Interruptions

we cannot merge, amalgamate or consolidate with any other entity.

If Alleviating any of these problems could require significant expenditures of our software is perceived as not being secure, customers may reducecapital and other resources and could cause interruptions or delays in the use of or stop using our software, and we may incur significant liabilities.

Our software involves the transmission of data between data stores, and between data stores and desktop and mobile computers, and may in the future involve the storage of data. Any security breaches with respect to such datasolutions, which could result in the loss of this information, litigation, indemnity obligations and other liabilities. While we have taken steps to protect the confidential information that we have access to, including confidential information we may obtain through our customer support services or customer usage of our products, we have no direct control over the substance of the content. Therefore, if customers use our software for the transmission of personally identifiable information and our security measures are breached as a result of third-party action, employee error, malfeasance or otherwise, our reputation could be damaged, our business may suffer and we could incur significant liability. Because techniques used to obtain unauthorized access or sabotage systems change frequently and generally are not identified until they are launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. While we maintain insurance coverage for some of the above events, the potential liabilities associated with these events could exceed the insurance coverage we maintain. Any or all of these issues could tarnish our reputation, negatively impact our ability to attract new customers or sell additional products to our existing customers, cause existing customers to elect not to renew their maintenance and support agreements or subject us to third-party lawsuits, regulatory fineslose existing or other action or liability, thereby adversely affecting our results of operations.

We are subject to federal, state and industry privacy and data security regulations, which could result in additional costs and liabilities to us or inhibit sales of our software.

Although our current software products do not transmit our customers’ data to us, we collect and utilize demographic and other information, including personally identifiable information, from and about users (such as customers, potential customers and others) as they interact with us over the internet and otherwise provide us with information whether via our website or blog or through email or other means. Users may provide personal information to us in many contexts, including through our direct telephonic support service, blog alert sign-up, product purchase, survey registration, or when accessing our online support portals or using other community or social networking features. Because we may collect and utilize this information, we are subject to laws and regulations regarding the collection, use and disclosure of personal information. In the United States, these include rules and regulations promulgated under the authority of the Federal Trade Commission, the Health Insurance Portability and Accountability Act of 1996, and state breach notification laws. Internationally, virtually every jurisdiction in which we operate has established its own data security and privacy legal framework with which we or our customers must comply, including the GDPR adopted in the EU and which will become enforceable on May 25, 2018.

Further, the regulatory framework for privacy issues worldwide is rapidly evolving and is likely to remain uncertain for the foreseeable future. Many federal, state and foreign government bodies and agencies have adopted or are considering adopting laws and regulations. In addition, privacy advocates and industry groups may propose new and different self-regulatory standards that either legally or contractually apply to us. Because the interpretation and application of privacy and data protection laws are still uncertain, it is possible that these laws may be interpreted and applied in a manner that is inconsistent with our existing data management practices or the features of our software. If so, in addition to the possibility of fines, lawsuits and other claims, we could be required to fundamentally change our business activities and practices or modify our software, which could have an adverse effect on our business. Any inability to adequately address privacy concerns, even if unfounded, or comply with applicable privacy or data protection laws, regulations and policies, could result in additional cost and liability to us, damage our reputation, inhibit sales and adversely affect our business.

Our long-term growth depends, in part, on being able to continue to expand internationally on a profitable basis, which subjects us to risks associated with conducting international operations.

Historically, we have generated a majority of our revenues from customers in the United States. For the year ended December 31, 2017, approximately 62% of our total revenues were derived from sales in the United States. Nevertheless, we have operations across the globe, and we plan to continue to expand our international operations as part of our long-term growth strategy. The further expansion of our international operations will subject us to a variety of risks and challenges, including:

Any of these risks could adversely affect our international operations, reduce our revenues from outside the United States or increase our operating costs, adversely affecting our business, results of operations and financial condition and growth prospects. There can be no assurance that all of our employees, independent contractors and channel partners will comply with the formal policies we have and will implement, or applicable laws and regulations. Violations of laws or key control policies by our employees, independent contractors and channel partners could result in delays in revenue recognition, financial reporting misstatements, fines, penalties or the prohibition of the importation or exportation of our software and services and could have a material adverse effect on our business and results of operations.

If currency exchange rates fluctuate substantially in the future, our results of operations, which are reported in U.S. dollars, could be adversely affected.

Our functional and reporting currency is the U.S. dollar, and we generate a majority of our revenues and incur a majority of our expenses in U.S. dollars. Revenues and expenses are also incurred in other currencies,primarily Euros, Pounds Sterling, Canadian dollars, Australian dollars and New Israeli Shekels (“NIS”). Accordingly, changes in exchange rates may have a material adverse effect on our business, results of operations and financial condition. The exchange rates between the U.S. dollar and foreign currencies have fluctuated substantially in recent years and may continue to fluctuate substantially in the future. For example, due to the recent appreciation of the NIS against the U.S. Dollar, we expect our operating expenses, mainly those related to research and development, to be negatively impacted by this foreign currency movement compared to 2017. For both the first quarter and full year 2018, we expect this impact to be approximately 300 basis points to our operating margin. Furthermore, a strengthening of the U.S. dollar could increase the cost in local currency of our software and our maintenance renewals to customers outside the United States, which could adversely affect our business, results of operations, financial condition and cash flows. Volatility in exchange rates may continue in the short term as the United Kingdom negotiates its exit from the European Union which is scheduled to occur by the end of March 2019. Brexit and the withdrawal of the United Kingdom from the European Union, as well as other member countries public discussions about the possibility of withdrawing from the European Union, may also create global economic uncertainty, which may impact, among other things, the demand for our products.

We incur expenses for employee compensation and other operating expenses at our non-U.S. locations in local currencies. The weakening of the U.S. dollar against such currencies would cause the U.S. dollar equivalent of such expenses to increase which could have a negative impact on our reported results of operations. We use forward foreign exchange contracts to hedge or mitigate the effect of changes in foreign exchange rates on our operating expenses denominated in certain foreign currencies. However, this strategy might not eliminate our exposure to foreign exchange rate fluctuations and involves costs and risks of its own, such as cash expenditures, ongoing management time and expertise, external costs to implement the strategy and potential accounting implications. Additionally, our hedging activities may contribute to increased losses as a result of volatility in foreign currency markets.

Our use of open source software could negatively affect our ability to sell our software and subject us to possible litigation.

We use open source software and expect to continue to use open source software in the future. Some open source software licenses require users who distribute open source software as part of their own software product to publicly disclose all or part of the source code to such software product or to make available any derivative works of the open source code on unfavorable terms or at no cost. We may face ownership claims of third parties over, or seeking to enforce the license terms applicable to, such open source software, including by demanding the release of the open source software, derivative works or our proprietary source code that was developed using such software. These claims could also result in litigation, require us to purchase a costly license or require us to devote additional research and development resources to change our software, any of which would have a negative effect on our business and results of operations. In addition, if the license terms for the open source code change, we may be forced to re-engineer our software or incur additional costs. Finally, we cannot assure you that we have incorporated open source software into our own software in a manner that conforms with our current policies and procedures.

Our business is highly dependent upon our brand recognition and reputation, and the failure to maintain or enhance our brand recognition or reputation may adversely affect our business.

We believe that enhancing the “Varonis” brand identity and maintaining our reputation in the information technology industry is critical to our relationships with our customers and to our ability to attract new customers. Our brand recognition and reputation is dependent upon:

We may not be able to successfully promote our brand or maintain our reputation. In addition, independent industry analysts often provide reviews of our products, as well as other products available in the market, and perception of our product in the marketplace may be significantly influenced by these reviews. If these reviews are negative, or less positive than reviews about other products available in the market, our brand may be adversely affected. Furthermore, negative publicity relating to events or activities attributed to us, our employees, our channel partners or others associated with any of these parties, may tarnish our reputation and reduce the value of our brand. Damage to our reputation and loss of brand equity may reduce demand for our products and have an adverse effect on our business, results of operations and financial condition. Any attempts to rebuild our reputation and restore the value of our brand may be costly and time consuming, and such efforts may not ultimately be successful.

Moreover, it may be difficult to enhance our brand and maintain our reputation in connection with sales to channel partners. Promoting our brand requires us to make significant expenditures, and we anticipate that the expenditures will increase as our market becomes more competitive, as we expand into new markets and geographies and as more sales are generated to our channel partners. To the extent that these activities yield increased revenues, these revenues may not offset the increased expenses we incur. If we do not successfully enhance our brand and maintain our reputation, our business may not grow, we may have reduced pricing power relative to competitors with stronger brands, and we could lose customers, all of which would adversely affect our business, operations and financial results.

False detection of security breaches, false identification of malicious sources or misidentification of sensitive or regulated information could adversely affect our business.

Our cyber-security products may falsely detect threats that do not actually exist. For example, our DatAlert solution may enrich metadata collected by our products with information from external sources and third-party data providers. If the information from these data providers is inaccurate, the potential for false positives increases. These false positives, while typical in the industry, may affect the perceived reliability of our products and solutions and may therefore adversely impact market acceptance of our products. As definitions and instantiations of personal identifiers and other sensitive content change, automated classification technologies may falsely identify or fail to identify data as sensitive. If our products and solutions fail to detect exposures or restrict access to important systems, files or applications based on falsely identifying legitimate use as an attack or otherwise unauthorized, then our customers’ businesses could be adversely affected. Any such false identification of use and subsequent restriction could result in negative publicity, loss of customers and sales, increased costs to remedy any problem and costly litigation.

Our success depends in part on maintaining and increasing our sales to customers in the public sector.

We derive a portion of our revenues from contracts with federal, state, local and foreign governments and government-owned or -controlled entities (such as public health care bodies, educational institutions and utilities), which we refer to as the public sector herein. We believe that the success and growth of our business will continue to depend on our successful procurement of public sector contracts. Selling to public sector entities can be highly competitive, expensive and time consuming, often requiring significant upfront time and expense without any assurance that our efforts will produce any sales. Factors that could impede our ability to maintain or increase the amount of revenues derived from public sector contracts include:

Furthermore, we must comply with laws and regulations relating to public sector contracting, which affect how we and our channel partners do business in both the United States and abroad. These laws and regulations may impose added costs on our business, and failure to comply with these or other applicable regulations and requirements, including non-compliance in the past, could lead to claims for damages from our channel partners, penalties, termination of contracts, and temporary suspension or permanent debarment from public sector contracting.

The occurrence of any of the foregoing could cause public sector customers to delay or refrain from purchasing licenses of our software in the future or otherwise have an adverse effect on our business, operations and financial results.

We are subject to governmental export and import controls that could subject us to liability or impair our ability to compete in international markets.

We incorporate encryption technology into certain of our products and these products are subject to U.S. export control. We are also subject to Israeli export controls on encryption technology since our product development initiatives are primarily conducted by our wholly-owned Israeli subsidiary. We have obtained the required licenses to export our products outside of the United States. In addition, the current encryption means used in our products are listed in the “free means encryption items” published by the Israeli Ministry of Defense, which means we are exempt from obtaining an encryption control license. If the applicable U.S. or Israeli legal requirements regarding the export of encryption technology were to change or if we change the encryption means in our products, we may need to apply for new licenses in the United States and may no longer be able to rely on our licensing exception in Israel. There can be no assurance that we will be able to obtain the required licenses under these circumstances. Furthermore, various other countries regulate the import of certain encryption technology, including import permitting and licensing requirements, and have enacted laws that could limit our ability to distribute our products or could limit our customers’ ability to implement our products in those countries.

We are also subject to U.S. and Israeli export control and economic sanctions laws, which prohibit the shipment of certain products to embargoed or sanctioned countries, governments and persons. Our products could be exported to these sanctioned targets by our channel partners despite the contractual undertakings they have given us and any such export could have negative consequences, including government investigations, penalties and reputational harm. Moreover, the Trump Administration may create further uncertainty regarding export or import regulations, economic sanctions or related legislation. It remains unclear what specifically President Trump would or would not do with respect to the initiatives he has raised and what support he would have to implement any such potential changes. Any change in export or import regulations, economic sanctions or related legislation, shift in the enforcement or scope of existing regulations, or change in the countries, governments, persons or technologies targeted by such regulations, could result in decreased use of our products by, or in our decreased ability to export or sell our products to, existing or potential customers with international operations. Any decreased use of our products or limitation on our ability to export or sell our products would likely adversely affect our business, financial condition and results of operations.

Our business in countries with a history of corruption and transactions with foreign governments increase the risks associated with our international activities.

As we operate and sell internationally, we are subject to the FCPA and other laws that prohibit improper payments or offers of payments to foreign governments and their officials and political parties for the purpose of obtaining or retaining business. We have operations, deal with and make sales to governmental customers in countries known to experience corruption, particularly certain emerging countries in Eastern Europe, South and Central America, East Asia, Africa and the Middle East. Our activities in these countries create the risk of unauthorized payments or offers of payments by one of our employees, consultants, channel partners or sales agents that could be in violation of various anti-corruption laws, even though these parties may not be under our control. While we have implemented safeguards to prevent these practices by our employees, consultants, channel partners and sales agents, our existing safeguards and any future improvements may prove to be less than effective, and our employees, consultants, channel partners or sales agents may engage in conduct for which we might be held responsible. Violations of the FCPA or other anti-corruption laws may result in severe criminal or civil sanctions, including suspension or debarment from government contracting, and we may be subject to other liabilities, which could negatively affect our business, operating results and financial condition.

Our ability to use our net operating loss carryforwards and other tax attributes may be limited if we undergo an “ownership change.”

Our ability to utilize our net operating loss carryforwards (“NOLs”) and other tax attributes could be limited if we undergo an “ownership change” within the meaning of Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”). An ownership change is generally defined as a greater than 50 percentage point increase in equity ownership by 5% stockholders in any three-year period. If an ownership change occurred as a result of the sale of future equity issuances, we may not be able to fully realize the benefits of these NOLs. Also, the cash tax benefit from our NOLs is dependent upon our ability to generate sufficient taxable income. Accordingly, we may be unable to earn enough taxable income in order to fully utilize our current NOLs.

Changes in our provision for income taxes or adverse outcomes resulting from examination of our income tax returns could adversely affect our results.

We are subject to income taxation in the United States, Israel and numerous other jurisdictions. Determining our provision for income taxes requires significant management judgment. In addition, our provision for income taxes could be adversely affected by many factors, including, among other things, changes to our operating structure, changes in the amounts of earnings in jurisdictions with different statutory tax rates, changes in the valuation of deferred tax assets and liabilities and changes in tax laws. We are subject to ongoing tax examinations in various jurisdictions. Tax authorities may disagree with our intercompany charges, cross-jurisdictional transfer pricing or other matters and assess additional taxes. While we regularly evaluate the likely outcomes of these examinations to determine the adequacy of our provision for income taxes, there can be no assurance that the outcomes of such examinations will not have a material impact on our results of operations and cash flows. In addition, we may be audited in various jurisdictions, and such jurisdictions may assess additional taxes against us. For example, we are currently subject to a tax audit in Israel. Although we believe our tax estimates are reasonable, the final determination of any tax audits or litigation could be materially different from our historical tax provisions and accruals, which could have a material adverse effect on our results of operations or cash flows in the period or periods for which a determination is made.

Significant judgment is required to determine the recognition and measurement attributes prescribed in Accounting Standards Codification (“ASC 740-10-25”). In addition, ASC 740-10-25 applies to all income tax positions, including the potential recovery of previously paid taxes, which if settled unfavorably could adversely impact our provision for income taxes. Further, as a result of certain of our ongoing employment and capital investment actions and commitments, our income in certain countries is subject to reduced tax rates. Our failure to meet these commitments could adversely impact our provision for income taxes. In addition, we are subject to the continuous examination of our income tax returns by the U.S. Internal Revenue Service and other tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. There can be no assurance that the outcomes from these continuous examinations will not have an adverse effect on our results of operations.

The adoption of the recent tax reform and the enactment of additional legislation changing the United States taxation of international business activities could materially impact our financial position and results of operations.

On December 22, 2017, President Trump signed into law the “Tax Cuts and Jobs Act” (TCJA) that significantly reforms the Code. The TCJA, among other things, includes changes to U.S. federal tax rates, imposes significant additional limitations on the deductibility of interest and restricts the use of net operating loss carryforwards arising after December 31, 2017, allows for the expensing of capital expenditures, and puts into effect the migration from a “worldwide” system of taxation to a territorial system. We do not expect tax reform to have a material impact to our net operating losses. We continue to examine the impact this tax reform legislation may have on our business. Due to the expansion of our international business activities, any changes in the U.S. taxation of such activities may increase our worldwide effective tax rate and adversely affect our financial position and results of operations. Further, foreign governments may enact tax laws in response to the TCJA that could result in further changes to global taxation and materially affect our financial position and results of operations. The impact of the TCJA on holders of our securities is uncertain. We urge our stockholders to consult with their legal and tax advisors with respect to such legislation and the potential tax consequences.

We conduct our operations in a number of jurisdictions worldwide and report our taxable income based on our business operations in those jurisdictions. Our intercompany relationships are subject to transfer pricing regulations administered by taxing authorities in various jurisdictions. The relevant taxing authorities may disagree with our determinations as to the income and expenses attributable to specific jurisdictions. If such a disagreement were to occur, and our position were not sustained, we could be required to pay additional taxes, interest and penalties, which could result in one-time tax charges, higher effective tax rates, reduced cash flows and lower overall profitability of our operations.

Changes in financial accounting standards may cause adverse and unexpected revenue fluctuations and impact our reported results of operations.

A change in accounting standards or practices could harm our operating results and may even affect our reporting of transactions completed before the change is effective. New accounting pronouncements, such as Accounting Standards Update 2014-09 related to revenue recognition, and varying interpretations of accounting pronouncements have occurred and may occur in the future. Changes to existing rules or the questioning of current practices may harm our operating results or the way we conduct our business. Additionally, the adoption of new or revised accounting principles may require that we make significant changes to our systems process and controls.

Acquisitions could disrupt our business and adversely affect our results of operations, financial condition and cash flows.

We may make acquisitions that could be material to our business, results of operations, financial condition and cash flows. Our ability as an organization to successfully acquire and integrate technologies or businesses is unproven. Acquisitions involve many risks, including the following:

We may not succeed in addressing these or other risks or any other problems encountered in connection with the integration of any acquired business. The inability to integrate successfully the business, technologies, products, personnel or operations of any acquired business, or any significant delay in achieving integration, could have a material adverse effect on our business, results of operations, financial condition and cash flows.

We may require additional capital to support our business growth, and this capital might not be available on acceptable terms, or at all.

Risks Related to

Our principal research and development facility, which also houses a portion of our support and general and administrative teams, is located in Israel. Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its neighboring countries, as well as incidents of terror activities and other hostilities, and a number of state and non-state actors have publicly committed to its destruction. Political, economic and security conditions in Israel could directly affect our operations. We could be adversely affected by hostilities involving Israel, including acts of terrorism or any other hostilities involving or threatening Israel, the interruption or curtailment of trade between Israel and its trading partners, a significant increase in inflation or a significant downturnoccur in the economic or financial condition of Israel. Any on-going or future armed conflicts, terrorist activities, tension along the Israeli borders or with other countries in the region, including Iran, or political instability in the region could disrupt international trading activities in Israel and may materially and negatively affect our business and could harm our results of operations.

Certain countries, as well as certain companies and organizations, continuefuture. Changes to participate in a boycott of Israeli companies, companies with large Israeli operations and others doing business with Israel and Israeli companies. The boycott, restrictive laws, policies or practices directed towards Israel, Israeli businesses or Israeli citizens could, individually or in the aggregate, have a material adverse effect on our business in the future.

Some of our officers and employees in Israel are obligated to perform routine military reserve duty in the Israel Defense Forces, depending on their age and position in the armed forces. Furthermore, they have been and may in the future be called to active reserve duty at any time under emergency circumstances for extended periods of time. Our operations could be disrupted by the absence, for a significant period, of one or more of our officers or key employees due to military service, and any significant disruption in our operations could harm our business.

The tax benefits that are available to our Israeli subsidiary require it to continue to meet various conditions and may be terminated or reduced in the future, which could increase its taxes.

Our Israeli subsidiary benefits from a status of a “Beneficiary Enterprise” under the Israeli Law for the Encouragement of Capital Investments, 5719-1959,existing rules or the Investment Law. Based on an evaluationquestioning of the relevant factors under the Investment Law, including the level of foreign (i.e., non-Israeli) investment in our company, we have determined that the effective tax rate to be paid by our Israeli subsidiary as a “Beneficiary Enterprise” has historically been approximately 10%. If our Israeli subsidiary does not meet the requirements for maintaining this status, for example, if the Israeli subsidiary materially changes the nature of its business or, if the level of foreign investment in our company decreases, itcurrent practices may no longer be eligible to enjoy this reduced tax rate. As a result, our Israeli subsidiary would be subject to Israeli corporate tax at the standard rate, which, as of January 1, 2018, was set at 23%. Even if our Israeli subsidiary continues to meet the relevant requirements, the tax benefits that the status of “Beneficiary Enterprise” provides may not be continued in the future at their current levels or at all. If these tax benefits were reduced or eliminated, the amount of taxes that our Israeli subsidiary would pay would likely increase, as all of our Israeli operations would consequently be subject to corporate tax at the standard rate, which could adversely affect our results of operations. Additionally, if our Israeli subsidiary increases its activities outside of Israel, for example, through acquisitions, these activities may not be eligible for inclusion in Israeli tax benefit programs. The tax benefits derived from the status of “Beneficiary Enterprise” is dependent upon the ability to generate sufficient taxable income. Accordingly, our Israeli subsidiary may be unable to earn enough taxable income in order to fully utilize its tax benefits.

Risks Related to the Ownership of our Common Stock

Our stock price has been and will likely continue to be volatile.

The market price for our common stock has been, and is likely to continue to be, volatile for the foreseeable future. For example, since shares of our common stock were sold in our initial public offering (“IPO”) in March 2014 at a price of $22.00 per share, our common stock’s price on The Nasdaq Global Select Market has ranged from $13.25 to $56.80 through February 9, 2018. On February 9, 2018, the closing price of our common stock was $52.40. The market price of our common stock may fluctuate significantly in response to a number of factors, many of which we cannot predict or control, including the factors listed below and other factors described in this “Risk Factors” section:

In addition, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many technology companies. Stock prices of many technology companies have fluctuated in a manner unrelated or disproportionate to the operating performance of those companies. In the past, stockholders have instituted securities class action litigation following periods of market volatility. If we were to become involved in securities litigation, it could subject us to substantial costs, divert resources and the attention of management from our business and adversely affect our business, results of operations, financial condition and cash flows.

If securities or industry analysts do not publish research or reports about our business, or publish negative reports about our business, our stock price and trading volume could decline.

Substantial future sales of shares of our common stock could cause the market price of our common stock to decline.

Sales of a substantial number of shares of our common stock into the public market, or the perception that these sales might occur, could depress the market price of our common stock and could impair our ability to raise capital through the sale of additional equity securities. We are unable to predict the effect that such sales may have on the prevailing market price of our common stock.

As of December 31, 2017, we had options and restricted stock units (“RSUs”) outstanding that, if fully vested and exercised, would result in the issuance of approximately 3.5 million shares of our common stock. All of the shares of our common stock issuable upon exercise of options and vesting of RSUs have been registered for public resale under the Securities Act. Accordingly, these shares will be able to be freely sold in the public market upon issuance as permitted by any applicable vesting requirements.

The requirements of being a public company may strain our resources, divert management’s attention and affect our ability to attract and retain executive management and qualified board members.

As a public company, we are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the listing requirements of The Nasdaq Global Select Market and other applicable securities rules and regulations. Compliance with these rules and regulations have increased our legal and financial compliance costs, make some activities more difficult, time-consuming or costly and increase demand on our systems and resources.

The Exchange Act requires, among other things, that we file annual, quarterly and current reports with respect to our business and results of operations. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. In order to maintain and, if required, improve our disclosure controls and procedures and internal control over financial reporting to meet this standard, significant resources and management oversight is required. As a result, management’s attention may be diverted from other business concerns, which could adversely affect our business and results of operations. We may need to hire more employees in the future or engage outside consultants, which will increase our costs and expenses. In addition, changing laws, regulations and standards relating to corporate governance and public disclosure are creating uncertainty for public companies, increasing legal and financial compliance costs and making some activities more time consuming. These laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices.

Being a public company, these rules and regulations have made it more expensive for us to obtain director and officer liability insurance, and in the future we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified members of our board of directors, particularly to serve on our audit and compensation committees, and qualified executive officers.

As a result of disclosure of information in our filings with the SEC, our business and financial condition have become more visible, which we believe may result in threatened or actual litigation, including by competitors and other third parties. If such claims are successful, our business and results of operations could be adversely affected, and even if the claims do not result in litigation or are resolved in our favor, these claims, and the time and resources necessary to resolve them, could divert the resources of our management and adversely affect our business and results of operations.

Future sales and issuances of our capital stock or rights to purchase our capital stock could result in substantial dilution to our existing stockholders. We may sell common stock, convertible securities and other equity securities in one or more transactions at prices and in a manner as we may determine from time to time. If we sell any such securities in subsequent transactions, investors may be materially diluted. New investors in such subsequent transactions could gain rights, preferences and privileges senior to those of holders of our common stock.

We do not intend to pay dividends on our common stock, so any returns will be limited to the value of our stock.

We have never declared or paid cash dividends on our common stock. We currently anticipate that we will retain any future earnings and do not expect to pay any dividends in the foreseeable future. Any determination to pay dividends in the future will be at the discretion of our board of directors and will be dependent on a number of factors, including our financial condition, results of operations, capital requirements, general business conditions and other factors that our board of directors may deem relevant. In addition, the loan agreement for our credit facility contains a prohibition on the payment of cash dividends. Until such time that we pay a dividend, investors must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investments.

Anti-takeover provisions in our charter documents and under Delaware law could make an acquisition of us, which may be beneficial to our stockholders, more difficult and may prevent attempts by our stockholders to replace or remove our current management.

Provisions in our amended and restated certificate of incorporation and amended and restated bylaws may delay or prevent an acquisition of us or a change in our management. These provisions include:

authorizing “blank check” preferred stock, which could be issued by the board without stockholder approval and may contain voting, liquidation, dividend and other rights superior to our common stock, which would increase the number of outstanding shares and could thwart a takeover attempt;

a classified board of directors whose members can only be dismissed for cause;

the prohibition on actions by written consent of our stockholders;

the limitation on who may call a special meeting of stockholders;

the establishment of advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted upon at stockholder meetings; and

the requirement of at least 75% of the outstanding capital stock to amend any of the foregoing second through fifth provisions.

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In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which limits the ability of stockholders owning in excess of 15% of our outstanding voting stock to merge or combine with us. Although we believe these provisions collectively provide for an opportunity to obtain greater value for stockholders by requiring potential acquirers to negotiate with our board of directors, they would apply even if an offer rejected by our board were considered beneficial by some stockholders. In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the members of our management.

Item 1B.			Unresolved Staff Comments

We do not have any unresolved comments from the SEC staff.

Item 2.			Properties

Our corporate headquarters are located in New York City in an office consisting of approximately 31,000 square feet. This lease expires in February 2026, although we

We have the option to both terminate the lease in February 2023 and extend the lease for an additional five years. Additionally, we currently lease an office locatedoffices in Herzliya, Israel consisting of approximately 76,000 square feet, where we employ the majority our research and development team and a portion of our support and general and administrative teams. The lease for this office expires in December 2019, although we have the option to extend the lease for an additional five years. We also lease smallerhave offices in North Carolina and Cork, Ireland which serve as our primary U.S. and EMEA customer support and inside sales center, respectively. Additionally, we have an office in New York City and smaller offices in France, the United Kingdom, Ireland, Oregon, Virginia, Australia, Germany, the Netherlands, Luxembourg and Germany (whichBelgium which serve as regional sales offices and some of which are customer support centers) and a second office in Herzliya, Israel (which houses a portioncenters. Substantially all of our general and administrative team).

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office space is leased under long-term leases with varying expiration dates. We planbelieve that our facilities are adequate to investmeet our needs in additional space as needed to accommodate our growth.

the near future.

Item 3.			Legal Proceedings

We are not currently a party to any material litigation.

Item 4.			Mine Safety Disclosures

Not applicable.

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PART II

Item 5.			Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market for Registrant’s Common Equity

Our common stock has been listed on The NASDAQ Global Select Market under the symbol “VRNS” since February 28, 2014, the date of our initial public offering. The following table sets forth, for the periods indicated, the range of high and low sales prices for our common stock as reported by The NASDAQ Global Select Market:

		2017								2016
		High				Low				High				Low
First Quarter		$	31.80			$	25.20			$	19.87			$	13.25
Second Quarter			37.90				26.35				26.14				17.09
Third Quarter			43.05				35.45				30.63				22.07
Fourth Quarter			53.60				41.50				32.05				24.45

Dividend Policy

We have never declared or paid cash dividends on our common stock. We currently intend to retain any future earnings for use in the operation of our business and do not intend to declare or pay any cash dividends in the foreseeable future. Any further determination to pay dividends on our common stock will be at the discretion of our board of directors, subject to applicable laws, and will depend on our financial condition, results of operations, capital requirements, general business conditions and other factors that our board of directors considers relevant.

Stockholders

As of February 1, 2018,January 27, 2022, there were nineseven stockholders of record of our common stock, including The Depository Trust Company, which holds shares of our common stock on behalf of an indeterminate number of beneficial owners.

25

Issuance of Unregistered Securities

On October 29, 2021, we issued 43,439 shares of our Common Stock to the two founders of Polyrize. Such issuance was a portion of the consideration paid to the two founders in connection with the acquisition, and it was in lieu of a cash payment that otherwise would have been paid to them. Such shares were issued in reliance upon the exemption from registration available under Regulation S as the issuance of our securities was to individuals that were non-U.S. persons.

38

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STOCK PERFORMANCE GRAPH

The following shall not be deemed “filed” for purposes of Section 18 of the Exchange Act, or incorporated by reference into any of our other filings under the Exchange Act or the Securities Act, except to the extent we specifically incorporate it by reference into such filing.

This chart compares the cumulative total return on our common stock with that of the NASDAQ Composite Index and the NASDAQ Computer Index. The chart assumes $100 was invested at the close of market on February 28, 2014December 31, 2016 in our common stock, the NASDAQ Composite Index and the NASDAQ Computer Index, and assumes the reinvestment of any dividends. The stock price performance on the following graph is not necessarily indicative of future stock price performance.

The closing price of our common stock on December 29, 2017,31, 2021, the last trading day of our 20172021 fiscal year, was $48.55$48.78 per share.

 

Company/Index		2/28/2014				12/31/2014				12/31/2015				12/31/2016				12/31/2017
VRNS		$	100.00			$	74.61			$	42.73			$	60.91			$	110.34
NASDAQ Composite		$	100.00			$	109.66			$	115.94			$	124.64			$	159.84
NASDAQ Computer		$	100.00			$	116.57			$	123.85			$	139.05			$	192.95

Sales of Unregistered Securities

None.

26

Use of Proceeds from Public Offerings of Common Stock

On March 5, 2014, we closed our initial public offering of 5,520,000 million shares of common stock, including 5,300,436 shares of common stock sold by us (inclusive of 500,436 shares of common stock from the full exercise of the overallotment option of shares granted to the underwriters) and 219,564 shares of common stock sold by the selling stockholder at a price to the public of $22.00 per share. The offer and sale of all of the shares in the IPO were registered under the Securities Act pursuant to a registration statement on Form S-1 (Registration No. 333-191840), which was declared effective by the SEC on February 27, 2014. The offering commenced on February 28, 2014, closed on March 5, 2014 and did not terminate before all of the shares in the IPO that were registered in the registration statement were sold. Morgan Stanley & Co. LLC, Barclays Capital Inc., Jefferies LLC, RBC Capital Markets, LLC and Needham & Company, LLC acted as the underwriters. The aggregate offering price for shares sold in the offering was approximately $121.4 million. We did not receive any proceeds from the sale of shares by the selling stockholder. We raised approximately $106.1 million in net proceeds from the offering, after deducting underwriter discounts and commissions of approximately $8.2 million and other offering expenses of approximately $2.4 million.

No payments were made by us to directors, officers or persons owning ten percent or more of our common stock or to their associates, or to our affiliates, other than payments in the ordinary course of business to our officers for salaries and bonuses and to our non-employee directors as compensation for serving on our board of directors and the various committees thereof. There has been no material change in the planned use of proceeds from our IPO as described in our final prospectus filed with the SEC pursuant to Rule 424(b) under the Securities Act on March 3, 2014. Pending the uses described, we have invested the net proceeds in short-term securities such as certificates of deposit and money market funds.

Company/Index						12/31/2016						12/31/2017						12/31/2018						12/31/2019						12/31/2020						12/31/2021
Varonis Systems, Inc.						$	100.00					$	181.16					$	197.39					$	289.96					$	610.49					$	546.04
NASDAQ Composite						$	100.00					$	128.24					$	123.26					$	166.68					$	239.42					$	290.63
NASDAQ Computer						$	100.00					$	138.77					$	133.66					$	200.94					$	301.37					$	415.46

Purchase of Equity Securities by Issuer and Affiliated Purchasers

None.

Item 6.

Selected Financial Data

The following selected consolidated historical financial data are derived from our audited financial statements. The consolidated balance sheet data as of December 31, 2017 and 2016 and the consolidated statement of operations data for the years ended December 31, 2017, 2016 and 2015 are derived from our audited consolidated financial statements and related notes that are included elsewhere in this Annual Report on Form 10-K. The consolidated balance sheet data as of December 31, 2015, 2014 and 2013 and the consolidated statement of operations for the years ended December 31, 2014 and 2013 are derived from our audited consolidated financial statements and related notes which are not included in this Annual Report. The information set forth below should be read in conjunction with our historical financial statements, including the notes thereto, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included elsewhere in this Annual Report.

		Year Ended December 31,
		2017				2016				2015				2014				2013
		(in thousands, except share and per share data)
Consolidated Statement of Operations Data:
Revenues:
Licenses		$	123,610			$	92,873			$	71,273			$	58,420			$	43,488
Maintenance and services			93,754				71,583				55,937				42,928				31,128
Total revenues			217,364				164,456				127,210				101,348				74,616
Cost of revenues(1)			20,873				15,843				12,019				9,911				6,476
Gross profit			196,491				148,613				115,191				91,437				68,140
Operating costs and expenses:
Research and development(1)			47,369				36,660				31,792				28,086				20,973
Sales and marketing(1)			135,896				107,825				86,367				68,787				44,131
General and administrative(1)			26,823				19,822				16,106				11,872				8,881
Total operating expenses			210,088				164,307				134,265				108,745				73,985
Operating loss			(13,597	)			(15,694	)			(19,074	)			(17,308	)			(5,845	)
Financial income (expenses), net			2,362				(885	)			(1,523	)			(1,714	)			(1,274	)
Loss before income taxes			(11,235	)			(16,579	)			(20,597	)			(19,022	)			(7,119	)
Income taxes			(2,459	)			(1,131	)			(686	)			(376	)			(356	)
Net loss		$	(13,694	)		$	(17,710	)		$	(21,283	)		$	(19,398	)		$	(7,475	)
Net loss per share of common stock, basic and diluted(2)		$	(0.50	)		$	(0.67	)		$	(0.84	)		$	(0.91	)		$	(1.93	)
Weighted average shares used to compute net loss per share attributable to common stockholders, basic and diluted			27,467,440				26,406,312				25,198,546				21,242,313				3,880,761

(1)       Includes non-cash stock-based compensation as follows:

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		Year Ended December 31,
		2017				2016				2015				2014				2013
		(in thousands)
Cost of revenues		$	1,078			$	699			$	419			$	192			$	39
Research and development			5,209				3,052				1,954				1,198				551
Sales and marketing			8,542				6,104				3,041				2,478				841
General and administrative			5,006				3,083				2,380				796				357
Total		$	19,835			$	12,938			$	7,794			$	4,664			$	1,788

(2)

Basic and diluted net loss per share of common stock is computed based on the weighted average number of shares of common stock outstanding during each period. For additional information, see Note 2.s to our consolidated financial statements included elsewhere in this Annual Report.

		As of December 31,
		2017				2016				2015				2014				2013
		(in thousands)
Consolidated Balance Sheet Data:
Cash, cash equivalents and short-term investments		$	136,557			$	113,808			$	106,344			$	111,695			$	13,977
Working capital			102,304				83,074				85,086				99,316				3,376
Total assets			232,152				181,838				165,144				156,847				47,254
Deferred revenues, current and long-term			80,925				62,040				48,771				37,217				28,700
Warrants to purchase convertible preferred stock			—				—				—				—				2,866
Convertible preferred stock			—				—				—				—				43,775
Total stockholders’ equity (deficiency)			101,578				82,739				83,587				95,026				(43,008	)

None.

Item 7.			Management’s Discussion and Analysis of Financial Condition and Results of Operations

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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 Annual Report on Form 10-K. This discussion contains forward-looking statements that reflect our plans, estimates and beliefs, and involve risks and uncertainties. Our actual results and the timing of certain events could differ materially from those anticipated in these forward-looking statements as a result of several factors, including those discussed in the section titled “Risk Factors” included under Part I, Item 1A and elsewhere in this Annual Report. See “Special Note Regarding Forward-Looking Statements”Statements and Summary Risk Factors” in this Annual Report.

COVID-19 and the Digital Transformation

In December 2019, COVID-19 was first reported in China; in January 2020, the World Health Organization (”WHO”) declared it a Public Health Emergency of International Concern; and in March 2020, the WHO declared it a pandemic. The ongoing measures taken by many governments around the world in response to the pandemic together with its unpredictability and duration, have meaningfully impacted businesses and changed the threat landscape of company data.

We believe that COVID-19 accelerated the global digital transformation, which, as it continues to gain traction across almost all industries, changes the way we live and work, and impacts how data is stored, managed and accessed. This transformation has fueled, and we expect will continue to fuel, the secular trends that drive demand for our products, including the shift to the cloud; increase in cybercrime; and compliance with data-driven regulations. These trends impact the way organizations operate and have increased our long-term opportunity to help our customers protect their data, detect threats and achieve regulatory compliance.

Companies around the world are focused on the elevated risks associated with having a highly distributed workforce collaborating on multiple platforms and we believe this trend will continue in the long-term and that we are well positioned to capitalize on the opportunity ahead. As companies of all sizes and industries are increasingly facing cyberattacks, they understand that a data-centric approach to security is critical and that the aforementioned elevated risks are here for the long-term. This has caused significant customer engagement which has converted into new business and expansion of existing business.

Overview

Varonis is a pioneer in data security and analytics, fighting a different battle than conventional cybersecurity companies. We are pioneers because over a decademore than 15 years 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 mediumsthat rapid data growth combined with increasing information dependence would change both the global economy and the risk profiles of corporations and government.governments. This conviction has only strengthened over time. Since thenour founding, our focus has been on using innovation to address the cyber-implications of this movement,these trends, creating software that provides new ways to track, alert and protect data wherever it is stored.

Our software allows enterprises

In 2021, we introduced an update to protect data stored on premisesour platform to help customers combat insider and collaboration risks in the cloud:Microsoft 365. The update increases insight into organization-wide exposures related to Microsoft 365, adds new threat detection capabilities in Azure AD, adds support for additional NAS solutions and versions, and enhances search granularity for locating sensitive files and emails; confidential customer, patientpersonal data. We also launched DatAdvantage Cloud, introducing licenses and employee data; financial records; strategicsupport for additional cloud applications and product plans;infrastructure, including AWS, Box, GitHub, Google Drive, Jira, Okta, Salesforce, Slack and other intellectual property. RecognizingZoom. DatAdvantage Cloud will help customers visualize and prioritize their biggest cloud risks, proactively reduce their blast radius, and conduct faster cross-cloud investigations. Additionally, we introduced Data Classification Cloud for Google Drive and Box to help automatically identify sensitive information in these mission-critical SaaS applications. While we do not expect these products to meaningfully contribute to our 2022 revenues, we believe they offer significant potential in extending the complexities of securing data, we have built a single integrated platform for security and analytics to simplify and streamline security and data management.

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The Varonis Data Security Platform built on patented technology,to cloud applications where our customers continue to move sensitive data. For a full business and product overview, see "Part I, Item 1. Business."

In the first quarter of 2019, we announced our strategic shift to a subscription-based business model, which allows enterprises to 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 product efficiently sustains a secure state with automation and addresses additional important use cases including governance, compliance, classification and threat analytics. 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 overbetter unleash the information transferredpower of our platform through corporate e-mails. In 2011,faster adoption of our integrated products. The transition, which we introduced DatAdvantage for Directory Services for increased visibility into Active Directory.

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 supportcompleted in 2020, has positioned us well for the following Microsoft Office 365 data stores: Exchange Online, SharePoint Online, OneDrivefuture, and, Active Directory hostedalthough revenues are still primarily front-end loaded, they are more predictable and recurring 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 thatnature. For the 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 have continued to update our web UI for DatAlert and added new threat models to detect suspicious mailbox, Exchange and Exchange Online behaviors, password resets, unusual activity from personal devices and more. 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 GDPR and expanded our offerings that can help enterprises meet compliance and regulation requirements. Finally, in early 2018, we introduced Varonis Edge to extend our proactive security approach to the perimeter enabling customers to spot signs of attack at the perimeter with telemetry from DNS, VPN and Web Proxies.

At the coreended December 31, 2021, 99% of our technology is our ability to intelligently extractlicenses revenues are subscriptions and analyze metadata from an enterprise’s vast, distributed data stores. The broad applicability99% of our technology has resulted in our customers deploying our platform for numerous use cases for security, IT, operations and business personnel.total revenues are recurring. We currently have six product families, and, asover thirty-five licenses. As of December 31, 2017, approximately 52%2021, 73% of our customers with 500 employees or more had purchased products in twofour or more families, one of which was DatAdvantage for all of these customers. We believe our existing customer base serves aslicenses, compared to 63% a strong source of incremental revenues given our broad platform of products, their growing volumesyear ago, and complexity of enterprise data and associated security concerns.41% purchased six or more licenses, compared to 30% a year ago. Our maintenance renewal rate for each of the years ended December 31, 2017, 20162021, 2020 and 2015 was2019 continued to be over 90%. Our key strategies to ensure and maintain oura high subscription and maintenance renewal rate include focusing on the quality and reliability of our customer service and support to

40

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ensure our customers receive value from our products and providing consistent software upgrades and having sufficient dedicated renewal sales personnel.

29

enhancements when and if they are available.

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 allacross industries and allacross geographies, the marketing focus and majority of our sales focus is on targeting organizations with 1,000 users or more who can make larger initial purchases with us and, over time, and have a greater potential lifetime value. As of December 31, 2017, we had approximately 6,250Our customers spanningspan leading firms in the financial services, public, healthcare, public, industrial, insurance, energy and utilities, technology, consumer and retail, education, media and entertainment and technologyeducation sectors. We believe our existing customer count isbase serves as a key indicatorstrong source of incremental future revenues given our market penetrationbroad platform of products, their growing volumes and the value that our products bring to our customer base. We also believe our existing customers represent significant future revenue opportunities for us.complexity of enterprise data and related security concerns. We will continue our focus on targeting organizations with 1,000 users or more who can make larger purchases with us initially and over time. The average spending per customer for each of the years ended December 31, 2017, 2016 and 2015 was approximately $83,000, $65,000 and $59,000, respectively.

We believe there is a significant long termlong-term growth opportunity in both domestic and foreign markets, which could include any organization that uses file shares, SaaS applications, intranets and email for collaboration, regardless of region.collaboration. For the year ended December 31, 2017, approximately 62%2021, 72% of our revenues were derived from the United States,North America, while Europe, the Middle East and Africa accounted for approximately 32%26% of our revenues were derived from EMEA and Rest of World (“ROW”) accounted for approximately 6% of our revenues. Growth in the US was strong, increasing 28% and 34%, respectively,2% from ROW. Additionally, total revenues grew approximately 33% for the three months and year ended December 31, 2017 as compared2021. We continue to the comparable periods in the prior year. In EMEA, growth for the three months and year ended December 31, 2017 was 52% and 34%, respectively, as compared to the comparable periods in the prior year. We expect both continued sales growth in the United StatesNorth America and international expansion to be key components of our long-term growth strategy, and we will continue to market our products and services in international markets.

strategy.

We plan to continue to expand our domestic and international operations as part of our long-term growth strategy. TheWhile the expansion of our domestic operations is focused primarily on our underpenetrated territories, 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

Since inception, we have continued to scale our products, services, including initial maintenance contractsbusiness and professional services, and renewals. Substantially all of our license sales are derived from a platform of products, consisting of DatAdvantage, Data Classification Engine, DataPrivilege and Data Transport Engine. As of December 31, 2017, 2016 and 2015, 93.6%, 92.8% and 92.5% of our customers, respectively, had purchased DatAdvantage; 41.2%, 35.2% and 30.5% of our customers, respectively, had purchased Data Classification Engine; 15.1%, 16.0% and 17.2% of our customers, respectively, had purchased DataPrivilege and 6.3%, 5.5% and 4.5% of our customers, respectively, had purchased Data Transport Engine. As of December 31, 2017, 2016 and 2015, 41.1%, 44.7% and 47.4% of our customers, respectively, made standalone purchases of DatAdvantage, and less than 0.4% of our customers made standalone purchases of DataPrivilege. As of December 31, 2017, our customers made no standalone purchases of Data Classification Engine or Data Transport Engine. Licenses sales accountedexecute on strategic initiatives which we believe have positioned us for 56.9%, 56.5% and 56.0% of our total revenues fordurable long-term growth. For the years ended December 31, 2017, 20162021, 2020 and 2015,2019, subscription revenues were $268.9 million, $161.2 million, and $76.7 million, respectively, representing year-over-year growth of 67% and 110%. For the years ended December 31, 2021, 2020 and 2019, our total revenues were $390.1 million, $292.7 million and $254.2 million, respectively.

We have achieved significant This represents year-over-year growth of 33% for the year ended December 31, 2021 and scale in recent periods utilizing our15% for the year ended December 31, 2020, the year we transitioned to a subscription-based business model. For the years ended December 31, 2017, 20162021, 2020 and 2015, our revenues were $217.4 million, $164.5 million and $127.2 million, respectively, representing year-over-year growth of 32% and 29%. For the years ended December 31, 2017, 2016 and 2015,2019, we had operating losses of $13.6$98.7 million, $15.7$78.4 million and $19.1$76.0 million and net losses of $13.7$116.9 million, $17.7$94.0 million and $21.3$78.8 million, respectively.

Key Performance Indicators and Recent Business Highlights

Annual Recurring Revenues

Annual recurring revenues is a key performance indicator defined as the annualized value of active term-based subscription license contracts and maintenance contracts related to perpetual licenses in effect at the end of that period. Subscription license contracts and maintenance for perpetual license contracts are annualized by dividing the total contract value by the number of days in the term and multiplying the result by 365.

As of December 31, 2021, 2020 and 2019, ARR was $387.1 million, $287.3 million and $210.5 million, respectively, an increase of 35% and 37% period over period. The annualized value of contracts is a legal and contractual determination made by assessing the contractual terms with our customers. The annualized value of maintenance contracts is not determined by reference to historical revenues, deferred revenues or any other GAAP financial measure over any period. ARR is not a forecast of future revenues and can be impacted by contract start and end dates and renewal rates. We expect ARR to continue to increase in absolute dollars.

Components of Operating Results

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Revenues

Our revenues consist of licenses and maintenance and services revenues.

License

Subscription Revenues. License Subscription revenues reflectare sold on-premises and are recognized at the revenues recognized from salespoint of time when the software licenses to new customerslicense has been delivered and sales of additional licenses to existing customers who can purchase additional users for existing licenses or purchase new licenses. Substantially all of our license revenues consist of revenues from perpetual licenses, under which we generally recognize the license fee portionbenefit of the arrangement upon delivery, assuming all revenue recognition criteria are satisfied. Customers may also purchase term license agreements, under which we recognize the license feeasset has transferred. Maintenance associated with subscription licenses is recognized ratably on a straight-line basis, over the term of the underlying maintenanceagreement. In 2021, we launched our cloud offering that allow customers to use hosted software and its revenue is recognized ratably over the associated contract whichperiod. As we only introduced these licenses in the second half of 2021, the contribution to total revenues has not yet been significant, nor is typically upit expected to one year.be significant in 2022. Subscription licenses have become the largest component of our revenues and are expected to be an even more significant portion of our total revenues in the future. Due to the timing of the renewals and the subscription renewal rates, 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.

30

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.available. We recognize the revenues associated with maintenance ratably on a straight-line basis, over the associated maintenancecontract period. We measure the perpetual license maintenance renewal rate for our customers over a 12-month period, based on a dollar maintenance renewal rate for contracts expiring during that time period. Our maintenance renewal rate for each of the years ended December 31, 2017, 20162021, 2020 and 2015 has been2019 continued to be over 90%. We have seen and expect to continue to see insignificant perpetual license revenues in the future and, therefore, we expect maintenance and support of perpetual licenses to continue to decline despite the strong renewal rates. We also offer professional services, generally provided on a time and materials basis, focused on both deployment and training our customers to fully leveragein the use of our products. 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.

Although professional services have always been a small percentage of our total revenues, we have recently seen, and expect to continue to see, that percentage decline as many of our newer licenses can provide remediation in more automated ways. As such, our overall maintenance and services revenues is also expected to continue to decline.

Perpetual License Revenues. Perpetual license revenues are generally recognized with the license fee portion of the arrangement upon delivery as the benefit of the asset has transferred. Due to the successful completion of our transition to a subscription-based business model, perpetual license revenues have meaningfully decreased and now represent an immaterial percentage of our total revenues.

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.

		Year Ended December 31,
		2017				2016				2015
		(as a percentage of total revenues)
Revenues:
Licenses			56.9	%			56.5	%			56.0	%
Maintenance and services			43.1	%			43.5	%			44.0	%
Total revenues			100.0	%			100.0	%			100.0	%

			Year Ended December 31,
			2021						2020						2019
			(as a percentage of total revenues)
Revenues:
Subscriptions			68.9		%				55.1		%				30.1		%
Maintenance and services			30.6		%				44.4		%				53.3		%
Perpetual licenses			0.5		%				0.5		%				16.6		%
Total revenues			100.0		%				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 December 31, 2017, we had approximately 6,250Our customers acrossspan a broad array of company sizesindustries and industriesare located in over 7585 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; amortization of acquired intangible assets; travel expenses; and allocated overhead costs for facilities, IT and depreciation of equipment.depreciation. We recognize expenses related to maintenance and services as they are incurred. We expect that our cost of maintenance and services

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revenues will increase in absolute dollars as we increasecontinue to invest in our headcount tocustomer success and support revenue growth.

teams and programs that play a critical role in our subscription-based business model and our overall renewals.

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 has historically fluctuated slightly from period to period as a resultAs the majority of changes in the mix of licenseour expenses are relatively fixed quarter over quarter and maintenance and services revenues. Duedue 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.year. 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.facilities, IT and depreciation. Allocated costs for facilities primarily consist of rent and office maintenance. Operating costs and expenses are generally recognized as incurred. As a company, we have always aimed to tie our level of investment in the business to the revenues we expect to achieve and we actively manage expenses across the business. We expect personnel costs to continue to increase in absolute dollars as we hire new employees to continue to grow our business.

31

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 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.

products through the hiring of talented and capable employees.

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 also expect sales and marketing expenses to continue to be our largest category of operating costs and expenses as we continue to expand our business worldwide.

expenses.

General and Administrative.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 expenseexpenses 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.

operations.

Financial Income (Expenses), Net

Financial income (expenses), net consist primarily of foreign exchange gains or losses, amortization of debt discount and net interest.issuance costs, interest expense 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. Brexit,Other factors such as well as other member countries public discussions about the possibility of withdrawing from the European Union,economic instability 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. NetAmortization of debt discount and issuance costs relate to the 2025 Notes we issued in May 2020 and the Credit Facility we entered into in August 2020. Interest expense consists of the contractual interest expenses associated with the 2025 Notes. Interest income represents interest income received on our cash, cash equivalents, marketable securities and short-term investments.

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.

provision. 

43

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Because of our history of U.S. and Israel net operating losses, we have established a full valuation allowance against potential future benefits for deferred tax assets, including loss carryforwards, in those jurisdictions; however, we have recorded a deferred tax asset of $0.2 million as of December 31, 2017 for other foreign jurisdictions.that jurisdiction. 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 continuousregular examinations of our income tax returns by different tax authorities. For example, we are currently subject to a withholding tax audit in Israel and state tax audits in the United States. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes.

On December 22, 2017, the TCJA was signed into law making significant changes to the Code. These changes include, but are not limited to:

·

A corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017;

·

The transition of U.S international taxation from a worldwide tax system to a territorial system;

32

·

A one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017 (“Deemed Repatriation Transition Tax”);

·

Taxation of global intangible low-taxed income (“GILTI”) earned by foreign subsidiaries beginning after December 31, 2017. The GILTI tax imposes a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations; and

·

Taxation of base erosion and anti-abuse (“BEAT”) payments made by U.S. corporations to foreign related parties. The BEAT tax applies only to corporation with average gross domestic sales of $500 million over three successive years.

We have calculated our best estimate of the impact of the TCJA in our year end income tax provision in accordance with our understanding of the TCJA and guidance available as of the date of this filing. As a result:

·

While we are able to make reasonable estimates of the impact of the reduction in corporate rate and the deemed repatriation transition tax, the final impact of the TCJA may differ from these estimates, due to, among other things, changes in our interpretations and assumptions, additional guidance that may be issued by the IRS, and actions we may take. We are continuing to gather additional information to determine the final impact of the TCJA.

·

Due to the aggregated accumulated deficits of our foreign subsidiaries, we should not be subject to any transition tax under this provision of the TCJA.

·

Because of the complexity of the new GILTI tax rules, we have not yet completed our analysis of the GILTI tax rules and are not yet able to reasonably estimate the effect of this provision of the TCJA or make an accounting policy election for the ASC 740 treatment of the GILTI tax.

We should not be subject to BEAT during 2018 due to the gross domestic sales threshold.

33

Results of Operations

The following tables are a summary of our consolidated statements of operations in dollars and as a percentage of our total revenues.

		Year Ended December 31
		2017				2016				2015
		(in thousands)
Statement of Operations Data:
Revenues:
Licenses		$	123,610			$	92,873			$	71,273
Maintenance and services			93,754				71,583				55,937
Total revenues			217,364				164,456				127,210
Cost of revenues			20,873				15,843				12,019
Gross profit			196,491				148,613				115,191
Operating costs and expenses:
Research and development			47,369				36,660				31,792
Sales and marketing			135,896				107,825				86,367
General and administrative			26,823				19,822				16,106
Total operating expenses			210,088				164,307				134,265
Operating loss			(13,597	)			(15,694	)			(19,074	)
Financial income (expenses), net			2,362				(885	)			(1,523	)
Loss before income taxes, net			(11,235	)			(16,579	)			(20,597	)
Income taxes			(2,459	)			(1,131	)			(686	)
Net loss		$	(13,694	)		$	(17,710	)		$	(21,283	)

		Year Ended December 31,
		2017				2016				2015
		(as a percentage of total revenues)
Statement of Operations Data:
Revenues:
Licenses			56.9	%			56.5	%			56.0	%
Maintenance and services			43.1				43.5				44.0
Total revenues			100.0				100.0				100.0
Cost of revenues			9.6				9.6				9.4
Gross profit			90.4				90.4				90.6
Operating costs and expenses:
Research and development			21.8				22.3				25.0
Sales and marketing			62.6				65.6				67.9
General and administrative			12.3				12.1				12.7
Total operating expenses			96.7				100.0				105.6
Operating loss			(6.3	)			(9.6	)			(15.0	)
Financial income (expenses), net			1.1				(0.5	)			(1.2	)
Loss before income taxes, net			(5.2	)			(10.1	)			(16.2	)
Income taxes			(1.1	)			(0.7	)			(0.5	)
Net loss			(6.3	)%			(10.8	)%			(16.7	)%

34

			Year Ended December 31,
			2021						2020						2019
			(in thousands)
Statement of Operations Data:
Revenues:
Subscriptions			$	268,942					$	161,188					$	76,730
Maintenance and services			119,302						130,028						135,367
Perpetual licenses			1,890						1,473						42,093
Total revenues			390,134						292,689						254,190
Cost of revenues			59,399						44,261						35,144
Gross profit			330,735						248,428						219,046
Operating expenses:
Research and development			137,882						99,363						80,764
Sales and marketing			230,314						179,902						169,898
General and administrative			61,233						47,578						44,371
Total operating expenses			429,429						326,843						295,033
Operating loss			(98,694)						(78,415)						(75,987)
Financial expenses, net			(12,145)						(7,483)						(389)
Loss before income taxes			(110,839)						(85,898)						(76,376)
Income taxes			(6,022)						(8,112)						(2,388)
Net loss			$	(116,861)					$	(94,010)					$	(78,764)

44

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			Year Ended December 31,
			2021						2020						2019
			(as a percentage of total revenues)
Statement of Operations Data:
Revenues:
Subscriptions			68.9		%				55.1		%				30.1		%
Maintenance and services			30.6						44.4						53.3
Perpetual licenses			0.5						0.5						16.6
Total revenues			100.0						100.0						100.0
Cost of revenues			15.2						15.1						13.8
Gross profit			84.8						84.9						86.2
Operating expenses:
Research and development			35.4						33.9						31.8
Sales and marketing			59.0						61.5						66.8
General and administrative			15.7						16.3						17.5
Total operating expenses			110.1						111.7						116.1
Operating loss			(25.3)						(26.8)						(29.9)
Financial expenses, net			(3.1)						(2.5)						(0.1)
Loss before income taxes			(28.4)						(29.3)						(30.0)
Income taxes			(1.6)						(2.8)						(1.0)
Net loss			(30.0)		%				(32.1)		%				(31.0)		%

Comparison of Years Ended December 31, 20172021 and 2016

2020

Revenues

		Year Ended December 31,
		2017				2016				% Change
		(in thousands)
Revenues:
Licenses		$	123,610			$	92,873				33.1	%
Maintenance and services			93,754				71,583				31.0	%
Total revenues		$	217,364			$	164,456				32.2	%

		Year Ended December 31,
		2017				2016
		(as a percentage of total revenues)
Revenues:
Licenses			56.9	%			56.5	%
Maintenance and services			43.1	%			43.5	%
Total revenues			100.0	%			100.0	%

Total revenue growth was achieved due

			Year Ended December 31,
			2021						2020						% Change
			(in thousands)
Revenues:
Subscriptions			$	268,942					$	161,188					66.8		%
Maintenance and services			119,302						130,028						(8.2)		%
Perpetual licenses			1,890						1,473						28.3		%
Total revenues			$	390,134					$	292,689					33.3		%

			Year Ended December 31,
			2021						2020
			(as a percentage of total revenues)
Revenues:
Subscriptions			68.9		%				55.1		%
Maintenance and services			30.6		%				44.4		%
Perpetual licenses			0.5		%				0.5		%
Total revenues			100.0		%				100.0		%

45

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Subscription revenues increased 67% from $161.2 million for the year ended December 31, 2020 to increased demand$268.9 million for our products and services from existing and new customers, mostly in the domestic market, as well as in international markets.year ended December 31, 2021. The increase in licensesubscription revenues was driven by sales to existing customers larger aggregate sales to 987expanding their licenses, new customers in 2017customer acquisitions and our high subscription renewal rate. Total revenues increased approximately 33% for the year ended December 31, 2021 as compared to the aggregate sales to 1,098 new customers in 2016year ended December 31, 2020. ARR was $387.1 million and sales of new products. As$287.3 million as of December 31, 20172021 and 2016, we had approximately 6,250 and approximately 5,350 customers, respectively. Almost all2020, respectively, representing an increase of our license revenues was attributable to sales of perpetual licenses.35%. The increaseanticipated decrease 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 2017 and 2016,insignificant new perpetual licenses revenue despite our maintenance renewal rate wascontinuing to be over 90%. Of for each of the licenseyears ended December 31, 2021 and first year2020, as well as, newer licenses providing remediation in more automated ways, requiring less professional services time. As a result, we expected, and continue to expect less associated maintenance and services revenues recognized in the year ended December 31, 2017, 54% was attributable to revenues from new customers, and 46% was attributable to revenues from existing customers. Of the license and first year maintenance and services revenues recognized in the year ended December 31, 2016, 58% was attributable to revenues from new customers, and 42% was attributable to revenues from existing customers.future. As of December 31, 2017 and 2016, 52% and 48%2021, 73% of our customers respectively,with 500 employees or more had purchased twofour or more product families.

licenses, compared to 63% a year ago, and 41% purchased six or more licenses, compared to 30% a year ago.

Cost of Revenues and Gross Margin

		Year Ended December 31,
		2017				2016				% Change
		(in thousands)
Cost of revenues		$	20,873			$	15,843				31.7	%

		Year Ended December 31,
		2017				2016
		(as a percentage of total revenues)
Total gross margin			90.4	%			90.4	%

			Year Ended December 31,
			2021						2020						% Change
			(in thousands)
Cost of revenues			$	59,399					$	44,261					34.2		%

			Year Ended December 31,
			2021						2020
			(as a percentage of total revenues)
Total gross margin			84.8		%				84.9		%

The increase in cost of revenues was primarily related to an increase of $3.7$13.4 million in salaries and benefits and stock basedstock-based compensation expense due to increased headcount for customer success and support personnel to supportensure high customer satisfaction and maintain our greater revenues and highstrong renewal rate andrates. The increase was also due to a $0.9$1.5 million increase in amortization of acquired intangible assets and facilities and allocated overhead costs.

35

Operating Costs and Expenses

		Year Ended December 31,
		2017				2016				% Change
		(in thousands)
Operating costs and expenses:
Research and development		$	47,369			$	36,660				29.2	%
Sales and marketing			135,896				107,825				26.0	%
General and administrative			26,823				19,822				35.3	%
Total operating expenses		$	210,088			$	164,307				27.9	%

		Year Ended December 31,
		2017				201
		(as a percentage of total revenues)
Operating costs and expenses:
Research and development			21.8	%			22.3	%
Sales and marketing			62.6	%			65.6	%
General and administrative			12.3	%			12.1	%
Total operating expenses			96.7	%			100.0	%

			Year Ended December 31,
			2021						2020						% Change
			(in thousands)
Operating costs and expenses:
Research and development			$	137,882					$	99,363					38.8		%
Sales and marketing			230,314						179,902						28.0		%
General and administrative			61,233						47,578						28.7		%
Total operating expenses			$	429,429					$	326,843					31.4		%

			Year Ended December 31,
			2021						2020
			(as a percentage of total revenues)
Operating costs and expenses:
Research and development			35.4		%				33.9		%
Sales and marketing			59.0		%				61.5		%
General and administrative			15.7		%				16.3		%
Total operating expenses			110.1		%				111.7		%

The increase in research and development expenses was primarily related to an increase of $8.7$36.7 million in salaries and stock basedbenefits and stock-based compensation expense resulting from increased headcount as part of our focus on enhancing and developing our existing and new products. The remainderproducts, including personnel costs related to our acquisition in the fourth quarter of the increase was attributable to a $1.6 million increase in facilities and allocated overhead costs.

2020.

46

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The increase in sales and marketing expenses was primarily related to a $23.4$49.3 million increase in salaries and benefits and stock basedstock-based compensation expense due to increased headcount to expand our sales force and commissions on increased customer orders. The remainder of the increase was attributable to a $3.3 million increase in facilities and allocated overhead costs and a $0.6 million increase in marketing related expenses.

The increase in general and administrative expenses was primarily related to an increase of $5.0$13.0 million in salaries and benefits and stock basedstock-based compensation expense primarily due to increased headcount to support the overall growth of our businessbusiness.

Financial Expenses, Net

			Year Ended December 31,
			2021						2020						% Change
			(in thousands)
Financial expenses, net			$	(12,145)					$	(7,483)					62.3		%

The increase in financial expenses, net was primarily due to the amortization of debt discount and an increase of $1.6 million of other expenses predominately relating to IT.

Financial issuance costs and interest expense on our convertible senior notes and revolving credit facility.

Income (Expenses), Net

		Year Ended December 31,
		2017				2016				% Change
		(in thousands)
Financial income (expenses), net		$	2,362			$	(885	)			366.9	%

Financial income (expense), netTaxes

			Year Ended December 31,
			2021						2020						% Change
			(in thousands)
Income taxes			$	(6,022)					$	(8,112)					(25.8)		%

Income taxes for the year ended December 31, 2017 was primarily comprised of foreign currency gains compared to foreign currency losses for the year ended December 31, 2016.

Income Taxes

		Year Ended December 31,
		2017				2016				% Change
		(in thousands)
Income taxes		$	(2,459	)		$	(1,131	)			(117.4	)%

Income taxes for the years ended December 31, 2017 and 20162021 were comprised primarily of foreign income taxes and state taxes.

36

Income taxes for the year ended December 31, 2020 were comprised primarily of a one-time tax expense related to our acquisition, foreign income taxes and state taxes.

Inflation

We do not believe that inflation rates have 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.

Comparison of Years Ended December 31, 20162020 and 2015

Revenues

		Year Ended December 31,
		2016				2015				% Change
		(in thousands)
Revenues:
Licenses		$	92,873			$	71,273				30.3	%
Maintenance and services			71,583				55,937				28.0	%
Total revenues		$	164,456			$	127,210				29.3	%

		Year Ended December 31,
		2016				2015
		(as a percentage of total revenues)
Revenues:
Licenses			56.5	%			56.0	%
Maintenance and services			43.5	%			44.0	%
Total revenues			100.0	%			100.0	%

Total revenue growth was achieved due to increased demand for our products and services from existing and new customers, mostly in the domestic market, as well as in international markets. The increase in license revenues was driven by sales to 1,098 new customers in 2016 compared to 1,065 new customers in 2015, sales to existing customers and sales of new products. As of December 31, 2016 and 2015, we had approximately 5,350 and approximately 4,350 customers, respectively. Almost all2019

For a comparison of our license revenues was attributable to salesresults of perpetual licenses. 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 2016 and 2015, our maintenance renewal rate was over 90%. Of the license and first year maintenance and services revenues recognized in the year ended December 31, 2016, 58% was attributable to revenues from new customers, and 42% was attributable to revenues from existing customers. Of the license and first year maintenance and services revenues recognized in the year ended December 31, 2015, 63% was attributable to revenues from new customers, and 37% was attributable to revenues from existing customers. As of December 31, 2016 and 2015, 48% and 45% of our customers, respectively, had purchased two or more product families.

Cost of Revenues and Gross Margin

		Year Ended December 31,
		2016				2015				% Change
		(in thousands)
Cost of revenues		$	15,843			$	12,019				31.8	%

		Year Ended December 31,
		201				2015
		(as a percentage of total revenues)
Total gross margin			90.4	%			90.6	%

The increase in cost of revenues was primarily related to an increase of $3.7 million in salaries and benefits and stock based compensation expense due to increased headcount for support.

37

Operating Costs and Expenses

		Year Ended December 31,
		2016				2015				% Change
		(in thousands)
Operating costs and expenses:
Research and development		$	36,660			$	31,792				15.3	%
Sales and marketing			107,825				86,367				24.8	%
General and administrative			19,822				16,106				23.1	%
Total operating expenses		$	164,307			$	134,265		��		22.4	%

		Year Ended December 31,
		2016				2015
		(as a percentage of total revenues)
Operating costs and expenses:
Research and development			22.3	%			25.0	%
Sales and marketing			65.6	%			67.9	%
General and administrative			12.1	%			12.7	%
Total operating expenses			100.0	%			105.6	%

The increase in research and development expenses was primarily related to an increase of $4.7 million in salaries and stock based compensation expense resulting from increased headcount as part of our focus on enhancing and developing our existing and new products.

The increase in sales and marketing expenses was primarily related to a $19.6 million increase in salaries and benefits and stock based compensation expense due to increased headcount to expand our sales force, and commissions on increased customer orders. The remainder of the increase was attributable to a $1.3 million increase in marketing related expenses.

The increase in general and administrative expenses was primarily related to an increase of $3.3 million in salaries and benefits and stock based compensation expense due to increased headcount to support the overall growth of our business and an increase of $0.4 million of other expenses predominately relating to IT.

Financial Expenses, Net

		Year Ended December 31,
		2016				2015				% Change
		(in thousands)
Financial expenses, net		$	(885	)		$	(1,523	)			41.9	%

For the years ended December 31, 2016 and 2015, financial expenses, net were primarily comprised of foreign exchange losses.

Income Taxes

		Year Ended December 31,
		2016				2015				% Change
		(in thousands)
Income taxes		$	(1,131	)		$	(686	)			(64.9	)%

Income taxesoperations for the years ended December 31, 20162020 and 2015 were comprised primarily2019, see “Part II, Item 7. Management’s Discussion and Analysis of foreign income taxesFinancial Condition and state taxes.

38

Quarterly Results of Operations

The following table sets forth” of our unaudited quarterly consolidated statement of operations dataAnnual Report on Form 10-K for each of the eight quartersyear ended December 31, 2017. The data presented below has been prepared2020, filed with the SEC on the same basis as the audited consolidated financial statements included elsewhere in this Annual Report and, in the opinion of management, reflects all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of this data. ThisFebruary 9, 2021, which comparative information should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Annual Report. The results of historical periods are not necessarily indicative of the results of operations for a full year or any future period.

		Three Months Ended
		Dec. 31, 2017				Sept. 30, 2017				June 30, 2017				March 31, 2017				Dec. 31, 2016				Sept. 30, 2016				June 30, 2016				March 31, 2016
		(in thousands)
Revenues:
Licenses		$	46,626			$	29,409			$	28,420			$	19,155			$	34,696			$	22,591			$	21,742			$	13,844
Maintenance and services			26,583				24,192				21,754				21,225				19,713				18,346				16,899				16,626
Total revenues			73,209				53,601				50,174				40,380				54,409				40,937				38,641				30,470
Cost of revenues (1)			5,887				5,436				4,878				4,672				4,510				4,116				3,721				3,496
Gross profit			67,322				48,165				45,296				35,708				49,899				36,821				34,920				26,974
Operating costs and expenses:
Research and development (1)			13,559				11,903				11,498				10,409				9,627				9,290				8,905				8,837
Sales and marketing (1)			39,723				32,802				32,560				30,811				30,212				26,410				26,840				24,364
General and administrative  (1)			8,017				6,711				6,582				5,513				5,449				5,051				4,760				4,562
Total operating expenses			61,299				51,416				50,640				46,733				45,288				40,751				40,505				37,763
Operating income (loss)			6,023				(3,251	)			(5,344	)			(11,025	)			4,611				(3,930	)			(5,585	)			(10,789	)
Financial income (expenses), net			321				622				950				469				(739	)			(187	)			(605	)			645
Income (loss) before income taxes			6,344				(2,629	)			(4,394	)			(10,556	)			3,872				(4,117	)			(6,190	)			(10,144	)
Provision for income taxes			(810	)			(685	)			(641	)			(323	)			(350	)			(272	)			(303	)			(206	)
Net income (loss)		$	5,534			$	(3,314	)		$	(5,035	)		$	(10,879	)		$	3,522			$	(4,389	)		$	(6,493	)		$	(10,350	)

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is herein incorporated by reference.

		Three Months Ended
		Dec. 31, 2017				Sept. 30, 2017				June 30, 2017				March 31, 2017				Dec. 31, 2016				Sept. 30, 2016				June 30, 2016				March 31, 2016
		(as a percentage of total revenues)
Revenues:
Licenses			63.7	%			54.9	%			56.6	%			47.4	%			63.8	%			55.2	%			56.3	%			45.4	%
Maintenance and services			36.3				45.1				43.4				52.6				36.2				44.8				43.7				54.6
Total revenues			100.0				100.0				100.0				100.0				100.0				100.0				100.0				100.0
Cost of revenues			8.0				10.1				9.7				11.6				8.3				10.1				9.6				11.5
Gross profit			92.0				89.9				90.3				88.4				91.7				89.9				90.4				88.5
Operating costs and expenses:
Research and development			18.5				22.2				22.9				25.8				17.7				22.7				23.1				29.0
Sales and marketing			54.3				61.2				64.9				76.2				55.5				64.5				69.5				79.9
General and administrative			11.0				12.6				13.1				13.7				10.0				12.3				12.3				15.0
Total operating expenses			83.8				96.0				100.9				115.7				83.2				99.5				104.9				123.9
Operating income (loss)			8.2				(6.1	)			(10.6	)			(27.3	)			8.5				(9.6	)			(14.5	)			(35.4	)
Financial income (expenses), net			0.5				1.2				1.9				1.2				(1.4	)			(0.5	)			(1.5	)			2.1
Income (loss) before income taxes			8.7				(4.9	)			(8.7	)			(26.1	)			7.1				(10.1	)			(16.0	)			(33.3	)
Provision for income taxes			(1.1	)			(1.3	)			(1.3	)			(0.8	)			(0.6	)			(0.6	)			(0.8	)			(0.7	)
Net income (loss)			7.6	%			(6.2	)%			(10.0	)%			(26.9	)%			6.5	%			(10.7	)%			(16.8	)%			(34.0	)%

(1)

Includes non-cash stock-based compensation expense and payroll tax expense related to stock-based compensation as follows:

		Three Months Ended
		Dec. 31, 2017				Sept. 30, 2017				June 30, 2017				March 31, 2017				Dec. 31, 2016				Sept. 30, 2016				June 30, 2016				March 31, 2016
		(in thousands)
Cost of revenues		$	295			$	283			$	273			$	227			$	195			$	186			$	172			$	146
Research and development			1,404				1,374				1,301				1,130				789				805				793				665
Sales and marketing			2,265				1,856				2,362				2,059				1,688				1,613				1,628				1,175
General and administrative			1,426				1,269				1,323				988				811				854				780				638
Total non-cash stock-based compensation expense related to employees and consultants		$	5,390			$	4,782			$	5,259			$	4,404			$	3,483			$	3,458			$	3,373			$	2,624

		Three Months Ended
		Dec. 31, 2017				Sept. 30, 2017				June 30, 2017				March 31, 2017				Dec. 31, 2016				Sept. 30, 2016				June 30, 2016				March 31, 2016
		(in thousands)
Cost of revenues		$	21			$	25			$	12			$	33			$	2			$	2			$	9			$	13
Research and development			12				27				13				15				9				9				2				8
Sales and marketing			243				213				166				319				15				40				60				63
General and administrative			8				8				8				35				2				3				8				14
Total payroll tax expense related to stock-based compensation		$	284			$	273			$	199			$	402			$	28			$	54			$	79			$	98

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Seasonality and Quarterly Trends

Our quarterly results reflect seasonality in the sale of our products and services. Historically, we have experienced a pattern of increased license sales in the fourth quarter. This trend makes it difficult to achieve sequential revenue growth in the first quarter of the following year. Because of customer budget and purchasing trends, demand for our products and services is typically slowest in the first quarter, resulting in a decrease in quarterly revenues from the fourth quarter to the first quarter of the subsequent fiscal year. We expect these seasonal patterns to continue in the future. Our gross margins and operating lossmargins have been affected by these historical trends because the majority of our expenses are relatively fixed quarter over quarter. The timing of revenues in relation to ourOur expenses, much of which doesdo not vary directly with revenues, hasand the seasonal pattern described above have an impact on the cost of revenues, research and development expenses, sales and marketing expenses and general and administrative expenses as a percentage of revenues in each calendar quarter during the year. The majority of our expenses isare personnel-related costs, which consists of salaries (including payroll tax expense related to stock-based compensation), employee benefits (including commissions and bonuses) and stock-based compensation. As a result, we have not experienced significant seasonal fluctuations in the timing of expenses

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from period to period. Although these seasonal factors are common in the technology industry, historical patterns should not be considered a reliable indicator of our future sales activity or performance.

Our revenues increased in each quarter as compared with the same quarter in the prior year due to an increase in sales of our licenses to new customers as well as incremental sales to existing customers and due to increases in our maintenance and services revenues primarily resulting from increases in our installed base of customers.

Cost of revenues has increased in each quarter as compared with the same quarter in the prior year primarily due to the increased cost of providing maintenance and services to our expanding customer base.

Total operating costs and expenses increased in each quarter as compared with the same quarter in the prior year, primarily due to the addition of personnel in connection with the expansion of our business. Furthermore, our commission expense has historically been the greatest towards the end of the year due to increased commissions earned on customer orders entered at year end.

Liquidity and Capital Resources

The following table shows our liquidity and capital resources as of and our cash flows from operating activities, investing activities and financing activities for the stated periods:

		Year Ended December 31,
		2017				2016				2015
		(in thousands)
Net cash provided by (used in) operating activities		$	16,351			$	7,347			$	(2,729	)
Net cash used in investing activities			(20,001	)			(12,324	)			(26,522	)
Net cash provided by financing activities			12,083				4,072				2,055
Increase (decrease) in cash, cash equivalents and restricted cash		$	8,433			$	(905	)		$	(27,196	)

years ended December 31, 2021 and 2020. For a discussion of our liquidity and capital resources as of and our cash flow activities for the fiscal year ended December 31, 2019, see “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on February 9, 2021, which discussion is herein incorporated by reference.

			Year Ended December 31,
			2021						2020
			(in thousands)
Net cash provided by (used in) operating activities			$	7,178					$	(5,842)
Net cash provided by (used in) investing activities			54,379						(54,748)
Net cash provided by financing activities			510,112						225,753
Increase in cash and cash equivalents			$	571,669					$	165,163

On December 31, 2017,2021, our cash and cash equivalents and short-term investmentsdeposits of $136.6$807.6 million were held for working capital purposes and were investedheld primarily in short-term investments.cash and money market funds. We intendhave proactively taken steps to increase our investment in capital expenditures in 2018available cash, including, but not limited to, supportissuing a follow-on equity offering and the growth in our business2025 Notes, and operations. Wewe believe that our existing cash and cash equivalents, short-term investmentsdeposits 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 of revenue growth, timing of renewals and subscription renewal rates, 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.

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Operating Activities

Net cash provided by

Our operating activities isare 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 amortization, stock-based compensation, amortization of deferred commissions, noncash operating lease costs and amortization of debt discount and issuance costs, 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 deferred revenues which represents unearned amounts billed to our channel partners, related to these sales.

For 2017,2021, cash inflows from ourprovided by operating activities were $16.4 million, compared to$7.2 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 negative sequential revenue 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 2021, sources of cash inflows of $7.3were $33.0 million, for the prior year. Our $13.7 millionwhich included our net loss includedof $116.9 million, offset by non-cash charges of $23.1 million driven primarily by increased headcount$149.9 million. Additional sources of our sales force and R&D personnel. Net loss was further offset bycash inflows were from changes in our working capital, including an $18.9 million increase in deferred revenues and a $14.5$5.9 million increase in accrued expenses and other short term liabilities, which werea $5.4 million increase in deferred revenues, a $4.5 million increase in trade payables, a $1.6 million increase in other long-term liabilities and a $1.4 million decrease in other long-term assets. This was partially offset by a $21.7$23.0 million increase in accounts receivable. This increase in working capital was impacted by the increased sales for the year ended December 31, 2017 and consistent with the seasonal pattern discussed above. Other changes in our working capital included an increase of $3.3 million in prepaid expenses and other current assets, a decrease of $0.7 million in accounts payable due to timing of payments and a decrease of $0.7 million in other long term liabilities. Our days’ sales outstanding (“DSO”) for the three months and year ended December 31, 20172021 was 7774 and 72 days,69, respectively.

For 2016, cash inflows from our operating activities were $7.3 million, compared to Other sources of cash outflows of $2.7were from a $21.7 million for the prior year. Our $17.7 million net loss included non-cash charges of $15.1 million driven primarily by increased headcount of our sales force and R&D personnel. Net loss was further offset by changes in our working capital, including a $13.3 million increase in deferred revenues and a $5.3 million increase in accrued expenses and other short term liabilities which were partially offset by a $6.4 million increase in accounts receivable. This increase in working capital was impacted by the increased sales for the year ended December 31, 2016 and consistent with the seasonal pattern discussed above. Other changes in our working capital included a decrease of $1.3 million in accounts payable due to timing of payments and a decrease of $1.0 million in prepaid expenses and other current assets.assets (including deferred commissions).

For 2020, cash used in operating activities were $5.8 million.  For 2020, sources of cash outflows were from changes in working capital, including a $19.7 million increase in prepaid expenses and other current assets (including deferred commissions) and a $19.1 million increase in accounts receivable. Our DSO for the three months and year ended December 31, 20162020 was 74 days.

For 2015,77 and 76, respectively. Additional sources of cash outflows were from a $0.3 million decrease in trade payables and

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a $0.2 million decrease in deferred revenues. This was partially offset by $10.4 million from our operating activities were $2.7 million, compared to cash outflows of $7.1 million for the prior year, mainly related to an increase innet loss excluding non-cash charges, which exceeded the increase in net loss year over year. Our $21.3 million net loss included non-cash charges of $9.4 million driven primarily by increased headcount of our sales force and R&D personnel. Net loss was further offset by changes in our working capital, including an $11.6 million increase in deferred revenues and a $6.3$16.1 million increase in accrued expenses and other short term liabilities, which were partially offset by a $9.6$5.5 million increase in accounts receivable. This increase in working capital was impacted by the increased sales for the year ended December 31, 2015other long-term liabilities and consistent with the seasonal pattern discussed above. Other changes in our working capital included a decrease of $0.8$1.4 million in prepaid expenses and other current assets and an increase of $0.1 milliondecrease in other long term liabilities. Our DSO for the three months and year ended December 31, 2015 was 80 and 84 days, respectively.

long-term assets.

Investing Activities

Our investing activities consist primarily of capital expenditures to purchase property and equipment, including leasehold improvements, salespurchase and purchasessale of short-term investmentsdeposits and changes in our restricted cash.marketable securities. In the future, we expect to continue to incur capital expenditures to support our expanding operations.

During 2017,2021, net cash used inprovided by investing activities of $20.0$54.4 million was primarily attributable to an increase$34.1 million of $14.7net proceeds from marketable securities and $30.8 million of net proceeds from short-term and long-term deposits. This was partially offset by $10.5 million in short-term investments and capital expenditures of $5.3 million to support our growth during the period including hardware, software, office equipment and leasehold improvements.

improvements mainly in connection with existing office space.

During 2016,2020, net cash used in investing activities of $12.3$54.7 million was attributable to $29.4 million of cash paid for an acquisition, a $22.7 million increase of $8.5in short-term and long-term deposits and $10.1 million in short-term investments and capital expenditures of $3.8 million to support our growth during the period including hardware, software, office equipment and leasehold improvements.

During 2015, net cash usedimprovements mainly in investing activitiesconnection with new office space that we entered into prior to the outbreak of $26.5the pandemic. This was partially offset by a $7.4 million was primarily attributable to an increase of $22.0 milliondecrease in short-term investments and capital expenditures of $4.5 million to support our growth during the period including hardware, software, office equipment and leasehold improvements.

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marketable securities.

Financing Activities

In 2017, 2016 and 2015,2021, net cash provided by financing activities of $12.1$510.1 million $4.1 million and $2.1 million, respectively, was attributable to $500.0 million of net proceeds from a public follow-on offering of equity and $10.1 million of net proceeds from employee stock plans.

Promissory Note

In 2020, net cash provided by financing activities of $225.8 million was attributable to $245.3 million of net proceeds from the issuance of convertible senior notes and $9.8 million of net proceeds from employee stock plans. This was partially offset by $29.3 million related to purchases of capped calls associated with the convertible senior notes.

Revolving Credit Facility

On March 31, 2014,August 21, 2020, we entered into the Credit and Security Agreement, for a promissory notethree-year secured revolving credit facility of $70.0 million, with a letter of credit sublimit of $15.0 million and related security documents with Bank Leumi USA. We may borrowan accordion feature under which we can increase the credit facility to up to $7.0 million against certain$90.0 million. For information regarding the revolving credit facility, refer to Note 2 of our accounts receivable outstanding amount, based on several conditions, at an annual interest rate of the Wall Street Journal Prime Rate less 0.15%, provided that the annual interest rate applicable to advances will not be lower than 4.10%. consolidated financial statements.

As of December 31, 2017, that rate amounted to 4.35%. 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 August 15, 2018 at which time the principal sum of each such loan, together with accrued and unpaid interest payable, will become due and payable. As of December 31, 2017,2021, we had no balance outstanding underon the promissory note. As partCredit Facility and we were in compliance with all financial covenants and non-financial covenants.

Convertible Notes

On May 11, 2020, we issued $253.0 million aggregate principal amount of the transaction,2025 Notes. The net proceeds from the offering, after deducting initial purchaser discount and issuance costs, were approximately $245.2 million. In connection with the issuance of the 2025 Notes, we grantedentered into the lenderCapped Call Transactions. We used $29.3 million of the net proceeds from the 2025 Notes to purchase the Capped Call Transactions, as further discussed in Note 7 of our consolidated financial statements.

Common Stock Split

On February 8, 2021, we announced a security interestthree-for-one split of our common stock to stockholders of record as of the close of business on March 12, 2021. Trading of our common stock began on a split-adjusted basis on March 15, 2021. Common stock and per share data in our personal property, excluding intellectual property and other intangible assets. The promissory note also contains customary eventsthis Annual Report on Form 10-K have been adjusted for the impact of default.

the split.

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 December 31, 20172021 for the upcoming years were as follows:

										Payments Due by Period
		2018				2019				2020				2021				2022				Thereafter				Total
																		(in thousands)
Operating lease obligations		$	6,418			$	5,561			$	4,335			$	4,561			$	4,587			$	21,063			$	46,525

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			Payments Due by Period
			2022						2023						2024						2025						2026						Thereafter						Total
			(in thousands)
Operating lease obligations			$	10,932					$	11,347					$	9,845					$	9,884					$	9,998					$	34,583					$	86,589

We have obligations related to unrecognized tax benefit liabilities totaling $3.4$9.3 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 December 31, 2017,2021, 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.

Revenue Recognition:

We generate revenues in the form of software license fees and related maintenance and services fees. Subscription revenues are sold on-premises and are comprised of time-based licenses whereby customers use our software (including support and unspecified upgrades and enhancements when and if they are available) for a specified period. Perpetual licenses have the same functionality as subscriptions. Maintenance and services primarily consist of fees for maintenance and services of perpetual license sales (including support and unspecified upgrades and enhancements when and if they are available) and to a lesser extent professional services, (including training)which focus on both operationalizing the software and training our customers to fully leverage the use of our products, although the user can benefit from the software without our assistance. In 2021, we launched our cloud offering that are not essentialallows customers to functionality of ouruse hosted software. We sell our products worldwide directly to a network of distributors and Value Added Resellers (VARs).

value-added resellers, and payment is typically due within 30 to 60 calendar days of the invoice date.

We account for the sale of perpetual softwarerecognize revenues in accordance with ASC No. 985-605, “Software Revenue Recognition.606, “Revenue from Contracts with Customers.” As required by ASC 985-605,such, we identify a contract with a customer, identify the performance obligations in the contract, determine the value oftransaction price, allocate the transaction price to each performance obligation in the contract and recognize revenues when (or as) we satisfy a performance obligation.

Subscription software component of its multiple-element arrangements using the residual method when vendor specific objective evidence (VSOE) of fair value exists for the undelivered elements of maintenance and professional services agreements. VSOE is based on the price charged when an element is sold separately or renewed. Under the residual method, the fair value of the undelivered elements is deferred, and the remaining portion of the arrangement fee is allocated to the delivered elements and is recognized as revenue, when all ASC 985-605 criteria for revenue recognition are met.

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We determine the fair value based on the stand alone sales price charged for maintenance and professional services. We have defined classes of transactions based on the value of licensed software products purchased from us. We price renewals for each class of transaction as a fixed percentage of the total gross value of licensed software products the customer purchased.

Softwareperpetual license revenues are recognized when persuasive evidenceat the point of an arrangement exists,time when the software license has been delivered there are no uncertainties surrounding product acceptance, there are no significant future performance obligations,and the license fees are fixed or determinable and collectionbenefit of the license feeasset has transferred. Maintenance associated with subscription licenses is considered probable. Fees for arrangements with payment terms extending beyond customary payment terms are considered not to be fixed or determinable, in which case revenue is deferred and recognized when payments become due from the customer provided that all other revenue recognition criteria have been met.

We recognize revenues from the sale of term license arrangements, ratably on a straight-line basis, over the term of the underlyingagreement. In 2021, we launched our cloud offering that allows customers to use hosted software and its revenue is recognized ratably over the associated contract and is typically up to one year.

period. As we only introduced these licenses in the second half of 2021, the total revenues have not yet been significant.

We recognize revenues from maintenance of perpetual license sales ratably over the term of the underlying maintenance contract term.contract. The term of the maintenance contract is usually one year.

Renewals of maintenance contracts create new performance obligations that are satisfied over the new term with the revenues recognized ratably over the period.

Revenues from professional services consist mostly of time and material servicesservices. The performance obligations are satisfied, and accordingly,revenues are generally recognized, aswhen the services are performedprovided or whenonce the service term has expired.

Professional

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We enter into contracts that can include combinations of products and services, bundled with licensedwhich 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 and otherwithout any professional services, updates or technical support. We allocate the transaction price to each performance obligation based on our relative standalone selling price out of the total consideration of the contract. For maintenance, we determine the standalone selling prices based on the price at which we separately sell a renewal contract. For professional services, we determine the standalone selling prices based on the price at which we separately sell those services. For software related elements are not essentiallicenses, we use the residual approach to determine the standalone selling prices due to the functionalitylack of history of selling software license on a standalone basis and the other elementshighly variable sales price.

Trade receivables are generally recorded at the invoice amount mostly for a one year period, net of the arrangement. Revenues allocable to the services are recognized as the services are performed or when the service term has expired, using VSOEan allowance for such services.

credit losses.

Deferred revenues represent mostly unrecognized fees billed or collected for maintenance and professional services.

Deferred revenues are recognized as (or when) we perform under the contract. Pursuant to these contracts, customers are not invoiced for subsequent years until the annual renewal occurs. The amount of revenues recognized in the period that was included in the opening deferred revenues balance was $98.1 million for the year ended December 31, 2021.

We do not grant a right of return to our customers, except for one of our resellers. During the years ended December 31, 2017, 20162021, 2020 and 2015,2019, there were no returns from this reseller.

For information regarding disaggregated revenues, please refer to Note 14 to our consolidated financial statements.

Contract Costs:

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

Accounting for Stock-Based Compensation:

We account for stock-based compensation in accordance with ASC No. 718, “Compensation-Stock Compensation.” ASC No. 718 requires companies to estimate the fair value of equity-based payment awards on the date of grant using an Option-Pricing Model (“OPM”). The value of the portion of the award that is ultimately expected to vest is recognized as an expense over the requisite service periods in our consolidated statements of operations.

Model. We recognize compensation expenses for the value of our equity awards granted based on the straight-line method over the requisite service period of each of the awards. Upon adoption of ASU 2016-09, we elected to change our accounting policy to

Business Combinations:

We account for forfeituresour business combinations using the acquisition method of accounting, which requires, among other things, allocation of the fair value of purchase consideration to the tangible and intangible assets acquired and liabilities assumed at their estimated fair values on the acquisition date. The excess of the fair value of purchase consideration over the values of these identifiable assets and liabilities is recorded as they occur.

We applied ASC 718goodwill. When determining the fair value of assets acquired and ASC 505-50, “Equity-Based Payments to Non-Employees”liabilities assumed, we make estimates and assumptions, especially with respect to options issuedintangible assets. Our estimates of fair value are based upon assumptions believed to non-employee consultants. Accordingly,be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. During the measurement period, not to exceed one year from the date of acquisition, we usemay record adjustments to the assets acquired and liabilities assumed, with a corresponding offset to goodwill if new information is obtained related to facts and circumstances that existed as of the acquisition date. After the measurement period, any subsequent adjustments are reflected in the consolidated statements of operations. Acquisition costs, such as legal and consulting fees, are expensed as incurred.

Convertible Senior Notes:

We account for our convertible senior notes in accordance with ASC 470-20 "Debt with Conversion and Other Options" and separated the Notes into liability and equity components. The carrying amounts of the liability component of the Notes were calculated by measuring the fair value of similar debt instruments that do not have an associated convertible feature. The

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carrying amounts of the equity components, representing the conversion option, valuation models to measurewere determined by deducting the fair value of the options atliability components from the measurement date as defined in ASC 505-50.

We selected the Black-Scholes-Merton option pricing model as the most appropriate fair value method for our stock options awards, whereas the fair value of restricted stock units is based on the marketpar value of the underlying shares at2025 Notes. This difference represents the date of grant.

Recently Issued Accounting Pronouncements

In May 2014,debt discount that is amortized to interest expense over the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers”, an updated standard on revenue recognition and issued subsequent amendments to the initial guidance in March 2016, April 2016, May 2016 and December 2016 within ASU 2016-08, 2016-10, 2016-12 and 2016-20, respectively. The new standards provide enhancements to the quality and consistency of how revenue is reported while also improving comparability in the financial statements of companies reporting using IFRS and US GAAP. The core principleterms of the new standard is for companies to recognize revenue to depict2025 Notes using the transfer of goods or services to customers in amounts that reflect the consideration (that is, payment) to which the company expects to be entitled in exchange for those goods or services.effective interest rate method. The new standard also will result in enhanced disclosures about revenue, provide guidance for transactions that were not previously addressed comprehensively (for example, service revenue and contract modifications) and improve guidance for multiple-element arrangements. ASU 2014-09 was initially scheduled to be effective for annual and interim reporting periods beginning after December 15, 2016 and may be adopted either on a full retrospective or modified retrospective approach. However, on July 9, 2015, the FASB approved a one year deferralcarrying amount of the effective date of ASU 2014-09. equity components representing the conversion option was approximately $31.8 million for the 2025 Notes and is recorded in additional paid-in capital and are not remeasured as long as they continue to meet the conditions for equity classification.

The revised effective date is for annual reporting periods beginning after December 15, 2017 and interim periods thereafter, with an early adoption permitted as of the original effective date. We have decided to adopt this standard effective January 1, 2018 using the full retrospective method which will require each prior reporting period presented to be recast in future issuances of our financial statements. In preparation for adoption of the standard, we have implemented internal controls and key system functionality to enable the preparation of financial information and have reached conclusions on key accounting assessmentsCompany allocates transaction costs related to the standard, including our assessmentissuance of the impact.

44

The most significant impact2025 Notes to the liability and equity components using the same proportions as the initial carrying value of the new standard relatesNotes. Transaction costs attributable to the way we account for term agreementsliability component were approximately $6.9 million and commission expense. Specifically, under the current revenue standard, we recognize both the term license and maintenance revenues ratably over the contract period whereas under the new revenue standard we would recognize term license revenues upfront and the associated maintenance revenues over the contract period. We have also considered the impact of the guidance in ASC 340-40, “Other Assets and Deferred Costs” under the new standard. Under ASC 340-40, we may be requiredare being amortized to capitalize and amortize certain incremental costs of obtaining a contract such as the maintenance portion of sales commissions over the life of the license. Under our current accounting policy, we do not capitalize sales commission costs but rather recognize these costs when the purchase order is received.

Adoption of the standard will result in a reduction of revenues of $2.0 million for the year ended December 31, 2017 and recognition of additional revenues of $1.4 million for the year ended December 31, 2016, primarily due to the net change in term license revenue recognition. In addition, adoption of the standard will result in an increase in prepaid expenses and other current assets and a decrease in deferred revenues of $9.9 and $0.1 million, respectively, as of December 31, 2017, driven by the capitalization of sales commission costs and the upfront recognition of license revenues from term licenses. The cumulative impact to our accumulated deficit as of January 1, 2016 is a reduction of $5.6 million.

Adoption of the standard related to revenue recognition had no impact to cash from or used in operating, financing or investing activities on our consolidated statements of cash flows.

Select recast financial statement information, which reflects the preliminary effect of the adoption of this standard, is set forth below.

		Year ended December 31, 2017
		As Reported				Adjustments				Recast for Adoption of ASC 606
Total revenues		$	217,364			$	(1,974	)		$	215,390
Operating loss		$	(13,597	)		$	178			$	(13,419	)
Income taxes		$	(2,459	)		$	(328	)		$	(2,787	)
Net loss		$	(13,694	)		$	(151	)		$	(13,845	)

		Year ended December 31, 2016
		As Reported				Adjustments				Recast for Adoption of ASC 606
Total revenues		$	164,456			$	1,407			$	165,863
Operating loss		$	(15,694	)		$	3,699			$	(11,995	)
Income taxes		$	(1,131	)		$	(182	)		$	(1,313	)
Net loss		$	(17,710	)		$	3,517			$	(14,193	)

		December 31, 2017 Balance Sheet Data
		As Reported				Adjustments				Recast for Adoption of ASC 606
Assets
Current assets:
Prepaid expenses and other current assets		$	7,130			$	9,865			$	16,995
Liabilities and stockholders’ equity
Current liabilities:
Accrued expenses and other short term liabilities		$	42,453			$	1,014			$	43,467
Deferred revenues		$	73,891			$	(227	)		$	73,664
Long-term liabilities:
Deferred revenues		$	7,034			$	130			$	7,164

45

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 whether to early adopt this standard and the potential effect on our consolidated financial statements.

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 leaseinterest expense is recognized based onat an effective interest method or on a straight line basisrate of 4.51% 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 similar2025 Notes. Transaction costs attributable to the accounting under existing guidance for operating leases today. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leasesequity component were approximately $1.0 million and operating leases. ASC 842 supersedesare netted with the previous leases standard, ASC 840, "Leases". The guidance is effective for the interim and annual periods beginning on or after December 15, 2018, and early adoption is permitted. We are currently evaluating whether to early adopt this standard and the potential effectequity component of the guidance on our consolidated financial statements.

2025 Notes in additional paid-in capital.

Recently Adopted Accounting Pronouncements

We did not adopt any new accounting standards in the period ended December 31, 2021.

Recently Issued Accounting Pronouncements Not Yet Adopted

In November 2016,August 2020, the FASB issued ASU 2016-18, “Statement2020-06, ASC Subtopic 470-20 “Debt—Debt with “Conversion and Other Options” and ASC subtopic 815-40 “Hedging—Contracts in Entity’s Own Equity.” The standard reduced the number of Cash Flows (Topic 230): Restricted Cash”,accounting models for convertible debt instruments and convertible preferred stock. Convertible instruments that continue to be subject to separation models are (1) those with embedded conversion features that are not clearly and closely related to the host contract, that meet the definition of a derivative, and that do not qualify for a scope exception from derivative accounting and (2) convertible debt instruments issued with substantial premiums for which the premiums are recorded as paid-in capital. Among other potential impacts, ASU 2020-06 will reduce reported interest expense, and thereby decrease reported net loss, and result in a reclassification of certain conversion feature balance sheet amounts from stockholder’s equity to liabilities as it relates to the Company’s 2025 Notes. Additionally, ASU 2020-06 requires companiesthe application of the if-converted method to include amounts generally described as restricted cash and restricted cash equivalentscalculate the impact of convertible instruments on earnings per share. The amendments in cash and cash equivalents when reconciling beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This ASU isthis update are effective for annual and interim periodsfiscal years beginning after December 15, 2017.2021, including interim periods within those fiscal years, and can be adopted on either a fully retrospective or modified retrospective basis. We have decided to adoptadopted this standard effective December 31, 2017on January 1, 2022 using thea modified retrospective transition method, as required by the new standard. The adoptionbasis which resulted in a decrease to accumulated deficit of this standard has$8.6 million, a decrease in additional paid-in capital of $30.8 million and an immaterial impactincrease in liabilities of $22.1 million on our consolidated statements of cash flows.

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:

		December 31, 2017				December 31, 2016				December 31, 2015
Cash and cash equivalents		$	56,689			$	48,315			$	49,241
Long term restricted cash included in other assets			547				488				467
Cash, cash equivalents and long term restricted cash shown in the consolidated statement of cash flows		$	57,236			$	48,803			$	49,708

In January 2018, the FASB released guidance on the accounting for tax on the global intangible low-taxed income provisions of the TCJA. The GILTI provisions impose a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations. The guidance indicates that either (i) accounting for deferred taxes related to GILTI inclusions, or (ii) to treat any taxes on GILTI inclusions as period cost, are both acceptable methods subject to an accounting policy election. In accordance with SEC Staff Accounting Bulletin No. 118, and as we are not yet able to reasonably estimate the effect of the GILTI tax, as described in note 9 to our consolidated financial statements, we have not yet adopted an accounting policy with respect to the GILTI tax.

sheets.

Item 7A.			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.

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or speculative 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 or speculative 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.

Foreign Currency Exchange Risk

Approximately 30%one quarter of our revenues for the years ended December 31, 20172021 and 20162020 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 CanadianAustralian dollar. Our NIS-denominatedforeign currency expenses consist primarily of personnel and overhead costs from our operations in Israel.international operations. 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. TheWe enter into financial hedging strategies to reduce our exposure to foreign currency rate changes.

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During 2021, the effect of a hypothetical 10% change in foreign currency exchange rates applicable to our business, after considering foreign currency hedges, would not have had 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,period.

Historically, 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 generally 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 and liabilities 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 trading or speculative or trading purposes.

Interest Rate Risk

We had cash and cash equivalents and short-term investmentsdeposits of $136.6$807.6 million as of December 31, 2017.2021. We hold our cash and cash equivalents and short-term investmentsdeposits 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.

The effect of a hypothetical 10% change in interest rates would not have a material impact on our consolidated financial statements.

In May 2020, we issued $253.0 million aggregate principal amount of 1.25% convertible senior notes due in 2025. The 2025 Notes have fixed annual interest rates at 1.25% and, therefore, we do not have economic interest rate exposure on our 2025 Notes. However, the values of the 2025 Notes are exposed to interest rate risk. Generally, the fair market value of our fixed interest rate 2025 Notes will increase as interest rates fall and decrease as interest rates rise. In addition, the fair values of the 2025 Notes are affected by our stock price. The fair value of the 2025 Notes will generally increase as our common stock price increases and will generally decrease as our common stock price declines in value. Additionally, we carry the 2025 Notes at face value less unamortized discount and issuance costs on our balance sheet, and we present the fair value for required disclosure purposes only.

As of December 31, 2017,2021, we had no outstanding obligations under our promissory note.credit facility. 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.

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Item 8.			Financial Statements and Supplementary Data

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

			Page
			Page
ReportReports of Independent Registered Public Accounting Firm (PCAOB ID No. 1281)			4855
Consolidated Balance Sheets			5159
Consolidated Statements of Operations			5361
Consolidated Statements of Comprehensive Loss			5462
Consolidated Statements of Changes in Stockholders’ Equity			5563
Consolidated Statements of Cash Flows			5664
Notes to Consolidated Financial Statements			5766

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			Kost Forer Gabbay & Kasierer 144 Menachem Begin Road, Building A Tel-Aviv 6492102, Israel			Tel: +972-3-6232525 Fax: +972-3-5622555 ey.com

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and the Board of Directors and Stockholders of

VARONIS SYSTEMS, INC.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Varonis Systems, Inc. and its subsidiaries (the "Company") as of December 31, 20172021, and 20162020 and the related consolidated statements of operations, statements of comprehensive loss, changes in stockholders’ equity and cash flows for each of the three years in the period ended December 31, 20172021, and the related notes (collectively referred to as the “financial“consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company at December 31, 20172021, and 20162020 and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2017,2021, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2017,2021, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 13, 20188, 2022, expressed an unqualified opinion thereon.

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current-period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which they relate.

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			Kost Forer Gabbay & Kasierer 144 Menachem Begin Road, Building A Tel-Aviv 6492102, Israel			Tel: +972-3-6232525 Fax: +972-3-5622555 ey.com

						Revenue Recognition
Description of the Matter						As described in Note 2.h to the consolidated financial statements, the Company generates revenues in the form of software license fees and related maintenance and services fees. Software license revenues are recognized at the point of time when the software license has been delivered and the benefit of the asset has been transferred. The Company recognizes revenues from maintenance ratably over the term of the underlying maintenance contract term. 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. 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. To account for promised goods and services, the Company allocates the transaction price to the distinct performance obligations on a relative standalone selling price basis and recognizes revenue when control of the distinct performance obligation is transferred. For maintenance and professional services, the Company determines the standalone selling prices based on the price at which the Company separately sells these 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 licenses on a standalone basis and the highly variable sales price. Auditing the Company’s recognition of revenue was challenging and complex due to the effort required to evaluate determination of whether products and services are considered distinct performance obligations that should be accounted for separately versus together, such as software licenses and related services, the determination of stand-alone selling prices for each distinct performance obligation and the timing of when revenue is recognized. Given these factors, the related audit effort in evaluating management’s judgments in determining revenue recognition was extensive and required a high degree of auditor judgment.
How We Addressed the Matter in Our Audit						We obtained an understanding, evaluated design and tested the operating effectiveness of internal controls related to the identification of distinct performance obligations, the determination of the stand-alone selling prices and of the timing of revenue recognition. Among the procedures we performed to test the identification and determination of distinct performance obligations, for a sample of contracts, we read the executed contract to understand and evaluated management’s identification of significant terms for completeness, including the identification of distinct performance obligations. To test management’s determination of stand-alone selling price for each performance obligation, we performed procedures to evaluate the methodology applied, tested the accuracy of the underlying data and calculations and the application of that methodology to the sample of contracts. We also tested the mathematical accuracy of management’s calculations of revenue and the associated timing of revenue recognized in the financial statements. Finally, we assessed the appropriateness of the related disclosures in the consolidated financial statements.

KOST FORER GABBAY & KASIERER

A Member of Ernst & Young Global

We have served as the Company’s auditor since 2007.

Tel-Aviv, Israel

February 13, 2018

8, 2022

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Kost Forer Gabbay & Kasierer 144 Menachem Begin Road, Building A Tel-Aviv 6492102, Israel

Tel: +972-3-6232525 Fax: +972-3-5622555 ey.com

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and the Board of Directors and Stockholders of

VARONIS SYSTEMS, INC.

Opinion on Internal Control over Financial Reporting

We have audited Varonis Systems, Inc. and its subsidiaries (the "Company"“Company”) internal control over financial reporting as of December 31, 2017,2021, based on criteria established in Internal Control – IntegratedControl-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the "COSO Criteria"criteria"). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017,2021, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 20172021, and 20162020 and the related consolidated statements of operations, statements of comprehensive loss, Changeschanges in Stockholders’ Equitystockholders’ equity and cash flows for each of the three years in the period ended December 31, 2017 of2021, and the Companyrelated notes, and our report dated February 13, 20188, 2022, expressed an unqualified opinion thereon.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management's Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.

Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

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Kost Forer Gabbay & Kasierer 144 Menachem Begin Road, Building A Tel-Aviv 6492102, Israel

Tel: +972-3-6232525 Fax: +972-3-5622555 ey.com

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/

KOST FORER GABBAY & KASIERER

A Member of Ernst & Young Global

We have served as the Company’s auditor since 2007.

Tel-Aviv, Israel

February 13, 2018

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8, 2022

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VARONIS SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands)

		December 31,
		2017				2016
Assets
Current assets:
Cash and cash equivalents		$	56,689			$	48,315
Short-term investments			79,868				65,493
Trade receivables (net of allowance for doubtful accounts of $ 433 and $ 372 at December 31, 2017 and at December 31, 2016, respectively)			75,596				53,861
Prepaid expenses and other current assets			7,130				3,650
Total current assets			219,283				171,319
Long-term assets:
Other assets			973				609
Property and equipment, net			11,896				9,910
Total long-term assets			12,869				10,519
Total assets		$	232,152			$	181,838

			December 31,
			2021						2020
Assets
Current assets:
Cash and cash equivalents			$	805,761					$	234,092
Marketable securities			—						34,117
Short-term deposits			1,850						30,053
Trade receivables (net of allowance of $2,754 and $1,250 at December 31, 2021 and December 31, 2020, respectively)			117,179						94,229
Prepaid expenses and other current assets			34,417						27,357
Total current assets			959,207						419,848
Long-term assets:
Operating lease right-of-use asset			63,749						47,924
Property and equipment, net			38,298						37,163
Intangible assets, net			4,313						5,846
Goodwill			23,135						23,135
Other assets			19,835						21,566
Total long-term assets			149,330						135,634
Total assets			$	1,108,537					$	555,482

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

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VARONIS SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

		December 31,
		2017				2016
Liabilities and stockholders’ equity
Current liabilities:
Trade payables		$	635			$	1,288
Accrued expenses and other short term liabilities			42,453				28,479
Deferred revenues			73,891				58,478
Total current liabilities			116,979				88,245
Long-term liabilities:
Deferred revenues			7,034				3,562
Other liabilities			6,561				7,292
Total long-term liabilities			13,595				10,854
Stockholders’ equity:
Share capital
Common stock of $ 0.001 par value—Authorized: 200,000,000 shares at December 31, 2017 and 2016; Issued and outstanding: 28,146,162 shares at December 31, 2017 and 26,821,762 shares at December 31, 2016			28				27
Accumulated other comprehensive income (loss)			136				(479	)
Additional paid-in capital			223,868				189,335
Accumulated deficit			(122,454	)			(106,144	)
Total stockholders’ equity			101,578				82,739
Total liabilities and stockholders’ equity		$	232,152			$	181,838

			December 31,
			2021						2020
Liabilities and stockholders’ equity
Current liabilities:
Trade payables			$	5,324					$	850
Accrued expenses and other short-term liabilities			102,226						83,198
Deferred revenues			104,221						98,588
Total current liabilities			211,771						182,636
Long-term liabilities:
Convertible senior notes, net			225,330						218,460
Operating lease liability			68,694						54,540
Deferred revenues			2,566						2,778
Other liabilities			3,583						2,997
Total long-term liabilities			300,173						278,775
Stockholders’ equity:
Share capital
Common stock of $0.001 par value - Authorized: 200,000,000 shares at December 31, 2021 and December 31, 2020; Issued and outstanding: 107,509,096 shares at December 31, 2021 and 95,456,862 shares at December 31, 2020			108						95
Accumulated other comprehensive income			6,083						9,371
Additional paid-in capital			1,018,005						395,347
Accumulated deficit			(427,603)						(310,742)
Total stockholders’ equity			596,593						94,071
Total liabilities and stockholders’ equity			$	1,108,537					$	555,482

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

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VARONIS SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per share data)

		Year ended December 31,
		2017				2016				2015
Revenues:
Licenses		$	123,610			$	92,873			$	71,273
Maintenance and services			93,754				71,583				55,937
Total revenues			217,364				164,456				127,210
Cost of revenues			20,873				15,843				12,019
Gross profit			196,491				148,613				115,191
Operating costs and expenses:
Research and development			47,369				36,660				31,792
Sales and marketing			135,896				107,825				86,367
General and administrative			26,823				19,822				16,106
Total operating expenses			210,088				164,307				134,265
Operating loss			(13,597	)			(15,694	)			(19,074	)
Financial income (expenses), net			2,362				(885	)			(1,523	)
Loss before income taxes			(11,235	)			(16,579	)			(20,597	)
Income taxes			(2,459	)			(1,131	)			(686	)
Net loss		$	(13,694	)		$	(17,710	)		$	(21,283	)
Net loss per share of common stock, basic and diluted		$	(0.50	)		$	(0.67	)		$	(0.84	)
Weighted average number of shares used in computing net loss per share of common stock, basic and diluted			27,467,440				26,406,312				25,198,546

			Year ended
			December 31,
			2021						2020						2019
Revenues:
Subscriptions			$	268,942					$	161,188					$	76,730
Maintenance and services			119,302						130,028						135,367
Perpetual licenses			1,890						1,473						42,093
Total revenues			390,134						292,689						254,190
Cost of revenues			59,399						44,261						35,144
Gross profit			330,735						248,428						219,046
Operating expenses:
Research and development			137,882						99,363						80,764
Sales and marketing			230,314						179,902						169,898
General and administrative			61,233						47,578						44,371
Total operating expenses			429,429						326,843						295,033
Operating loss			(98,694)						(78,415)						(75,987)
Financial expenses, net			(12,145)						(7,483)						(389)
Loss before income taxes			(110,839)						(85,898)						(76,376)
Income taxes			(6,022)						(8,112)						(2,388)
Net loss			$	(116,861)					$	(94,010)					$	(78,764)
Net loss per share of common stock, basic and diluted			$	(1.11)					$	(1.00)					$	(0.87)
Weighted average number of shares used in computing net loss per share of common stock, basic and diluted			105,305,957						94,336,893						90,772,230

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

53

61

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VARONIS SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(in thousands)

		2017				2016				2015
Net loss		$	(13,694	)		$	(17,710	)		$	(21,283	)
Other comprehensive income (loss):
Unrealized losses on short-term investments			(27	)			-				-
Unrealized gains (losses) on derivative instruments			642				(148	)			(5	)
Total other comprehensive income (loss)			615				(148	)			(5	)
Comprehensive loss		$	(13,079	)		$	(17,858	)		$	(21,288	)

			Year ended
			December 31,
			2021						2020						2019
Net loss			$	(116,861)					$	(94,010)					$	(78,764)
Other comprehensive income (loss):
Unrealized income (loss) on marketable securities, net of tax			(7)						(94)						21
Income on marketable securities reclassified into earnings, net of tax			4						76						5
			(3)						(18)						26
Unrealized income on derivative instruments, net of tax			5,616						4,043						3,510
Loss (income) on derivative instruments reclassified into earnings, net of tax			(8,901)						5,795						(352)
			(3,285)						9,838						3,158
Total other comprehensive income (loss)			(3,288)						9,820						3,184
Comprehensive loss			$	(120,149)					$	(84,190)					$	(75,580)

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

54

62

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VARONIS SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(in thousands, except share data)

		Common stock								Additional paid-in				Accumulated other comprehensive				Accumulated				Total stockholders’
		Number				Amount				capital				loss				deficit				equity
Balance as of January 1, 2015			24,685,604				25				162,478				(326	)			(67,151	)			95,026
Stock-based compensation expense			—				—				7,794				—				—				7,794
Exercise of stock options			1,350,162				1				2,054				—				—				2,055
Exercise of restricted stock units			33,388				*)				—				—				—				—
Unrealized loss on derivative instruments			—				—				—				(5	)			—				(5	)
Net loss			—				—				—				—				(21,283	)			(21,283	)
Balance as of December 31, 2015			26,069,154				26				172,326				(331	)			(88,434	)			83,587
Stock-based compensation expense			—				—				12,938				—				—				12,938
Common stock issued under employee stock plans, net			752,608				1				4,071				—				—				4,072
Unrealized loss on derivative instruments			—				—				—				(148	)			—				(148	)
Net loss			—				—				—				—				(17,710	)			(17,710	)
Balance as of December 31, 2016			26,821,762			$	27			$	189,335			$	(479	)		$	(106,144	)		$	82,739
Effect of adoption of ASU 2016-09			—				—				2,616				—				(2,616	)			—
Stock-based compensation expense			—				—				19,835				—				—				19,835
Common stock issued under employee stock plans, net			1,324,400				1				12,082				—				—				12,083
Unrealized gain on derivative instruments			—				—				—				642				—				642
Unrealized gains and losses on available for sale securities			—				—				—				(27	)			—				(27	)
Net loss			—				—				—				—				(13,694	)			(13,694	)
Balance as of December 31, 2017			28,146,162			$	28			$	223,868			$	136			$	(122,454	)		$	101,578

			Common stock												Additional paid-in capital						Accumulated other comprehensive income (loss)						Accumulated deficit						Total stockholders’ equity
			Number						Amount
Balance as of January 1, 2019			88,730,640						89						266,882						(3,633)						(137,968)						125,370
Stock-based compensation expense			—						—						46,139						—						—						46,139
Common stock issued under employee stock plans, net			3,019,293						3						(2,400)						—						—						(2,397)
Unrealized income on derivative instruments			—						—						—						3,158						—						3,158
Unrealized income on available for sale securities			—						—						—						26						—						26
Net loss			—						—						—						—						(78,764)						(78,764)
Balance as of December 31, 2019			91,749,933						92						310,621						(449)						(216,732)						93,532
Stock-based compensation expense			—						—						68,585						—						—						68,585
Common stock issued under employee stock plans, net			3,600,003						3						9,788						—						—						9,791
Issuance of common stock from acquisitions			106,926						—						4,198						—						—						4,198
Fair value of replacement equity awards attributable to pre-acquisition service			—						—						709						—						—						709
Realized and unrealized income on derivative instruments			—						—						—						9,838						—						9,838
Unrealized loss on available for sale securities			—						—						—						(18)						—						(18)
Purchase of capped calls related to Convertible senior notes			—						—						(29,348)						—						—						(29,348)
Equity component of Convertible senior notes, net			—						—						30,794						—						—						30,794
Net loss			—						—						—						—						(94,010)						(94,010)
Balance as of December 31, 2020			95,456,862						95						395,347						9,371						(310,742)						94,071
Issuance of Common stock in connection with follow-on offering, net of issuance costs of $17,466			7,961,538						8						500,026						—						—						500,034
Stock-based compensation expense			—						—						109,779						—						—						109,779
Common stock issued under employee stock plans, net			4,090,696						5						12,853						—						—						12,858
Realized and unrealized loss on derivative instruments, net			—						—						—						(3,285)						—						(3,285)
Unrealized loss on available for sale securities			—						—						—						(3)						—						(3)
Net loss			—						—						—						—						(116,861)						(116,861)
Balance as of December 31, 2021			107,509,096						$	108					$	1,018,005					$	6,083					$	(427,603)					$	596,593

___________________

*)

Represents an amount lower than $ 1.

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

55

63

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VARONIS SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

		Year Ended December 31,
		2017				2016				2015
Cash flows from operating activities:
Net loss		$	(13,694	)		$	(17,710	)		$	(21,283	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation			3,328				2,180				1,615
Stock-based compensation			19,835				12,938				7,794
Capital gain from disposal of fixed assets			(20	)			(2	)			(4	)
Changes in assets and liabilities:
Trade receivables			(21,735	)			(6,425	)			(9,567	)
Prepaid expenses and other current assets			(3,317	)			(1,028	)			796
Trade payables			(653	)			(1,324	)			(91	)
Accrued expenses and other short term liabilities			14,453				5,302				6,270
Deferred revenues			18,885				13,269				11,554
Other long term liabilities			(731	)			147				187
Net cash provided by (used in) operating activities			16,351				7,347				(2,729	)
Cash flows from investing activities:
Increase in short-term investments			(14,402	)			(8,390	)			(22,001	)
Decrease (increase) in long-term deposits			(305	)			(111	)			11
Proceeds from sale of property and equipment			20				2				4
Purchase of property and equipment			(5,314	)			(3,825	)			(4,536	)
Net cash used in investing activities			(20,001	)			(12,324	)			(26,522	)
Cash flows from financing activities:
Proceeds from employee stock plans, net			12,083				4,072				2,055
Net cash provided by financing activities			12,083				4,072				2,055
Increase (decrease) in cash, cash equivalents and restricted cash			8,433				(905	)			(27,196	)
Cash, cash equivalents and restricted cash at beginning of period			48,803				49,708				76,904
Cash, cash equivalents and restricted cash at end of period		$	57,236			$	48,803			$	49,708
Supplemental disclosures of non-cash flow information
Deferred rent fixed asset additions		$	-			$	583			$	1,355
Supplemental disclosure of cash flow information:
Cash paid for income taxes		$	469			$	246			$	354

64

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			Year ended
			December 31,
			2021						2020						2019
Cash flows from operating activities:
Net loss			$	(116,861)					$	(94,010)					$	(78,764)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization			10,888						10,167						6,321
Stock-based compensation			109,779						68,585						46,139
Amortization of deferred commissions			14,147						13,106						13,630
Noncash operating lease costs			8,232						8,737						9,023
Amortization of debt discount and issuance costs			6,870						4,096						—
Capital loss from sale of fixed assets			—						—						45
Changes in assets and liabilities:
Trade receivables			(22,950)						(19,075)						8,173
Prepaid expenses and other current assets			(506)						(543)						(1,225)
Deferred commissions			(21,151)						(19,131)						(19,132)
Other long-term assets			1,404						1,172						81
Trade payables			4,474						(328)						(1,623)
Accrued expenses and other short-term liabilities			5,850						16,058						(886)
Deferred revenues			5,421						(169)						7,219
Other long-term liabilities			1,581						5,493						316
Net cash provided by (used in) operating activities			7,178						(5,842)						(10,683)
Cash flows from investing activities:
Proceeds from sales and maturities of marketable securities			34,117						51,539						65,359
Investment in marketable securities			—						(44,124)						(67,120)
Proceeds from short-term and long-term deposits			80,752						74,776						147,531
Investment in short-term and long-term deposits			(50,000)						(97,454)						(87,086)
Acquisition, net of cash acquired			—						(29,369)						—
Proceeds from sale of property and equipment			—						—						11
Purchases of property and equipment			(10,490)						(10,116)						(25,392)
Net cash provided by (used in) investing activities			54,379						(54,748)						33,303
Cash flows from financing activities:
Proceeds from follow-on offering, net			500,034						—						—
Proceeds from issuance of convertible senior notes, net of issuance costs			—						245,308						—
Purchases of capped calls			—						(29,348)						—
Proceeds from employee stock plans, net			10,078						9,793						(2,398)
Net cash provided by (used in) financing activities			510,112						225,753						(2,398)
Increase in cash and cash equivalents			571,669						165,163						20,222
Cash and cash equivalents at beginning of period			234,092						68,929						48,707
Cash and cash equivalents at end of period			$	805,761					$	234,092					$	68,929
Supplemental disclosure of cash flow information:
Cash paid for income taxes			$	8,507					$	1,342					$	3,955
Lease liabilities arising from obtaining right-of-use assets			$	22,156					$	6,256					$	10,252

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

56

65

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VARONIS SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

NOTE 1:- GENERAL

Varonis Systems, Inc. (“VSI”("VSI" and together with its subsidiaries, collectively, the “Company” or "Varonis") was incorporated under the laws of the State of Delaware on November 3, 2004, and commenced operations on January 1, 2005.

VSI2005 and has seven12 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; and Varonis Systems (Australia) Pty Ltd (“VAUS”) incorporated under the laws of Victoria, Australia on February 28, 2017.

subsidiaries.

The Company’s software products and services allow enterprises to manage, analyze, alert and secure enterprise data. Varonis focuses on protecting enterprise data:data including: sensitive files and emails; confidential customer, patient and employee data; financial records; strategic and product plans; and other intellectual property. Through its products DatAdvantage (including DatAlert, the Automation Engine andEngine), DatAlert (including Varonis Edge), DataPrivilege, Data Classification Engine (including GDPR Patterns)Policy Pack and Data Classification Labels), Data Transport Engine and DatAnswers, the Varonis Data Security Platform detects cyberthreats from both internal and DatAnywhere, the software platform allows enterprises to protectexternal actors by analyzing data, account activity and user behavior; prevents and limits disaster by locking down sensitive and stale data; and efficiently sustains a secure state with automation. Varonis products address additional important use cases including data from insider threatsprotection, data governance, Zero Trust, cybercrime, compliance, data privacy, classification and cyberattacks,threat detection and realize the value of their enterprise data in ways that are not resource-intensive and easy to implement.

VSI markets and sells products and services mainly in the United States. VSUK, VSG, VSF, VSC, VIRE and VAUS resell the Company’s products and services mainly in the UK, Germany, France and rest of Europe, Canada, Ireland and Australia, 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.

response.

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES

The consolidated financial statements are prepared according to United States generally accepted accounting principles (“U.S. GAAP”), applied on a consistent basis, as follows:

	a.
a.			Use of Estimates:

The preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates, judgments and assumptions. The Company’s management believes that the estimates, judgments and assumptions used are reasonable based upon information available at the time they are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. On an ongoing basis, the Company’s management evaluates estimates, including those related to accounts receivable and salescredit loss allowances, fair values of stock-based awards, deferred taxes and income tax uncertainties, and contingent liabilities. Such estimates are based on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities.

	b.
b.			Financial Statements in U.S. Dollars:

Most of the Company's revenues and costs of VSI are denominated in United States dollars (“dollars”). Some of the subsidiaries’ revenues and costs are primarily incurred in Euros, the Pound Sterling, Canadian dollars, Australian dollars and NIS;New Israeli Shekels ("NIS"); however, the Company’s management believes that the dollar is the primary currency of the economic environment in which VSIit and each of its subsidiaries operate. Thus, the dollar is the Company’s functional and reporting currency.

Accordingly, transactions denominated in currencies other than the functional currency are re-measuredremeasured to the functional currency in accordance with ASC No. 830, “Foreign Currency Matters” at the exchange rate at the date of the transaction or the average exchange rate in the quarter. At the end of each reporting period, financial assets and liabilities are re-measuredremeasured to the functional currency using exchange rates in effect at the balance sheet date. Non-financial assets and liabilities are re-measuredremeasured at historical exchange rates. Gains and losses related to re-measurementremeasurement are recorded as financial income (expense) in the consolidated statements of operations as appropriate.

	57
c.			Principles of Consolidation:

c.

Principles of Consolidation:

The consolidated financial statements include the accounts of VSI and its wholly-owned subsidiaries, VSL, VSUK, VSG, VSF, VSC, VIRE and VAUS.subsidiaries. All intercompany transactions and balances have been eliminated upon consolidation.

66

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	d.
d.			Cash, Cash Equivalents, Marketable Securities and Short-Term Investments:

The Company accounts for investments in marketable securities in accordance with ASC No. 320, “Investments—Debt and Equity Securities”. and ASC No. 326, “Financial Instruments—Credit Losses.” The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Cash and cash equivalents consist of cash on hand, highly liquid investments in money market funds and various deposit accounts.

The Company considers all high qualityhigh-quality investments purchased with original maturities at the date of purchase greater than three months but less than one year to be short-term investments. Investments are available to be used for current operations and are, therefore, classified as current assets even though maturities may extend beyond one year.deposits. Cash equivalents, marketable securities and short-term investmentsdeposits 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 investmentsdeposits consist of the following (in thousands):

		As of December 31, 2017
		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Loss				Fair Value
Cash and cash equivalents
Cash		$	49,819			$	-			$	-			$	49,819
Money market funds			6,870				-				-				6,870
Total		$	56,689			$	-			$	-			$	56,689
Short-term investments
US Treasury securities		$	39,758			$	*)			$	(27	)		$	39,731
Term bank deposits			40,137				-				-				40,137
Total		$	79,895			$	-			$	(27	)		$	79,868

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

			As of December 31, 2020
			Amortized Cost						Gross Unrealized Gains						Gross Unrealized Losses						Fair Value
Cash and cash equivalents
Money market funds			$	10,712					$	—					$	—					$	10,712
Total			$	10,712					$	—					$	—					$	10,712
Marketable securities
US Treasury securities			$	34,113					$	4					*)						$	34,117
Total			$	34,113					$	4					*)						$	34,117
Short-term deposits
Term bank deposits			$	30,053					$	—					$	—					$	30,053
Total			$	30,053					$	—					$	—					$	30,053

*) Represents an amount lower than $1.

All the US Treasury securities in short-term investmentsmarketable securities have a stated effective maturity of less than 12 months as of December 31, 2017.

		As of December 31, 2016
		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Loss				Fair Value
Cash and cash equivalents
Cash		$	42,175			$	-			$	-			$	42,175
Money market funds			6,140				-				-				6,140
Total		$	48,315			$	-			$	-			$	48,315
Short-term investments
Term bank deposits		$	65,493				-				-			$	65,493
Total		$	65,493			$	-			$	-			$	65,493

58

2020.

The gross unrealized lossgains and losses 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 experiencedAvailable for sale debt securities with 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. Ifbasis in excess of estimated fair value are assessed using the Company believesCurrent Expected Credit losses ("CECL") model to determine what portion of that an other than temporary decline exists in one of these securities, the Company writes down these investments to fair value. Fordifference, if any, is caused by expected credit losses. Expected credit losses on available for sale debt securities the portion of the write-down related to credit loss would be recorded to other income (expense), netare recognized in financial expenses, net

67

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on 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 yearyears ended December 31, 2017,2021 and 2020, the Company did not considerrecognize an allowance for credit losses on available for sale marketable securities as any of its investmentsexpected credit losses are not material to be other-than-temporarily impaired.

the consolidated financial statements.

A short-term bank deposit is a deposit with a maturity of more than three months but less than one year. Deposits in U.S. dollars bearbore interest at rates ranging from 0.60% - 1.35% and 0.55%-1.11%a rate of 0.15%, per annum, as of December 31, 20172021 and 2016, respectively. Deposits in NIS bear interest at rates of 0.03% and 0.15%ranging from 0.10% - 0.16%, per annum, as of December 31, 2017 and 2016, respectively.2020. Short-term investmentsdeposits are presented at cost which approximates market value due to their short maturities.

e.

Restricted Cash:

Restricted cash is primarily invested in certificates of deposit and is used mostly as security for the Company’s lease commitments.

The Company had no short-term restricted cash as of December 31, 2017 and 2016, respectively. The Company had long-term restricted cash in the amount of $547 and $488 as of December 31, 2017 and 2016, respectively.

	f.
e.			Property and Equipment:

Property and equipment are stated at cost, net of accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets at the following annual rates:

		%
Computer equipment				33
Office furniture and equipment			14	-	15
Leasehold improvements				Over the shorter of the expected lease term or estimated useful life

			%
Computer equipment									33%
Office furniture and equipment			14%						—						15%
Leasehold improvements									Over the shorter of the expected lease term or estimated useful life

	g.	Impairment of
f.			Goodwill and Other Long-Lived Assets:Assets, including Acquired Intangible Assets and Right-of-Use-Asset:

Goodwill represents the excess of the fair value of purchase consideration in a business combination over the fair value of net tangible and intangible assets acquired. Goodwill amounts are not amortized, but rather tested for impairment at least annually or more often if circumstances indicate that the carrying value may not be recoverable. The Company operates as one reporting segments and considers the enterprise to be the only reporting unit. If the carrying amount of our reporting unit exceeds its fair value, the Company recognizes an impairment loss in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. No indications of impairment of goodwill were noted during the periods presented.

Acquired intangible assets consist of identifiable intangible assets, including developed technology and trademarks, resulting from business combinations. Acquired finite-lived intangible assets are initially recorded at fair value and are amortized on a straight-line basis over their estimated useful lives. Amortization expense of developed technology and trademarks are recorded within cost of revenues and sales and marketing, respectively, in the consolidated statements of operations.

The Company’s long-lived assets are reviewed for impairment in accordance with ASC No. 360 “Property, Plant and Equipment” whenever events or changes in circumstances indicate that the carrying amount of an asset (or asset group) may not be recoverable. Recoverability of assets (or asset group) to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted cash flows expected to be generated by the assets. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. During the years ended December 31, 2017, 20162021 and 2015,2020, no impairment losses have been recorded.

	h.
g.			Long-Term Lease Deposits:

Long-term lease deposits include long-term deposits for offices.

	i.
h.			Revenue Recognition:

The Company generates revenues in the form of software license fees and related maintenance and services fees. MaintenanceSubscription revenues are sold on-premises and services primarily consistare comprised of fees for maintenance servicestime-based licenses whereby customers use the Company's software (including support and unspecified upgrades and enhancements when and if they are available) for a specified period. Perpetual licenses have the same functionality as subscriptions. Maintenance and services primarily consist of fees for maintenance and services of perpetual license sales (including support and unspecified upgrades and

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enhancements when and if they are available) and to a lesser extent professional services, (including training)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. In 2021, the Company launched its cloud offering that are not essentialallow customers to functionality of the Company’suse hosted software. The Company sells its products worldwide directly to a network of distributors and VARs.

value-added resellers, and payment is typically due within 30 to 60 calendar days of the invoice date.

The Company accounts for the sale of perpetual softwarerecognizes revenues in accordance with ASC No. 985-605, “Software Revenue Recognition”.606, “Revenue from Contracts with Customers.” As required by ASC 985-605,such, the Company identifies a contract with a customer, identifies the performance obligations in the contract, determines the value oftransaction price, allocates the transaction price to each performance obligation in the contract and recognizes revenues when (or as) the Company satisfies a performance obligation.

Subscription software component of its multiple-element arrangements using the residual method when vendor specific objective evidence (VSOE) of fair value exists for the undelivered elements of maintenance, and professional services agreements. VSOE is based on the price charged when an element is sold separately or renewed. Under the residual method, the fair value of the undelivered elements is deferred, and the remaining portion of the arrangement fee is allocated to the delivered elements and is recognized as revenue, when all ASC 985-605 criteria for revenue recognition are met.

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The Company determines the fair value based on the stand alone sales price charged for maintenance, and professional services. The Company has defined classes of transactions, based on the value of licensed software products purchased from the Company. The Company prices renewals for each class of transaction as a fixed percentage of the total gross value of licensed software products the customer purchased.

Softwareperpetual license revenues are recognized when persuasive evidenceat the point of an arrangement exists,time when the software license has been delivered there are no uncertainties surrounding product acceptance, there are no significant future performance obligations,and the license fees are fixed or determinable and collectionbenefit of the license feeasset has transferred. Maintenance associated with subscription licenses is considered probable. Fees for arrangements with payment terms extending beyond customary payment terms are considered not to be fixed or determinable, in which case revenue is deferred and recognized when payments become due from the customer provided that all other revenue recognition criteria have been met.

The Company recognizes revenues from the sale of term license arrangements, ratably on a straight-line basis, over the term of the underlyingagreement. In 2021, the Company launched its cloud offering that allows customers to use hosted software and its revenue is recognized ratably over the associated contract and is typically up to one year.

period. As the Company only introduced these licenses in the second half of 2021, the total revenues have not yet been material.

The Company recognizes revenues from maintenance of perpetual license sales ratably over the term of the underlying maintenance contract term.contract. The term of the maintenance contract is usually one year.

Renewals of maintenance contracts create new performance obligations that are satisfied over the new term with the revenues recognized ratably over the period.

Revenues from professional services consist mostly of time and material servicesservices. The performance obligations are satisfied, and accordingly,revenues are generally recognized, aswhen the services are performedprovided or whenonce the service term has expired.

Professional

The Company enters into contracts that can include combinations of products and services, bundled with licensedwhich 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 and otherwithout 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 related elements are not essentiallicenses, the Company uses the residual approach to determine the standalone selling prices due to the functionalitylack of history of selling software license on a standalone basis and the other elementshighly variable sales price.

Trade receivables are generally recorded at the invoice amount mostly for a one year period, net of the arrangement. Revenues allocable to the services are recognized as the services are performed or when the service term has expired, using VSOEan allowance for such services.

credit losses.

Deferred revenues represent mostly unrecognized fees billed or collected for maintenance and professional services.

Deferred revenues are recognized as (or when) the Company performs under the contract. Pursuant to these contracts, customers are not invoiced for subsequent years until the annual renewal occurs. The amount of revenues recognized in the period that was included in the opening deferred revenues balance was $98,085 for the year ended December 31, 2021.

The Company does not grant a right of return to its customers, except for one of its resellers. During the years ended December 31, 2017, 20162021, 2020 and 2015,2019, there were no returns from this reseller.

For information regarding disaggregated revenues, please refer to Note 14.

	j.
i.			Contract Costs:

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

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amortized on a straight-line basis. Amortization expenses related to these costs are included in sales and marketing expenses in the accompanying consolidated statements of operations.

j.			Cost of Revenues:

Cost of revenues consists of the cost of maintenance and services, resulting from costs associated with support, customer success and professional services.

These costs 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; amortization of acquired intangible assets; travel expenses; and allocated overhead costs for facilities, IT and depreciation.

	k.
k.			Accounting for Stock-Based Compensation:

The Company accounts for stock-based compensation in accordance with ASC No. 718, “Compensation-Stock Compensation”.Compensation.” ASC No. 718 requires companies to estimate the fair value of equity-based payment awards on the date of grant using an Option-Pricing Model (“OPM”). The value of the portion of the award that is ultimately expected to vest is recognized as an expense over the requisite service periods in the Company’s consolidated statements of operations.

Model. The Company recognizes compensation expenses for the value of its equity awards granted based on the straight-line method over the requisite service period of each of the awards.

The Company applies ASC 718 and ASC 505-50, “Equity-Based Payments to Non-Employees” with respect to options issued to non-employee consultants. Accordingly, the Company uses option valuation models to measure the fair value of the options at the measurement date as defined in ASC 505-50.

The Company selected the Black-Scholes-Merton option pricing model as the most appropriate fair value method for its stock options awards, whereas the fair value of restricted stock units is based on the market value of the underlying shares at the date of grant.

The fair value of options granted to employees and non-employee directors is estimated at the date of grant using the following weighted average assumptions:

For the year ended December 31, 2017, there were no stock options granted. For the years ended December 31, 2016 and 2015, dividend yield was 0%, expected volatility was 62.1% and 65.0%, respectively, risk-free interest was 1.42% and 1.94% - 2.00%, respectively, and expected life was 6.25.

The Company used its historical volatility in accordance with ASC 718. The computation of volatility uses historical volatility derived from the Company’s exchange traded shares. Expected term of options granted is calculated based on the simplified method, in accordance with SAB 110, (i.e., as the average between the vesting period and the contractual term of the options). The risk free interest rate assumption is the implied yield currently available on United States treasury zero-coupon issues with a remaining term equal to the expected life of the Company’s options. The dividend yield assumption is based on the Company’s historical experience and expectation of no future dividend payouts and may be subject to substantial change in the future. The Company has historically not paid cash dividends and has no foreseeable plans to pay cash dividends in the future.

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The non-cashstock-based compensation expenses related to employees and consultants for the years ended December 31, 2017, 20162021, 2020 and 20152019 amounted to $19,835, $12,938$109,779, $68,585 and $7,794,$46,139, respectively.

Effective as

l.			Business Combinations:

The Company accounts for its business combinations using the acquisition method of January 1, 2017,accounting, which requires, among other things, allocation of the Company adopted Accounting Standards Update 2016-09, “Compensation—Stock Compensation (Topic 718)” (“ASU 2016-09”)fair value of purchase consideration to the tangible and intangible assets acquired and liabilities assumed at their estimated fair values on a modified, retrospective basis. ASU 2016-09 permits entities to make an accounting policy election related to how forfeitures will impact the recognition of compensation cost for stock-based compensation: to estimate the total number of awards for which the requisite service period will not be rendered or to account for forfeitures as they occur. Upon adoption of ASU 2016-09, the Company elected to change its accounting policy to account for forfeitures as they occur.acquisition date. The change was applied on a modified, retrospective basis with a cumulative-effect adjustment to retained earnings of $2,616 (which increased the accumulated deficit) as of January 1, 2017.

ASU 2016-09 also eliminates the requirement that excess tax benefits be realized as a reduction in current taxes payable before the associated tax benefit can be recognized as an increase in paid in capital. Approximately $7,131 of federal net operating losses and $718 of state net operating losses, neither of which was included in the deferred tax assets recognized in the statement of financial position as of December 31, 2016, have been attributed to tax deduction for stock-based compensation in excess of the fair value of purchase consideration over the values of these identifiable assets and liabilities is recorded as goodwill. When determining the fair value of assets acquired and liabilities assumed, the Company makes estimates and assumptions, especially with respect to intangible assets. The Company's estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. During the measurement period, not to exceed one year from the date of acquisition, the Company may record adjustments to the assets acquired and liabilities assumed, with a corresponding offset to goodwill if new information is obtained related book expense. Under ASU 2016-09, these previously unrecognized deferred tax assets will be recognized on a modified, retrospective basisto facts and circumstances that existed as of the startacquisition date. After the measurement period, any subsequent adjustments are reflected in the consolidated statements of the year in which the ASU 2016-09 is adopted; in this caseoperations. Acquisition costs, such as of January 1, 2017. The U.S. federallegal and state net operating losses and credits that were recognizedconsulting fees, are expensed as of January 1, 2017 have been offset by a valuation allowance. As a result, there is no cumulative-effect adjustment to retained earnings as of January 1, 2017.

Additionally, ASU 2016-09 addresses the presentation of excess tax benefits and employee taxes paid on the statement of cash flows. The Company is now required to present excess tax benefits as an operating activity on the statement of cash flows rather than as a financing activity. The Company adopted this change prospectively.

incurred.

	l.
m.			Research and Development Costs:

Research and development costs are charged to the statement of operations as incurred. ASC No. 985-20, “Software-Costs of Software to Be Sold, Leased, or Marketed,” requires capitalization of certain software development costs subsequent to the establishment of technological feasibility.

Based on the Company’s product development process, technological feasibility is established upon the completion of a working model. The Company does not incur material costs between the completion of the working model and the point at which the product is ready for general release. Therefore, research and development costs are charged to the statement of operations as incurred.

	m.
n.			Income Taxes:

The Company accounts for income taxes in accordance with ASC No. 740, using the asset and liability method whereby deferred tax assets and liability account balances are determined based on the differences between financial reporting and the tax basis for assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company provides a valuation allowance, if necessary, to reduce deferred tax assets to the amounts that are more likely-than-not to be realized.

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ASC 740 contains a two-step approach to recognizing and measuring a liability for uncertain tax positions. The first step is to evaluate the tax position taken or expected to be taken in a tax return by determining if the weight of available evidence indicates that it is more likely than not that, on an evaluation of the technical merits, the tax position will be sustained on audit, including resolution of any related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. The Company accrues interest and penalties related to unrecognized tax provisions in its taxes on income.

	n.
o.			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 forecastforecasted 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 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. In addition, the Company enters into forward contracts to hedge a portion of its monetary items in the balance sheet, such as trade receivables and payables, denominated in Pound Sterling and Euro for short-term periods (the “Fair Value Hedging Program”). The purpose of the Fair Value Hedging Program is to protect the fair value of the monetary assets from foreign exchange rate fluctuations. Gains and losses from derivatives related to the Fair Value Hedging Program are not designated as hedging instruments. The Company does not enter into derivative financial instruments for trading or speculative purposes.

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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 December 31, 2017								Liabilities as of December 31, 2016
		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		$	1,746			$	163			$	46,116			$	(479	)

			Assets (liabilities) as of												Assets as of
			December 31, 2021												December 31, 2020
			Notional Amount						Fair Value						Notional Amount						Fair Value
Foreign exchange forward contract derivatives in cash flow hedging relationships included in prepaid expenses and other current assets			$	115,710					$	6,083					$	90,452					$	3,315
Foreign exchange forward contract derivatives for monetary items included in prepaid expenses and other current assets and accrued expenses and other short-term liabilities			$	42,056					$	(62)					$	33,977					$	17

For the years ended December 31, 20172021, 2020 and 2016,2019, the consolidated statements of operations reflect a gain of approximately $2,649$8,901, $257 and $332,$352, respectively, related to the effective portion of foreign currency forward contracts. There was nothe cash flow hedges. No material ineffective portionhedges were recognized for the years ended December 31, 20172021, 2020 and 2016.

2019 in operating expenses in the consolidated statement of operations.

For the years ended December 31, 2021, 2020 and 2019, the consolidated statements of operations reflect a gain of $959, a loss of $1,144 and a gain of $683, respectively, in financial expenses, net, related to the Fair Value Hedging Program.

	o.
p.			Concentrations of Credit Risks:

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash, cash equivalents, marketable securities, short-term investmentsdeposits and trade receivables.

The Company’s cash, cash equivalents, marketable securities and short-term investmentsdeposits are invested in major banks mainly in the United States but also in Israel, France, Canada, the United Kingdom, France, Germany, Israel, Canada,the Netherlands, Ireland, Luxembourg and Australia. Such deposits in the United States may be in excess of insured limits and are not insured in other jurisdictions. The Company maintains cash and cash equivalents with diversereputable financial institutions and monitors the amount of credit exposure to each financial institution.

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The Company’s trade receivables are geographically diversified and derived primarily from sales to a network of distributors and VARs mainly in the United States and Europe. Concentration of credit risk with respect to trade receivables is limited by credit limits, ongoing credit evaluation and account monitoring procedures. The Company performs ongoing credit evaluations of its channel partners and establishes an allowance for doubtful accountscredit losses based upon a specific review of all significant outstanding invoices.invoices, historical collection experience, customer creditworthiness, current, and future economic and market condition. The Company writes off receivables when they are deemed uncollectible and having exhausted all collection efforts.

	p.
q.			Retirement and Severance Pay:

VSI makesand Varonis U.S. Public Sector LLC ("VPS") make available to its employees a retirement plan (the “U.S. Plan”) that qualifies as a deferred salary arrangement under Section 401(k) of the Internal Revenue Code of 1986, as amended (“the Code”(the "Code"). Participants in the U.S. Plan may elect to defer a portion of their pre-tax earnings, up to the Internal Revenue Service annual contribution limit. VSI matchesand VPS match 100% of each participant’s contributions up to a maximum of 3% of the participant’s total pay and 50% of each participant’s contributions on contributions between 3% and 5% of the participant’s total pay. Each participant may contribute up to 80% of total remuneration up to the Internal Revenue Service’s annual contribution limit. Contributions to the U.S. Plan are recorded during the year contributed as an expense in the consolidated statements of income.

Pursuant

Varonis Systems Ltd ("VSL") makes available to its employees, pursuant to Israel’s Severance Pay Law, Israeli employees are entitled to severance pay equal to one month’s salary for each year of employment, or a portion thereof. The employees of the Israeli subsidiary elected to be included under section 14 of the Severance Pay Law, 1963 (“section 14”). According to this section, these employees are entitled only to monthly deposits, at a rate of 8.33% of their monthly salary, made in their name with insurance companies. Payments in accordance with section 14 release the Company from any future severance payments (under the above Israeli Severance Pay Law) in respect of those employees; therefore, related assets and liabilities are not presented in the balance sheet.

The Company’s liability for severance pay for the employees of its French subsidiary is calculated pursuant to French law, according to which French employees are entitled to an indemnity (a statutory redundancy). The law provides for the payment of severance payment to any employee working for the French subsidiary for at least a year.

VSUK

In addition, the Company also makes available pension plans to certain eligible employees a pension plan whereby participantsof other subsidiaries in the plan may elect to defer a portion of their earnings. VSUK matches 100% of each participant’s contributions up to a maximum of 3% of the participant’s net pay.

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which it operates. Total Company expenses related to retirement and severance pay amounted to $4,801, $3,775$9,598, $7,169 and $3,085$6,390 for the years ended December 31, 2017, 20162021, 2020 and 2015,2019, respectively. The amount of severance payable included in other liabilities as of December 31, 20172021 and 20162020 is $1,781$2,877 and $1,664,$2,727, respectively.

	q.
r.			Fair Value of Financial Instruments:

Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability.

A three tier fair value hierarchy is established as a basis for considering such assumptions and for inputs used in the valuation methodologies in measuring 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 ourthe Company's own assumptions incorporated in valuation techniques used to determine fair value. These assumptions are required to be consistent with market participant assumptions that are reasonably available.

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The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

The carrying amounts of cash and cash equivalents, marketable securities, trade receivables, short-term investmentsdeposits and trade payables approximate their fair value due to the short-term maturity of such instruments.

	r.
s.			Basic and Diluted Net Loss Per Share:

Basic net loss per share is computed by dividing the net loss by the weighted-average number of shares of common stock outstanding during the period.

Diluted net loss per share is computed by giving effect to all potential shares of common stock,potentially dilutive securities, including stock options, restricted stock units, performance stock units and the impact of the conversion spread of the 1.25% Convertible Senior Notes issued by the Company on May 11, 2020 and due August 2025 in an aggregate principal amount of $253,000 (the "2025 Notes"), to the extent dilutive.

Basic and diluted net loss per share was the same for each period presented as the inclusion of all potential shares of common stock outstanding would have been anti-dilutive.

There were 8,556,245,  9,445,326 and 9,101,154 potentially dilutive shares from the conversion of outstanding stock options, restricted stock units and performance stock units that were not included in the calculation of diluted net loss per share for the years ending of December 31, 2021, 2020 and 2019, respectively. Additionally, 8,239,254 shares underlying the conversion option of the 2025 Notes are not considered in the calculation of diluted net loss per share as the effect would be anti-dilutive for the years ending of December 31, 2021 and 2020. The Company intends to settle the principal amount of the 2025 Notes in cash and will use the if-converted method for calculating any potential dilutive effect on diluted net income per share, if applicable. The conversion will have a dilutive impact on diluted net income per share when the average market price of a common stock for a given period exceeds the conversion price of $30.71 per share.

	s.
t.			Contingent Liabilities:

The Company accounts for its contingent liabilities in accordance with ASC No. 450 “Contingencies”.“Contingencies.” A provision is recorded when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated.

With respect to legal matters, provisions are reviewed and adjusted to reflect the impact of negotiations, estimated settlements, legal rulings, advice of legal counsel and other information and events pertaining to a particular matter. As of December 31, 20172021 and 2016,2020, the Company was not a party to any litigation that could have a material adverse effect on the Company’s business, financial position, results of operations or cash flows.

	t.	Reclassification:
u.			Basis of Presentation:

Certain amounts in prior years' financial statements have been recast and reclassified to conform to the current year's presentation.

	u.
v.			Revolving Credit Facility:

On August 21, 2020, the Company entered into a credit and security agreement with KeyBank National Association (the "Credit and Security Agreement"), for a three-year secured revolving credit facility of $70,000 (the "Credit Facility"). The Credit Facility maturity date is the earlier of August 21, 2023 or 90 days prior to the scheduled maturity of any convertible debt securities. The fees incurred in connection with entering into the Credit and Security Agreement are amortized on a straight-line basis over the contractual term of the arrangement. Ongoing fees and interest paid on the used and unused portions of the Credit Facility are expensed as incurred and included within financial expenses, net on the consolidated statement of operations. The Credit Facility is secured and the Credit and Security Agreement contains customary covenants and customary events of default provisions.

As of December 31, 2021, the Company had no balance outstanding on the Credit Facility and was in compliance with all financial covenants and non-financial covenants.

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w.			Recently Issued Accounting Pronouncements:Pronouncements Not Yet Adopted:

In May 2014,August 2020, the FASB issued ASU No. 2014-09, “Revenue from 2020-06, ASC Subtopic 470-20 “Debt—Debt with Conversion and Other Options” and ASC subtopic 815-40 “Hedging—Contracts in Entity’s Own Equity.” The standard reduced the number of accounting models for convertible debt instruments and convertible preferred stock. Convertible instruments that continue to be subject to separation models are (1) those with Customers”, an updated standard on revenue recognition embedded conversion features that are not clearly and issued subsequent amendmentsclosely related to the initial guidancehost contract, that meet the definition of a derivative, and that do not qualify for a scope exception from derivative accounting and (2) convertible debt instruments issued with substantial premiums for which the premiums are recorded as paid-in capital. Among other potential impacts, ASU 2020-06 will reduce reported interest expense, and thereby decrease reported net loss, and result in March 2016, April 2016, May 2016 and December 2016 within ASU 2016-08, 2016-10, 2016-12 and 2016-20, respectively. The new standards provide enhancementsa reclassification of certain conversion feature balance sheet amounts from stockholder’s equity to liabilities as it relates to the quality and consistency of how revenue is reported while also improving comparability inCompany’s 2025 Notes. Additionally, ASU 2020-06 requires the financial statements of companies reporting using IFRS and US GAAP. The core principleapplication of the new standard is for companiesif-converted method to recognize revenue to depictcalculate the transferimpact of goods or services to customersconvertible instruments on earnings per share. The amendments in amounts that reflect the consideration (that is, payment) to which the company expects to be entitled in exchange for those goods or services. The new standard also will result in enhanced disclosures about revenue, provide guidance for transactions that were not previously addressed comprehensively (for example, service revenue and contract modifications) and improve guidance for multiple-element arrangements. ASU 2014-09 was initially scheduled to bethis update are effective for annual and interim reporting periodsfiscal years beginning after December 15, 20162021, including interim periods within those fiscal years, and maycan be adopted on either on a fullfully retrospective or modified retrospective approach. However, on July 9, 2015, the FASB approved a one year deferral of the effective date of ASU 2014-09. The revised effective date is for annual reporting periods beginning after December 15, 2017 and interim periods thereafter, with an early adoption permitted as of the original effective date.basis. The Company has decided to adoptadopted this standard effectiveon January 1, 20182022 using the fulla modified retrospective methodbasis which will require each prior reporting period presented to be recast in future issuances of the Company’s financial statements. In preparation for adoption of the standard, the Company has implemented internal controls and key system functionality to enable the preparation of financial information and have reached conclusions on key accounting assessments related to the standard, including the assessment of the impact.

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The most significant impact of the new standard relates to the way the Company accounts for term agreements and commission expense. Specifically, under the current revenue standard, the Company recognizes both the term license and maintenance revenues ratably over the contract period whereas under the new revenue standard it would recognize term license revenues upfront and the associated maintenance revenues over the contract period. The Company has also considered the impact of the guidance in ASC 340-40, “Other Assets and Deferred Costs” under the new standard. Under ASC 340-40, it may be required to capitalize and amortize certain incremental costs of obtaining a contract such as the maintenance portion of sales commissions over the life of the license. Under the Company’s current accounting policy, it does not capitalize sales commission costs but rather recognizes these costs when the purchase order is received.

Adoption of the standard will resultresulted in a reductiondecrease to accumulated deficit of revenues$8,647, a decrease in additional paid-in capital of $1,974 for the year ended December 31, 2017$30,794 and recognition of additional revenues of $1,407 for the year ended December 31, 2016, primarily due to the net change in term license revenue recognition. In addition, adoption of the standard will result in an increase in prepaid expenses and other current assets and a decrease in deferred revenuesliabilities of $9,865 and $97, respectively, as of December 31, 2017, driven by the capitalization of sales commission costs and the upfront recognition of license revenues from term licenses. The cumulative impact to the Company’s accumulated deficit as of January 1, 2016 is a reduction of $5,583.

Adoption of the standard related to revenue recognition had no impact to cash from or used in operating, financing or investing activities on the Company’s consolidated statements of cash flows.

Select recast financial statement information, which reflects the preliminary effect of the adoption of this standard, is set forth below.

		Year ended December 31, 2017
		As Reported				Adjustments				Recast for Adoption of ASC 606
Total revenues		$	217,364			$	(1,974	)		$	215,390
Operating loss		$	(13,597	)		$	178			$	(13,419	)
Income taxes		$	(2,459	)		$	(328	)		$	(2,787	)
Net loss		$	(13,694	)		$	(151	)		$	(13,845	)

		Year ended December 31, 2016
		As Reported				Adjustments				Recast for Adoption of ASC 606
Total revenues		$	164,456			$	1,407			$	165,863
Operating loss		$	(15,694	)		$	3,699			$	(11,995	)
Income taxes		$	(1,131	)		$	(182	)		$	(1,313	)
Net loss		$	(17,710	)		$	3,517			$	(14,193	)

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		December 31, 2017 Balance Sheet Data
		As Reported				Adjustments				Recast for Adoption of ASC 606
Assets
Current assets:
Prepaid expenses and other current assets		$	7,130			$	9,865			$	16,995
Liabilities and stockholders’ equity
Current liabilities:
Accrued expenses and other short term liabilities		$	42,453			$	1,014			$	43,467
Deferred revenues		$	73,891			$	(227	)		$	73,664
Long-term liabilities:
Deferred revenues		$	7,034			$	130			$	7,164

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 whether to early adopt this standard and the potential effect$22,146 on its consolidated financial statements.

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 existing guidance for operating leases today. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. ASC 842 supersedes the previous leases standard, ASC 840, "Leases". The guidance is effective for the interim and annual periods beginning on or after December 15, 2018, and early adoption is permitted. The Company is currently evaluating whether to early adopt this standard and the potential effect of the guidance on its consolidated financial statements.

In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash”, which requires companies to include amounts generally described as restricted cash and restricted cash equivalents in cash and cash equivalents when reconciling beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This ASU is effective for annual and interim periods beginning after December 15, 2017. The Company has decided to adopt this standard effective December 31, 2017 using the retrospective transition method, as required by the new standard. The adoption of this standard has an immaterial impact on the Company’s consolidated statements of cash flows.

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:

		December 31. 2017				December 31. 2016				December 31. 2015
Cash and cash equivalents		$	56,689			$	48,315			$	49,241
Long term restricted cash included in other assets			547				488				467
Cash, cash equivalents and long term restricted cash shown in the consolidated statement of cash flows		$	57,236			$	48,803			$	49,708

In January 2018, the FASB released guidance on the accounting for tax on the GILTI provisions of the TCJA. The GILTI provisions impose a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations. The guidance indicates that either (i) accounting for deferred taxes related to GILTI inclusions, or (ii) to treat any taxes on GILTI inclusions as period cost, are both acceptable methods subject to an accounting policy election. In accordance with SEC Staff Accounting Bulletin No. 118, and as the Company is not yet able to reasonably estimate the effect of the GILTI tax, as described in note 9 of the consolidated financial statements, the Company has not yet adopted an accounting policy with respect to the GILTI tax.

65

sheets.

NOTE 3:- PREPAID EXPENSES AND OTHER CURRENT ASSETS

		December 31,
		2017				2016
Prepaid expenses		$	6,044			$	2,871
Government institutions & other receivables			542				369
Deferred charges			-				256
Foreign currency forward contracts derivatives			163				-
Short-term deposits			374				122
Other			7				32
		$	7,130			$	3,650

Prepaid expenses and other current assets consist of the following (in thousands):

			December 31,
			2021						2020
Deferred commission			$	17,930					$	14,144
Prepaid expenses			6,746						7,938
Foreign currency forward contracts derivatives			6,083						3,332
Government institutions & other receivables			3,333						1,586
Short-term deposits & other			325						357
Prepaid expenses and other current assets			$	34,417					$	27,357

NOTE 4:- PROPERTY AND EQUIPMENT, NET

		December 31,
		2017				2016
Cost:
Computer equipment		$	8,473			$	7,800
Office furniture and equipment			2,263				2,094
Leasehold improvements			9,163				7,459
			19,899				17,353
Accumulated depreciation			8,003				7,443
Property and equipment, net		$	11,896			$	9,910

Property and equipment, net consist of the following (in thousands):

			December 31,
			2021						2020
Cost:
Computer equipment			$	23,515					$	18,848
Office furniture and equipment			6,462						5,735
Leasehold improvements			42,419						37,391
			72,396						61,974
Accumulated depreciation			34,098						24,811
Property and equipment, net			$	38,298					$	37,163

Depreciation expensesand amortization expense of property and equipment, net for the years ended December 31, 2017, 20162021, 2020 and 20152019 were $3,328, $2,180$9,355, $9,903 and $1,615,$6,321, respectively.

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NOTE 5:- ACCRUED EXPENSES AND OTHER SHORT TERMSHORT-TERM LIABILITIES

		December 31,
		2017				2016
Employees		$	17,748			$	12,306
Accrued expenses			9,507				6,777
Government authorities and other			14,006				8,293
Foreign exchange forward contract derivatives			-				479
Other short term liabilities			1,192				624
		$	42,453			$	28,479

Accrued expenses and other short-term liabilities consist of the following (in thousands):

			December 31,
			2021						2020
Employees			$	44,057					$	32,593
Government authorities and other			38,487						37,268
Accrued expenses			19,620						13,337
Foreign exchange forward contract derivatives			62						—
Accrued expenses and other short-term liabilities			$	102,226					$	83,198

NOTE 6:- COMMITMENTS AND CONTINGENT LIABILITIES

a.

Liens:

LEASES

The Company has several liens grantedvarious operating leases for office space, vehicles and office equipment that expire through 2032. The lease agreements generally do not contain any material residual value guarantees or material restrictive covenants. Below is a summary of its operating right-of-use assets and operating lease liabilities (in thousands):

			December 31, 2021
Operating right-of-use assets			$	63,749
Operating lease liabilities, current			$	8,794
Operating lease liabilities, long-term			68,694
Total operating lease liabilities			$	77,488

Operating lease liabilities, current are included within accrued expenses and other short-term liabilities in the consolidated balance sheet.

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

Some of the real estate leases contain variable lease payments, including payments based on a Consumer Price Index ("CPI"). Variable lease payments based on a CPI are initially measured using the index in effect at lease adoption. Additional payments based on the change in a CPI are recorded as a period expense when incurred.

The Company has deposit guarantees issued by a financial institutions mainlyinstitution to secure various operating lease agreements in connection with its office space.

66

b.

Lease Commitments:

The Company rents its facilities in all locations under operating leases with

75

---

Minimum lease payments for the Company's right-of-use assets over the remaining lease periods expiring from 2018-2026. The lease agreements of VSL include extension options. VSL leases cars for its employees under operating lease agreements expiring at various dates from 2018-2020.

Aggregate minimum rental commitments under non-cancelable leases as of December 31, 20172021, are as follows (in thousands):

			December 31, 2021
2022			$	10,932
2023			11,347
2024			9,845
2025			9,884
2026			9,998
Thereafter			34,583
Total undiscounted lease payments			$	86,589
Less: Imputed interest			(9,101)
Present value of lease liabilities			$	77,488

The weighted average remaining lease terms and discount rates for the upcoming yearsall operating leases were as follows:

follows as of December 31, 2021:

Remaining lease term and discount rate:
Weighted average remaining lease term (years)			8.19
Weighted average discount rate			2.88		%

		Payments Due By Period
2018		$	6,418
2019			5,561
2020			4,335
2021			4,561
2022			4,587
Thereafter			21,063
		$	46,525

Total rent expensesoperating lease cost for the years ended December 31, 2017, 20162021, 2020 and 20152019 were $4,075, $3,258$6,920, $12,151 and $4,296,$8,912, respectively.

NOTE 7:- CONVERTIBLE SENIOR NOTES AND CAPPED CALL TRANSACTIONS

On May 11, 2020, the Company issued the 2025 Notes pursuant to an Indenture dated May 11, 2020 (the “Indenture”), between the Company and U.S. Bank National Association, as trustee. The total minimum rentoffering consisted of $220,000 aggregate principal amount plus the full exercise of the initial purchasers’ option to purchase up to an additional $33,000 aggregate principal amount. The net proceeds to the Company after the initial purchaser discount and issuance costs were approximately $245,158. The Company used $29,348 of the net proceeds from the offering to pay the cost of the capped call transactions described below.

The 2025 Notes will mature on August 15, 2025, unless earlier converted, redeemed or repurchased. Interest will be payable semi-annually in arrears on February 15 and August 15 of each year, beginning on August 15, 2020, at a rate of 1.25% per year.

The initial conversion rate for the 2025 Notes is 32.5668 shares of the Company’s common stock for each $1,000 principal amount of the 2025 Notes, which is equivalent to an initial conversion price of approximately $30.71 per share. The conversion rate is subject to adjustment in specified events. The 2025 Notes are convertible into shares of the Company’s common stock, at the option of a holder, prior to the close of business on the business day immediately preceding February 15, 2025, under certain conditions.

In addition, on or after February 15, 2025, a holder may convert all or any portion of its 2025 Notes at any time. During the three months ended December 31, 2021, the conversion feature of the 2025 Notes was triggered and therefore the 2025 Notes are currently convertible, in whole or in part, at the option of the holders from January 1, 2022 through March 31, 2022. Whether the 2025 Notes will be convertible following such period will depend on the continued satisfaction of this condition or another conversion condition. The Company has not received any conversion notices through the issuance date of our consolidated financial statements. Since the Company may elect to repay the 2025 Notes in cash, shares of our common stock, or a combination of both, it has continued to classify the future under the non-cancelable sublease2025 Notes as long-term debt on its consolidated balance sheet as of December 31, 2017 was $732.

For leases that contain predetermined fixed escalations2021.

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

If the Company undergoes a “fundamental change” (as defined in the Indenture), subject to certain conditions, holders may require the Company to repurchase for cash all or part of their 2025 Notes. The Indenture includes customary terms, including certain events of default after which the 2025 Notes may be due and payable immediately.

The Company accounted for the 2025 Notes in accordance with ASC 470-20 "Debt with Conversion and Other Options" and separated the 2025 Notes into liability and equity components. The carrying amounts of the minimum rent,liability components of the 2025 Notes were calculated by measuring the fair value of similar debt instruments that do not have an associated convertible feature. The carrying amounts of the equity components, representing the conversion option, were determined by deducting the fair value of the liability components from the par value of the 2025 Notes. This difference represents the debt discount that is amortized to interest expense over the terms of the 2025 Notes using the effective interest rate method. The carrying amount of the equity components representing the conversion option was approximately $31,779 for the 2025 Notes and is recorded in additional paid-in capital and are not remeasured as long as they continue to meet the conditions for equity classification.

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

The net carrying amount of the liability and equity components of the 2025 Notes was as follows (in thousands):

			As of
			December 31, 2021
Liability component
Principal			$	253,000
Unamortized discount			(22,759)
Unamortized issuance costs			(4,911)
Net carrying amount			$	225,330
Equity component, net of discount and issuance costs			$	30,794

The interest expense recognized related to the 2025 Notes for the years ended December 31, 2021 and 2020 was as follows (in thousands):

						December 31, 2021						December 31, 2020
Contractual interest expense						$	3,162					$	2,012
Amortization of debt discount						5,651						3,369
Amortization of debt issuance costs						1,219						727
Total						$	10,032					$	6,108

As of December 31, 2021, the total estimated fair value of the 2025 Notes was approximately $436,425. The fair value was determined based on the closing trading price per $100 of the 2025 Notes as of the last day of trading for the period. The fair value of the 2025 Notes is primarily affected by the trading price of our common stock and market interest rates. The fair value of the 2025 Notes is considered a Level 2 within the fair value hierarchy and was determined based on inputs that are observable in the market or that could be derived from, or corroborated with, observable market data, quoted price of the 2025 Notes in an over-the-counter market.

Capped Call Transactions

In May 2020, in connection with the pricing of the 2025 Notes, the Company recognizesentered into privately negotiated capped call transactions (the “Capped Call Transactions”). The Capped Call Transactions are generally expected to reduce the

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potential dilution to the Company’s common stock upon any conversion of the 2025 Notes and/or offset any cash payments the Company is required to make in excess of the principal amount of converted 2025 Notes, as the case may be, with such reduction and/or offset subject to a cap initially equal to $47.24 (the "Cap Price").

The Capped Call Transactions are separate transactions, and are not part of the terms of the 2025 Notes and will not change the holders’ rights under the 2025 Notes. As the Capped Call Transactions are considered indexed to the Company's stock and are considered equity classified, they are recorded in stockholders’ equity on the consolidated balance sheet and are not accounted for as derivatives. The cost of the Capped Call Transactions was approximately $29,348 and was recorded as a reduction to additional paid-in capital.

NOTE 8:- BUSINESS COMBINATIONS

On October 29, 2020, the Company completed the acquisition of all the share capital of Polyrize Security Ltd. ("Polyrize"). The deal was for $39,380 and comprised of the total fair value of consideration of $29,620 (the "Purchase Price") and an aggregate conditional retention consideration of $9,760 to be paid to its founders over three years subject to their continued employment with the Company. The Purchase Price consisted of $24,713 in cash, $4,198 for the fair value of 106,926 shares of our common stock issued and $709 in fair value of replacement equity awards attributable to pre-acquisition service. The conditional retention consideration expenses related rent expenseto the founders will be recorded as compensation expenses in the statement of operations over the period.

The following table summarizes the allocation of the purchase price to the fair value of the tangible and intangible assets acquired and liabilities assumed as of the acquisition date:

			Purchase Price Allocation (in thousands)						Estimated Useful Life (in years)
Net tangible assets acquired			$	375
Intangible assets:
Developed technology & trademarks			6,110						4
Goodwill			23,135
Total purchase price			$	29,620

The excess of purchase consideration over the fair value of net tangible and identifiable intangible assets acquired was recorded as goodwill. The Company believes the goodwill represents the synergies expected from expanded market opportunities when integrating Polyrize with our offerings. Acquisition-related costs of $325 are included in general and administrative expenses on our consolidated statements of operations for the year ended December 31, 2020.

NOTE 9:- GOODWILL AND INTANGIBLE ASSETS

On October 29, 2020, the Company completed the acquisition of the share capital of Polyrize, a provider of software that maps and analyzes relationships between users and data across a number of cloud applications and services.

Goodwill

Goodwill represents the excess of the purchase price over the identifiable tangible and intangible assets acquired less liabilities assumed arising from business combinations. The Company believes the goodwill represents the synergies expected from expanded market opportunities when integrating with its offerings.

All goodwill balances are subject to annual goodwill impairment testing. As of December 31, 2021, the Company concluded that no impairment for goodwill, including intangibles, was required.

Intangible Assets

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

78

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Intangible assets, net			Estimated Useful Life (in years)						December 31, 2021
Developed technology & trademarks			4						$	6,110
Total intangible assets									6,110
Less: Accumulated amortization									1,797
Total intangible assets, net									$	4,313

Intangible assets are expensed on a straight-line basis fromover the date of possessionuseful life of the property to the end of the initial lease term.asset. The Company records any differences betweenrecorded amortization expense of $1,533 and $264 for the straight-line rent amountsyears ended December 31, 2021 and amounts payable under the leases2020, respectively.

The following table summarizes estimated future amortization expense of our intangible assets as part of deferred rent, in accrued liabilities or long-term liabilities, as appropriate. Cash or lease incentives received upon entering into certain leases (“tenant allowances”) are recognized on a straight-line basis as a reduction to rent from the date of possession of the property through the end of the initial lease term. The Company records the unamortized portion of tenant allowances as a part of deferred rent, in current liabilities or other long-term liabilities, as appropriate. As of December 31, 2017 and 2016, deferred rent included $941 and $624, respectively, in current liabilities in the Company’s consolidated balance sheets, and deferred rent included $4,780 and $5,377, respectively, in long-term liabilities in the Company’s consolidated balance sheets.

On March 31, 2014, the Company entered into a promissory note and related security documents with Bank Leumi USA. 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 less 0.15%, provided that the annual interest rate applicable to advances will not be lower than 4.10%. As of December 31, 2017, that rate amounted to 4.35%. 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 August 15, 2018 at which time the principal sum of each such loan, together with accrued and unpaid interest payable, will become due and payable. As of December 31, 2017, 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.

2021 (in thousands):

Years ending December 31,			Amount
2022			1,525
2023			1,525
2024			1,263
Total future amortization expense			$	4,313

NOTE 7:10:- 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 years ended December 31, 2021 and 2020.

The following table sets forth the Company’s assets and liabilities that were measured at fair value as of December 31, 20172021 and 20162020 by level within the fair value hierarchy (in thousands):

As of December  31, 2017

As of December 31, 2016

Level I

Level II

Level III

Fair Value

Level I

Level II

Level III

Fair Value

Financial assets:

Cash equivalents:

Money market funds

6,870

–

–

6,870

6,140

–

–

6,140

Short-term investments:

US Treasury securities

39,731

–

–

39,731

–

–

–

–

Term bank deposits

40,137

–

–

40,137

65,493

–

–

65,493

Other current assets:

Forward foreign exchange contracts

–

163

–

163

–

–

–

–

Financial liabilities:

Forward foreign exchange contracts

–

–

–

–

–

(479

)

–

(479

)

Total financial assets (liabilities)

$

86,738

$

163

$

–

$

86,901

$

71,633

$

(479

)

$

–

$

71,154

67

			As of December 31, 2021																								As of December 31, 2020
			Level I						Level II						Level III						Fair Value						Level I						Level II						Level III						Fair Value
Financial assets:
Cash equivalents:
Money market funds			$	414,942					$	—					$	—					$	414,942					$	10,712					$	—					$	—					$	10,712
Marketable securities:
US Treasury securities			—						—						—						—						34,117						—						—						34,117
Prepaid expenses and other current assets:
Forward foreign exchange contracts			—						6,083						—						6,083						—						3,332						—						3,332
Financial liabilities:
Accrued expenses and other short-term liabilities:
Forward foreign exchange contracts			—						(62)						—						(62)						—						—						—						—
Total financial assets (liabilities)			$	414,942					$	6,021					$	—					$	420,963					$	44,829					$	3,332					$	—					$	48,161

See Note 7 “Convertible Senior Notes and Capped Call Transactions” for the carrying amount and estimated fair value of the Company's 2025 Notes as of December 31, 2021.

NOTE  8:11:- STOCKHOLDERS’ EQUITY

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	a.
a.			Composition of common stock capital:

		Authorized								Issued and outstanding
		Number of shares
		December 31,								December 31,
		2017				2016				2017				2016
Stock of $0.001 par value:
Common stock			200,000,000				200,000,000				28,146,162				26,821,762

			Authorized												Issued and outstanding
			Number of shares
			December 31,												December 31,
			2021						2020						2021						2020
Stock of $0.001 par value:
Common stock			200,000,000						200,000,000						107,509,096						95,456,862

	b.
b.			Common stock rights:

The Company’s Amended and Restated Certificate of Incorporation authorizes the Company to issue 200,000,000 shares of common stock, par value $0.001 per share.

The common stock confers upon its holders the right to participate in the general meetings of the Company, to vote at such meetings (each share represents one1 vote), to elect board members and to participate in any distribution of dividends or any other distribution of the Company’s property, including the distribution of surplus assets upon liquidation.

On February 8, 2021, the Company announced a 3-for-one split of its common stock to stockholders of record as of the close of business on March 12, 2021. Trading of the Company’s common stock began on a split-adjusted basis on March 15, 2021. Common stock and per share data in this Annual Report on Form 10-K have been adjusted for the impact of the split.

	c.
c.			Stock option plans:

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 4,713,31914,139,957 shares of common stock available for issuance to employees, directors, officers and consultants of the Company and its subsidiaries. The optionsawards 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 1,904,6335,713,899 shares of common stock for issuance under the 2013 Plan to employees, directors, officers and consultants of the Company and its subsidiaries. The number of shares of common stock available for issuance under the 2013 Plan was increased on January 1, 2016 and has been, and will be, increased on each January 1 thereafter by four percent (4%) of the number of shares of common stock issued and outstanding on each December 31 immediately prior to the date of increase (rounded down to the nearest whole share), but the amount of each increase will be limited to the number of shares of common stock necessary to bring the total number of shares of Common Stock available for grant and issuance under the 2013 Plan to five percent (5%) of the number of shares of common stock issued and outstanding on each December 31. OnSince January 1, 2018, 2017 and 2016, the share reserve under the 2013 Plan washas been automatically increased by 1,125,846, 1,072,870 and 1,042,766 shares, respectively.an aggregate of 24,217,741 shares. Awards granted under the 2013 Plan generally vest over four years. Any award that is forfeited or canceled before expiration becomes available for future grants under the 2013 Plan.

On October 22, 2020, and as part of the acquisition, the Company’s board of directors approved the assumption of a certain portion of Polyrize Options pursuant to the terms and conditions of the Polyrize 2019 Share Incentive (“Polyrize Plan”) as part of the acquisition.

A summary of employees’ stock options activities during the year ended December 31, 20172021 is as follows:

		Year ended December 31, 2017
		Number				Weighted average exercise price				Aggregate intrinsic value (in thousands)				Weighted average remaining contractual life (years)
Options outstanding at the beginning of the year			2,388,348			$	15.243			$	30,025				5.861
Granted			-			$	-
Exercised			(832,270	)		$	13.031
Forfeited			(99,793	)		$	19.930
Options outstanding at the end of the period			1,456,285			$	16.172			$	47,152				4.906
Vested and expected to vest			1,456,285			$	16.172			$	47,152				4.906
Options exercisable at the end of the period			1,262,206			$	15.052			$	42,282				4.595

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80

A summary of employees’ stock options activities during the years ended December 31, 2016 and 2015 is as follows:

---

		Year ended December 31, 2016
		Number				Weighted average exercise price				Aggregate intrinsic value (in thousands)				Weighted average remaining contractual life (years)
Options outstanding at the beginning of the year			2,782,560			$	14.026			$	21,337				6.246
Granted			135,000			$	16.870
Exercised			(445,535	)		$	5.901
Forfeited			(83,677	)		$	27.126
Options outstanding at the end of the period			2,388,348			$	15.243			$	30,025				5.861
Vested and expected to vest			2,331,800			$	15.074			$	29,689				5.806
Options exercisable at the end of the period			1,752,416			$	12.583			$	26,473				5.119

		Year ended December 31, 2015
		Number				Weighted average exercise price				Aggregate intrinsic value (in thousands)				Weighted average remaining contractual life (years)
Options outstanding at the beginning of the year			4,080,611			$	9.697			$	95,855				6.092
Granted			191,200			$	28.253
Exercised			(1,334,351	)		$	1.521
Forfeited			(154,900	)		$	25.265
Options outstanding at the end of the period			2,782,560			$	14.026			$	21,337				6.246
Vested and expected to vest			2,677,503			$	13.623			$	21,284				6.156
Options exercisable at the end of the period			1,794,249			$	8.841			$	20,496				5.035

			Year ended
			December 31, 2021
			Number						Weighted average exercise price						Aggregate intrinsic value (in thousands)						Weighted average remaining contractual life (years)
Options outstanding at the beginning of the year			1,022,763						$	6.862					$	47,417					3.452
Granted			—						$	—
Exercised			(215,893)						$	6.128
Forfeited			(3,000)						$	2.077
Options outstanding at the end of the period			803,870						$	7.077					$	33,524					2.747
Options exercisable at the end of the period			787,775						$	7.106					$	32,830					2.638

There were no options granted in 2017. The weighted average grant date fair values of options granted during the year ended December 31, 2016 and 2015 were $16.870 and $28.637, respectively.

2021 pursuant to our 2005 Stock Plan, 2013 Plan or Polyrize Plan (collectively "Stock Plans").

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 years ended December 31, 2017, 20162021, 2020 and 20152019 was $22,382, $9,418$13,153, $9,922 and $27,885,$12,453, respectively. As of December 31, 20172021 and 2016,2020, there was $2,208$496 and $3,380,$810, respectively, of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the 2005our Stock Plan and 2013 Plan.Plans. This cost is expected to be recognized over a weighted-average period of approximately 0.8871.802 and 1.7742.721 years, respectively.

69

The options outstanding as of December 31, 20172021 have been separated into ranges of exercise price as follows:

Range of exercise price				Options outstanding as of December 31, 2017				Weighted average remaining contractual life (years)				Weighted average exercise price				Options exercisable as of December 31, 2017				Weighted average remaining contractual life (years)				Weighted average exercise price of options exercisable
$1.039	-	1.576			401,476				1.383			$	1.295				401,476				1.383			$	1.295
$6.230	-	8.800			55,929				3.908			$	7.125				55,929				3.908			$	7.125
$12.470	-	16.870			228,001				5.820			$	13.435				200,917				5.508			$	12.972
$19.510	-	21.660			374,257				6.606			$	21.207				284,671				6.567			$	21.201
$22.010	-	24.230			170,815				6.193			$	22.292				144,967				6.182			$	22.342
	$29.880				117,829				7.145			$	29.880				74,758				7.145			$	29.880
	$39.860				107,978				6.225			$	39.860				99,488				6.225			$	39.860
					1,456,285				4.906			$	16.172				1,262,206				4.595			$	15.052

Range of exercise price																		Options outstanding as of December 31, 2021						Weighted average remaining contractual life (years)						Weighted average exercise price						Options exercisable as of December 31, 2021						Weighted average remaining contractual life (years)						Weighted average exercise price of options exercisable
$	4.157					—						5.682						224,661						2.959						$	4.883					208,566						2.561						$	4.808
$	6.503					—						8.077						433,307						2.559						$	7.111					433,307						2.559						$	7.111
						$	9.960											120,180						3.142						$	9.960					120,180						3.142						$	9.960
						$	13.287											25,722						2.222						$	13.287					25,722						2.222						$	13.287
																		803,870						2.747						$	7.077					787,775						2.638						$	7.106

The options outstanding as of December 31, 2016 have been separated into ranges of exercise price as follows:

Range of exercise price				Options outstanding as of December 31, 2016				Weighted average remaining contractual life (years)				Weighted average exercise price				Options exercisable as of December 31, 2016				Weighted average remaining contractual life (years)				Weighted average exercise price of options exercisable
$0.901	-	1.576			710,562				2.482			$	1.317				710,562				2.482			$	1.317
$6.230	-	8.800			89,373				4.963			$	6.953				89,373				4.963			$	6.953
$12.470	-	16.870			442,507				7.078			$	13.812				279,863				6.163			$	12.470
$19.510	-	21.660			546,959				7.622			$	21.205				307,302				7.558			$	21.200
$22.010	-	24.230			295,513				7.299			$	22.278				191,891				7.289			$	22.316
	$29.880				154,200				8.145			$	29.880				70,684				8.145			$	29.880
	$39.860				149,234				7.225			$	39.860				102,741				7.225			$	39.860
					2,388,348				5.861			$	15.243				1,752,416				5.119			$	12.583

	d.
d.			Options issued to consultants:

The Company’s outstanding options granted to consultants for services as of December 31, 20172021 were as follows:

Issuance date		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			4,188			$	21.140				4,083			August 2023
March 2014			7,953			$	39.860				7,163			March 2024
May 2014			6,075			$	22.010				5,317			May 2024
November 2014			7,107			$	21.660				4,897			November 2024
May 2015			2,000			$	19.510				1,292			May 2025
February 2016			2,500			$	16.870				1,145			February 2026
			31,323								25,397

Issuance date			Number of options outstanding and exercisable						Exercise price per share						Exercisable through
August 2013			6,000						$	7.047					August 2023
March 2014			4,950						$	13.287					March 2024
May 2014			3,000						$	7.337					May 2024
November 2014			9,300						$	7.220					November 2024
February 2016			3,000						$	5.623					February 2026
			26,250

There were no options granted in 2021 pursuant to our Stock Plans.

	70
e.			Restricted stock units and performance stock units:

81

 The Company’s outstanding options granted to consultants for services as of December 31, 2016 were as follows:

---

Issuance date		Options for shares of common stock				Exercise price per share				Options exercisable				Exercisable through
		(number)								(number)
February 2013			1,500			$	12.470				1,344			February 2023
August 2013			4,188			$	21.140				3,104			August 2023
October 2013			750			$	24.230				547			October 2023
March 2014			13,100			$	39.860				8,187			March 2024
May 2014			6,850			$	22.010				3,704			May 2024
November 2014			10,246			$	21.660				4,364			November 2024
May 2015			5,250			$	19.510				1,750			May 2025
February 2016			2,500			$	16.870				—			February 2026
			44,384								23,000

e.

Restricted stock units:

The following provides a

A summary of the restricted stock unit activityunits and performance stock units for employees, consultants and non-employee directors of the Company for the year ended December 31, 2017:

2021 is as follows:

		Number of Shares Underlying Outstanding Restricted Stock Units				Weighted- Average Grant Date Fair Value
Outstanding as of January 1, 2017			1,399,127			$	19.96
Granted			1,295,653			$	31.58
Vested			(407,458	)		$	21.89
Forfeited			(269,201	)		$	22.75
Unvested as of December 31, 2017			2,018,121			$	27.32

			Number of Shares Underlying Outstanding Restricted Stock Units and Performance Stock Units						Weighted- Average Grant Date Fair Value
Outstanding as of January 1, 2021			8,388,963						$	23.00
Granted			3,542,175						$	65.25
Vested			(3,615,077)						$	20.10
Forfeited			(589,936)						$	38.10
Unvested as of December 31, 2021			7,726,125						$	42.53

As of December 31, 2021 and 2020, there was $265,345 and $141,408, respectively, of total unrecognized compensation cost related to employees and non-employees unvested restricted stock units and performance stock units which is expected to be recognized over a weighted-average period of 2.078 and 2.120 years, respectively.

The following providesCompany grants performance stock units to certain employees under the 2013 Plan. The number of performance stock units earned and eligible to vest are generally determined after a summaryone-year performance period, based on achievement of certain Company financial performance measures and the recipient’s continued service. The Company recognizes share-based compensation expense for the performance stock units on a straight-line basis over the requisite service period for each separately vesting portion of the restrictedaward when it is probable that the performance conditions will be achieved. Compensation expense for performance stock unit activity forunits with financial performance measures is measured using the Company forfair value at the year ended December 31, 2016:

date of grant and recorded over the three-year vesting period, and may be adjusted over the vesting period based on interim estimates of performance against the pre-set objectives.

		Number of Shares Underlying Outstanding Restricted Stock Units				Weighted- Average Grant Date Fair Value
Outstanding as of January 1, 2016			643,506			$	23.38
Granted			1,038,044			$	19.67
Vested			(199,074	)		$	22.82
Forfeited			(83,349	)		$	20.21
Unvested as of December 31, 2016			1,399,127			$	19.96

	f.
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 500,0001,500,000 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 increasebe, 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) 400,0001,200,000 shares of common stock. OnSince January 1, 2018, 2017 and 2016, the share reserve under the ESPP washas been automatically increased by 188,813, 158,695 and 21,383 shares, respectively.an aggregate of 3,004,765 shares. The ESPP will continue in effect until the earlier of (i) the date when no shares of common stock are available for issuance thereunder or (ii) June 30, 2025; unless terminated prior thereto by the Company’s board of directors or compensation committee, each of which has the right to terminate the ESPP at any time.

71

	g.
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 (in thousands):

		Year ended December 31,
		2017				2016				2015
Cost of revenues		$	1,078			$	699			$	419
Research and development			5,209				3,052				1,954
Sales and marketing			8,542				6,104				3,041
General and administrative			5,006				3,083				2,380
Total		$	19,835			$	12,938			$	7,794

82

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			Year ended
			December 31,
			2021						2020						2019
Cost of revenues			$	8,995					$	5,013					$	2,561
Research and development			36,033						21,979						13,188
Sales and marketing			39,684						25,578						14,782
General and administrative			25,067						16,015						15,608
Total			$	109,779					$	68,585					$	46,139

h.			Follow-on offering:

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

NOTE 9:12:- INCOME TAXES

	a.
a.			U.S. Tax Reform:

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “TCJA”"TCJA"). was signed into law. The TCJA makes broad and complex changes to the Code.Code that impact the Company's provision for income taxes. The changes include, but are not limited to:

·		A corporate income tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017 (“Rate Reduction”);
·		The transition of U.S international taxation from a worldwide tax system to a territorial system by providing a 100 percent deduction to an eligible U.S. shareholder on foreign sourced dividends received from a foreign subsidiary (“100% Dividend Received Deduction”);
·		A one-time transition tax on •Decreasing the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017; and
·		Taxation of GILTI earned by foreign subsidiaries beginning after December 31, 2017. The GILTI tax imposes a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations.

The Company has not completed its accounting for the income tax effects of the TCJA. Where the Company has not yet been able to make reasonable estimates of the impact of certain elements, the Company has not recorded any amounts related to those elements and has continued accounting for them in accordance with ASC 740 on the basis of the tax laws in effect immediately prior to the enactment of the TCJA, pursuant to SEC Staff Accounting Bulletin No. 118.

The Company has calculated its best estimate of the impact of the TCJA for its year end income tax provision in accordance with its understanding of the TCJA and guidance available as of the date of this filing. As a result:

Rate Reduction

The TCJA reduces the U.S. federal corporate income tax rate from 35% to 21% for tax years beginning after December 31, 2017. In addition, the TCJA makes certain changes to the depreciation rules and implements new limits on the deductibility of certain executive compensation.

The Company estimates that after it utilizes its $23,992 net operating losses carryforwards for Federal income tax purposes, available as of December 31, 2017, the Rate Reduction is expected to positively impact the Company’s future US after tax earnings. However, the ultimate impact is subject to the effect of other complex provisions in the TCJA, including the GILTI tax, which the Company is currently reviewing, and it is possible that any impact of GILTI tax could significantly reduce the benefit of the Rate Reduction. Due to the uncertain practical and technical application of many of these provisions, it is currently not possible to reliably estimate whether GILTI will apply and if so, how it would impact the Company.

72

Deemed Repatriation Transition Tax

The Deemed Repatriation Transition Tax is a tax on previously untaxed accumulated and current earnings and profits (“E&P”) of certain of our foreign subsidiaries. To determine the amount of the Transition Tax, the Company must determine, in addition to other factors, the amount of post-1986 E&P of its foreign subsidiaries, as well as the amount of non-U.S. income taxes paid on such earnings. Due to the aggregate accumulated deficits of our foreign subsidiaries, the Company will not be subject to any transition tax under this provision of the TCJA.

100% Dividend Received Deduction and Indefinite Reinvestment Assertion

Effectiveeffective for tax years beginning after December 31, 2017 the TCJA provides a 100% dividend received deduction, subject to a one-year holding period, to a U.S. corporate shareholder for the foreign source portion(“Rate Reduction”); and

•Taxation of dividends received from a “specified 10-percent owned foreign corporation.”

Prior to enactment of the TCJA, the Company had asserted indefinite reinvestment of the earnings of its foreign subsidiaries. Under the TCJA, however, these earnings are no longer subject to U.S. tax as a result of the transition tax. Nevertheless, a distribution of the earnings from ourGILTI earned by foreign subsidiaries may still be subject to withholding taxes imposed by the local country from which the earnings would be distributed. Because the Company did not have sufficient information as of year-end to evaluate how the TCJA would impact the Company’s existing position that its foreign earnings are permanently reinvested, the Company has not included a provisional amount for this item in its financial statements for fiscal yearbeginning after December 31, 2017. The Company will record amounts as needed for this item beginningGILTI tax imposes a tax on foreign income in the first reporting period within the measurement period in which the Company obtains the necessary information and is able to analyze and use to prepareexcess of a reasonable estimate.

deemed return on tangible assets of foreign corporations.

GILTI Tax

The TCJA creates a new requirement that certain

Certain income (i.e.(i.e., GILTI) earned by controlled foreign corporations (“CFCs”) must be included currently in the gross income of the CFCs’ U.S. shareholder. GILTI is the excess of the shareholder’s “net CFC tested income” over the net deemed tangible income return, which is currently defined as the excess of (1) 10 percent of the aggregate of the U.S. shareholder’s pro rata share of the qualified business asset investment of each CFC with respect to which it is a U.S. shareholder, over (2) the amount of certain interest expense taken into account in the determination of net CFC-tested income.

Because of the complexity of the new GILTI tax rules,

For 2021, the Company is continuingnot subject to evaluate this provisiontax on account of GILTI as it has net CFC tested loss on an aggregated basis.

Accounting for the TCJA

The Company accounted for the tax impact related to the TCJA and believe its analysis to be completed. The Company recognizes that the application of ASC 740. Under U.S. GAAP,IRS is continuing to publish and finalize ongoing guidance which may modify accounting interpretation for the TCJA, the Company would look to account for these impacts in the period of such change is permitted to make an accounting policy election to either treat taxes due on future inclusions in U.S. taxable income related to GILTI as a current-period expense when incurred or to factor such amounts into the Company’s measurement of its deferred taxes.

Whether the Company is expected to have future U.S. inclusions in taxable income related to GILTI depends on not only its current structure and estimated future results of global operations but also its intent and ability to modify its structure and/or business, The Company has not yet completed its analysis of the GILTI tax rules and is not yet able to reasonably estimate the effect of this provision of the TCJA or make an accounting policy election for the ASC 740 treatment of the GILTI tax. Therefore, the Company has not recorded any amounts related to potential GILTI tax in its financial statements and has not yet made a policy decision regarding whether to record deferred taxes on GILTI.

enacted.

	b.
b.			The Company:

The Company is taxed in accordance with U.S. tax laws.

83

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As of December 31, 2017,2021, the Company had gross federal net operating loss carry-forward("NOL") carry-forwards of approximately $318,321, of which approximately $22,907 expire starting in 2032 and the remainder do not expire and can only be used to offset 80% of taxable income. As of December 31, 2021, the Company had NOL carry-forwards for federal, state and foreign income tax purposes of approximately $23,992, $10,646$201,029 and $534,$3,870, respectively. If not utilized, these carryforwards willState NOL carry-forwards of $172,131 expire starting in 2028, 20202023 and indefinitely for federal, state and foreign tax purposes, respectively.the remainder do not expire. Foreign NOL carry-forwards do not expire. In addition, as of December 31, 2017,2021, the Company had federal research credit, retention credit, and foreign tax credit and Ireland Employment credit carryforwards of approximately $1,412, $24, $190 and $195,$19, respectively. If not utilized, the federal tax carryforwards will begin to expire in 2033, 2032 and 2026, respectively. The Company alsoIreland has credits in Israel totaling approximately $344. These credits have no expiration date. Utilization ofon the employment credit.

A U.S. net operating lossescorporation's ability to utilize its federal and credits may be subjectstate NOL and tax credit carryforwards to substantial annual limitations due to the “change in ownership” provisionsoffset its taxable income is limited under Section 382 of the Code if the corporation undergoes an ownership change (within the meaning of Code Section 382). In general, an “ownership change” occurs whenever the percentage of the stock of a corporation owned by “5-percent shareholders” (within the meaning of Code Section 382) increases by more than 50 percentage points over the lowest percentage of the stock of such corporation owned by such “5-percent shareholders” at any time over the testing period.

An ownership change under Code Section 382 would establish an annual limitation to the amount of NOL and similar state provisions.tax credit carryforwards the Company could utilize to offset its taxable income or income tax in any single year. The annual limitation may result in the expiration of net operating losses and credits before utilization and in the event the Company undergoeswe have a change of ownership, utilization of the carryforwards could be restricted.

73

	c.
c.			Loss before taxes on income is comprised as follows:  follows (in thousands):

		Year ended December 31,
		2017				2016				2015
Domestic		$	(18,234	)		$	(16,898	)		$	(20,098	)
Foreign			6,999				319				(499	)
		$	(11,235	)		$	(16,579	)		$	(20,597	)

			Year ended
			December 31,
			2021						2020						2019
Domestic			$	(101,245)					$	(80,086)					$	(82,007)
Foreign			(9,594)						(5,812)						5,631
			$	(110,839)					$	(85,898)					$	(76,376)

	d.
d.			Taxes on income (loss) are comprised as follows:follows (in thousands):

		Year ended December 31,
		2017				2016				2015
Current:
Domestic:
Federal		$	(92	)		$	92			$	—
State			191				109				85
Foreign			2,516				930				601
Total current income tax		$	2,615			$	1,131			$	686
Deferred:
Foreign		$	(156	)		$	—			$	—
Total deferred income tax		$	(156	)		$	—			$	—
Income tax expense		$	2,459			$	1,131			$	686

			Year ended
			December 31,
			2021						2020						2019
Current:
Domestic:
Federal			$	(549)					$	90					$	665
State			145						128						13
Foreign			5,182						8,854						1,619
Total current income tax			$	4,778					$	9,072					$	2,297
Deferred:
Domestic:
Federal			$	43					$	8					$	—
State			6						1						—
Foreign			1,195						(969)						91
Total deferred income tax			$	1,244					$	(960)					$	91
Income tax expense			$	6,022					$	8,112					$	2,388

84

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	e.
e.			Deferred income taxes:

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The Company’s deferred tax assets are derived from its U.S. net operating loss carry forwardsNOL carry-forwards and other temporary differences.

In assessing

ASC 740 requires an assessment of both positive and negative evidence concerning the realizationrealizability of our deferred tax assets in each jurisdiction. After considering evidence such as current and cumulative financial reporting incomes, the Company considers whether itexpected sources of future taxable income and tax planning strategies, the Company’s management concluded that a valuation allowance is more likely than not that all orrequired in the Unites States and some portionforeign jurisdictions. However, other foreign jurisdictions recorded a net deferred tax liability of $97 as of December 31, 2021. Future changes in these factors, including the Company’s anticipated results, could have a significant impact on the realization of the deferred tax assets will not be realized. Based on the Company’s history of losses in the US and Israel, the Company established a valuation allowance on its US and Israeli deferred tax assets.

		December 31,
		2017				2016
Carry forward losses and credits		$	7,407			$	6,294
Deferred revenues			14,226				16,774
Accrued payroll, commissions, vacation			1,105				2,078
Allowance for doubtful accounts			633				43
Accrued severance pay			239				372
Other			2,668				2,939
Net deferred tax assets before valuation allowance			26,278				28,500
Valuation allowance			(26,122	)			(28,500	)
Net deferred tax assets		$	156			$	—

Valuation allowance decreased by $2,378 during 2017, which included the impact of the Company’s adoption of ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, on January 1, 2017. ASU 2016-09 simplifies several aspects of accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, statutory tax withholding requirements and classification in the statements of cash flows.  Upon adoption, the Company recognized the previously unrecognized excess tax benefits using the modified retrospective transition method.  The adoption resultedwould result in an increase or decrease to the valuation allowance and a corresponding charge to income tax expense. The Company reevaluates the judgements surrounding its estimates and makes adjustments as appropriate each reporting period.

Significant components of our deferred tax assets and liabilities as of $7,849December 31, 2021 and a decrease to retained earnings of the same amount with an offsetting entry to valuation allowance which was also recorded to retained earnings. As a result, the adoption of this standard did not have an impact on our consolidated balance sheet, results of operations, cash flows or statement of stockholders’ equity. Without2020 are as follows (in thousands):

			December 31,
			2021						2020
Deferred tax assets:
Carry forward losses and credits			$	82,530					$	53,221
Deferred revenues			11,628						13,054
Accrued payroll, commissions, vacation			6,867						3,808
Equity compensation			18,469						10,348
Allowance for credit losses			1,711						1,287
Accrued severance pay			391						312
Operating lease liability			14,453						11,302
Other			512						963
Deferred tax assets before valuation allowance			136,561						94,295
Valuation allowance			(118,882)						(77,542)
Deferred tax assets			$	17,679					$	16,753
Deferred tax liability:
Accrued compensation and other accrued expense			$	—					$	(48)
Operating lease right-of-use asset			(12,478)						(8,780)
Convertible senior notes, net			(5,298)						(6,797)
Deferred tax liability			$	(17,776)					$	(15,625)
Net deferred tax asset (liability)			$	(97)					$	1,128

The change in the valuation allowance the Company’s deferred tax assets would have increased by $7,849.

74

was approximately an increase of $41,340 and $14,943 during 2021 and 2020, respectively.

	f.
f.			Reconciliation of the theoretical tax expenses:

85

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A reconciliation between the theoretical tax expense, assuming all income is taxed at the statutory tax rate applicable to income of the Company, and the actual tax expense (benefit) as reported in the consolidated statements of operations is as follows:

follows (in thousands, except tax rate):

		Year ended December 31,
		2017				2016				2015
Loss before taxes, as reported in the consolidated statements of operations		$	(11,235	)		$	(16,579	)		$	(20,597	)
Statutory tax rate			34	%			34	%			34	%
Theoretical tax benefits on the above amount at the US statutory tax rate		$	(3,820	)		$	(5,637	)		$	(7,003	)
Income tax at rate other than the U.S. statutory tax rate			(934	)			68				333
Tax advances and non-deductible expenses including equity based compensation expenses			3,123				4,298				1,061
Operating losses and other temporary differences for which valuation allowance was provided			(10,203	)			3,001				6,558
Research and Development Tax Credit			1,126				(1,182	)			-
State tax			(563	)			(536	)			(477	)
Impact of rate change			12,121				(360	)			(82	)
Change in tax reserve for uncertain tax positions			1,576				1,209				320
Other individually immaterial income tax items			33				270				(24	)
Actual tax expense		$	2,459			$	1,131			$	686

			Year ended December 31,
			2021						2020						2019
Loss before taxes, as reported in the consolidated statements of operations			$	(110,839)					$	(85,898)					$	(76,376)
Statutory tax rate			21		%				21		%				21		%
Theoretical tax benefits on the above amount at the US statutory tax rate			$	(23,276)					$	(18,039)					$	(16,039)
Income tax at rate other than the U.S. statutory tax rate			(2,621)						4,845						(2,508)
Tax advances and non-deductible expenses including equity based compensation expenses			(8,533)						934						(115)
Operating losses and other temporary differences for which valuation allowance was provided			41,340						22,189						22,818
State tax			(2,945)						(2,872)						(3,436)
Impact of rate change			(2,568)						—						401
Change in tax reserve for uncertain tax positions			4,850						1,489						1,247
Other individually immaterial income tax items			(225)						(434)						20
Actual tax expense			$	6,022					$	8,112					$	2,388

g.			A reconciliation of the beginning and ending amounts of unrecognized tax benefits in the years ended December 31, 20162021 and 20152020 are as follows:follows (in thousands):

Gross unrecognized tax benefits as of January 1, 2016		$	897
Increase/decrease in tax position for current year			992
Increase/decrease in tax position for prior years			217
Gross unrecognized tax benefits as of December 31, 2016		$	2,106
Increase/decrease in tax position for current year			1,752
Increase/decrease in tax position for prior years			(176	)
Gross unrecognized tax benefits as of December 31, 2017		$	3,682

Gross unrecognized tax benefits as of January 1, 2020			$	3,201
Increase in tax position for current year			1,787
Increase in tax position for prior years			979
Decrease in tax position for prior years			(171)
Decrease for lapse of statute of limitations/settlements			(1,106)
Gross unrecognized tax benefits as of December 31, 2020			$	4,690
Increase in tax position for current year			4,335
Increase in tax position for prior years			3,624
Decrease in tax position for prior years			(870)
Decrease for lapse of statute of limitations/settlements			(2,239)
Gross unrecognized tax benefits as of December 31, 2021			$	9,540

There was $3,682$9,540 of unrecognized income tax benefits that, if recognized, approximately $3,400$5,762 would impact the effective tax rate in the period in which each of the benefits is recognized. The Company includes interest and penalties related to unrecognized tax benefits within the provision for income taxes on the consolidated statements of operations. The total amount of penalties and interest is approximately $172$578 as of December 31, 2017.

2021.

	75
h.			Foreign taxation:

86

h.

Foreign taxation:

---

1. Israeli tax benefits under the Law for the Encouragement of Capital Investments, 1959 (the “Investment Law”):

Conditions for entitlement to

VSL has utilized various benefits under the benefits:

TheInvestment Law. Those benefits available to a Beneficiary Enterprise relate only to taxable income attributable to the specific investment program and are conditioned upon meeting the terms stipulated in the Investment Law, and the related regulations and the criteria set forth in the applicable certificate of approval (for a Beneficiary Enterprise).approval. If VSL does not fulfill these conditions, in whole or in part, the benefits canwill most likely be cancelled, and VSL may be required to refund the benefits, in an amount linked to the Israeli consumer price index plus interest.

The Office of the Chief Scientist at Israel’s Ministry of Industry, Trade and Labor approved the Israeli subsidiary as an R&D-incentive enterprise for a foreign resident company in accordance with the Encouragement of Capital Investments (Consolidated Version) Law.

If cash dividends are distributed out of tax exempt profits in a manner other than upon complete liquidation, VSL will then become liable for tax at the rate of 10%-25% (depending on the level of foreign investments in VSL) in respect of the amount distributed.

2. Undistributed earnings of foreign subsidiaries:

In general, it is the Company’s practice and intention to reinvest the earnings of its non-U.S. subsidiaries in those operations. Undistributed earnings, if any, of foreign subsidiaries are immaterial for all periods presented. Because the Company’s non-U.S. subsidiary earnings have previously been included in the computation of the one-time Transition Tax on foreign earnings required by the TCJA and throughout the years have been included in the GILTI computations, any additional taxes due with respect to such earnings or the excess of the amount for financial reporting over the tax basis of its foreign investments would generally be limited to foreign withholding taxes and/or U.S. state income taxes.

i.			Tax assessments:

As of December 31, 2017, approximately $3,401 of undistributed earnings from non-U.S. operations held by2021, the Company’s foreign subsidiaries andCompany's federal tax returns for the Beneficiary Enterprise of VSL are designated as indefinitely reinvested outsideyears 2010 through the U.S. Accordingly, no additional U.S. income taxes or additional foreign withholding taxes have been provided thereon. Determination ofcurrent period, excluding the amount of unrecognized deferred2016 tax liability related to these earnings is not practicable.

i.

Tax assessments:

The Company has not beenyear which was audited by the Internal Revenue Service, but are under current audit in various states forand most state tax years 2013 through 2016. As of December 31, 2016, our federal returns for the years ended 2012 through the current period and most state returns for the years ended 2009 through the current period, are still open to examination. In addition, all ofThe Company remains open to examination to the extent net carry-over unused operating losses and research and developmenttax credit carryforwards that may be used in futureattributable to those years are still subject to adjustment.

In January 2017,remain unutilized. The Company is currently under certain state tax audits.

During 2020, the Israeli Tax AuthoritiesAuthority initiated a withholding tax assessment audit on VSL for the years 2013-2015. The2016-2019. During 2021, the Company believes it has valid arguments to support its positions and intends to defend against anythe Israeli Tax Authority settled an income tax assessment.audit on VSL for the tax years 2016-2019. The Company has recorded a provision with respect to its uncertain tax positions in accordance with ASC 740.

The Company has final income tax assessments for VSL in Israel through 2012, VSUK in UK2019, Varonis (UK) Limited through 20122017 and VSF inVaronis France SAS through 2012.

VSG in Germany, VSC in Canada, VIRE in Ireland and VAUS in Australia2018.

All other foreign subsidiaries do not have final tax assessments since their respective inceptions.

87

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NOTE 10:13:- FINANCIAL EXPENSES, NET

			Year ended
			December 31,
			2021						2020						2019
Financial income:
Interest on bank deposits & other			$	164					$	674					$	2,041
			164						674						2,041
Financial expenses:
Amortization of debt discount and issuance costs			6,870						4,096						—
Interest expenses, principally from convertible note			3,168						2,017						—
Foreign currency transaction losses, net			1,699						1,726						2,225
Bank and other charges			572						318						205
			(12,309)						(8,157)						(2,430)
Financial expenses, net			$	(12,145)					$	(7,483)					$	(389)

		Year ended December 31,
		2017				2016				2015
Financial income:
Interest on bank deposits, net		$	747			$	520			$	330
Foreign currency transactions gains, net			1,773				—				—
Other			27				—				—
			2,547				520				330
Financial expenses:
Bank charges			185				149				95
Foreign currency transactions losses, net			—				1,224				1,711
Other			—				32				47
			(185	)			(1,405	)			(1,853	)
		$	2,362			$	(885	)		$	(1,523	)

76

NOTE 11:14:- 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 one1 reportable segment and unit and derives revenues from licensing of software saleand sales of professional services, maintenance and technical support (see Note 1 above for a brief description of the Company’s business). The following is a summary of revenues within geographic areas:

areas (in thousands):

		Year ended December 31,
		2017				2016				2015
Revenues based on customer’s location:
United States		$	134,438			$	100,281			$	73,343
EMEA (*)			70,128				52,410				44,994
Rest of the World			12,798				11,765				8,873
Total revenues		$	217,364			$	164,456			$	127,210

			Year ended
			December 31,
			2021						2020						2019
Revenues based on customer’s location:
North America			$	279,104					$	207,488					$	174,607
EMEA (*)			101,694						77,093						70,208
Rest of the World			9,336						8,108						9,375
Total revenues			$	390,134					$	292,689					$	254,190

	(*)	Sales to customers in France accounted for $22,762, $17,129 and $13,570 for the years ended December 31, 2017, 2016 and 2015, respectively.
		During the years ended December 31, 2017, 2016 and 2015, there were no sales to a single customer exceeding 10% of the Company’s revenues.

		December 31,
		2017				2016
Long-lived assets by geographic region:
United States		$	7,072			$	7,664
Israel			2,944				1,827
France			1,426				207
Other			454				212
		$	11,896			$	9,910

(*) Sales to customers in France accounted for 10.5% and 10.6% of the Company’s revenues for the years ended December 31, 2021 and 2020, respectively. Sales to customers in France did not exceed 10% of total revenues for the year ended December 31, 2019.

During the years ended December 31, 2021, 2020 and 2019, respectively, there were no sales to a single customer exceeding 10% of the Company’s revenues.

The following is a summary of long-lived assets, including property and equipment, net and operating lease right-of-use assets, within geographic areas (in thousands):

88

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			December 31,
			2021						2020
Long-lived assets by geographic region:
United States			$	43,317					$	30,938
Israel			40,169						42,471
Ireland			16,341						9,684
Other			2,220						1,994
			$	102,047					$	85,087

89

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Item 9.			Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

There have been no changes in our independent registered public accounting firm, Kost Forer Gabbay & Kasierer, a member of Ernst & Young Global, or disagreements with our accountants on matters of accounting and financial disclosure.

Item 9A.			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. The effectiveness of our internal control over financial reporting as of December 31, 2017 has been audited by Kost Forer Gabbay & Kasierer, a member of Ernst & Young Global and an independent registered public accounting firm, as stated in their report which is included in Part II, Item 8 of this Annual Report on Form 10-K.

77

Management’s Annual Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act). Our management conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 20172021 based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

Based on the results of its evaluation, management concluded that our internal control over financial reporting was effective as of December 31, 2017.

2021.

The effectiveness of our internal control over financial reporting as of December 31, 2021 has been audited by Kost Forer Gabbay & Kasierer, a member of Ernst & Young Global and an independent registered public accounting firm, as stated in their report which is included in Part II, Item 8 of this Annual Report on Form 10-K.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting that occurred during the three months ended December 31, 20172021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

We regularly seek to identify, develop and implement improvements to our technology systems and business processes, some of which may affect our internal control over financial reporting. These changes may include such activities as implementing new, more efficient systems, updating existing systems or platforms, automating manual processes or utilizing technology developed by third parties. These system changes are often phased in over multiple periods in order to limit the implementation risk in any one period, and as each change is implemented we monitor its effectiveness as part of its internal control over financial reporting.

Item 9B.			Other Information

None.

Item 5.02 Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers.

On February 3, 2022, in connection with a change in the reporting structure of the Company, Gilad Raz, the Company’s Chief Information Officer and Vice President of Technical Services, is no longer an executive officer of the Company, as defined under the Securities Exchange Act of 1934.

Item 5.03. Amendments to Articles of Incorporation or Bylaws; Change in Fiscal Year.

90

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On February 3, 2022, the Board adopted amendments to the Company’s Amended and Restated Bylaws (the “Bylaws,” and as so amended, the “Amended Bylaws”), effective immediately, to change the requirements under which stockholders may (i) nominate persons for election to the Board or bring business before an annual meeting of stockholders and (ii) nominate persons for election to the Board at a special meeting of stockholders called by the Board for that purpose, in each case, without including such matters in the Company’s proxy materials. As amended, nominations and notices of other business to be brought before an annual meeting must be received at the Company’s principal executive offices not earlier than the close of business on the 120th day nor later than the close of business on the 90th day prior to the anniversary date of the immediately preceding annual meeting. Director nominations for a special meeting must be received at the Company’s principal executive offices (i) not earlier than the close of business on the120th day prior to the scheduled date of the special meeting (ii) nor later than (a) the close of business on the 90th day prior to the scheduled date of the special meeting or (b) the close of business on the 10th day following the date on which the public disclosure of the date of the special meeting was first made. In addition, the amendments to the Bylaws expand upon the procedural requirements applicable to stockholders who wish to nominate director candidates or propose other business at a meeting of stockholders, by adding certain customary informational and other requirements regarding the proposing stockholder and any director nominee. The Board made the amendments to the timing and other procedural requirements for stockholder nominations and proposals of other business to better align them with peer company norms.

The foregoing summary of the amendments to the Bylaws is qualified in its entirety by reference to the Amended Bylaws, a copy of which is filed with this Annual Report as Exhibit 3.2 and incorporated in this Part II, Item 9B by reference. Additionally, a copy of the Amended Bylaws, marked to show changes to the Bylaws, is also included as Exhibit 3.3 hereto (additions are underlined and deletions are struck through) and incorporated herein by reference.

91

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PART III

Item 10.			Directors, Executive Officers and Corporate Governance

The information required by this item (other than the information set forth in the next paragraph in this Item 10) will be included in our definitive proxy statement with respect to our 20182022 Annual Meeting of Stockholders to be filed with the SEC, and is incorporated herein by reference.

reference (the “2022 Proxy Statement”).

Code of Business Conduct and Ethics

We have adopted a code of business conduct and ethics that is applicable to all of our employees, officers and directors, including our chief executive and senior financial officers. The code of business conduct and ethics is available on our website at www.varonis.com. We expect that any amendment to the code, or any waivers of its requirements, will be disclosed on our website. The inclusion of our website in this Form 10-K does not include or incorporate by reference the information on our website into this Form 10-K.

Procedures for Stockholder Nominations

The information required under Item 407(c)(3) of Regulation S-K is incorporated herein by reference to the discussion under “Stockholder Recommendations and Nominations of Directors” in our 2022 Proxy Statement on the procedures by which stockholders may recommend nominees to our Board or directly propose nominees for consideration pursuant to our Bylaws. No material changes to those procedures have occurred since the disclosure regarding those procedures in our definitive proxy statement for our 2021 Annual Meeting of Shareholders, except as set forth in Item 9B above.

Item 11.			Executive Compensation

The information called for by this item will be included in our definitive proxy statement with respect to our 20182022 Annual Meeting of Stockholders to be filed with the SEC and is incorporated herein by reference.

Item 12.			Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information called for by this item will be included in our definitive proxy statement with respect to our 20182022 Annual Meeting of Stockholders to be filed with the SEC and is incorporated herein by reference.

Item 13.			Certain Relationships and Related Transactions, and Director Independence

The information called for by this item will be included in our definitive proxy statement with respect to our 20182022 Annual Meeting of Stockholders to be filed with the SEC and is incorporated herein by reference.

Item 14.			Principal Accounting Fees and Services

The information called for by this item will be included in our definitive proxy statement with respect to our 20182022 Annual Meeting of Stockholders to be filed with the SEC and is incorporated herein by reference.

92

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PART IV

Item 15.			Exhibits and Financial Statement Schedules

(a) Financial Statements

Our consolidated financial statements are listed in the “Index to Consolidated Financial Statements” under Part II, Item 8 of this Annual Report on Form 10-K. All schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.

78

(b) Exhibits

Exhibit Number	Description of the Document
3.1(1)	Amended and Restated Certificate of Incorporation
3.2(2)	Amended and Restated Bylaws
4.1(3)	Third Amended and Restated Investors’ Rights Agreement, dated as of February 24, 2011, by and among the Company and certain holders of the Company’s capital stock named therein
10.1(4)†	Form of Indemnification Agreement between the Company and its directors and officers
10.2(5)†	2005 Stock Plan, as amended May 7, 2013
10.3(6)†	2013 Omnibus Equity Incentive Plan
10.4(7)†	Forms of Restricted Stock Unit Award Grant Notice and Restricted Stock Unit Award Agreement under the 2013 Omnibus Equity Incentive Plan
10.5(8)†	2015 Employee Stock Purchase Plan
10.6(9)†	Employment Agreement by and between the Company and Yakov Faitelson, dated as of February 10, 2014
10.7(10)†	Employment Agreement by and between the Company and Ohad Korkus, dated as of February 10, 2014
10.8(11)†	Employment Agreement by and between the Company and Guy Melamed, dated as of February 7, 2017
10.9(12)†	Amendment to Employment Agreement by and between the Company and Guy Melamed, dated as of February 8, 2018
10.10(13)†	Employment Agreement by and between the Company and James O’Boyle, dated as of February 10, 2014
10.11(14)	New York Office Lease, dated as of December 19, 2011 by and between JT MH 1250 Owner LP and the Company
10.12(15)	First Modification of Lease Agreement, dated as of June 18, 2014, between JT MH 1250 Owner LP and the Company
10.13(16)*	EMC Select Distributor Agreement for Software, dated January 24, 2007, by and between EMC Corporation and the Company
10.14(17)*	Amendment No. 1 to the EMC Select Distributor Agreement for Software, dated July 2011, by and between EMC Corporation and the Company
21.1	List of Subsidiaries
23.1	Consent of Kost Forer Gabbay & Kasierer, a member of Ernst & Young Global
31.1	Rule 13a-14(a) Certification of Chief Executive Officer and President of the Company in accordance with Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Rule 13a-14(a) Certification of Chief Financial Officer of the Company in accordance with Section 302 of the Sarbanes-Oxley Act of 2002
32.1**	Section 1350 Certification of Chief Executive Officer and President of the Company in accordance with Section 906 of the Sarbanes-Oxley Act of 2002
32.2**	Section 1350 Certification of Chief Financial Officer of the Company in accordance with Section 906 of the Sarbanes-Oxley Act of 2002
101	The following materials from the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Comprehensive Loss, (iv) the Consolidated Statements of Cash Flows and (v) related notes to these consolidated financial statements, tagged as blocks of text and in detail

†

Indicates management contract or compensatory plan or arrangement.

*

Confidential treatment for portions of this exhibit has been granted by the Securities and Exchange Commission.

79

**

Document has been furnished, is not deemed filed and is not to be incorporated by reference into any of the Company’s filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, irrespective of any general incorporation language contained in any such filing.

(1)

Filed as Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on May 8, 2014 (the “Company’s First Quarter 2014 Form 10-Q”) and incorporated herein by reference.

(2)

Filed as Exhibit 3.2 to the Company’s First Quarter 2014 Form 10-Q and incorporated herein by reference.

(3)

Filed as Exhibit 4.2 to the Company’s Registration Statement on Form S-1 (Registration No. 333-191840) (the “IPO Registration Statement”) with the SEC on October 22, 2013 and incorporated herein by reference.

(4)

Filed as Exhibit 10.1 to the IPO Registration Statement with the SEC on February 18, 2014 and incorporated herein by reference.

(5)

Filed as Exhibit 10.2 to the IPO Registration Statement with the SEC on October 22, 2013 and incorporated herein by reference.

(6)

Filed as Exhibit 99.2 to the Company’s Registration Statement on Form S-8 (Registration No. 333-194657) with the SEC on March 18, 2014 and incorporated herein by reference.

(7)

Filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on August 6, 2014 (the “Company’s Third Quarter 2014 Form 10-Q”) and incorporated herein by reference.

(8)

Filed as Exhibit A of the Proxy Statement on Form DEF 14A with the SEC on March 26, 2015 and incorporated herein by reference.

(9)

Filed as Exhibit 10.8 to the IPO Registration Statement with the SEC on February 18, 2014 and incorporated herein by reference.

(10)

Filed as Exhibit 10.9 to the IPO Registration Statement with the SEC on February 18, 2014 and incorporated herein by reference.

(11)

Filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on February 13, 2017 and incorporated herein by reference.

(12)

Filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on February 12, 2018 and incorporated herein by reference.

(13)

Filed as Exhibit 10.11 to the IPO Registration Statement with the SEC on February 18, 2014 and incorporated herein by reference.

(14)

Filed as Exhibit 10.11 to the IPO Registration Statement with the SEC on October 22, 2013 and incorporated herein by reference.

(15)

Filed as Exhibit 10.2 to the Company’s Third Quarter 2014 Form 10-Q and incorporated herein by reference.

(16)

Filed as Exhibit 10.12 to the IPO Registration Statement with the SEC on October 22, 2013 and incorporated herein by reference.

(17)

Filed as Exhibit 10.13 to the IPO Registration Statement with the SEC on October 22, 2013 and incorporated herein by reference.

The exhibits listed below in the accompanying “Index to Exhibits” are filed or incorporated by reference as part of this Annual Report on Form 10-K.

Item  16.			Form 10-K Summary

None.

80

None.

93

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

						VARONIS SYSTEMS, INC.
February 13, 20188, 2022						By:			/s/ Yakov Faitelson
									Yakov Faitelson
									Chief Executive Officer and President (Principal Executive Officer)
February 13, 20188, 2022						By:			/s/ Guy Melamed
									Guy Melamed
									Chief Financial Officer and Chief Operating Officer (Principal Financial Officer and Principal Accounting Officer)

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POWER OF ATTORNEY

Each

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Yakov Faitelson and Guy Melamed, jointly and each of them,severally, his true and lawfulor her attorneys-in-fact, and agents, each with fullthe power of substitution, and resubstitution, severally, for him and in his name, place and stead,or her in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that each of said attorneys-in-fact, and agents, or any of them or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated below.

indicated.

Signature

Title

Date

Signature

Title

Date

/s/ Yakov Faitelson

Chief Executive Officer, President

February 13, 20188, 2022

Yakov Faitelson

and Chairman of the Board (Principal Executive Officer)

/s/ Ohad Korkus

Chief Technology Officer and

February 13, 2018

Ohad Korkus

Director

/s/ Guy Melamed

Chief Financial Officer (Principal and Chief Operating Officer

February 13, 20188, 2022

Guy Melamed

(Principal Financial Officer)Officer and Principal Accounting Officer Officer)

/s/ Carlos Aued

Director

February 8, 2022

Carlos Aued

/s/ Kevin Comolli

Director

February 13, 20188, 2022

Kevin Comolli

/s/ John J. Gavin, Jr.

Director

February 13, 20188, 2022

John J. Gavin, Jr.

/s/ Gili Iohan

Director

February 13, 20188, 2022

Gili Iohan

/s/ Avrohom J. Kess

Director

February 8, 2022

Avrohom J. Kess

/s/ Ohad Korkus

Director

February 8, 2022

Ohad Korkus

/s/ Thomas F. Mendoza

Director

February 13, 20188, 2022

Thomas F. Mendoza

/s/ Rachel Prishkolnik

Director

February 8, 2022

Rachel Prishkolnik

/s/ Ofer Segev

Director

February 13, 20188, 2022

Ofer Segev

/s/ Rona Segev-Gal

Director

February 13, 2018

Rona Segev-Gal

/s/ Fred Van Den Bosch

Director

February 13, 20188, 2022

Fred Van Den Bosch

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EXHIBIT INDEX

Exhibit Number
Exhibit Number			Description of the Document
3.1(1)			Amended and Restated Certificate of Incorporation
3.2(2)3.2			Amended and Restated Bylaws
4.1(3)3.3			Third Amended and Restated Investors’ Rights Agreement,Bylaws (marked)
4.1			Description of Securities Registered under Section 12 of the Securities Exchange Act of 1934
4.2(2)			Indenture, dated as of February 24, 2011,May 11, 2020, by and among the Companybetween Varonis Systems, Inc. and certain holdersU.S. Bank National Association, as Trustee (including Form of the Company’s capital stock named thereinNote, representing Varonis Systems, Inc.’s 1.25% Convertible Senior Notes due 2025)
10.1(4)10.1(3)†			Form of Indemnification Agreement between the Company and its directors and officers
10.2(5)10.2(4)†			2005 Stock Plan, as amended May 7, 2013
10.3(6)10.3(5)†			2013 Omnibus Equity Incentive Plan
10.4(7)10.4(6)†			Forms of Restricted Stock Unit Award Grant Notice and Restricted Stock Unit Award Agreement under the 2013 Omnibus Equity Incentive Plan
10.5(8)10.5(7)†			Forms of Performance-Based Restricted Stock Unit Award Grant Notice and Performance-Based Restricted Stock Unit Award Agreement under the 2013 Omnibus Equity Incentive Plan
10.6(8)†			2015 Employee Stock Purchase Plan
10.6(9)10.7(9)†			Employment Agreement by and between the Company and Yakov Faitelson, dated as of February 10, 2014
10.7(10)10.8(10)†			Amendment to Employment Agreement, dated as of August 27, 2018, by and between the Company and Ohad Korkus,Yakov Faitelson
10.9(11)†			Amended and Restated Performance-Based Restricted Stock Unit Award Grant Notice and Performance-Based Restricted Stock Unit Award Agreement under the 2013 Omnibus Equity Incentive Plan, dated June 25, 2019, between Yakov Faitelson and the Company
10.10(12)†			Employment Agreement, dated as of February 10, 2014
10.8(11)†	Employment Agreement7, 2017, by and between the Company and Guy Melamed
10.11(13)†			Amendment to Employment Agreement, dated as of February 7, 2017
10.9(12)†	Amendment to Employment Agreement8, 2018, by and between the Company and Guy Melamed
10.12(14)†			Amendment to Employment Agreement, dated as of August 27, 2018, by and between the Company and Guy Melamed
10.13(15)†			Employment Agreement, dated as of February 8, 2018
10.10(13)†	Employment Agreement10, 2014, by and between the Company and James O’Boyle

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10.14(16)†			Amendment to Employment Agreement, dated as of August 27, 2018, by and between the Company and James O’Boyle
10.15(17)†			Employment Agreement, dated as of February 10, 2014
10.11(14)	New York Office Lease, dated as of December 19, 20118, 2018, by and between JT MH 1250 Owner LPVaronis Systems Ltd. and the CompanyDavid Bass
10.12(15)10.16(18)†			First Modification of LeaseEmployment Agreement, dated as of June 18, 2014, between JT MH 1250 Owner LP and the Company
10.13(16)*	EMC Select Distributor Agreement for Software, dated January 24, 2007,February 7, 2019, by and between EMC Corporationthe Company and the CompanyGilad Raz
10.14(17)*10.17(19)			Amendment No. 1 to the EMC Select Distributor AgreementForm of Confirmation for Software, dated July 2011, by and between EMC Corporation and the CompanyCapped Call Transactions
21.1			List of Subsidiaries
23.1			Consent of Kost Forer Gabbay & Kasierer, a member of Ernst & Young Global
31.1			Rule 13a-14(a) Certification of Chief Executive Officer and President of the Company in accordance with Section 302 of the Sarbanes-Oxley Act of 2002
31.2			Rule 13a-14(a) Certification of Chief Financial Officer of the Company in accordance with Section 302 of the Sarbanes-Oxley Act of 2002
32.1**			Section 1350 Certification of Chief Executive Officer and President of the Company in accordance with Section 906 of the Sarbanes-Oxley Act of 2002
32.2**			Section 1350 Certification of Chief Financial Officer of the Company in accordance with Section 906 of the Sarbanes-Oxley Act of 2002
101			The following materials from the Company’s Annual Report on Form 10-K for the year ended December 31, 2016,2021, formatted in inline XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Comprehensive Loss, (iv) the Unaudited Consolidated Statements of Changes in Stockholders' Equity, (v) the Consolidated Statements of Cash Flows and (v)(vi) related notes to these consolidated financial statements, tagged as blocks of text and in detail
104			Cover Page Interactive Data File - (formatted as Inline XBRL and contained in Exhibit 101)

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____________________________________

	†
†						Indicates management contract or compensatory plan or arrangement.

**

*

Confidential treatment for portions of this exhibit has been granted by the Securities and Exchange Commission.

**

Document has been furnished, is not deemed filed and is not to be incorporated by reference into any of the Company’s filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, irrespective of any general incorporation language contained in any such filing.

(1)

(1)

Filed as Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on May 8, 2014 (the “Company’s First Quarter 2014 Form 10-Q”) and incorporated herein by reference.

(2)

(2)

Filed as Exhibit 3.24.1 to the Company’s First Quarter 2014Current Report on Form 10-Q8-k filed with the SEC on May 11, 2020 and incorporated herein by reference.

(3)

(3)

Filed as Exhibit 4.210.1 to the Company’sCompany's Registration Statement on Form S-1 (Registration No. 333-191840) (the “IPO"IPO Registration Statement”Statement") with the SEC on October 22, 2013 and incorporated herein by reference.

(4)

Filed as Exhibit 10.1 to the IPO Registration Statement with the SEC on February 18, 2014 and incorporated herein by reference.

(4)

(5)

Filed as Exhibit 10.2 to the IPO Registration Statement with the SEC on October 22, 2013 and incorporated herein by reference.

(5)

(6)

Filed as Exhibit 99.2 to the Company’s Registration Statement on Form S-8 (Registration No. 333-194657) with the SEC on March 18, 2014 and incorporated herein by reference.

(6)

(7)

Filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on August 6, 2014 (the “Company’s Third Quarter 2014 Form 10-Q”) and incorporated herein by reference.

(7)						Filed as Exhibit 10.4 to the Company’s Current Report on Form 8-K filed with the SEC on June 26, 2019 and incorporated herein by reference.
(8)						Filed as Exhibit A of the Proxy Statement on Form DEF 14A with the SEC on March 26, 2015 and incorporated herein by reference.

(9)

(9)

Filed as Exhibit 10.8 to the IPO Registration Statement with the SEC on February 18, 2014 and incorporated herein by reference.

(10)

(10)

Filed as Exhibit 10.910.1 to the IPO Registration StatementCompany’s Current Report on Form 8-K filed with the SEC on February 18, 2014August 31, 2018 and incorporated herein by reference.

(11)						(11)Filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the SEC on June 26, 2019 and incorporated herein by reference.
(12)						Filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on February 13, 2017 and incorporated herein by reference.

(13)

(12)

Filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on February 12, 2018 and incorporated herein by reference.

(14)						(13)Filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC on August 31, 2018 and incorporated herein by reference.
(15)						Filed as Exhibit 10.11 to the IPO Registration Statement with the SEC on February 18, 2014 and incorporated herein by reference.

(16)

(14)

Filed as Exhibit 10.1110.3 to the IPO Registration StatementCompany’s Current Report on Form 8-K filed with the SEC on October 22, 2013August 31, 2018 and incorporated herein by reference.

(17)

(15)

Filed as Exhibit 10.2 to the Company’s Third Quarter 2014 Form 10-Q and incorporated herein by reference.

(16)

Filed as Exhibit 10.12 to the IPO Registration Statement with the SEC on October 22, 2013 and incorporated herein by reference.

	(17)	Filed as Exhibit 10.13 to the IPO Registration StatementCompany’s Annual Report on Form 10-K filed with the SEC on October 22, 2013February 12, 2019 (the “Company’s 2018 Form 10-K”) and incorporated herein by reference.
(18)						Filed as Exhibit 10.14 to the Company’s 2018 Form 10-K and incorporated herein by reference.
(19)						Filed as Exhibit 10.1 to the company’s Current Report on Form 8-k filed with the SEC on May 11, 2020 and incorporated herein by reference.

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