TUFIN SOFTWARE TECHNOLOGIES LTD.
TUFIN SOFTWARE TECHNOLOGIES LTD.
U.S. dollars in thousands
TUFIN SOFTWARE TECHNOLOGIES LTD.
U.S. dollars in thousands (except share data)
TUFIN SOFTWARE TECHNOLOGIES LTD.
U.S. dollars in thousands (except per share data)
The accompanying notes are an integral part of the condensed consolidated financial statements.
TUFIN SOFTWARE TECHNOLOGIES LTD.
U.S. dollars in thousands
TUFIN SOFTWARE TECHNOLOGIES LTD.
U.S. dollars in thousands (except share data)
The accompanying notes are an integral part of the condensed consolidated financial statements
TUFIN SOFTWARE TECHNOLOGIES LTD.
(U.S. dollars in thousands)
The accompanying notes are an integral part of the condensed consolidated financial statements.
Note 1: Business Description, Basis of Presentation and Recent Developments
Tufin Software Technologies Ltd. (together with its subsidiaries, “Tufin” or the “Company”) is an Israeli company that develops, markets and sells software-based solutions that help organizations visualize, define and enforce a unified security policy across complex, heterogeneous network environments. Tufin’s solutions automate security policy management, and allow organizations to gain visibility and control over their IT and cloud environments. Substantially all of the Company’s sales of products and services worldwide are made through a global network of distributors and resellers, which sell the products and services to their end-user customers.
Tufin Software Technologies Ltd. (the “Company”) was incorporated as an Israeli company on January 2, 2005 and commenced operations on that date. The Company has incorporated wholly owned subsidiaries in the United States, the United Kingdom, Germany, France, Australia and Romania.
In April 2019, the Company completed its initial public offering (“IPO”) in which it sold 8,855,000 ordinary shares to the public, including 1,155,000 ordinary shares pursuant to an option granted to the underwriters. The Company received aggregate net proceeds from the IPO of approximately $112,465 thousand, net of underwriting discounts and offering expenses payable by the Company. Upon the execution of the IPO, the Company’s outstanding redeemable convertible preferred shares were converted into 16,416,749 ordinary shares.
The accompanying unaudited condensed consolidated financial statements and have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) using accounting policies that are consistent with those used in the preparation of the Company’s audited consolidated financial statements for the year ended December 31, 2019. The unaudited condensed consolidated financial statements include the accounts of Tufin Software Technologies Ltd. and its subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
Certain financial information and footnote disclosures normally included in the annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted. Such information reflects all adjustments (consisting of normal, recurring adjustments), which are, in the opinion of management, necessary for a fair statement of results for the interim period.
The results of operations for the three and six months ended June 30, 2020 are not necessarily indicative of the results to be expected for the full year. These financial statements and accompanying notes should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2019, included in the filed with the SEC as part of the Company’s Annual Report on Form 20-F for such year on March 18, 2020.
In March 2020, the World Health Organization declared the outbreak of a disease caused by a novel strain of the coronavirus (COVID-19) to be a pandemic. The COVID-19 pandemic has rapidly changed market and economic conditions globally and may continue to create significant uncertainty in the macroeconomic environment. Such macroeconomic volatility, in addition to other unforeseen effects of this pandemic, has impacted the Company’s business, results of operations and overall financial performance. The COVID-19 pandemic has adversely affected the Company’s financial results primarily through elongated sales cycle on large transactions, and may adversely impact the Company’s long-term financial results in the future should the COVID-19 pandemic continue for a significant period of time.
The Company has been monitoring the developments relating to the COVID-19 pandemic, and has been acting to mitigate adverse implications as needed. As part of its actions, the Company has made adjustments to its operations and executed certain cost reduction initiatives, including workforce reduction. The Company will continue to monitor the evolving situation and will assess the relevant implications on its overall financial performance.
As a result of the COVID-19 pandemic, many of the Company’s estimates and assumptions may require increased judgment and may involve a higher degree of variability and volatility. While the Company continues to assess the implications of COVID-19 on its operations, it’s unable to accurately predict the full impact of COVID-19 on its business, results of operations, financial position and cash flows due to numerous uncertainties, including the severity of the disease, the duration of the outbreak and additional actions that may be taken by governmental authorities.
Note 2: Recently Adopted Accounting Standards
In August 2018, the FASB issued ASU 2018-15 “Intangibles—Goodwill and other—Internal-use software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract.” ASU 2018-15 clarifies the accounting for costs incurred to implement a cloud computing hosting arrangement that is a service contract by establishing a model for capitalizing or expensing such costs, depending on their nature and the stage of the implementation project during which they are incurred and aligns the requirements for capitalization of such implementation costs with the existing guidance for internal-use software. Any capitalized costs are to be amortized over the reasonably certain term of the hosting arrangement and presented in the same line within the statement of operations as the related service arrangement’s fees. ASU 2018-15 also requires enhanced qualitative and quantitative disclosures surrounding hosting arrangements that are service contracts. The Company adopted ASU 2018-15 effective January 1, 2020, with no material impact on its consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13 that supersedes the existing impairment model for most financial assets to a model that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. ASU 2016-13 requires an entity to recognize an impairment allowance equal to its current estimate of all contractual cash flows the entity does not expect to collect. ASU 2016-13 also requires that credit losses relating to available-for-sale debt securities will be recorded through an allowance for credit losses. The Company adopted ASU 2016-13 effective January 1, 2020, with no material impact on its consolidated financial statements.
NOTE 3: CASH, CASH EQUIVALENTS AND RESTRICTED CASH
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the statement of financial position that sum to the total of the same such amounts shown in the statement of cash flows.
| | | December 31, | | | June 30, | |
| | | 2019 | | | 2020 | |
| | | (U.S. $ in thousands) | |
| Cash and cash equivalents | | $ | 118,661 | | | $ | 94,818 | |
| Restricted bank deposits | | | 224 | | | | 224 | |
| Long-term restricted bank deposits | | | 2,844 | | | | 2,839 | |
| Total cash, cash equivalents, and restricted cash shown in the statement of cash flows | | $ | 121,729 | | | $ | 97,881 | |
Amounts included in restricted cash represent those required to be set aside by a contractual agreement with lease, hedging and credit card transactions.
NOTE 4: FAIR VALUE MEASUREMENT
The following tables summarize the Company’s financial assets and liabilities that are carried at fair value on a recurring basis, by fair value hierarchy, on the consolidated balance sheet:
| | | | |
| | | December 31, 2019 | | | June 30, 2020 | |
| | | | |
| | | Level 2 | | | Level 2 | |
| Assets: | | | | | | |
| Marketable securities | | | - | | | | 10,627 | |
| Foreign currency exchange derivative instrument | | | 81 | | | | 415 | |
| Total Financial Assets | | $ | 81 | | | $ | 11,042 | |
| | | | | | | | | |
| Liabilities: | | | | | | | | |
| Foreign currency exchange derivative instruments | | | 7 | | | | 9 | |
| Total Financial Liabilities | | $ | 7 | | | $ | 9 | |
The Company’s marketable securities are classified as Level 2 as these assets are valued using quoted market prices or alternative pricing sources and models utilizing observable market inputs.
The foreign currency exchange derivative instruments are classified as Level 2, as they are not actively traded and are valued using pricing models that use observable market inputs, including interest rate curves and both forward and spot prices for currencies (Level 2 inputs).
Other financial instruments consist mainly of cash and cash equivalents, restricted bank deposits, accounts receivable, accounts payable and other accounts payables. The fair value of these financial instruments approximates their carrying values.
NOTE 5: MARKETABLE SECURITIES
The Company accounts for its investments in marketable securities in accordance with ASC No. 320, “Investments—Debt and Equity Securities”. The Company determines the appropriate classification of its investments in marketable securities at the time of purchase and re-evaluates the appropriate classifications at each balance sheet date. As of June 30, 2020, all of the Company’s investments in marketable debt securities are classified as available-for-sale. Therefore, the Company’s marketable debt securities are recorded at fair value on the balance sheet. Unrealized gains and losses on marketable debt securities classified as available-for-sale are recorded in other comprehensive income (loss). Realized gains and losses on sale of marketable debt securities are included in financial income (expense), net in the consolidated statement of operations, and are derived using the specific identification method. The amortized cost of marketable debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization and accretion are included in the Company’s financial income (expenses), net in the consolidated statement of operations. The Company classifies its marketable debt securities as either short-term or long-term based on each instrument’s underlying contractual maturity date.
Available-for-sale debt securities with an amortized cost basis in excess of the estimated fair value are assessed using the Current Expected Credit Losses model (in accordance with ASU 2016-13) in order to determine what portion of that difference, if any, is caused by expected credit losses. Expected credit losses on available for sale debt securities are recognized in financial income (expenses), net on the consolidated statements of operations.
During the three and six months ended June 30, 2020, the Company did not recognize an allowance for credit losses on its available-for-sale marketable debt securities as any expected credit losses are not material to the consolidated financial statements.
The following tables summarize the amortized cost, unrealized gains and losses, and fair value of available-for-sale marketable securities as of June 30, 2020:
| | | June 30, 2020 | |
| | |
Amortized cost | | | Gross unrealized losses | | | Gross unrealized gains | | | Fair value | |
| | | | | | | | | | | | | |
| Government debentures | | $ | 8,004 | | | $ | (3 | ) | | $ | - | | | $ | 8,001 | |
| Corporate debentures | | | 2,633 | | | | (7 | ) | | | - | | | | 2,626 | |
| | | | | | | | | | | | | | | | | |
| Total | | $ | 10,637 | | | $ | (10 | ) | | $ | - | | | $ | 10,627 | |
As of June 30, 2020, the Company’s available-for-sale marketable securities mature in one to two years.
NOTE 6: DERIVATIVE INSTRUMENTS
The Company carries out transactions involving foreign currency exchange derivative financial instruments. The transactions are designed to hedge the Company’s exposure in currencies other than the U.S. dollar, but are not designated as an accounting hedge. The Company is primarily exposed to foreign exchange risk with respect to recognized assets and liabilities and forecasted transactions denominated in NIS, Euros and GBP.
The following table summarizes the consolidated balance sheets classification and fair values of the Company’s derivative instruments:
| | Balance sheet location | | Fair Value | | | Notional Amount | |
| | | | December 31, | | | June 30, | | | December 31, | | | June 30, | |
| | | | 2019 | | | 2020 | | | 2019 | | | 2020 | |
| | | | (U.S. $ in thousands) | |
| Assets derivatives -Foreign exchange contracts, not designated as cash flow hedge | Other current assets | | $ | 81 | | | $ | 415 | | | $ | 11,185 | | | $ | 12,565 | |
| Liability derivatives -Foreign exchange contracts, not designated as hedging instruments | Other accounts payables | | | (7 | ) | | | (9 | ) | | | 11,185 | | | | 507 | |
| | | | $ | 74 | | | $ | 406 | | | $ | 22,370 | | | $ | 13,072 | |
NOTE 7: SHARE-BASED COMPENSATION
Under the 2019 Plan, options or restricted share units (RSUs) generally vest over a requisite service period of four years commencing on the grant date and have a contractual term of ten years from the grant date. As of June 30, 2020, 343,236 shares were available for future equity awards under the 2019 Plan.
Share-based compensation expenses for options were allocated as follows:
| | | Three Months Ended | | | Six Months Ended | |
| | | June 30, | | | June 30, | | | June 30, | | | June 30, | |
| | | 2019 | | | 2020 | | | 2019 | | | 2020 | |
| Cost of revenues | | | 311 | | | | 467 | | | | 546 | | | | 962 | |
| Research and development | | | 477 | | | | 1,113 | | | | 615 | | | | 2,183 | |
| Sales and marketing | | | 1,511 | | | | 1,022 | | | | 2,000 | | | | 2,209 | |
| General and administrative | | | 344 | | | | 935 | | | | 574 | | | | 1,838 | |
| Total share-based compensation expense | | | 2,643 | | | | 3,537 | | | | 3,735 | | | | 7,192 | |
The fair value of options granted was estimated using the Black-Scholes option-pricing model. The fair value of RSUs was determined based on the quoted price of the Company’s ordinary shares on the date of the grant.
As of June 30, 2020, the Company had 3,998,335 unvested options. As of June 30, 2020, the unrecognized compensation cost related to all unvested, equity-classified options of $14,585 thousands is expected to be recognized as an expense over a weighted-average period of 1.1 years.
TUFIN SOFTWARE TECHNOLOGIES LTD.
NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)
| a. | A summary of the Company’s option activity for the six months ended June 30, 2020 is as follows: |
| | | Amount of Options | | | Weighted average exercise price | |
| | | | | | | |
| Balance as of January 1, 2020 | | | 7,507,811 | | | $ | 8.17 | |
| Granted | | | 921,500 | | | $ | 10.73 | |
| Exercised | | | (484,146 | ) | | $ | 1.52 | |
| Forfeited | | | | ) | | $ | 14.36 | |
| Balance as of June 30, 2020 | | | 7,461,553 | | | $ | 8.51 | |
| Exercisable as of June 30, 2020 | | | 3,463,218 | | | $ | | |
| b. | A summary of the Company’s RSUs activity for the six months ended June 30, 2020 is as follows: |
| | | Amount of RSUs | | | Weighted Average Grant Date Fair Value | |
| | | | | | | |
| Balance as of January 1, 2020 | | | - | | | $ | - | |
| Granted | | | 1,012,170 | | | $ | 9.15 | |
| Forfeited | | | (4,470 | ) | | $ | 8.83 | |
| Unvested as of June 30, 2020 | | | 1,007,700 | | | $ | 9.15 | |
As of June 30, 2020, the unrecognized compensation cost of $8.4 million related to all unvested, equity-classified RSUs is expected to be recognized as expense over a weighted-average period of 1.1 years.
| c. | The Company incurred net losses for the three and six months ended June 30, 2019 and 2020. Therefore, the inclusion of all potential ordinary shares outstanding would have had an anti-dilutive effect on the diluted net loss per share. As a result, 7,496,742 and 8,469,253 options and RSUs were not included in the calculation of diluted net loss per share for the three and six months ended June 30, 2019 and 2020, respectively. |
NOTE 8: REVENUES, DEFERRED REVENUES AND DEFERRED COSTS
Disaggregation of Revenue
The Company generates revenue from the sale of software products, hardware products, maintenance and support, and professional services. All revenue recognized in the consolidated statement of operations is considered to be revenue from contracts with customers. The following table sets for the disaggregated revenue by revenue type and is consistent with how the Company evaluates its performance obligations:
| | | Three Months Ended June 30, | | | Six Months Ended June 30, | |
| | | 2019 | | | 2020 | | | 2019 | | | 2020 | |
| | | (U.S. dollars in thousands) | | | (U.S. dollars in thousands) | |
| Product | | | | | | | | | | | | |
| Software products | | | 9,960 | | | | 7,147 | | | | 20,243 | | | | 12,625 | |
| Hardware products | | | 937 | | | | 754 | | | | 1,277 | | | | 1,080 | |
| | | $ | 10,897 | | | $ | 7,901 | | | $ | 21,520 | | | $ | 13,705 | |
| Maintenance and professional services | | | | | | | | | | | | | | | | |
| Support and maintenance | | | 11,305 | | | | 12,315 | | | | 21,674 | | | | 24,703 | |
| Professional services | | | 2,899 | | | | 2,816 | | | | 4,361 | | | | 5,868 | |
| | | $ | 14,204 | | | $ | 15,131 | | | $ | 26,035 | | | $ | 30,571 | |
| Total revenue | | $ | 25,101 | | | $ | 23,032 | | | $ | 47,555 | | | $ | 44,276 | |
Deferred revenue
| | | December 31, | | | June 30, | |
| | | 2019 | | | 2020 | |
| | | (U.S. $ in thousands) | |
| Deferred revenues: | | | | | | |
| Deferred product revenues | | $ | 695 | | | $ | 166 | |
| Deferred maintenance and professional services revenues | | | 56,900 | | | | 48,928 | |
| | | | 57,595 | | | | 49,094 | |
| Less - amounts offset from accounts receivable | | | (22,032 | ) | | | (8,543 | ) |
| Deferred revenues | | | 35,563 | | | | 40,551 | |
| The change in deferred revenues: | | | | | | | | |
| Balance at beginning of year | | | 56,629 | | | | 57,595 | |
| Deferred revenue relating to new sales | | | 40,225 | | | | 16,644 | |
| Revenue recognition during the period | | | (39,259 | ) | | | (25,145 | ) |
| Balance at end of year | | | 57,595 | | | | 49,094 | |
| Less - amounts offset from accounts receivable | | | (22,032 | ) | | | (8,543 | ) |
| Deferred revenues | | $ | 35,563 | | | $ | 40,551 | |
Remaining Performance Obligations
As of June 30, 2020, the Company’s total remaining performance obligations were approximately $54,740 thousand.
The Company expects that it will satisfy its remaining performance obligations over a period of three years during which, on June, 2020, an amount of $32,999 thousand will be recognized in the next twelve months, which constitutes 60% of total deferred revenues.
Assets Recognized from the Costs to Obtain a Contract with a Customer
The Company determined that certain costs related to its sales incentive programs meet the requirements to be capitalized and deferred. These assets are recorded as current and non-current assets. The Company amortizes these deferred costs over the benefit period, currently estimated to be four years. The Company considers the benefit period to exceed the initial contract term for certain costs because of anticipated renewals and because sales commission rates for renewal contracts are not commensurate with sales commissions for initial contracts.
| | | December 31, | | | June 30, | |
| | | 2019 | | | 2020 | |
| | | (U.S. $ in thousands) | |
| Balance at beginning of year | | $ | 5,313 | | | $ | 5,962 | |
| Additional costs deferred | | | 3,436 | | | | 1,365 | |
| Amortization of deferred costs | | | (2,787 | ) | | | (1,597 | ) |
| Balance at end of year | | $ | 5,962 | | | $ | 5,730 | |
NOTE 9: ENTITY WIDE DISCLOSURES
ASC 280, “Segment Reporting,” establishes standards for reporting information about operating segments. The Company manages its business based on one operating segment and derives revenues from licensing of software, sales of hardware, providing maintenance and technical support and sales of professional services.
The following is a summary of revenues within geographic areas:
| | | Three Months Ended June 30, | | | Six Months Ended June 30, | |
| | | 2019 | | | 2020 | | | 2019 | | | 2020 | |
| | | (U.S. dollars in thousands) | | | (U.S. dollars in thousands) | |
| Americas: | | | | | | | | | | | | |
| United States | | $ | 12,572 | | | $ | 12,235 | | | $ | 24,875 | | | $ | 23,304 | |
| Other | | | 460 | | | | 184 | | | | 578 | | | | 551 | |
| | | | 13,032 | | | | 12,419 | | | | 25,453 | | | | 23,855 | |
| EMEA: | | | | | | | | | | | | | | | | |
| Germany | | | 2,946 | | | | 2,712 | | | | 5,694 | | | | 5,045 | |
| Israel | | | 306 | | | | 282 | | | | 543 | | | | 556 | |
| Other | | | 6,539 | | | | 5,740 | | | $ | 12,600 | | | | 11,596 | |
| | | | 9,791 | | | | 8,734 | | | | 18,837 | | | | 17,197 | |
| | | | | | | | | | | | | | | | | |
| APAC | | | 2,278 | | | | 1,879 | | | | 3,265 | | | | 3,224 | |
| | | | | | | | | | | | | | | | | |
| Total | | $ | 25,101 | | | $ | 23,032 | | | $ | 47,555 | | | $ | 44,276 | |
Revenues are attributed to geographic areas based on the location of customer.
For the year ended December 31, 2019 and six months ended June 30, 2020, each of the following distributors comprised more than 10% of the Company’s revenue:
| | | Year Ended | | | Six months Ended | |
| | | December 31, | | | June 30, | |
| | | 2019 | | | 2020 | |
| | | | | | | |
| Customer A | | | 15 | % | | | 15 | % |
| Customer B | | | 9 | % | | | 10 | % |
Property, plant and equipment, net by geographical area were as follows as of December 31, 2019 and June 30, 2020:
| | | December 31, | | | June 30, | |
| | | 2019 | | | 2020 | |
| | | (U.S. $ in thousands) | |
| Americas (primarily the United States) | | $ | 959 | | | | 1,146 | |
| EMEA | | | 123 | | | | 111 | |
| Israel | | | 3,095 | | | | 3,553 | |
| | | $ | 4,177 | | | | 4,810 | |
As of December 31, 2019 and June 30, 2020, each of the following distributors comprised more than 10% of the Company’s accounts receivable:
| | | December 31, | | | June 30, | |
| | | 2019 | | | 2020 | |
| Customer A | | | 14 | % | | | 18 | % |
| Customer B | | | 15 | % | | | 13 | % |
| Customer C | | | 12 | % | | | 0 | % |
| Customer D | | | 2 | % | | | 15 | % |
| Customer E | | | 2 | % | | | 14 | % |
For purposes of this calculation, the Company assessed distributors by aggregating distributors within the same holding group.
NOTE 10: Contingencies
Legal Proceedings
As previously disclosed, the Company, along with its directors and officers at the time of its IPO (the “Individual Defendants”) were named as defendants in putative shareholder class action lawsuits filed in the Supreme Court of the State of New York on (1) February 26, 2020, captioned Matt Primozich v. Tufin Software Technologies Ltd., et al., Index No. 651287/2020 (Sup. Ct. 2020), (2) June 15, 2020, captioned Avi Shmuely v. Tufin Software Technologies Ltd., et al., Index No. 652475/2020 (Sup. Ct. 2020), and (3) July 1, 2020 captioned Michael Roche v. Tufin Software Technologies Ltd., et al., Index No. 652833/2020 (Sup. Ct. 2020) (the “Roche Complaint”). The Roche Complaint also named the underwriters in the IPO as defendants. The Company, the Individual Defendants and the underwriters in the IPO were also named as defendants in a putative shareholder class action lawsuit filed in the United States District Court, Southern District New York on July 21, 2020, captioned Matthew Ellison v. Tufin Software Technologies Ltd. et al., Case No. 1:20-cv-05646 (S.D.N.Y.), and the Company and the Individual Defendants were also named as defendants in a substantially similar lawsuit in the Southern District of New York on August 10, 2020 captioned David Michaelson v. Tufin Software Technologies Ltd. et al., Case No. 1:20-cv-06290 (S.D.N.Y.).
In the state court complaints, the plaintiffs, seeking to represent a class of all purchasers and acquirers of the Company’s ordinary shares issued in connection with the Company’s IPO, allege that the Company violated Sections 11 of the Securities Act (and, in the case of the Roche Complaint, Section 12(a)(2) of the Securities Act) by making material misstatements or failing to disclose material information. The complaints also assert claims against the Individual Defendants for control person liability under Section 15 of the Securities Act. In the federal complaint, the plaintiff, seeking to represent a class of all shareholders that purchased ordinary shares of the Company in or traceable to both the IPO and the Company’s secondary public offering on December 5, 2019, alleges violations of Sections 11 and 12(a)(2) of the Securities Act against all defendants, including the Company, and Section 15 of the Securities Act against the Individual Defendants in connection with alleged material misstatements or failures to disclose material information. It is expected that the state court complaints will be ultimately consolidated into a single complaint.
Based on information currently available and the current stage of the litigation, the Company is unable to reasonably estimate a possible loss or range of possible losses, if any, with regard to the remaining lawsuits in the state court or District Court; therefore, no litigation reserve has been recorded in the Company’s condensed consolidated balance sheets as of June 30, 2020. The Company will continue to evaluate information as it becomes known and will record an estimate for losses at the time or times if and when it is probable that a loss will be incurred and the amount of the loss is reasonably estimable.
F - 17
