plans, net
602,469

 
1

 
1,065

 

 

 
1,066

Unrealized losses on derivative instruments

 

 

 
(2,101
)
 

 
(2,101
)
Unrealized losses on available for sale securities

 

 

 
(8
)
 

 
(8
)
Net loss

 

 

 

 
(15,046
)
 
(15,046
)
Balance as of March 31, 2018
28,748,631

 
29

 
231,860

 
(1,973
)
 
(124,436
)
 
105,480

 
 
 
 
 
 
 
 
 
 
 
 
 
Common stock
 
Additional
paid-in capital
 
Accumulated
other
comprehensive loss
 
Accumulated deficit
 
Total
stockholders’ equity
 
Number
 
Amount
 
 
 
 
Balance as of December 31, 2018
29,576,880

 
$
30

 
$
266,941

 
$
(3,633
)
 
$
(137,968
)
 
$
125,370

Stock-based compensation expense

 

 
8,961

 

 

 
8,961

Common stock issued under employee stock plans, net
686,357

 

 
(4,642
)
 

 

 
(4,642
)
Unrealized gains on derivative instruments

 

 

 
2,935

 

 
2,935

Unrealized gains on available for sale securities

 

 

 
10

 

 
10

Net loss

 

 

 

 
(22,639
)
 
(22,639
)
Balance as of March 31, 2019
30,263,237

 
$
30

 
$
271,260

 
$
(688
)
 
$
(160,607
)
 
$
109,995

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


4



VARONIS SYSTEMS, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 
Three Months Ended
March 31,
 
2019
 
2018
Cash flows from operating activities:
 

 
 

Net loss
$
(22,639
)
 
$
(15,046
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Depreciation
1,337

 
797

Stock-based compensation
8,961

 
6,927

Amortization of deferred commissions
3,626

 
3,325

Amortization of operating lease right-of-use asset
1,399

 

Capital gain from disposal of fixed assets
24

 

 
 
 
 
Changes in assets and liabilities:
 

 
 

Trade receivables
41,427

 
43,128

Prepaid expenses and other current assets
(623
)
 
(5,806
)
Deferred commissions
(4,870
)
 
(2,434
)
Other long term assets
(19
)
 
41

Trade payables
(1,996
)
 
(152
)
Accrued expenses and other short term liabilities
(7,358
)
 
(8,200
)
Deferred revenues
(5,384
)
 
(5,373
)
Other long term liabilities
170

 
237

Net cash provided by operating activities
14,055

 
17,444

 
 
 
 
Cash flows from investing activities:
 

 
 

Decrease (increase) in short-term deposits
9,120

 
(1,144
)
Decrease (increase) in marketable securities
1,928

 
(1,889
)
Increase in long-term deposits
(12
)
 
(308
)
Purchase of property and equipment
(5,103
)
 
(1,081
)
Net cash provided by (used in) investing activities
5,933

 
(4,422
)
 
 
 
 
Cash flows from financing activities:
 

 
 

Proceeds (withholdings) from employee stock plans, net
(4,234
)
 
1,066

Net cash provided (used in) by financing activities
(4,234
)
 
1,066

Increase in cash, cash equivalents and restricted cash
15,754

 
14,088

Cash, cash equivalents and restricted cash at beginning of period
48,707

 
57,236

Cash, cash equivalents and restricted cash at end of period
$
64,461

 
$
71,324

 
 
 
 
Supplemental disclosure of cash flow information:
 

 
 

Cash paid for income taxes
$
2,543

 
$
102

Initial recognition of operating lease right-of-use assets
$
53,274

 
$

Initial recognition of operating lease liabilities
$
58,024

 
$


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



5



NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1:-     GENERAL
 
a. Varonis Systems, Inc. (“VSI” and together with its subsidiaries, collectively, the “Company”) was incorporated under the laws of the State of Delaware on November 3, 2004 and commenced operations on January 1, 2005.
 
VSI has nine wholly-owned subsidiaries: Varonis Systems Ltd. (“VSL”) incorporated under the laws of Israel on November 24, 2004; Varonis (UK) Limited (“VSUK”) incorporated under the laws of England on March 14, 2007; Varonis Systems (Deutschland) GmbH (“VSG”) incorporated under the laws of Germany on July 6, 2011; Varonis France SAS (“VSF”) incorporated under the laws of France on February 22, 2012; Varonis Systems Corp. (“VSC”) incorporated under the laws of British Columbia, Canada on February 19, 2013; Varonis Systems (Ireland) Limited ("VIRE") incorporated under the laws of Ireland on November 11, 2016; Varonis Systems (Australia) Pty Ltd (“VAUS”) incorporated under the laws of Victoria, Australia on February 28, 2017; Varonis Systems (Netherlands) B.V. ("VNL") incorporated under the laws of the Netherlands on March 13, 2018; and Varonis U.S. Public Sector LLC ("VPS") incorporated under the laws of the State of Delaware on May 14, 2018.

The Company’s software products and services allow enterprises to manage, analyze and secure enterprise data. Varonis focuses on protecting enterprise data: sensitive files and emails; confidential customer, patient and employee data; financial records; strategic and product plans; and other intellectual property.  Through its products DatAdvantage (including the Automation Engine), DatAlert (including Varonis Edge), DataPrivilege, Data Classification Engine (including GDPR Patterns and Data Classification Labels), Data Transport Engine and DatAnswers, the software platform allows enterprises to protect sensitive data from insider threats and cyberattacks, and realize the value of their enterprise data in ways that are not resource-intensive and easy to implement.
 
VSI and VPS market and sell products and services mainly in the United States. VSUK, VSG, VSF, VSC, VIRE, VAUS and VNL resell the Company’s products and services mainly in the United Kingdom, Germany, France, Canada, Ireland, Australia and the Netherlands and Belgium, respectively. The Company primarily sells its products and services to a global network of distributors and Value Added Resellers (VARs), which sell the products to end user customers.
 
b.
Basis of Presentation:
 
The accompanying unaudited consolidated interim financial statements have been prepared in accordance with Article 10 of Regulation S-X, “Interim Financial Statements” and the rules and regulations for Form 10-Q of the Securities and Exchange Commission (the “SEC”). Pursuant to those rules and regulations, the Company has condensed or omitted certain information and footnote disclosure it normally includes in its annual consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). Certain amounts in prior periods' financial statements have been recast and reclassified to conform to the current year's presentation.
 
In management’s opinion, the Company has made all adjustments (consisting only of normal, recurring adjustments, except as otherwise indicated) necessary to fairly present its consolidated financial position, results of operations and cash flows. The Company’s interim period operating results do not necessarily indicate the results that may be expected for any other interim period or for the full fiscal year. These financial statements and accompanying notes should be read in conjunction with the 2018 consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for its fiscal year ended December 31, 2018 filed with the SEC on February 12, 2019 (the “2018 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, 2018 included in the 2018 Form 10-K, except as follows:
 
During the three months ended March 31, 2019, the Company adopted Accounting Standards Update 2016-02, “Leases” (“ASU 2016-02”) using the modified retrospective approach. For information regarding ASU 2016-02, please refer to note 3.
c.
Revenue Recognition:

The Company generates revenues in the form of software license fees and related maintenance and services fees. Perpetual license revenues consist of the revenues recognized from sales of perpetual licenses to new and existing customers. Subscription revenues are comprised of time-based licenses whereby customers use our software with related maintenance (including support and unspecified upgrades and enhancements when and if they are available) for a specified period. Subscriptions are sold on premises with the same functionality as the perpetual license and are recognized from sales of

6



subscription and maintenance licenses to new and existing customers. When products are purchased as a subscription, the associated maintenance is included as part of the subscription revenues. Maintenance and services primarily consist of fees for maintenance services of perpetual license sales (including support and unspecified upgrades and enhancements when and if they are available) and to a lesser extent professional services which focus on both operationalizing the software and training the Company’s customers to fully leverage the use of its products although the user can benefit from the software without the Company’s assistance. The Company sells its products worldwide directly to a network of distributors and VARs, and payment is typically due within 30 to 60 calendar days of the invoice date.

The Company recognizes revenues in accordance with ASC No. 606, “Revenue from Contracts with Customers”. As such, the Company identifies a contract with a customer, identifies the performance obligations in the contract, determines the transaction price, allocates the transaction price to each performance obligation in the contract and recognizes revenues when (or as) the Company satisfies a performance obligation.

Perpetual and subscription software license revenues are recognized at the point of time when the software license has been delivered and the benefit of the asset has transferred.
 
The Company recognizes revenues from maintenance ratably over the term of the underlying maintenance contract. The term of the maintenance contract is usually one year. Renewals of maintenance contracts create new performance obligations that are satisfied over the term with the revenues recognized ratably over the period.

Revenues from professional services consist mostly of time and material services. The performance obligations are satisfied, and revenues are recognized, when the services are provided or once the service term has expired.
 
The Company enters into contracts that can include combinations of products and services, which are generally capable of being distinct and accounted for as separate performance obligations.  The license is distinct upon delivery as the customer can derive the economic benefit of the software without any professional services, updates or technical support. The Company allocates the transaction price to each performance obligation based on its relative standalone selling price out of the total consideration of the contract. For maintenance, the Company determines the standalone selling prices based on the price at which the Company separately sells a renewal contract. For professional services, the Company determines the standalone selling prices based on the price at which the Company separately sells those services. For software licenses, the Company uses the residual approach to determine the standalone selling prices due to the lack of history of selling software license on a standalone basis.
 
Trade and other receivables are primarily comprised of trade receivables that are recorded at the invoice amount, net of an allowance for doubtful accounts.
 
Deferred revenues represent mostly unrecognized fees billed or collected for maintenance and professional services. Deferred revenues are recognized as (or when) the Company performs under the contract. Deferred revenues do not include multi-year subscription contracts with an automatic renewal component for which the associated revenues have not been recognized and the customers have not yet been invoiced. The amount of revenues recognized in the period that was included in the opening deferred revenues balance was $32,061 for the three months ended March 31, 2019.
 
The Company does not grant a right of return to its customers, except for one of its resellers. In 2018 and for the three months ended March 31, 2019, there were no returns from this reseller.
 
For information regarding disaggregated revenues, please refer to note 5.

d.
Contract Costs:

The Company pays sales commissions to sales and marketing and certain management personnel based on their attainment of certain predetermined sales goals. Sales commissions earned by its employees are considered incremental and recoverable costs of obtaining a contract with a customer. Sales commissions paid for initial contracts, which are not commensurate with sales commissions paid for renewal contracts, are capitalized and amortized over an expected period of benefit. Based on its technology, customer contracts and other factors, the Company has determined the expected period of benefit to be approximately four years. Sales commissions for renewal contracts are capitalized and then amortized on a straight line basis over the related contractual renewal period. Amortization expenses related to these costs are mostly included in sales and marketing expenses in the accompanying consolidated statements of operations.


7



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 forecast to be incurred in currencies other than the U.S. dollar. A majority of the Company’s revenues and operating expenditures are transacted in U.S. dollars. However, certain operating expenditures are incurred in or exposed to other currencies, primarily the New Israeli Shekel (“NIS”).

The Company has established forecasted transaction currency risk management programs to protect against fluctuations in fair value and the volatility of future cash flows caused by changes in exchange rates. The Company’s currency risk management program includes forward foreign exchange contracts designated as cash flow hedges. These forward foreign exchange contracts generally mature within 12 months. The Company does not enter into derivative financial instruments for trading purposes. In addition, the Company enters into forward contracts to hedge a portion of its monetary items in the balance sheet, such as trade receivables and payables, denominated in Pound Sterling and Euro for short term periods (the “Fair Value Hedging Program”). The purpose of the Fair Value Hedging Program is to protect the fair value of the monetary assets from foreign exchange rate fluctuations. Gains and losses from derivatives related to the Fair Value Hedging Program are not designated as hedging instruments.
 
Derivative instruments measured at fair value and their classification on the consolidated balance sheets are presented in the following table (in thousands):
 
 
Assets (liabilities) as of
March 31, 2019
(unaudited)
 
Liabilities as of
December 31, 2018
 
Notional
Amount
 
Fair
Value
 
Notional
Amount
 
Fair
Value
Foreign exchange forward contract derivatives in cash flow hedging relationships - included in accrued expenses and other short term liabilities
$
58,213

 
$
(731
)
 
$
75,153

 
$
(3,628
)
Foreign exchange forward contract derivatives for monetary items included in other current assets and accrued expenses and other short term liabilities
$
26,785

 
$
72

 
$
29,162

 
$
(18
)
 
For the three months ended March 31, 2019 and 2018, the unaudited consolidated statements of operations reflect a loss of $451 and a gain of $48, respectively, related to the effective portion of the cash flow hedges. Any ineffective portion of the cash flow hedges is recognized in financial income (expenses), net in the consolidated statement of operations. No material ineffective hedges were recognized in financial income (expenses), net for the three months ended March 31, 2019 and 2018.

For the three months ended March 31, 2019, the unaudited consolidated statements of operations reflect a gain of $471 in financial income (expenses), net, related to the Fair Value Hedging Program. The Company did not enter into any transactions related to the Fair Value Hedging Program for the three months ended March 31, 2018.
 
f.
Cash, Cash Equivalents, Marketable Securities and Short-Term Investments:   
 
The Company accounts for investments in marketable securities in accordance with ASC No. 320, “Investments—Debt and Equity Securities”. The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Cash and cash equivalents consist of cash on hand, highly liquid investments in money market funds and various deposit accounts.

The Company considers all high quality investments purchased with original maturities at the date of purchase greater than three months to be short-term deposits. Investments are available to be used for current operations and are, therefore, classified as current assets even though maturities may extend beyond one year. Cash equivalents, marketable securities and short-term deposits are classified as available for sale and are, therefore, recorded at fair value on the consolidated balance sheet, with any unrealized gains and losses reported in accumulated other comprehensive income (loss), which is reflected as a separate component of stockholders’ equity in the Company’s consolidated balance sheets, until realized. The Company uses the specific identification method to compute gains and losses on the investments. The amortized cost of securities is adjusted for

8



amortization of premiums and accretion of discounts to maturity. Such amortization and accretion is included as a component of financial income, net in the consolidated statement of operations. Cash, cash equivalents, marketable securities and short-term deposits consist of the following (in thousands):
 
 
As of March 31, 2019
 
(unaudited)
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized  
Loss
 
Fair
Value
Cash and cash equivalents
 

 
 

 
 

 
 

Money market funds
$
8,815

 
$

 
$

 
$
8,815

Total
$
8,815

 
$

 
$

 
$
8,815

 
 
 
 
 
 
 
 
Marketable securities
 
 
 
 
 
 
 
US Treasury securities
$
37,837

 
$
5

 
$ *)

 
$
37,842

Total
$
37,837

 
$
5

 
$ *)

 
$
37,842

 
 
 
 
 
 
 
 
Short-term investments
 
 
 
 
 
 
 
Term bank deposits
$
61,328

 
$

 
$

 
$
61,328

Total
$
61,328

 
$

 
$

 
$
61,328

 
 
As of December 31, 2018
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized  
Loss
 
Fair
Value
Cash and cash equivalents
 

 
 

 
 

 
 

Money market funds
$
2,594

 
$

 
$

 
$
2,594

Total
$
2,594

 
$

 
$

 
$
2,594

 
 
 
 
 
 
 
 
Marketable securities
 
 
 
 
 
 
 
US Treasury securities
$
39,776

 
$ *)

 
$
(6
)
 
$
39,770

Total
$
39,776

 
$ *)

 
$
(6
)
 
$
39,770

 
 
 
 
 
 
 
 
Short-term investments
 
 
 
 
 
 
 
Term bank deposits
$
70,438

 
$

 
$

 
$
70,438

Total
$
70,438

 
$

 
$

 
$
70,438

 
*) Represents an amount lower than $1

All the US Treasury securities in short-term investments have a stated effective maturity of less than 12 months as of March 31, 2019 and December 31, 2018.
 

9



The gross unrealized loss related to these short-term investments was due primarily to changes in interest rates. The Company reviews its short-term investments on a regular basis to evaluate whether or not any security has experienced an other than temporary decline in fair value. The Company considers factors such as length of time and extent to which the market value has been less than the cost, the financial condition and near-term prospects of the issuer and its intent to sell, or whether it is more likely than not the Company will be required to sell the investment before recovery of the investment’s amortized cost basis. If the Company believes that an other than temporary decline exists in one of these securities, the Company writes down these investments to fair value. For debt securities, the portion of the write-down related to credit loss would be recorded to other income (expense), net in the Company’s consolidated statements of operations. Any portion not related to credit loss would be recorded to accumulated other comprehensive income (loss), which is reflected as a separate component of stockholders’ equity in the Company’s condensed consolidated balance sheets. During the three months ended March 31, 2019, the Company did not consider any of its investments to be other-than-temporarily impaired.

g.
Restricted Cash:
 
The following table provides a reconciliation of cash and cash equivalents and long term restricted cash reported within the consolidated balance sheets that sum to the total of such amounts in the consolidated statements of cash flows:
 
 
March 31, 2019
 
March 31, 2018
 
(unaudited)
Cash and cash equivalents
$
64,461

 
$
70,778

Long term restricted cash included in other assets

 
546

Cash, cash equivalents and long term restricted cash shown in the consolidated statement of cash flows
$
64,461

 
$
71,324


h.
Credit Facility:

On March 31, 2014, the Company entered into a promissory note and related security documents with Bank Leumi USA, which the Company has extended a number of times. The Company may borrow up to $7,000 against certain of its accounts receivable outstanding amount, based on several conditions, at an annual interest rate of the Wall Street Journal Prime Rate plus 0.05%, provided that the annual interest rate applicable to advances will not be lower than 4.10%. As of March 31, 2019, that rate amounted to 5.55%. This promissory note enables the Company, among other things, to engage in foreign currency hedging transactions with Bank Leumi USA to manage exposure to foreign currency risk without restricted cash requirements. The Company may borrow under the promissory note until November 15, 2020 at which time the principal sum of each such loan, together with accrued and unpaid interest payable, will become due and payable. As of March 31, 2019, the Company had no balance outstanding under the promissory note. As part of the transaction, the Company granted the lender a security interest in its personal property, excluding intellectual property and other intangible assets. The promissory note also contains customary events of default.

 
i.
Recently Adopted Accounting Pronouncements:

In February 2016, the FASB issued ASU 2016-02, “Leases”, on the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for in a manner similar to the accounting under the prior guidance (ASC 840). The new standard requires lessors to account for leases using an approach that is substantially equivalent to ASC 840 guidance for sales-type leases, direct financing leases and operating leases. The new standard supersedes the previous leases standard, ASC 840, "Leases".

The Company adopted the new standard as of January 1, 2019, using the modified retrospective approach. Consequently, prior period balances and disclosures have not been restated. The Company has elected to utilize the available package of practical

10



expedients permitted under the transition guidance within the new standard which does not require it to reassess the prior conclusions about lease identification, lease classification and initial direct costs. The adoption of ASC 842 resulted in the elimination of deferred rent of $1,313 and $4,236 in current and long-term liabilities in the Company’s consolidated balance sheets, respectively. Additionally, the Company included in its balance sheet at adoption an operating right-of-use assets, short term operating lease liabilities and long term operating lease liabilities of $53,274, $2,349 and $55,676, respectively. The standard did not materially impact the Company's net earnings and had no impact on cash flows. For additional information regarding the Company's accounting for leases, please refer to note 3.

In June 2018, the FASB issued ASU No. 2018-07, “Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting.” These amendments expand the scope of Topic 718, Compensation - Stock Compensation (which currently only includes share-based payments to employees) to include share-based payments issued to nonemployees for goods or services. Consequently, the accounting for share-based payments to nonemployees and employees will be substantially aligned. This ASU supersedes Subtopic 505-50, Equity - Equity-Based Payments to Non-Employees. Adoption of this standard had an immaterial impact on the Company's consolidated financial statements.
j.
Recently Issued Accounting Pronouncements Not Yet Adopted:

In January 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses on Financial Instruments”, which requires that expected credit losses relating to financial assets measured on an amortized cost basis and available for sale debt securities be recorded through an allowance for credit losses. ASU 2016-13 limits the amount of credit losses to be recognized for available for sale debt securities to the amount by which carrying value exceeds fair value and also requires the reversal of previously recognized credit losses if fair value increases. The new standard will be effective for interim and annual periods beginning after January 1, 2020, and early adoption is permitted. The Company is currently evaluating the potential effect of this standard on its consolidated financial statements.

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, 2019.
 
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.

11



The following table sets forth the Company’s assets and liabilities that were measured at fair value as of March 31, 2019 and December 31, 2018 by level within the fair value hierarchy (in thousands):
 
 
As of March 31, 2019
(unaudited)
 
As of December 31, 2018
 
Level I
 
Level
II
 
Level III
 
Fair
Value
 
Level I
 
Level
II
 
Level III
 
Fair
Value
Financial assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds
8,815

 

 

 
8,815

 
2,594

 

 

 
2,594

Marketable securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
US Treasury securities
37,842

 

 

 
37,842

 
39,770

 

 

 
39,770

Other current assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Forward foreign exchange contracts

 
72

 

 
72

 

 

 

 

Financial liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Forward foreign exchange contracts

 
(731
)
 

 
(731
)
 

 
(3,647
)
 

 
(3,647
)
Total financial assets (liabilities)
$
46,657

 
$
(659
)
 
$

 
$
45,998

 
$
42,364

 
$
(3,647
)
 
$

 
$
38,717


NOTE 3:-    LEASES

In February 2016, the FASB issued ASU 2016-02, “Leases”, on the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification.
 
The Company has elected the short-term lease exception for leases with a term of 12 months or less. As part of this election it will not recognize right-of-use assets and lease liabilities on the balance sheet for leases with terms less than 12 months. The Company also elected the practical expedient to not separate lease and non-lease components for all our leases. This will result in the initial and subsequent measurement of the balances of the right-of-use asset and lease liability being greater than if the policy election was not applied.

Some leases include one or more options to renew. The exercise of lease renewal options is typically at the Company's sole discretion; therefore, the majority of renewals to extend the lease terms are not included in our right of use assets and lease liabilities as they are not reasonably certain of exercise. The Company regularly evaluates the renewal options, and, when it is reasonably certain of exercise, it will include the renewal period in its lease term. Lease modifications result in remeasurement of the lease liability.

The right-of-use asset and lease liability are initially measured at the present value of the lease payments, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the Company's incremental borrowing rate based on the information available at the date of adoption in determining the present value of the lease payments.

Some of the real estate leases contain variable lease payments, including payments based on an index or rate. Variable lease payments based on an index or rate are initially measured using the index or rate in effect at lease adoption. Additional payments based on the change in an index or rate are recorded as a period expense when incurred.

The Company has various operating leases for office space, vehicles and office equipment that expire through 2030. Below is a summary of our operating right-of-use assets and operating lease liabilities as of March 31, 2019:

12



 
March 31, 2019
 
(unaudited)
Operating right-of-use assets
$
51,875

 
 
Operating lease liabilities, current
$
3,468

Operating lease liabilities long-term
52,697

Total operating lease liabilities
$
56,165


The short term lease liabilities is included within accrued expenses and other short term liabilities in the consolidated balance sheet.

Minimum lease payments for our right of use assets over the remaining lease periods as of March 31, 2019, are as follows:

 
March 31, 2019
 
(unaudited)
2019
$
3,114

2020
9,005

2021
7,860

2022
7,863

2023
7,673

Thereafter
32,373

 
 
Total undiscounted lease payments
$
67,888

 
 
Less: Interest
(11,723
)
 
 
Present value of lease liabilities
$
56,165

 
As of March 31, 2019, the Company had an additional operating lease that had not yet commenced of $8,684. This operating lease will commence in the second quarter of 2019 with a lease term through 2028.

The weighted average remaining lease terms and discount rates for all of operating leases were as follows as of March 31, 2019:
Remaining lease term and discount rate:
 
Weighted average remaining lease term (years)
8.86

 
 
Weighted average discount rate
4.02
%

Total rent expenses for the three months ended March 31, 2019 and 2018 were $1,701 and $980, respectively.

NOTE 4:–    STOCKHOLDERS’ EQUITY

a. On December 30, 2005, the Company’s board of directors adopted the Varonis Systems, Inc. 2005 Stock Plan (the “2005 Stock Plan”). As of December 31, 2013, the Company had reserved 4,713,319 shares of common stock available for issuance to employees, directors, officers and consultants of the Company and its subsidiaries. The options generally vest over four years. No awards were granted under the 2005 Stock Plan subsequent to December 31, 2013, and no further awards will be granted under the 2005 Stock Plan.
 
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

13



1,904,633 shares of common stock for issuance under the 2013 Plan to employees, directors, officers and consultants of the Company and its subsidiaries. The number of shares of common stock available for issuance under the 2013 Plan was increased on January 1, 2016 and has been, and will be, increased on each January 1 thereafter by four percent (4%) of the number of shares of common stock issued and outstanding on each December 31 immediately prior to the date of increase (rounded down to the nearest whole share), but the amount of each increase will be limited to the number of shares of common stock necessary to bring the total number of shares of Common Stock available for grant and issuance under the 2013 Plan to five percent (5%) of the number of shares of common stock issued and outstanding on each December 31. On January 1, 2019, 2018, 2017 and 2016, the share reserve under the 2013 Plan was automatically increased by 1,183,075, 1,125,846, 1,072,870 and 1,042,766 shares, respectively. Awards granted under the 2013 Plan generally vest over four years. Any award that is forfeited or canceled before expiration becomes available for future grants under the 2013 Plan.

A summary of employees’ stock options activities during the three months ended March 31, 2019 is as follows:
 
 
Three Months Ended
March 31, 2019 (unaudited)
 
Number
 
Weighted
average
exercise price
 
Aggregate
intrinsic value
(in thousands)
 
Weighted average
remaining
contractual life
(years)
 
 
 
 
 
 
 
 
Options outstanding as of January 1, 2019
709,668

 
$
17.941

 
$
24,810

 
4.513
Granted

 
$

 
 
 
 
Exercised
(149,132
)
 
$
5.503

 
 
 
 
Forfeited

 
$

 
 
 
 
 
 
 
 
 
 
 
 
Options outstanding as of March 31, 2019
560,536

 
$
21.250

 
$
21,514

 
5.069
 
 
 
 
 
 
 
 
Options exercisable as of March 31, 2019
548,421

 
$
21.343

 
$
20,997

 
5.029
 
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, 2019 was $7,467.

b. The options outstanding as of March 31, 2019 (unaudited) have been separated into ranges of exercise price as follows:

Range of exercise price
 
Options
outstanding
as of
March 31,
2019
 
Weighted
average
remaining
contractual
life (years)
 
Weighted
average
exercise price
 
Options
exercisable
as of
March 31,
2019
 
Weighted
average
remaining
contractual
life (years)
 
Weighted
average
exercise price
of options
exercisable
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
1.256

 
 
1.576
 
8,970

 
0.892

 
$
1.562

 
8,970

 
0.892

 
$
1.562

$
6.230

 
 
8.800
 
12,356

 
2.760

 
$
8.039

 
12,356

 
2.760

 
$
8.039

$
12.470

 
 
16.870
 
144,925

 
4.778

 
$
14.052

 
133,465

 
4.596

 
$
13.749

$
19.510

 
 
21.660
 
201,472

 
5.371

 
$
21.160

 
200,817

 
5.369

 
$
21.164

$
22.010

 
 
24.230
 
85,361

 
5.037

 
$
22.366

 
85,361

 
5.037

 
$
22.366

 

 
$29.880
 
 
 
64,725

 
5.899

 
$
29.880

 
64,725

 
5.899

 
$
29.880

 

 
$39.860
 
 
 
42,727

 
4.978

 
$
39.860

 
42,727

 
4.978

 
$
39.860

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
 
 
 
560,536

 
5.069

 
$
21.250

 
548,421

 
5.029

 
$
21.343


14



c.
Options issued to consultants:

The Company’s outstanding options granted to consultants for services as of March 31, 2019 (unaudited) were as follows:
 
 
Options for
shares of
common stock
 
Exercise price
per share
 
Options
exercisable
 
Exercisable
through
 
(number)
 
 
 
(number)
 
 
 
 
 
 
 
 
 
 
February 2013
1,500

 
$
12.470

 
1,500

 
February 2023
August 2013
4,000

 
$
21.140

 
4,000

 
August 2023
March 2014
5,550

 
$
39.860

 
5,550

 
March 2024
May 2014
3,700

 
$
22.010

 
3,700

 
May 2024
November 2014
5,468

 
$
21.660

 
5,468

 
November 2024
May 2015
1,137

 
$
19.510

 
1,055

 
May 2025
February 2016
2,138

 
$
16.870

 
1,563

 
February 2026
 
 
 
 
 
 
 
 
 
23,493

 
 

 
22,836

 
 
 
d.
Restricted stock units:

A summary of restricted stock units and performance stock units for employees, consultants and non-employee directors of the Company for the three months ended March 31, 2019 (unaudited) is as follows:
 
 
Number of
shares underlying
outstanding
restricted stock units
 
Weighted-
average
grant date
fair value
Unvested balance - January 1, 2019
2,440,027

 
$
40.00

Granted
1,149,434

 
$
55.52

Vested
(622,523
)
 
$
35.95

Forfeited
(101,638
)
 
$
41.33

Unvested balance – March 31, 2019
2,865,300

 
$
47.09

 
e. As of March 31, 2019, there was $70 and $127,638 of total unrecognized compensation cost related to unvested employee and non-employees stock options and unvested restricted stock units, respectively. This cost is expected to be recognized over a period of 0.798 years and 2.972 years for stock options and restricted stock units, respectively.

15



f.
2015 Employee Stock Purchase Plan

On May 5, 2015, the Company’s stockholders approved the Varonis Systems, Inc. 2015 Employee Stock Purchase Plan (the “ESPP”), which the Company’s board of directors had adopted on March 19, 2015. The ESPP became effective as of June 30, 2015. The ESPP allows eligible employees to purchase shares of the Company’s common stock at a discount through payroll deductions of up to 15% of their eligible compensation, at not less than 85% of the fair market value of the Company’s common stock on the first day or last trading day in the offering period, subject to any plan limitations. The Company initially reserved 500,000 shares of common stock for issuance under the ESPP. The number of shares available for issuance under the ESPP was increased on January 1, 2016 and has been, and will be, increased each January 1 thereafter, by an amount equal to the lesser of (i) one percent (1%) of the number of shares of common stock issued and outstanding on each December 31 immediately prior to the date of increase, except that the amount of each such increase will be limited to the number of shares of common stock necessary to bring the total number of shares of common stock available for issuance under the ESPP to two percent (2%) of the number of shares of common stock issued and outstanding on each such December 31, or (ii) 400,000 shares of common stock. On January 1, 2019, 2018, 2017 and 2016, the share reserve under the ESPP was automatically increased by 177,358, 188,813, 158,695 and 21,383 shares, respectively. The ESPP will continue in effect until the earlier of (i) the date when no shares of common stock are 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.
 
g.
Stock-based compensation expense for employees and consultants:
 
The Company recognized non-cash stock-based compensation expense in the consolidated statements of operations as follows:
 
 
Three Months Ended
March 31,
 
2019
 
2018
 
(unaudited)
(in thousands)
 
 
 
 
Cost of revenues
$
558

 
$
362

Research and development
2,678

 
2,105

Sales and marketing
3,443

 
3,101

General and administrative
2,282

 
1,359

 
 
 
 
Total
$
8,961

 
$
6,927

  

h. Since the Company is in a net loss position for all periods presented, basic net loss per share is the same as diluted net loss per share for all the periods as the inclusion of all potential shares of common stock outstanding would have been anti-dilutive. There were 3,449,329 and 3,932,450 potentially dilutive shares from the conversion of outstanding restricted stock units and stock options that were not included in the calculation of diluted net loss per share as of March 31, 2019 and 2018, respectively.

NOTE 5:–    GEOGRAPHIC INFORMATION AND MAJOR CUSTOMER AND PRODUCT DATA

Summary information about geographic areas:
 
ASC 280, “Segment Reporting,” establishes standards for reporting information about operating segments. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company manages its business on the basis of one reportable segment and derives revenues from licensing of software and sales of professional services, maintenance and technical support (see note 1 for a brief description of the Company’s business). The following is a summary of revenues within geographic areas:
 

16



 
Three Months Ended
March 31,
 
2019
 
2018
 
(unaudited)
 
(in thousands)
 
 
 
 
Revenues based on customer’s location:
 

 
 

North America
$
37,849

 
$
31,620

EMEA (*)
16,400

 
20,347

Rest of World
2,111

 
1,561

 
 
 
 
Total revenues
$
56,360

 
$
53,528

 
(*)       Sales to customers in France accounted for $6,241 and $6,754 of the Company’s revenues for the three months ended March 31, 2019 and 2018, respectively. Sales to customers in the United Kingdom did not exceed 10% of total revenues for the three months ended March 31, 2019 and accounted for $5,694 of the Company’s revenues for the three months ended March 31, 2018.

 
March 31, 2019
 
December 31, 2018
 
(unaudited)
 
 
 
(in thousands)
Long-lived assets by geographic region:
 

 
 

United States
$
11,394

 
$
7,612

Israel
7,682

 
7,834

France
1,205

 
1,243

Other
784

 
634

 
 
 
 
 
$
21,065

 
$
17,323



17



Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for our fiscal year ended December 31, 2018.

Special Note Regarding Forward-Looking Statements
 
This report contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed in the forward-looking statements. The statements contained in this report that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements are often identified by the use of words such as, but not limited to, “anticipate,” “believe,” “can,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “project,” “seek,” “should,” “strategy,” “target,” “will,” “would” and similar expressions or variations intended to identify forward-looking statements. These statements are based on the beliefs and assumptions of our management based on information currently available to management. Such forward-looking statements are subject to risks, uncertainties and other important factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in the section titled “Risk Factors” included under Part II, Item 1A below. Furthermore, such forward-looking statements speak only as of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.

Overview
 
Varonis is a pioneer in data security and analytics, fighting a different battle than conventional cybersecurity companies. We are pioneers because over a decade ago, we recognized that enterprise capacity to create and share data far exceeded its capacity to protect it. We believed the vast movement of information from analog to digital mediums combined with increasing information dependence would change both the global economy and the risk profiles of corporations and government. Since then our focus has been on using innovation to address the cyber-implications of this movement, creating software that provides new ways to track and protect data wherever it is stored.
 
Our software specializes in data protection, threat detection and response and compliance. Varonis software enables enterprises to protect data stored on premises and in the cloud: sensitive files and emails; confidential customer, patient and employee data; financial records; strategic and product plans; and other intellectual property. Recognizing the complexities of securing data, we have built a single integrated platform for security and analytics to simplify and streamline security and data management.

The Varonis Data Security Platform, built on patented technology, helps enterprises protect data against insider threats and cyberattacks. Our products enable enterprises to analyze data, account activity and user behavior to detect attacks. Our Data Security Platform prevents or limits unauthorized use of sensitive information, prevents potential cyberattacks and limits others by locking down sensitive and stale data. Our products efficiently sustain a secure state with automation and addresses additional important use cases including data protection, governance, compliance, classification and threat detection and response. Our Data Security Platform is driven by a proprietary technology, our Metadata Framework, that extracts critical metadata, or data about data, from an enterprise’s IT infrastructure. Our Data Security Platform uses this contextual information to map functional relationships among employees, data objects, content and usage.
 
We started operations in 2005 with a vision to make enterprise data more accessible, manageable, secure and actionable. We began offering our flagship product, DatAdvantage, which provides centralized visibility for enterprise data, in 2006. Since then we have continued to invest in innovation and have consistently introduced new products to our customers. In 2006, we introduced DataPrivilege as our self-service web portal for business users. In 2008, we enhanced our DatAdvantage offering with DatAdvantage for UNIX/Linux. In 2009, we introduced the IDU Classification Framework (later renamed the Data Classification Engine) for sensitive data classification and DatAdvantage for SharePoint. We further enhanced our DatAdvantage offering by releasing DatAdvantage for Exchange in 2010, enabling our customers to exercise control over the information transferred through corporate e-mails. In 2011, we introduced DatAdvantage for Directory Services for increased visibility into Active Directory.
 

18



In 2012, we released the Data Transport Engine for intelligent data migration and archiving and DatAnywhere for secure hybrid cloud collaboration. In 2013, we introduced DatAlert to monitor and alert on sensitive data and file activity. In 2014, we introduced DatAnswers, a secure enterprise search solution for enterprise data that delivers highly relevant and secure search results to enterprise employees, greatly improving their productivity. In 2015, we enhanced our DatAdvantage, DataPrivilege and Data Classification Engine offerings; with DatAdvantage support for the following Microsoft Office 365 data stores: Exchange Online, SharePoint Online, OneDrive and Active Directory hosted in Azure; with DataPrivilege for SharePoint; and with Data Classification Engine for UNIX, SharePoint Online and OneDrive. In 2016, we enhanced our DatAdvantage offerings with additional Office 365 support; DatAnswers support for SharePoint Online and OneDrive; and introduced a new web UI for DatAlert for comprehensive security management and threat detection. In that year we also added additional user behavior analytics driven threat models to DatAlert to significantly enhance our detection of insider threats, including potential disgruntled employees, rogue administrators, hijacked accounts and malware, such as ransomware. We also established a behavioral research laboratory where a dedicated team of security experts and data scientists from Varonis continually research the latest threats and emerging security vulnerabilities and introduce new behavior-based threat models to DatAlert.

In 2017, we introduced the Automation Engine to allow customers to automatically repair and maintain file systems so that organizations are less vulnerable to attacks and security breaches, more compliant and consistently meeting a least privilege model. We enhanced DatAlert with DatAlert Analytics Rewind to allow customers to analyze past user and data activity to identify security breaches that may have occurred in the past and pre-emptively tune out false positives. We updated our web UI for DatAlert and added new threat models to detect suspicious mailbox, Exchange and Exchange Online behaviors, password resets and unusual activity from personal devices. We introduced a new security dashboard in DatAlert, along with enhanced behavioral analytics, geolocation and more to make it easier than ever to perform security investigations and forensics. In 2017, we also released GDPR Patterns, part of the Data Classification Engine family, to help enterprises identify data that falls under the European Union's ("EU") General Data Protection Regulation ("GDPR") and expanded our offerings that can help enterprises meet compliance and regulation requirements.
 
In 2018, we introduced Varonis Edge to extend our proactive security approach, enabling customers to spot signs of attack at the perimeter by analyzing telemetry from DNS, VPN and Web Proxies. We introduced Data Classification Labels, part of the Data Classification Engine family, to integrate with Microsoft Information Protection (MIP) and enable customers to better classify, track and secure files across enterprise data stores. We enhanced DatAnswers to address additional compliance requirements from new data privacy laws and standards. We added classification categories to the Data Classification Engine, to better identify and analyze regulated data like GDPR, PII, PCI and PHI. We updated the DataPrivilege UI for improved usability and added classification categories making it easier to see who can access regulated data. We updated our web UI and introduced new features to DatAlert, including new threat models to combat cyberattacks, support for more data stores and optimizations to make DatAlert faster and more intuitive for security investigations.

In the first quarter of 2019, we introduced updates to our existing products to include new dashboards to highlight cloud, Active Directory and GDPR security risks so that customers can easily identify critical risk in their hybrid environments, including vulnerable user accounts, at-risk cloud data and potential compliance violations. We extended our cloud support to include Box; added threat intelligence to our security insights; built incident response playbooks directly into the UI; and made usability and performance improvements.

At the core of our technology is our ability to intelligently extract and analyze metadata from an enterprise’s vast, distributed data stores. The broad applicability of our technology has resulted in our customers deploying our platform for numerous use cases for security, IT, operations and business personnel. We currently have six product families, and, as of March 31, 2019 and 2018, approximately 73% and 70% of our customers, respectively, had purchased products in two or more families, one of which was DatAdvantage for all of these customers. As of March 31, 2019 and 2018, approximately 41% and 37% of our customers, respectively, had purchased products in three or more families. We believe our existing customer base serves as a strong source of incremental revenues given our broad platform of products, their growing volumes and complexity of enterprise data and associated security concerns. Our maintenance renewal rate for each of the three months ended March 31, 2019 and 2018 was over 90%. Our key strategies to maintain our renewal rate include focusing on the quality and reliability of our customer service and support to ensure our customers receive value from our products, providing consistent software upgrades and having sufficient dedicated renewal sales personnel.

We sell substantially all of our products and services to channel partners, including distributors and resellers, which sell to end-user customers, which we refer to in this report as our customers. We believe that our sales model, which combines the leverage of a channel sales model with our highly trained and professional sales force, has and will continue to play a major role in our ability to grow and to successfully deliver our unique value proposition for enterprise data. While our products serve customers of all sizes, in all industries and all geographies, the marketing focus and majority of our sales focus is on targeting

19



organizations with 1,000 users or more who can make larger purchases with us over time and have a greater potential lifetime value. As of March 31, 2019, we had approximately 6,700 customers, spanning leading firms in the financial services, public, healthcare, industrial, insurance, energy and utilities, consumer and retail, media and entertainment, technology and education sectors. We believe our customer count is a key indicator of our market penetration and the value that our products bring to our customer base. We also believe our existing customers represent significant future revenue opportunities for us. We will continue our focus on targeting organizations with 1,000 users or more who can make larger purchases with us over time.

We believe there is a significant long-term growth opportunity in both domestic and foreign markets, which could include any organization that uses file shares, intranets and email for collaboration, regardless of region. For the three months ended March 31, 2019, approximately 67% of our revenues were derived from North America, while Europe, the Middle East and Africa (“EMEA") accounted for approximately 29% of our revenues and Rest of World (“ROW”) accounted for approximately 4% of our revenues. Growth in North America was 20% for the three months ended March 31, 2019 as compared to the comparable period in the prior year. We expect sales growth in North America and international expansion to be key components of our growth strategy, and we will continue to market our products and services in international markets.

We plan to continue to expand our international operations as part of our growth strategy. The expansion of our international operations depends in particular on our ability to hire, integrate and retain local sales and marketing personnel in these international markets, acquire new channel partners and implement an effective marketing strategy. Given the nominal amount of our ROW revenues, our ROW revenue growth rates have fluctuated in the past and may fluctuate in the future based on the timing of deal closures. In addition, the further expansion of our international operations will increase our sales and marketing and general and administrative expenses and will subject us to a variety of risks and challenges, including those related to economic and political conditions in each region, compliance with foreign laws and regulations, and compliance with domestic laws and regulations applicable to our international operations.

We derive revenues from license sales of our products, services, including initial maintenance contracts and professional services, and renewals. Perpetual license revenues consist of the revenues recognized from sales of perpetual licenses to new and existing customers. Subscription revenues are comprised of time-based licenses whereby customers use our software with related maintenance for a specified period. While historically fees from subscription licenses comprised an insignificant amount of our revenues, we expect that over the next several years revenues from subscription licenses will become a more significant portion of our total revenues as we continue to transition to a subscription-based business model. As a result, we expect subscription revenues to comprise a larger proportion of our total revenues in the future, resulting in revenues that are more recurring and predictable.

Substantially all of our license sales are derived from a platform of products, consisting of DatAdvantage, DatAlert, Data Classification Engine, DataPrivilege and Data Transport Engine. As of March 31, 2019 and 2018, 100.0% and 99.6% of our customers, respectively, had purchased DatAdvantage; 51.3% and 48.1% of our customers, respectively, had purchased DatAlert; 50.1% and 45.2% of our customers, respectively, had purchased Data Classification Engine; 15.4% and 16.0% of our customers, respectively, had purchased DataPrivilege; and 7.9% and 6.9% of our customers, respectively, had purchased Data Transport Engine. As of March 31, 2019 and 2018, 26.5% and 29.4% of our customers, respectively, made standalone purchases of DatAdvantage. No other product families outside of DatAdvantage can be sold on a standalone basis. Perpetual license sales accounted for 27.5% and 45.0% of our total revenues for the three months ended March 31, 2019 and 2018, respectively. Subscription licenses accounted for 12.5% and 2.0% of our total revenues for the three months ended March 31, 2019 and 2018, respectively, and 31.1% and 4.3% of our license revenues for the three months ended March 31, 2019 and 2018, respectively. We expect that over the next several years revenues from subscription licenses will become a more significant portion of our total revenues as we continue to transition to a subscription-based business model.

We have achieved significant growth and scale since inception under a perpetual business model. In the first quarter of 2019, we announced our transition to a subscription-based business model. For the three months ended March 31, 2019 and 2018, subscription revenues were $7.0 million and $1.1 million, respectively, representing year-over-year growth of 554% and providing us with revenues that are more recurring and predictable. For the three months ended March 31, 2019 and 2018, our total revenues were $56.4 million and $53.5 million, respectively, representing year-over-year growth of 5%. For the three months ended March 31, 2019 and 2018, we had operating losses of $22.0 million and $15.5 million and net losses of $22.6 million and $15.0 million, respectively.

Components of Operating Results

Transition to Subscription-Based Business Model
 

20



In the first quarter of 2019, we announced our transition to a subscription-based business model which, due to shifts in the mix of perpetual and subscription licenses, could produce significant variation in the reported revenues for a given period. In order to normalize between perpetual revenues and subscription revenues, we have defined a conversion factor of approximately 2.2 whereby subscription revenues are multiplied by the conversion factor to yield the equivalent perpetual revenues. We arrived at the conversion factor of approximately 2.2 by considering many variables, including perpetual price list, average discount levels provided on perpetual deals, mix of new and upsell revenues and number of users and licenses sold. This conversion factor of approximately 2.2 was calculated for the three months ended March 31, 2019, and we expect it to vary between 2.2-2.5 for the year ended 2019 based on a number of variables.

Annual recurring revenues ("ARR") are a key performance indicator defined as the annualized value of all recurring revenues related to active contracts at the end of each period. For the three months ended March 31, 2019 and 2018, ARR was $138.7 million and $103.0 million, respectively, an increase of 35% period over period. We expect ARR to increase as we continue our transition to a subscription-based business model. We could encounter significant variations in ARR in a given period due to the shifts in the mix of perpetual and subscription licenses.

Revenues
 
Our revenues consist of both perpetual and subscription licenses and maintenance and services revenues.
 
Perpetual License Revenues. Perpetual license revenues reflect the revenues recognized from sales of perpetual licenses to new customers and sales of additional perpetual licenses to existing customers who can purchase additional users for existing licenses or purchase new licenses. Our license revenues consist of revenues from perpetual licenses, under which we generally recognize the license fee portion of the arrangement upon delivery as the benefit of the asset has transferred.

Subscription Revenues. Subscription revenues are comprised of time-based licenses whereby customers use our software with related maintenance for a specified period. Subscription revenues are sold on premises with the same functionality as the perpetual license and are recognized from sales of subscription and maintenance licenses to new and existing customers. Similar to perpetual license revenues, subscription license revenues are recognized at the point of time when the software license has been delivered and the benefit of the asset has transferred. We expect revenues from subscription licenses to become a larger percentage of our total license revenues. Due to the shifts in the mix of perpetual and subscription licenses, we could produce significant variation in the revenues we recognize in a given period. We are focused on acquiring new subscription customers and increasing subscription revenues from our existing customers.

Maintenance and Services Revenues. Maintenance and services revenues consist of revenues from maintenance agreements of perpetual license sales and, to a lesser extent, professional services. Typically, when purchasing a perpetual license, a customer also purchases a one year maintenance contract for which we charge a percentage of the license fee. Customers may renew, and generally have renewed, their maintenance agreements for a fee that is based upon a percentage of the initial license fee paid. Customers with maintenance agreements are entitled to receive support and unspecified upgrades and enhancements when and if they become available during the maintenance period. We have experienced growth in maintenance revenues primarily due to increased license sales to new and existing customers and high annual retention of existing customers. We recognize the revenues associated with maintenance ratably, on a straight-line basis, over the associated maintenance period. We measure the perpetual license maintenance renewal rate for our customers over a 12-month period, based on a dollar renewal rate for contracts expiring during that time period. Our maintenance renewal rate for each of the three months ended March 31, 2019 and 2018 has been over 90%. We also offer professional services focused on training our customers in the use of our products, providing advice on deployment planning, network design, product configuration and implementation, automating and customizing reports and tuning policies and configuration. We recognize the revenues associated with these professional services, which are generally provided on a time and materials basis, as we deliver the services, provide the training or when the service term has expired.

The following table sets forth the percentage of our revenues that have been derived from licenses and maintenance and services revenues for the periods presented.
 

21



 
Three Months Ended
March 31,
 
2019
 
2018
 
(as a percentage of total revenues)
Revenues:
 

 
 

Perpetual licenses
27.5
%
 
45.0
%
Subscriptions
12.5

 
2.0

Maintenance and services
60.0

 
53.0

Total revenues
100.0
%
 
100.0
%

 
Three Months Ended
March 31,
 
2019
 
2018
 
(as a percentage of total perpetual licenses and subscriptions revenues)
Perpetual Licenses and Subscriptions Revenues:
 

 
 

Perpetual licenses
68.9
%
 
95.7
%
Subscriptions
31.1
%
 
4.3
%
Total perpetual licenses and subscriptions revenues
100.0
%
 
100.0
%
 
Our products are used by a wide range of enterprises, including Fortune 500 corporations and small and medium-sized businesses. As of March 31, 2019, we had approximately 6,700 customers across a broad array of company sizes and industries located in 80 countries.
 
Cost of Revenues, Gross Profit and Gross Margin
 
Our cost of revenues consists of cost of maintenance and services revenues. Cost of maintenance and services revenues consist primarily of salaries (including payroll tax expense related to stock-based compensation), employee benefits (including commissions and bonuses) and stock-based compensation for our maintenance and services employees; travel expenses; and allocated overhead costs for facilities, IT and depreciation of equipment. We recognize expenses related to maintenance and services as they are incurred. We expect that our cost of maintenance and services revenues will increase in absolute dollars as we increase our teams that support our transition to a subscription-based business model: professional services and customer success teams.

 Gross profit is total revenues less total cost of revenues. Gross margin is gross profit expressed as a percentage of total revenues. Our gross margin will fluctuate from period to period as a result of changes in the mix of perpetual and subscription license as we continue to transition to a subscription-based business model. Due to the seasonality of our business, the first quarter typically results in the lowest gross margin as our first quarter revenues have historically been the lowest for the year and the majority of our expenses are relatively fixed quarter over quarter. Conversely, the fourth quarter typically results in the highest gross margin as our fourth quarter revenues have historically been the highest for the year.

Operating Costs and Expenses
 
Our operating costs and expenses are classified into three categories: research and development, sales and marketing and general and administrative. For each category, the largest component is personnel costs, which consists of salaries (including payroll tax expense related to stock-based compensation), employee benefits (including commissions and bonuses) and stock-based compensation. Operating costs and expenses also include allocated overhead costs for depreciation of equipment. Allocated costs for facilities primarily consist of rent and office maintenance. Operating costs and expenses are generally recognized as incurred. We expect personnel costs to continue to increase in absolute dollars as we hire new employees to continue to grow our business.

Research and Development. Research and development expenses primarily consist of personnel costs attributable to our research and development personnel, as well as allocated overhead costs. We expense research and development costs as

22



incurred. We expect that our research and development expenses will continue to increase in absolute dollars as we increase our research and development headcount to further strengthen our technology platform and invest in the development of both existing and new products.
 
Sales and Marketing. Sales and marketing expenses are the largest component of our operating costs and expenses and consist primarily of personnel costs, as well as marketing and business development costs, travel expenses, training and education and allocated overhead costs. We expect that sales and marketing expenses will continue to increase in absolute dollars, as we plan to expand our sales and marketing efforts, both domestically and internationally. We expect sales and marketing expenses to be our largest category of operating costs and expenses as we continue to expand our business worldwide.
 
General and Administrative. General and administrative expenses mostly consist of personnel and facility-related costs for our executive, finance, legal, human resources and administrative personnel. Other expenses are comprised of legal, accounting and other consultant fees and other corporate expenses and allocated overhead. We expect that general and administrative expense will increase in absolute dollars as we grow and expand our operations, including higher legal, corporate insurance and accounting expenses, and the additional costs of achieving and maintaining compliance with the Sarbanes-Oxley Act and related regulations.

Financial Income (Expenses), Net
 
Financial income (expenses), net consist primarily of foreign exchange gains or losses and interest income. Foreign exchange gains or losses relate to our business activities in foreign countries with different operational reporting currencies. As a result of our business activities in foreign countries, we expect that foreign exchange gains or losses will continue to occur due to fluctuations in exchange rates in the countries where we do business. The United Kingdom’s exit from the EU, commonly referred to as “Brexit," as well as other member countries public discussions about the possibility of withdrawing from the EU, could also contribute to instability and volatility in the global financial and foreign exchange markets, including volatility in the value of Pounds Sterling, Euros and other currencies. Interest income represents interest received on our cash, cash equivalents, marketable securities and short-term deposits.
 
Income Taxes
 
We operate in several tax jurisdictions and are subject to taxes in each country or jurisdiction in which we conduct business. Earnings from our non-U.S. activities are subject to local country income tax and may be subject to U.S. income tax. To date, on a consolidated basis, we have incurred accumulated net losses and have not recorded any U.S. federal tax provisions. 

Because of our history of U.S. net operating losses, we have established a full valuation allowance against potential future benefits for deferred tax assets, including loss carryforwards, in that jurisdiction; however, we have recorded a net deferred tax asset of $0.3 million as of March 31, 2019 for foreign jurisdictions. Our income tax provision could be significantly impacted by estimates surrounding our uncertain tax positions and changes to our valuation allowance in future periods. We reevaluate the judgments surrounding our estimates and make adjustments as appropriate each reporting period.
 
Our Israeli subsidiary currently qualifies as a “Beneficiary Enterprise” which, upon fulfillment of certain conditions, allows it to qualify for a reduced tax rate based on the beneficiary program guidelines.
 
In addition, we are subject to the continuous examinations of our income tax returns by different tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes.

23



Results of Operations
 
Comparison of the Three Months Ended March 31, 2019 and 2018
 
The following tables are a summary of our consolidated statements of operations for the three months ended March 31, 2019 and 2018 in dollars and as a percentage of our total revenues.
 
 
Three Months Ended
March 31,
 
2019
 
2018
 
(unaudited)
(in thousands)
Statement of Operations Data:
 

 
 

Revenues:
 

 
 

Perpetual licenses
$
15,521

 
$
24,086

Subscriptions
7,005

 
1,071

Maintenance and services
33,834

 
28,371

Total revenues
56,360

 
53,528

Cost of revenues
8,326

 
6,442

Gross profit
48,034

 
47,086

Operating costs and expenses:
 

 
 

Research and development
18,768

 
15,542

Sales and marketing
41,996

 
39,972

General and administrative
9,271

 
7,069

Total operating expenses
70,035

 
62,583

Operating loss
(22,001
)
 
(15,497
)
Financial income (expenses), net
(128
)
 
978

Loss before income taxes
(22,129
)
 
(14,519
)
Income taxes
(510
)
 
(527
)
Net loss
$
(22,639
)
 
$
(15,046
)
 

24



 
Three Months Ended
March 31,
 
2019
 
2018
 
(as a percentage of total revenues)
Statement of Operations Data:
 

 
 

Revenues:
 

 
 

Perpetual licenses
27.5
 %
 
45.0
 %
Subscriptions
12.5

 
2.0

Maintenance and services
60.0

 
53.0

Total revenues
100.0

 
100.0

Cost of revenues
14.8

 
12.0

Gross profit
85.2

 
88.0

 
 
 
 
Operating costs and expenses:
 

 
 

Research and development
33.3

 
29.1

Sales and marketing
74.5

 
74.7

General and administrative
16.4

 
13.2

Total operating expenses
124.2

 
117.0

 
 
 
 
Operating loss
(39.0
)
 
(29.0
)
Financial income (expenses), net
(0.3
)
 
1.9

Loss before income taxes
(39.3
)
 
(27.1
)
Income taxes
(0.9
)
 
(1.0
)
Net loss
(40.2
)%
 
(28.1
)%
 
Revenues
 
 
Three Months Ended
March 31,
 
 
 
2019
 
2018
 
% Change
 
(unaudited)
(in thousands)
 
 
Revenues:
 

 
 

 
 

Perpetual licenses
$
15,521

 
$
24,086

 
(35.6
)%
Subscriptions
7,005

 
1,071

 
554.1
 %
Maintenance and services
33,834

 
28,371

 
19.3
 %
Total revenues
$
56,360

 
$
53,528

 
5.3
 %
 
 
 
Three Months Ended
March 31,
 
2019
 
2018
 
(as a percentage of total revenues)
Revenues:
 

 
 

Perpetual licenses
27.5
%
 
45.0
%
Subscriptions
12.5
%
 
2.0
%
Maintenance and services
60.0
%
 
53.0
%
Total revenues
100.0
%
 
100.0
%

25



 
 
Three Months Ended
March 31,
 
2019
 
2018
 
(as a percentage of total perpetual licenses and subscriptions revenues)
Perpetual Licenses and Subscriptions Revenues:
 

 
 

Perpetual licenses
68.9
%
 
95.7
%
Subscriptions
31.1
%
 
4.3
%
Total perpetual licenses and subscriptions revenues
100.0
%
 
100.0
%

Our transition to a subscription-based model has yielded revenue headwinds for the three months ended March 31, 2019, with an increase in our subscription revenues from $1.1 million for the three months ended March 31, 2018 to $7.0 million for the three months ended March 31, 2019. The increase in subscription revenues was driven by our customers’ demand for a higher number of licenses than what we historically sold with perpetual license sales. For the three month ended March 31, 2019 and 2018, we had 133 and 183 new customers, respectively. Our relatively lower number of new customers this quarter was a consequence of slower adoption of the subscription-based model transition in EMEA. ARR was $138.7 million and $103.0 million for the three months ended March 31, 2019 and 2018, respectively, representing an increase of 35%. As of March 31, 2019 and 2018, we had approximately 6,700 and approximately 6,000 customers, respectively. The increase in maintenance and services revenues was primarily due to an increase in the sale of maintenance agreements resulting from the growth of our installed customer base. In each of the three months ended March 31, 2019 and 2018, our maintenance renewal rate was over 90%. Of the license and first year maintenance and services revenues recognized in the three months ended March 31, 2019, 44% was attributable to revenues from new customers, and 56% was attributable to revenues from existing customers. Of the license and first year maintenance and services revenues recognized in the three months ended March 31, 2018, 51% was attributable to revenues from new customers, and 49% was attributable to revenues from existing customers. As of March 31, 2019 and 2018, 73% and 70% of our customers, respectively, had purchased products in two or more families. As of March 31, 2019 and 2018, 41% and 37% of our customers, respectively, purchased products in three or more families.
 
Cost of Revenues and Gross Margin
 
 
Three Months Ended
March 31,
 
 
 
2019
 
2018
 
% Change
 
(unaudited)
(in thousands)
 
 
Cost of revenues
$
8,326

 
$
6,442

 
29.2
%
 
 
Three Months Ended
March 31,
 
2019
 
2018
 
(as a percentage of total revenues)
Total gross margin
85.2
%
 
88.0
%

The increase in cost of revenues was primarily related to an increase of $1.6 million in salaries and benefits and stock based compensation expense due to increased headcount for support personnel to support our increased revenues and high renewal rate and a $0.3 million increase in facilities and allocated overhead costs.
 
Operating Costs and Expenses
 

26



 
Three Months Ended
March 31,
 
 
 
2019
 
2018
 
% Change
 
(unaudited)
(in thousands)
 
 
Operating costs and expenses:
 

 
 

 
 

Research and development
$
18,768

 
$
15,542

 
20.8
%
Sales and marketing
41,996

 
39,972

 
5.1
%
General and administrative
9,271

 
7,069

 
31.2
%
Total operating expenses
$
70,035

 
$
62,583

 
11.9
%

 
 
Three Months Ended
March 31,
 
2019
 
2018
 
(as a percentage of total revenues)
Operating costs and expenses:
 

 
 

Research and development
33.3
%
 
29.1
%
Sales and marketing
74.5
%
 
74.7
%
General and administrative
16.4
%
 
13.2
%
Total operating expenses
124.2
%
 
117.0
%
 
The increase in research and development expenses was primarily related to an increase of $2.8 million in salaries and benefits and stock based compensation expense resulting from increased headcount as part of our focus on enhancing and developing our existing and new products and a $0.4 million increase in facilities and allocated overhead costs.
 
The increase in sales and marketing expenses was due to a $0.6 million increase in salaries and benefits and stock based compensation expense partially due to higher commissions on customer orders related to the incentivization of our sales force to sell subscription. Of the remainder, $1.1 million was related to facilities and allocated overhead costs.
 
The increase in general and administrative expenses was primarily related to an increase of $2.1 million in salaries and benefits and stock based compensation expense due to increased headcount to support the overall growth of our business.
 
Financial Income (Expenses), Net
 
 
Three Months Ended
March 31,
 
 
 
2019
 
2018
 
% Change
 
(unaudited)
(in thousands)
 
 
Financial income (expenses), net
$
(128
)
 
$
978

 
(113.1
)%
 

27



Financial expenses, net for the three months ended March 31, 2019 was primarily due to foreign currency losses. Financial income, net for the three months ended March 31, 2018 was primarily due to foreign currency gains.

Income Taxes
 
 
Three Months Ended
March 31,
 
 
 
2019
 
2018
 
% Change
 
(unaudited)
(in thousands)
 
 
Income taxes
$
(510
)
 
$
(527
)
 
3.2
%
 
Income taxes for the three months ended March 31, 2019 and 2018 were comprised primarily of foreign income taxes.

Liquidity and Capital Resources
 
The following table shows our cash flows from operating activities, investing activities and financing activities for the stated periods:
 
 
Three Months Ended
March 31,
 
2019
 
2018
 
(unaudited)
(in thousands)
Net cash provided by operating activities
$
14,055

 
$
17,444

Net cash provided by (used in) investing activities
5,933

 
(4,422
)
Net cash provided by (used in) financing activities
(4,234
)
 
1,066

Increase in cash, cash equivalents and restricted cash
$
15,754

 
$
14,088


On March 31, 2019, our cash and cash equivalents, marketable securities and short-term deposits of $163.6 million were held for working capital purposes and were invested primarily in short-term deposits. We intend to increase our investment in capital expenditures in 2019 to support the growth in our business and operations mainly with leasehold improvements in our North Carolina and Israel offices. We believe that our existing cash and cash equivalents, marketable securities, short-term deposits and cash flow from operations will be sufficient to fund our operations and capital expenditures for at least the next 12 months. Our future capital requirements will depend on many factors, including our rate and mix of revenue growth, the expansion of our sales and marketing activities, the timing and extent of spending to support product development efforts and expansion into new geographic locations, the timing of introductions of new software products and enhancements to existing software products, the continuing market acceptance of our software offerings and our use of cash to pay for acquisitions, if any.
 
Operating Activities
 
Net cash provided by operating activities is driven by sales of our products less costs and expenses, primarily payroll and related expenses, and adjusted for certain non-cash items, mainly depreciation and stock-based compensation, and changes in operating assets and liabilities. Changes in operating assets and liabilities are driven mainly by collection of accounts receivable from the sales of our software products and services and deferred revenues which represent unearned amounts billed to our channel partners, related to these sales.

For the three months ended March 31, 2019, cash inflows from our operating activities were $14.1 million. We have observed two seasonal patterns that impact our net cash provided by operating activities. First, a majority of our sales are made during the last three weeks of the quarter. Second, the highest dollar amount of sales of our products and services occurs in the fourth quarter. Consequently, we end the fourth quarter with our highest accounts receivable balance of any quarter which in turn generates the greatest amount of collections in the following quarter. In addition, there is a negative sequential revenue growth in the first quarter which results in a relatively lower amount collected during the second quarter. These seasonal trends also impact our operating loss because the majority of our expenses are relatively fixed in the short term. For the three months

28



ended March 31, 2019, sources of cash inflows were from changes in our working capital, including a $41.4 million decrease in accounts receivable. Our days’ sales outstanding (“DSO”) for the three months ended March 31, 2019 was 74. Additional sources of cash inflows were from a $0.2 million increase in other long term liabilities. This was partially offset by $7.3 million from our net loss excluding non-cash charges, a $7.4 million decrease in accrued expenses and other liabilities, a $5.5 million increase in prepaid expenses and other current assets (including deferred commissions), a $5.4 million decrease in deferred revenues and a $2.0 million decrease in trade payables.

For the three months ended March 31, 2018, cash inflows from our operating activities were $17.4 million. For the three months ended March 31, 2018, sources of cash inflows were from changes in our working capital, including a $43.1 million decrease in accounts receivable. Our DSO for the three months ended March 31, 2018 was 62. Additional sources of cash inflows were from a $0.2 million increase in other long term liabilities. This was partially offset by our net loss excluding non-cash charges of $4.0 million. Our net loss was primarily driven by increased headcount of our sales and research and development personnel. Additional sources of cash outflows included an $8.2 million decrease in accrued expenses and other liabilities, a $8.2 million increase in prepaid expenses and other current assets (including deferred commissions) and a $5.4 million decrease in deferred revenues. 

Investing Activities
 
Our investing activities consist primarily of capital expenditures to purchase property and equipment, leasehold improvements, sale and purchases of short-term deposits and changes in our marketable securities. In the future, we expect to continue to incur capital expenditures to support our expanding operations.

During the three months ended March 31, 2019, net cash provided by investing activities of $5.9 million was primarily attributable to a $11.0 million decrease in deposits and marketable securities partially offset by $5.1 million in capital expenditures to support our growth during the period including hardware, software, office equipment and leasehold improvements mainly in connection with new office space.
 
During the three months ended March 31, 2018, net cash used in investing activities of $4.4 million was primarily attributable to a $3.3 million increase in short-term deposits and long-term investments and $1.1 million in capital expenditures to support our growth during the period including hardware, software, office equipment and leasehold improvements mainly in connection with new office space.
 
Financing Activities
 
For the three months ended March 31, 2019 and 2018, net cash used in financing activities of $4.2 million and net cash provided by financing activities of $1.1 million, respectively, was attributable to net proceeds (withholdings) from employee stock plans.
 
Promissory Note

On March 31, 2014, we entered into a promissory note and related security documents with Bank Leumi USA, which we have extended a number of times. We may borrow up to $7.0 million against certain of our accounts receivable outstanding amount, based on several conditions, at an annual interest rate of the Wall Street Journal Prime Rate plus 0.05%, provided that the annual interest rate applicable to advances will not be lower than 4.10%. As of March 31, 2019, that rate amounted to 5.55%. This promissory note enables us, among other things, to engage in foreign currency hedging transactions with Bank Leumi USA to manage our exposure to foreign currency risk without restricted cash requirements. We may borrow under the promissory note until November 15, 2020 at which time the principal sum of each such loan, together with accrued and unpaid interest payable, will become due and payable. As of March 31, 2019, we had no balance outstanding under the promissory note. As part of the transaction, we granted the lender a security interest in our personal property, excluding intellectual property and other intangible assets. The promissory note also contains customary events of default.


Contractual Payment Obligations
 
Our principal commitments primarily consist of obligations under leases for office space and motor vehicles. Aggregate minimum rental commitments under non-cancelable leases as of March 31, 2019 for the upcoming years were as follows:


29



 
Payments Due by Period
 
2019
 
2020
 
2021
 
2022
 
2023
 
Thereafter
 
Total
 
(in thousands)
Operating lease obligations
$
3,114

 
$
9,005

 
$
7,860

 
$
7,863

 
$
7,673

 
$
32,373

 
$
67,888


We have obligations related to unrecognized tax benefit liabilities totaling $1.3 million and others related to severance pay, which have been excluded from the table above as we do not believe it is practicable to make reliable estimates of the periods in which payments for these obligations will be made.

Off-Balance Sheet Arrangements
 
As of March 31, 2019, we did not have any off-balance sheet arrangements.

Critical Accounting Policies and Estimates
 
We prepare our consolidated financial statements in accordance with generally accepted accounting principles in the United States. The preparation of consolidated financial statements also requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ significantly from the estimates made by our management. To the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected. We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates. Critical accounting policies and estimates are those that we consider the most important to the portrayal of our financial condition and results of operations because they require our most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of the matters that are inherently uncertain.
 
Except for the accounting policies for leases that were updated as a result of adopting ASU 2016-02, there have been no other changes to our critical accounting policies and estimates described in the 2018 Form 10-K that have had a material impact on our consolidated financial statements and related notes. These changes are more fully described in notes 1 and 3 to our consolidated financial statements.

Recently Issued Accounting Pronouncements Not Yet Adopted
 
In January 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses on Financial Instruments”, which requires that expected credit losses relating to financial assets measured on an amortized cost basis and available for sale debt securities be recorded through an allowance for credit losses. ASU 2016-13 limits the amount of credit losses to be recognized for available for sale debt securities to the amount by which carrying value exceeds fair value and also requires the reversal of previously recognized credit losses if fair value increases. The new standard will be effective for interim and annual periods beginning after January 1, 2020, and early adoption is permitted. We are currently evaluating the potential effect of this standard on our consolidated financial statements.

Item 3.
Quantitative and Qualitative Disclosures About Market Risk
 
Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily a result of fluctuations in foreign currency exchange rates. We do not hold financial instruments for trading purposes.
 
 Market Risk
 
We are exposed to certain financial risks, including fluctuations in foreign currency exchange rates and interest rates. We manage our exposure to these market risks through internally established policies and procedures. Our policies do not allow speculation in derivative instruments for profit or execution of derivative instrument contracts for which there are no underlying exposures. We do not use financial instruments for trading purposes, and we are not a party to any leveraged derivatives. We monitor our underlying market risk exposures on an ongoing basis and, where appropriate, may use hedging strategies to mitigate these risks.

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Foreign Currency Exchange Risk
 
Approximately one third of our revenues for the three months ended March 31, 2019 were earned in non-U.S. dollar denominated currencies, mainly in the Euro and Pound Sterling. Our expenses are generally denominated in the currencies in which our operations are located, primarily the U.S. dollar and NIS, and to a lesser extent the Euro, Pound Sterling, Canadian dollar and Australian dollar. Our NIS-denominated expenses consist primarily of personnel and overhead costs from our operations in Israel. Our consolidated results of operations and cash flow are, therefore, subject to fluctuations due to changes in foreign currency exchange rates and may be adversely affected in the future due to changes in foreign exchange rates. The effect of a hypothetical 10% change in foreign currency exchange rates applicable to our business would not have a material impact on our historical consolidated financial statements.

For purposes of our consolidated financial statements, local currency assets and liabilities are translated at the rate of exchange to the U.S. dollar on the balance sheet date and local currency revenues and expenses are translated at the exchange rate at the date of the transaction or the average exchange rate dollar during the reporting period to the United States.

To date, we have used derivative financial instruments, specifically foreign currency forward contracts, to manage exposure to foreign currency risks, by hedging a portion of our forecasted expenses denominated in NIS expected to occur within 12 months. The effect of exchange rate changes on foreign currency forward contracts is expected to offset the effect of exchange rate changes on the underlying hedged item. We also enter into forward contracts to hedge a portion of our monetary items in the balance sheet, such as trade receivables and payables, denominated in Pound Sterling and Euro for short term periods to protect the fair value of the monetary assets from foreign exchange rate fluctuations. The effect of exchange rate changes on foreign currency forward contracts is expected to offset the effect of exchange rate changes which impacts financial income (expenses), net. We do not use derivative financial instruments for speculative or trading purposes.
 
Interest Rate Risk
 
We had cash and cash equivalents, marketable securities and short-term deposits of $163.6 million as of March 31, 2019. We hold our cash and cash equivalents, marketable securities and short-term deposits for working capital purposes. Our cash and cash equivalents are held in cash deposits and money market funds. Due to the short-term nature of these instruments, we believe that we do not have any material exposure to changes in the fair value of our investment portfolio as a result of changes in interest rates. Declines in interest rates, however, would reduce our future interest income.
 
As of March 31, 2019, we had no outstanding obligations under our promissory note. To the extent we enter into other long-term debt arrangements in the future, we would be subject to fluctuations in interest rates which could have a material impact on our future financial condition and results of operation.
 
Inflation
 
We do not believe that inflation had a material effect on our business, financial condition or results of operations in the last three fiscal years. If our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, financial condition and results of operations.
Item 4.
Controls and Procedures
 
Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this report were effective at a reasonable assurance level in ensuring that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. We believe that a control system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the control system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.
 
Changes in Internal Control over Financial Reporting

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There was no change in our internal control over financial reporting that occurred during the three months ended March 31, 2019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II.
OTHER INFORMATION

Item 1.
Legal Proceedings
 
We are not currently a party to any material litigation. 

Item 1A.
Risk Factors
 
Investing in our common stock involves a high degree of risk. You should carefully consider the following risks and all other information contained herein, including our consolidated financial statements and the related notes thereto, before investing in our common stock. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, also may become important factors that affect us. If any of the following risks materialize, our business, financial condition and results of operations could be materially harmed. In that case, the trading price of our common stock could decline, and you may lose some or all of your investment.
 
Risks Related to Our Business and Industry
 
The market for software that analyzes, secures, manages and migrates enterprise data is new and unproven and may not grow.
 
We believe our future success depends in large part on the growth of the market for software that enables enterprises to analyze, secure, manage and migrate their data. In order for us to market and sell our products, we must successfully demonstrate to enterprise IT, security and business personnel the potential value of their data and the risk of that data getting compromised or stolen. We must persuade them to devote a portion of their budgets to a unified platform that we offer to manage, protect, secure and extract value from this resource. We cannot provide any assurance that enterprises will recognize the need for our products or, if they do, that they will decide that they need a solution that offers the range of functionalities that we offer. Software solutions focused on enterprise data may not yet be viewed as a necessity, and accordingly, our sales effort is and will continue to be focused in large part on explaining the need for, and value offered by, our solution. We can provide no assurance that the market for our solution will continue to grow at its current rate or at all. The failure of the market to develop would materially adversely impact our results of operations.

Our quarterly results of operations have fluctuated and may fluctuate significantly due to variability in our revenues which could adversely impact our stock price.
 
Our revenues and other results of operations have fluctuated from quarter to quarter in the past and could continue to fluctuate in the future. As a result, comparing our revenues and results of operations on a period-to-period basis may not be meaningful, and you should not rely on any particular past quarter or other period results. Our revenues depend in part on the conversion of enterprises that have undergone risk assessments into paying customers. In this regard, most of our sales are typically made during the last three weeks of every quarter. We may fail to meet market expectations for that quarter if we are unable to close the number of transactions that we expect during this short period and closings are deferred to a subsequent quarter. In addition, our sales cycle from initial contact to delivery of and payment for the software license generally becomes longer and less predictable with respect to large transactions and often involves multiple meetings or consultations at a substantial cost and time commitment to us. Although we try to minimize the potential impact of large transactions on our quarterly results of operations, the closing of a large transaction in a particular quarter may raise our revenues in that quarter and thereby make it more difficult for us to meet market expectations in subsequent quarters, and our failure to close a large transaction in a particular quarter may adversely impact our revenues in that quarter. Moreover, we base our current and future expense levels on our revenue forecasts and operating plans, and our expenses are relatively fixed in the short term. Accordingly, we would likely not be able to reduce our costs sufficiently to compensate for an unexpected shortfall in revenues and even a relatively small decrease in revenues could disproportionately and adversely affect our financial results for that quarter.
 

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The variability and unpredictability of these and other factors, many of which are outside of our control, could result in our failing to meet or exceed financial expectations for a given period. If our revenues or results of operations fall below the expectations of investors or any securities analysts that cover our stock, the price of our common stock could decline substantially.

A failure to hire and integrate additional sales and marketing personnel or maintain their productivity could adversely affect our results of operations and growth prospects.

Our business requires intensive sales and marketing activities. Our sales and marketing personnel are essential to attracting new customers and expanding sales to existing customers, both of which are key to our future growth. We face a number of challenges in successfully expanding our sales force. We must locate and hire a significant number of qualified individuals, and competition for such individuals is intense. In addition, as we expand into new markets with which we have less familiarity, we will need to recruit individuals who are multilingual or who have skills particular to a certain geography, and it may be difficult to find candidates with those qualifications. We may be unable to achieve our hiring or integration goals due to a number of factors, including, but not limited to, the number of individuals we hire, challenges in finding individuals with the correct background due to increased competition for such hires and increased attrition rates among new hires and existing personnel. Furthermore, based on our past experience in mature territories, it often can take up to 12 months before a new sales force member is trained and operating at a level that meets our expectations. We invest significant time and resources in training new members of our sales force, and we may be unable to achieve our target performance levels with new sales personnel as rapidly as we have done in the past due to larger numbers of hires or lack of experience training sales personnel to operate in new jurisdictions. Our failure to hire a sufficient number of qualified individuals, to integrate new sales force members within the time periods we have achieved historically or to keep our attrition rates at levels comparable to others in our industry may materially impact our projected growth rate.
 
Failure to attract, recruit and retain highly qualified engineers could adversely affect our results of operations and growth prospects.
 
Our future success and growth depend, in part, on our ability to continue to recruit and retain highly skilled personnel, particularly engineers. Any of our employees may terminate their employment at any time, we face intense competition for highly skilled engineering personnel, especially in Israel, where we have a substantial presence and need for qualified engineers, from numerous other companies, including other software and technology companies, many of whom have greater financial and other resources than we do. Moreover, to the extent we hire personnel from other companies, we may be subject to allegations that they have been improperly solicited or may have divulged proprietary or other confidential information to us. If we are unable to attract or retain qualified engineers, our ability to innovate, introduce new products and compete would be adversely impacted, and our financial condition and results of operations may suffer.
 
If we fail to manage our growth effectively, our business and results of operations will be adversely affected.
 
We have experienced rapid growth in a relatively short period of time. Our revenues grew from $74.6 million in 2013 to $270.3 million in 2018. Our number of employees and independent contractors increased from 573 as of December 31, 2013 to 1,451 as of March 31, 2019. During this period, we also established and expanded our operations in a number of countries outside the United States and in additional locations within the United States. We intend to continue to grow our business and plan to continue to hire new employees, particularly in our sales and marketing and research and development groups. If we cannot adequately train these new employees, including our sales force, engineers and customer support staff, our sales may not grow at the rates we project or our customers may lose confidence in the knowledge and capability of our employees. In addition, we are expanding our current operations, and we intend to make investments to continue our expansion efforts. We must successfully manage our growth to achieve our objectives. Although our business has experienced significant growth in the past, we cannot provide any assurance that our business will continue to grow at the same rate, or at all.
 
Our ability to effectively manage any significant growth of our business will depend on a number of factors, including our ability to do the following:
 
effectively recruit, integrate, train and motivate a large number of new employees, including our sales force and engineers, while retaining existing employees, maintaining the beneficial aspects of our corporate culture and effectively executing our business plan;
satisfy existing customers and attract new customers;
transition from perpetual licenses to a subscription-based business model;
successfully introduce new products and enhancements;
effectively manage existing channel partnerships and expand to new ones;

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improve our key business applications and processes to support our business needs;
enhance information and communication systems to ensure that our employees and offices around the world are well-coordinated and can effectively communicate with each other and our growing customer base;
enhance our internal controls to ensure timely and accurate reporting of all of our operations and financial results;
protect and further develop our strategic assets, including our intellectual property rights; and
make sound business decisions in light of the scrutiny associated with operating as a public company.

These activities will require significant investments and allocation of valuable management and employee resources, and our growth will continue to place significant demands on our management and our operational and financial infrastructure. There are no guarantees we will be able to grow our business in an efficient or timely manner, or at all. Moreover, if we do not effectively manage the growth of our business and operations, the quality of our software could suffer, which could negatively affect our brand, results of operations and overall business.

Our failure to continually enhance and improve our technology could adversely affect sales of our products.
 
The market is characterized by the exponential growth in enterprise data, rapid technological advances, changes in customer requirements, including customer requirements driven by changes to legal, regulatory and self-regulatory compliance mandates, frequent new product introductions and enhancements and evolving industry standards in computer hardware and software technology. As a result, we must continually change and improve our products in response to changes in operating systems, application software, computer and communications hardware, networking software, data center architectures, programming tools, computer language technology and various regulations. Moreover, the technology in our products is especially complex because it needs to effectively identify and respond to a user’s data retention, security and governance needs, while minimizing the impact on database and file system performance. Our products must also successfully interoperate with products from other vendors.
 
We cannot guarantee that we will be able to anticipate future market needs and opportunities or be able to extend our technological expertise and develop new products or expand the functionality of our current products in a timely manner or at all. Even if we are able to anticipate, develop and introduce new products and expand the functionality of our current products, there can be no assurance that enhancements or new products will achieve widespread market acceptance.
 
Our product enhancements or new products could fail to attain sufficient market acceptance for many reasons, including:
 
failure to accurately predict market demand in terms of product functionality and to supply products that meet this demand in a timely fashion;
inability to interoperate effectively with the database technologies and file systems of prospective customers;
defects, errors or failures;
negative publicity or customer complaints about performance or effectiveness; and
poor business conditions, causing customers to delay IT purchases.

If we fail to anticipate market requirements or stay abreast of technological changes, we may be unable to successfully introduce new products, expand the functionality of our current products or convince our customers and potential customers of the value of our solutions in light of new technologies. Accordingly, our business, results of operations and financial condition could be materially and adversely affected.

If we fail to successfully manage the transition to a subscription-based business model, our results of operations could be negatively impacted.

We are currently transitioning to a subscription-based business model. It is uncertain whether this transition will prove successful. Market acceptance of our products is dependent on our ability to include functionality and usability that address certain customer requirements. Additionally, we must optimally price our products in light of marketplace conditions, our costs and customer demand. This transition has had and may continue to have negative revenue implications, including on our quarterly results of operations. If we are unable to respond to these competitive threats, our business could be harmed.

This subscription strategy may give rise to a number of risks, including the following:

    our revenues and cash flows may fluctuate more than anticipated over the short-term as a result of this strategy;

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    if new or current customers desire only perpetual licenses our subscription sales may lag behind our expectations;
    the shift to a subscription strategy may raise concerns among our customer base, including concerns regarding changes to pricing over time and access to data once a subscription has expired;
    we may be unsuccessful in maintaining or implementing our target pricing or new pricing models, product adoption and projected renewal rates, or we may select a target price or new pricing model that is not optimal and could negatively affect our sales or earnings;
    our shift to a subscription licensing model may result in confusion among new or existing customers (which can slow adoption rates), resellers and investors;
    our relationships with existing partners that resell perpetual license products may be damaged;
    we may incur sales compensation costs at a higher than forecasted rate if the pace of our subscription transition is faster than anticipated; and
our sales force may struggle with the transition which may lead to increased turnover rates and lower headcount.

We started our move to a subscription-based business model, which has adversely affected, and may continue to adversely affect, our revenues and earnings in the transition period and which may make predicting our revenues and earnings more difficult.

We started our transition to a subscription-based software company in 2019 but still offer the perpetual license option. Under a subscription, customers pay a periodic fee for the right to use our software and receive maintenance. Revenues from perpetual and subscription licenses are generally recognized upon purchase. A portion of our customers have elected to purchase our solutions as subscriptions rather than under perpetual licenses. As a result, our license revenues have declined. Our maintenance and services revenues (which comprises a significant portion of our revenues) might also decrease due to support services being included in the subscription offering.

We may not be able to predict subscription renewal rates and their impact on our future revenues and operating results.

Although our subscription solutions are designed to increase the number of customers that purchase our solutions as subscriptions and create a recurring revenue stream that increases and is more predictable over time, our customers are not required to renew their subscriptions for our solutions and they may elect not to renew when or as we expect. Customer renewal rates may decline or fluctuate due to a number of factors, including offering pricing, competitive offerings, customer satisfaction and reductions in customer spending levels or customer activity due to economic downturns, the adverse impact of import tariffs or other market uncertainty. If our customers do not renew their subscriptions when or as we expect, or if they renew on less favorable terms, our revenues and earnings may decline, and our business may suffer.

We are dependent on the continued services and performance of our co-founder, Yakov Faitelson, the loss of whom could adversely affect our business.
 
Our future performance depends in large part on the continued services and continuing contributions of our co-founder, Chief Executive Officer and President, Yakov Faitelson, to successfully manage our company, to execute on our business plan and to identify and pursue new opportunities and product innovations. The loss of services of Mr. Faitelson could significantly delay or prevent the achievement of our development and strategic objectives and adversely affect our business.
 
Due to our rapid growth, we have a limited operating history at our current scale, which makes it difficult to evaluate and predict our future prospects and may increase the risk that we will not be successful.
 
We have been growing rapidly in recent periods and, as a result, have a relatively short history operating our business at its current scale. For example, we have significantly increased the number of our employees and have expanded our operations and product offerings. This limits our ability to forecast our future operating results and subjects us to a number of uncertainties, including our ability to plan for and model future growth. We have encountered and will continue to encounter risks and uncertainties frequently experienced by growing companies in new markets that may not develop as expected. Because we depend in part on the market’s acceptance of our products, it is difficult to evaluate trends that may affect our business. If our assumptions regarding these trends and uncertainties, which we use to plan our business, are incorrect or change in reaction to changes in our markets, or if we do not address these risks successfully, our operating and financial results could differ materially from our expectations and our business could suffer. Moreover, although we have experienced significant growth historically, we may not continue to grow as quickly in the future. 
 
Our future success will depend in large part on our ability to, among other things:

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maintain and expand our business, including our customer base and operations, to support our growth, both domestically and internationally;
hire, integrate, train and retain skilled talent, including members of our sales force and engineers;
develop new products and services and bring products and services in beta to market;
manage the transition to a subscription-based business model successfully;
renew maintenance and support agreements with, and sell additional products to, existing customers;
maintain high customer satisfaction and ensure quality and timely releases of our products and product enhancements;
increase market awareness of our products and enhance our brand; and
maintain compliance with applicable governmental regulations and other legal obligations, including those related to intellectual property, international sales and taxation.

If we fail to address the risks and difficulties that we face, including those associated with the challenges listed above as well as those described elsewhere in this “Risk Factors” section, our business will be adversely affected, and our results of operations will suffer.
 
If we are unable to attract new customers and expand sales to existing customers, both domestically and internationally, our growth could be slower than we expect, and our business may be harmed.
 
Our future growth depends in part upon increasing our customer base, particularly those customers with potentially high customer lifetime values. Our ability to achieve significant growth in revenues in the future will depend, in large part, upon the effectiveness of our sales and marketing efforts, both domestically and internationally, and our ability to attract new customers. If we fail to attract new customers and maintain and expand those customer relationships, our revenues will grow more slowly than expected, and our business will be harmed.

Our future growth also depends upon expanding sales of our products to existing customers and their organizations. If our customers do not purchase additional licenses or capabilities, our revenues may grow more slowly than expected, may not grow at all or may decline. There can be no assurance that our efforts would result in increased sales to existing customers ("upsells") and additional revenues. If our efforts to upsell to our customers are not successful, our business would suffer. Additionally, while a majority of our software is currently licensed and sold under perpetual license agreements, we also enter into subscription license agreements with our customers and are currently transitioning to a subscription-based business model. Due to the differences in average annual spending per customer, applied to perpetual versus subscription license sales, shifts in the mix of subscription licenses could produce significant variation in the revenues we recognize in a given period.
 
We have a history of losses, and we may not be profitable in the future.
 
We have incurred net losses in each year since our inception, including a net loss of $22.6 million for the three months ended March 31, 2019 and net losses of $28.6 million and $13.8 million in each of the years ended December 31, 2018 and 2017, respectively. Because the market for our software is rapidly evolving and has still not yet reached widespread adoption, it is difficult for us to predict our future results of operations. We expect our operating expenses to increase over the next several years as we hire additional personnel, particularly in our sales and marketing and research and development groups, expand and improve the effectiveness of our distribution channels, and continue to develop features and applications for our software.

Prolonged economic uncertainties or downturns could materially adversely affect our business.
 
Our business depends on our current and prospective customers’ ability and willingness to invest money in information technology services, including cybersecurity projects, which in turn is dependent upon their overall economic health. Negative conditions in the general economy both in the United States and abroad, including conditions resulting from changes in gross domestic product growth, potential future government shutdowns, the federal government's failure to raise the debt ceiling, financial and credit market fluctuations, the imposition of trade barriers and restrictions such as tariffs, political deadlock, natural catastrophes, warfare and terrorist attacks, could cause a decrease in business investments, including corporate spending on enterprise software in general and negatively affect the rate of growth of our business.
 
Uncertainty in the global economy, particularly in EMEA, which accounted for approximately one-third of our revenues in 2018 and for the three months ended March 31, 2019, and where we have experienced inconsistent quarterly growth rates over the last few years, makes it extremely difficult for our customers and us to forecast and plan future business activities accurately. This could cause our customers to reevaluate decisions to purchase our product or to delay their purchasing decisions, which could lengthen our sales cycles.

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We have a significant number of customers in the financial services, public sector, healthcare and industrial industries. A substantial downturn in any of these industries, or a reduction in public sector spending, may cause enterprises to react to worsening conditions by reducing their capital expenditures in general or by specifically reducing their spending on information technology. Customers may delay or cancel information technology projects, choose to focus on in-house development efforts or seek to lower their costs by renegotiating maintenance and support agreements. To the extent purchases of licenses for our software are perceived by customers and potential customers to be discretionary, our revenues may be disproportionately affected by delays or reductions in general information technology spending. In addition, the increased pace of consolidation in certain industries may result in reduced overall spending on our software. If the economic conditions of the general economy or industries in which we operate worsen from present levels, our business, results of operations and financial condition could be adversely affected.

If our technical support, customer success or professional services are not satisfactory to our customers, they may not renew their maintenance and support agreements or buy future products, which could adversely affect our future results of operations.
 
Our business relies on our customers’ satisfaction with the technical support and professional services we provide to support our products. Our customers typically purchase one year of software maintenance and support as part of their initial purchase of our products, with an option to renew their maintenance agreements. In order for us to maintain and improve our results of operations, it is important that our existing customers renew their maintenance and support agreements and subscription licenses, if applicable, when the initial contract term expires. Our customers have no obligation to renew their maintenance and support agreements or subscription licenses with us after the initial terms have expired. For example, our maintenance renewal rate for each of the years ended December 31, 2018 and 2017 and for the three months ended March 31, 2019 was over 90%. Customer satisfaction will become even more important as we shift more of our licensing to subscription license agreements.

If we fail to provide technical support services that are responsive, satisfy our customers’ expectations and reso