| General | GENERAL a. Description of Business: 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: Effective as of January 1, 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 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 $57,064 for the six months ended June 30, 2019 . The Company does not grant a right of return to its customers, except for one of its resellers. In 2018 and for the six months ended June 30, 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. e. Derivative Instruments: The Company’s primary objective for holding derivative instruments is to reduce its exposure to foreign currency rate changes. The Company reduces its exposure by entering into forward foreign exchange contracts with respect to operating expenses that are forecasted to be incurred in currencies other than the U.S. dollar. A majority of the Company’s revenues and operating expenditures are transacted in U.S. dollars. However, certain operating expenditures are incurred in or exposed to other currencies, primarily the New Israeli Shekel (“NIS”). The Company has established forecasted transaction currency risk management programs to protect against fluctuations in fair value and the volatility of future cash flows caused by changes in exchange rates. The Company’s currency risk management program includes forward foreign exchange contracts designated as cash flow hedges. These forward foreign exchange contracts generally mature within 12 months. 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 as of Liabilities as of Notional Amount Fair Value Notional Amount Fair Value Foreign exchange forward contract derivatives in cash flow hedging relationships included in other current assets and accrued expenses and other short term liabilities $ 40,768 $ 197 $ 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 $ 22,906 $ 31 $ 29,162 $ (18 ) For the three and six months ended June 30, 2019 , the unaudited consolidated statements of operations reflect a loss of $80 and $531 , respectively, related to the effective portion of the cash flow hedges. For the three and six months ended June 30, 2018 , the unaudited consolidated statements of operations reflect a loss of $948 and $900 , 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 and six months ended June 30, 2019 and 2018 . For the three and six months ended June 30, 2019 , the unaudited consolidated statements of operations reflect a gain of $90 and $484 , respectively, 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 and six months ended June 30, 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 amortization of premiums and accretion of discounts to maturity. Such amortization and accretion is included as a component of financial income (expenses), net in the consolidated statement of operations. Cash, cash equivalents, marketable securities and short-term deposits consist of the following (in thousands): As of June 30, 2019 (unaudited) Amortized Cost Gross Unrealized Gains Gross Unrealized Loss Fair Value Cash and cash equivalents Money market funds $ 11,080 $ — $ — $ 11,080 Total $ 11,080 $ — $ — $ 11,080 Marketable securities US Treasury securities $ 35,806 $ 39 $ — $ 35,845 Total $ 35,806 $ 39 $ — $ 35,845 Short-term deposits Term bank deposits $ 41,328 $ — $ — $ 41,328 Total $ 41,328 $ — $ — $ 41,328 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 deposits Term bank deposits $ 70,438 $ — $ — $ 70,438 Total $ 70,438 $ — $ — $ 70,438 *) Represents an amount lower than $1 All the US Treasury securities in marketable securities have a stated effective maturity of less than 12 months as of June 30, 2019 and December 31, 2018 . 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 (expenses), 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 six months ended June 30, 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: June 30, 2019 June 30, 2018 (unaudited) Cash and cash equivalents $ 69,159 $ 73,636 Long term restricted cash included in other assets — 520 Cash, cash equivalents and long term restricted cash shown in the consolidated statement of cash flows $ 69,159 $ 74,156 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 June 30, 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 June 30, 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 Financial Accounting Standards Board ("FASB") issued ASU 2016-02, “Leases” ("ASC 842"), on the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for in a manner similar to the accounting under the prior guidance (ASC 840). The new standard requires lessors to account for leases using an approach that is substantially equivalent to ASC 840 guidance for sales-type leases, direct financing leases and operating leases. The new standard supersedes the previous leases standard, ASC 840, "Leases". The Company adopted the new standard as of January 1, 2019, using the modified retrospective approach. Consequently, prior period balances and disclosures have not been restated. The Company has elected to utilize the available package of practical expedients permitted under the transition guidance within the new standard which does not require it to reassess the prior conclusions about lease identification, lease classification and initial direct costs. The adoption of ASC 842 resulted in the elimination of deferred rent of $1,313 and $4,236 in current and long-term liabilities in the Company’s consolidated balance sheets, respectively. Additionally, the Company included in its balance sheet at adoption an operating right-of-use assets, short term operating lease liabilities and long term operating lease liabilities of $ 53,274 , $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. |
