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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

__________________

FORM 10-Q

__________________

 

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the Quarterly Period Ended September 30, 2020

 

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the transition period from          to

Commission file number 001-35662

__________________

QUALYS, INC.

(Exact name of registrant as specified in its charter)

__________________

 

Delaware

 

77-0534145

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification Number)

 

919 E. Hillsdale Boulevard, 4th Floor, Foster City, California 94404

(Address of principal executive offices, including zip code)

 

(650) 801-6100

(Registrant’s telephone number, including area code)

__________________

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common stock, $0.001 par value per share

QLYS

The NASDAQ Stock Market LLC

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No   ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

 

Smaller reporting company

   

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  ☒

The number of shares of the Registrant's common stock outstanding as of October 29, 2020 was 39,016,591.

 

 

 

Qualys, Inc.

 

TABLE OF CONTENTS

 

   

Page

PART I – FINANCIAL INFORMATION

Item 1.

Financial Statements

 
 

Condensed Consolidated Balance Sheets as of September 30, 2020 and December 31, 2019

3

 

Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2020 and 2019

4

 

Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2020 and 2019

5

 

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2020 and 2019

6

 

Condensed Consolidated Statements of Stockholders' Equity for the three and nine months ended September 30, 2020 and 2019

7

 

Notes to Condensed Consolidated Financial Statements

9

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

27

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

37

Item 4.

Controls and Procedures

38

PART II – OTHER INFORMATION

Item 1.

Legal Proceedings

39

Item 1A.

Risk Factors

39

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

62

Item 3.

Defaults upon Senior Securities

62

Item 4.

Mine Safety Disclosures

62

Item 5.

Other Information

62

Item 6.

Exhibits

63

 

Signatures

64

 

 

 

PART I. FINANCIAL INFORMATION

 

Item 1.

Financial Statements

 

Qualys, Inc. 

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

(in thousands, except share and per share data)

 

  

September 30,

  

December 31,

 
  

2020

  

2019

 

Assets

        

Current assets:

        

Cash and cash equivalents

 $93,027  $87,559 

Short-term marketable securities

  225,734   211,331 

Accounts receivable, net of allowance of $664 and $585 as of September 30, 2020 and December 31, 2019, respectively

  64,291   78,034 

Prepaid expenses and other current assets

  22,480   18,692 

Total current assets

  405,532   395,616 

Long-term marketable securities

  133,260   119,508 

Property and equipment, net

  67,574   60,579 

Operating leases - right of use asset

  47,985   40,551 

Deferred tax assets, net

  13,581   18,830 

Intangible assets, net

  13,651   16,795 

Goodwill

  7,447   7,447 

Restricted cash

  1,200   1,200 

Other noncurrent assets

  16,854   15,082 

Total assets

 $707,084  $675,608 

Liabilities and Stockholders’ Equity

        

Current liabilities:

        

Accounts payable

 $2,223  $848 

Accrued liabilities

  24,772   22,784 

Deferred revenues, current

  200,283   192,172 

Operating lease liabilities, current

  11,777   7,663 

Total current liabilities

  239,055   223,467 

Deferred revenues, noncurrent

  19,157   20,935 

Operating lease liabilities, noncurrent

  48,392   44,015 

Other noncurrent liabilities

  181   388 

Total liabilities

  306,785   288,805 

Commitments and contingencies (Note 9)

          

Stockholders’ equity:

        

Preferred stock, $0.001 par value; 20,000,000 shares authorized, no shares issued and outstanding at September 30, 2020 and December 31, 2019

      

Common stock, $0.001 par value; 1,000,000,000 shares authorized; 39,119,169 and 39,146,272 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively

  39   39 

Additional paid-in capital

  388,814   362,408 

Accumulated other comprehensive income

  1,075   1,162 

Retained earnings

  10,371   23,194 

Total stockholders’ equity

  400,299   386,803 

Total liabilities and stockholders’ equity

 $707,084  $675,608 

 

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

 

 

 

Qualys, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

(in thousands, except per share data)

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

 
   

2020

   

2019

   

2020

   

2019

 

Revenues

  $ 93,069     $ 82,671     $ 268,162     $ 236,943  

Cost of revenues

    20,619       17,108       58,005       52,354  

Gross profit

    72,450       65,563       210,157       184,589  

Operating expenses:

                               

Research and development

    17,864       16,899       53,905       50,431  

Sales and marketing

    16,060       17,009       50,073       51,489  

General and administrative

    12,223       9,106       33,937       29,961  

Total operating expenses

    46,147       43,014       137,915       131,881  

Income from operations

    26,303       22,549       72,242       52,708  

Other income (expense), net:

                               

Interest expense

    (1 )     (28 )     (4 )     (98 )

Interest income

    1,123       2,142       4,439       6,391  

Other income (expense), net

    209       (328 )     268       (320 )

Total other income, net

    1,331       1,786       4,703       5,973  

Income before income taxes

    27,634       24,335       76,945       58,681  

Provision for income taxes

    4,891       5,161       9,189       10,009  

Net income

  $ 22,743     $ 19,174     $ 67,756     $ 48,672  

Net income per share:

                               

Basic

  $ 0.58     $ 0.49     $ 1.73     $ 1.24  

Diluted

  $ 0.56     $ 0.47     $ 1.66     $ 1.17  

Weighted average shares used in computing net income per share:

                               

Basic

    39,238       39,014       39,171       39,099  

Diluted

    40,764       41,162       40,907       41,447  

 

 

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

 

 

 

Qualys, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)

(in thousands)

 

  

Three Months Ended

  

Nine Months Ended

 
  

September 30,

  

September 30,

 
  

2020

  

2019

  

2020

  

2019

 

Net income

 $22,743  $19,174  $67,756  $48,672 

Other comprehensive income (loss):

                

Available-for-sale debt securities:

                

Changes in net unrealized gains (losses), net of tax effects of $183 and ($6) in the three months ended September 30, 2020 and 2019, respectively, and ($245) and ($257) in the nine months ended September 30, 2020 and 2019, respectively.

  (619)  40   825   1,419 

Reclassification adjustments for net realized (gains) losses included in net income, net of tax effects of ($32) and $0 in the three months ended September 30, 2020 and 2019, respectively, and ($2) and ($6) in the nine months ended September 30, 2020 and 2019, respectively.

  108   (18)  8   25 

Total changes in unrealized gains (losses) on marketable securities, net of tax

  (511)  22   833   1,444 

Cash flow hedges:

                

Changes in net unrealized gains (losses), net of tax effects of $213 and ($313) in the three months ended September 30, 2020 and 2019, respectively, and $152 and ($404) in the nine months ended September 30, 2020 and 2019, respectively.

  (718)  1,072   (510)  1,423 

Reclassification adjustments for net realized (gains) losses included in net income, net of tax effects of $39 and $16 in the three months ended September 30, 2020 and 2019, respectively, and $121 and $0 in the nine months ended September 30, 2020 and 2019, respectively.

  (131)  (63)  (410)  (10)

Total changes in unrealized gains (losses) on cash flow hedges, net of tax

  (849)  1,009   (920)  1,413 

Other comprehensive income (loss), net of tax

  (1,360)  1,031   (87)  2,857 

Comprehensive income

 $21,383  $20,205  $67,669  $51,529 

 

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

 

 

 

Qualys, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)

 

   

Nine Months Ended

 
   

September 30,

 
   

2020

   

2019

 

Cash flow from operating activities:

               

Net income

  $ 67,756     $ 48,672  

Adjustments to reconcile net income to net cash provided by operating activities:

               

Depreciation and amortization expense

    23,975       23,486  

Bad debt expense

    392       156  

Loss on disposal of property and equipment

    9       196  

Stock-based compensation

    29,930       25,163  

Amortization of premiums (accretion of discounts) on marketable securities

    163       (1,402 )

Deferred income taxes

    5,061       7,296  

Changes in operating assets and liabilities:

               

Accounts receivable

    13,351       14,355  

Prepaid expenses and other assets

    (6,071 )     (6,568 )

Accounts payable

    326       (1,336 )

Accrued liabilities

    72       1,518  

Deferred revenues

    6,333       15,413  

Net cash provided by operating activities

    141,297       126,949  

Cash flow from investing activities:

               

Purchases of marketable securities

    (290,534 )     (259,286 )

Sales and maturities of marketable securities

    263,296       263,874  

Purchases of property and equipment

    (22,742 )     (19,473 )

Acquisition of businesses, net of cash acquired, and purchases of intangible assets

    (1,500 )     (1,850 )
Purchase of privately-held investment           (625 )

Net cash used in investing activities

    (51,480 )     (17,360 )

Cash flow from financing activities:

               

Repurchases of common stock

    (91,881 )     (73,877 )

Proceeds from exercise of stock options

    23,962       11,014  

Payments for taxes related to net share settlement of equity awards

    (16,338 )     (10,864 )

Principal payments under finance lease obligations

    (92 )     (1,273 )

Net cash used in financing activities

    (84,349 )     (75,000 )

Net increase in cash, cash equivalents and restricted cash

    5,468       34,589  

Cash, cash equivalents and restricted cash at beginning of period

    88,759       42,226  

Cash, cash equivalents and restricted cash at end of period

  $ 94,227     $ 76,815  

 

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

 

 

 

Qualys, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY 

(unaudited)

(in thousands, except share data)

 

                           

Accumulated

                 
   

Common Stock

   

Additional

   

Other

           

Total

 
                   

Paid-In

   

Comprehensive

   

Retained

   

Stockholders’

 
   

Shares

   

Amount

   

Capital

   

Income

   

Earnings

   

Equity

 

Balances at December 31, 2019

    39,146,272     $ 39     $ 362,408     $ 1,162     $ 23,194     $ 386,803  

Net income

                            18,694       18,694  

Other comprehensive income, net of tax

                      391             391  

Issuance of common stock upon exercise of stock options

    144,989             4,714                   4,714  

Repurchase of common stock

    (346,250 )           (4,160 )           (24,766 )     (28,926 )

Issuance of common stock upon vesting of restricted stock units

    138,260                                

Taxes related to net share settlement of equity awards

    (58,598 )           (5,000 )                 (5,000 )

Stock-based compensation

                10,054                   10,054  

Balances at March 31, 2020

    39,024,673       39       368,016       1,553       17,122       386,730  

Net income

                            26,319       26,319  

Other comprehensive income, net of tax

                      882             882  

Issuance of common stock upon exercise of stock options

    448,056       1       15,715                   15,716  

Repurchase of common stock

    (242,500 )     (1 )     (2,912 )           (22,343 )     (25,256 )

Issuance of common stock upon vesting of restricted stock units

    146,343                                

Taxes related to net share settlement of equity awards

    (61,235 )           (6,115 )                 (6,115 )

Stock-based compensation

                9,498                   9,498  

Balances at June 30, 2020

    39,315,337       39       384,202       2,435       21,098       407,774  

Net income

                            22,743       22,743  

Other comprehensive income, net of tax

                      (1,360 )           (1,360 )
Issuance of common stock upon exercise of stock options     102,254             3,532                   3,532  
Repurchase of common stock     (352,000 )           (4,229 )           (33,470 )     (37,699 )
Issuance of common stock upon vesting of restricted stock units     97,408                                
Taxes related to net share settlement of equity awards     (43,830 )           (5,223 )                 (5,223 )
Stock-based compensation                 10,532                   10,532  

Balances at September 30, 2020

    39,119,169     $ 39     $ 388,814     $ 1,075     $ 10,371     $ 400,299  

 

 

Qualys, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY 

(unaudited)

(in thousands, except share data)

 

                           

Accumulated

                 
   

Common Stock

   

Additional

   

Other

           

Total

 
                   

Paid-In

   

Comprehensive

   

Retained

   

Stockholders’

 
   

Shares

   

Amount

   

Capital

   

Income

   

Earnings

   

Equity

 

Balances at December 31, 2018

    39,015,034     $ 39     $ 330,572     $ (586 )   $ 27,964     $ 357,989  

Net income

                            13,266       13,266  

Other comprehensive income, net of tax

                      896             896  

Issuance of common stock upon exercise of stock options

    152,164             4,047                   4,047  

Repurchase of common stock

    (94,090 )           (1,129 )           (6,742 )     (7,871 )

Issuance of common stock upon vesting of restricted stock units

    99,601                                

Taxes related to net share settlement of equity awards

    (38,877 )           (3,367 )                 (3,367 )

Stock-based compensation

                8,443                   8,443  

Balances at March 31, 2019

    39,133,832       39       338,566       310       34,488       373,403  

Net income

                            16,232       16,232  

Other comprehensive income, net of tax

                        930             930  

Issuance of common stock upon exercise of stock options

    192,687             4,944                   4,944  

Repurchase of common stock

    (183,948 )           (2,207 )           (14,038 )     (16,245 )

Issuance of common stock upon vesting of restricted stock units

    126,754                                

Taxes related to net share settlement of equity awards

    (45,250 )           (4,044 )                 (4,044 )

Stock-based compensation

                8,378                   8,378  

Balances at June 30, 2019

    39,224,075       39       345,637       1,240       36,682       383,598  

Net income

                            19,174       19,174  

Other comprehensive income, net of tax

                      1,031             1,031  

Issuance of common stock upon exercise of stock options

    68,059             2,023                   2,023  

Repurchase of common stock

    (603,417 )           (7,240 )           (42,521 )     (49,761 )

Issuance of common stock upon vesting of restricted stock units

    103,206                                

Taxes related to net share settlement of equity awards

    (41,120 )           (3,453 )                 (3,453 )

Stock-based compensation

                8,411                   8,411  

Balances at September 30, 2019

    38,750,803     $ 39     $ 345,378     $ 2,271     $ 13,335     $ 361,023  

 

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

 

 

Qualys, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

 

NOTE 1.

The Company and Summary of Significant Accounting Policies

 

Description of Business

 

Qualys, Inc. (the “Company”, "we", "us", "our") was incorporated in the state of Delaware on December 30, 1999. The Company is headquartered in Foster City, California and has wholly-owned subsidiaries throughout the world. The Company is a pioneer and leading provider of cloud-based information technology ("IT"), security and compliance solutions that enable organizations to identify security risks to their IT infrastructures, help protect their IT systems and applications from ever-evolving cyber-attacks and achieve compliance with internal policies and external regulations. The Company’s cloud solutions address the growing security and compliance complexities and risks that are amplified by the dissolving boundaries between internal and external IT infrastructures and web environments, the rapid adoption of cloud computing and the proliferation of geographically dispersed IT assets. Organizations can use the Company’s integrated suite of solutions delivered on its Qualys Cloud Platform to cost-effectively obtain a unified view of their security and compliance posture across globally distributed IT infrastructures.

 

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements and condensed footnotes have been prepared in accordance with accounting principles generally accepted in the United States ("U.S. GAAP") for interim financial information as well as the instructions to Form 10-Q and the rules and regulations of the U.S. Securities and Exchange Commission ("SEC"). Certain information and disclosures normally included in the financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. The condensed consolidated balance sheet as of December 31, 2019, included herein, was derived from the audited financial statements as of that date but does not include all disclosures, including notes required by U.S. GAAP. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, which include only normal recurring adjustments, necessary for the fair presentation of the financial position, results of operations and cash flows for the interim periods. The results of operations for the three and nine months ended September 30, 2020 are not necessarily indicative of the results of operations expected for the entire year ending December 31, 2020 or for any other future annual or interim periods. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, filed with the SEC on February 21, 2020.

 

Risks and Uncertainties

 

In March 2020, the World Health Organization declared the outbreak of a novel strain of coronavirus (“COVID-19”) as a pandemic. As a result of COVID-19, the Company has modified certain aspects of its business, including restricting employee travel, requiring employees to work from home, and canceling certain events and meetings, among other modifications. The Company will continue to actively monitor the situation and may take further actions that alter its business operations as may be required by federal, state or local authorities or that the Company determines are in the best interests of its employees, customers, partners, suppliers and stockholders. While the Company has not incurred significant disruptions from the COVID-19 outbreak, the Company is unable to accurately predict the full impact that COVID-19 will have due to numerous uncertainties, including the duration of the outbreak, actions that may be taken by governmental authorities and the impact to the business of its customers and partners. The Company will continue to evaluate the nature and extent of the impact to its business, financial position, results of operations and cash flows.

 

Use of Estimates

 

The preparation of the unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of assets and liabilities at the date of the condensed consolidated financial statements and the reported results of operations during the reporting period. The Company’s management regularly assesses these estimates, which primarily affect revenue recognition, the valuation of accounts receivable, goodwill and intangible assets, capitalization of internally developed software, stock-based compensation and the provision for income taxes. Actual results could differ from those estimates and such differences may be material to the accompanying unaudited condensed consolidated financial statements.

 

9

 

Qualys, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

Derivative Financial Instruments

 

Derivative financial instruments are utilized by the Company to reduce foreign currency exchange risks. The Company uses foreign currency forward contracts to mitigate the impact of foreign currency fluctuations of certain non-U.S. dollar denominated net asset positions, to date primarily cash, accounts receivable and operating lease liabilities, as well as to manage foreign currency fluctuation risk related to forecasted transactions. Open contracts are recorded within prepaid expenses and other current assets, other noncurrent assets, accrued liabilities or other noncurrent liabilities in the condensed consolidated balance sheets. Gains and losses resulting from currency exchange rate movements on non-designated forward contracts are recognized in other income (expense), net. Any gains or losses from derivatives designated as cash flow hedges are first recorded within accumulated other comprehensive income ("AOCI") and then reclassified into revenue or operating expenses when the hedged item impacts the condensed consolidated statements of operations.

 

Stock-Based Compensation

 

The Company recognizes the fair value of its employee stock options and restricted stock units over the requisite service periods for those awards ultimately expected to vest. The fair value of each option is estimated on the date of grant using the Black-Scholes-Merton option pricing model and the fair value of each restricted stock unit ("RSU") is based on the price of the Company's stock on the date of grant. Forfeitures are estimated on the date of grant and revised if actual or expected forfeiture activity differs materially from original estimates.

 

The Company has issued performance-based awards and stock options, and accounts for these awards and options as stock-based compensation with multiple performance conditions. For these performance-based awards, the Company records compensation expense for only the performance milestones that are probable of being achieved, with such expense recorded on a straight-line basis over the expected vesting period. The Company reassesses performance-based estimates each reporting period and if there are any changes in the probability of achievement, the Company recognizes the cumulative effect in the period when the estimate changes.

 

Non-Marketable Securities

 

During the fiscal year ended December 31, 2018, the Company invested $2.5 million in preferred stock of a privately-held company. The fair value of the investment is not readily available, and there are no quoted market prices for the investment. The investment is included in other noncurrent assets on the condensed consolidated balance sheets and measured at cost less impairment, adjusted for observable price changes. The investment is assessed for impairment annually or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. During the second quarter ended June 30, 2019, the Company made an advance payment of $0.6 million to the investee for certain development work, which is recorded in other noncurrent assets on the condensed consolidated balance sheet. During the third quarter ended  September 30, 2019, the Company made an additional investment of $0.6 million in a convertible security issued by this investee and recorded it in other current assets on the condensed consolidated balance sheet. As of September 30, 2020 and December 31, 2019, no impairment was recorded for the investments.

 

Recently Adopted Accounting Pronouncements

 

In August 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. This ASU aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs related to internal-use software. It also requires the Company to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement. The Company adopted this ASU prospectively to applicable implementation costs incurred since January 1, 2020. The adoption did not have a material impact on the Company's condensed consolidated financial statements.

 

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326) as modified by subsequently issued ASU No. 2018-19, 2019-04 and 2019-05, which introduces a new accounting model, Current Expected Credit Losses ("CECL"). CECL requires earlier recognition of credit losses, while also providing additional transparency about credit risk. CECL utilizes a lifetime expected credit loss measurement objective for the recognition of credit losses at the time the financial asset is originated or acquired. The expected credit losses are adjusted each period for changes in expected lifetime credit losses. The Company adopted this ASU on January 1, 2020, using a modified retrospective transition method, which requires a cumulative-effect adjustment, if any, to the opening balance of retained earnings to be recognized on the date of adoption with prior periods not restated. The adoption did not have a material impact on the Company's condensed consolidated financial statements.

 

10

 

Qualys, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

Recently Issued Accounting Pronouncements Not Yet Adopted

 

In January 2020, the FASB issued ASU No. 2020-01, Investments—Equity Securities (Topic 321), Investments—Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) ("ASU 2020-01"). This ASU clarifies the interaction of the accounting for equity securities under Topic 321, the accounting for equity method investments in Topic 323, and the accounting for certain forward contracts and purchased options in Topic 815. It is effective for the Company beginning in the first quarter of fiscal 2021, and earlier adoption is permitted. The Company is currently evaluating the impact of its pending adoption of ASU 2020-01 on the Company's condensed consolidated financial statements.

 

In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes ("ASU 2019-12"), which simplifies the accounting for income taxes, eliminates certain exceptions within ASC 740, Income Taxes, and clarifies certain aspects of the current guidance to promote consistency among reporting entities. ASU 2019-12 is effective for the Company for fiscal years beginning after December 15, 2020. Most amendments within the standard are required to be applied on a prospective basis, while certain amendments must be applied on a retrospective or modified retrospective basis. The Company is currently evaluating the impacts of the provisions of ASU 2019-12 on its condensed consolidated financial statements.

 

 

NOTE 2.

Fair Value of Financial Instruments

 

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. For certain of the Company’s financial instruments, including certain cash equivalents, accounts receivable, accounts payable and other current liabilities, the carrying amounts approximate their fair values due to the relatively short maturity of these balances.

 

The Company measures and reports certain cash equivalents, marketable securities, derivative foreign currency forward contracts and commitments associated with prior business combinations at fair value in accordance with the provisions of the authoritative accounting guidance that addresses fair value measurements. This guidance establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. The hierarchy is broken down into three levels based on the reliability of inputs as follows:

 

Level 1-Valuations based on quoted prices in active markets for identical assets or liabilities.

 

Level 2-Valuations based on other than quoted prices in active markets for identical assets or liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

Level 3-Valuations based on inputs that are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability.

 

11

 

Qualys, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

The Company's Level 1 assets include highly liquid money market funds, which are valued using unadjusted quoted prices that are available in an active market for an identical asset. Level 2 assets include fixed-income U.S. government agency securities, commercial paper, corporate bonds, asset-backed securities and derivative financial instruments consisting of foreign currency forward contracts. The securities, bonds and commercial paper are valued using prices from independent pricing services based on quoted prices in active markets for similar instruments or on industry models using data inputs such as interest rates and prices that can be directly observed or corroborated in active markets. The foreign currency forward contracts are valued using observable inputs, such as quotations on forward foreign exchange points and foreign interest rates. During the fiscal years ended December 31, 2019 and 2018, the Company made investments of $0.6 million in a convertible security and $2.5 million in preferred stock, respectively, issued by a privately-held company. The estimated fair value of the investments was determined based on Level 3 inputs. As of September 30, 2020 and December 31, 2019, management estimated that the fair value of the investments equaled their carrying value.

 

The Company's cash and cash equivalents, and marketable securities consist of the following:

 

  

September 30, 2020

 
      

Unrealized

  

Unrealized

     
  

Amortized Cost

  

Gains

  

(Losses)

  

Fair Value

 
  

(in thousands)

 

Cash and cash equivalents:

                

Cash

 $33,566  $  $  $33,566 

Money market funds

  58,511         58,511 

Commercial paper

  950         950 

Total

  93,027         93,027 

Short-term marketable securities:

                

Commercial paper

  649         649 

Corporate bonds

  30,508   249   (1)  30,756 

Asset-backed securities

  5,514   25      5,539 

U.S. government agencies

  188,525   266   (1)  188,790 

Total

  225,196   540   (2)  225,734 

Long-term marketable securities:

                

Asset-backed securities

  40,367   290      40,657 

U.S. government agencies

  37,414   373   (2)  37,785 

Foreign government agencies

  1,001   33      1,034 

Corporate bonds

  52,870   920   (6)  53,784 

Total

  131,652   1,616   (8)  133,260 

Total

 $449,875  $2,156  $(10) $452,021 

 

  

December 31, 2019

 
      

Unrealized

  

Unrealized

     
  

Amortized Cost

  

Gains

  

(Losses)

  

Fair Value

 
  

(in thousands)

 

Cash and cash equivalents:

                

Cash

 $84,102  $  $  $84,102 

Money market funds

  58         58 

Commercial paper

  3,399         3,399 

Total

  87,559         87,559 

Short-term marketable securities:

                

Commercial paper

  2,239         2,239 

Corporate bonds

  33,048   51   (1)  33,098 

Asset-backed securities

  2,438   11      2,449 

U.S. government agencies

  173,364   184   (3)  173,545 

Total

  211,089   246   (4)  211,331 

Long-term marketable securities:

                

Asset-backed securities

  40,001   193   (1)  40,193 

U.S. government agencies

  46,447   370      46,817 

Corporate bonds

  32,236   262      32,498 

Total

  118,684   825   (1)  119,508 

Total

 $417,332  $1,071  $(5) $418,398 

 

12

 

Qualys, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

There were no marketable securities that had been in a continuous unrealized loss position for 12 months or longer. As of September 30, 2020, the Company had the ability and intent to hold all marketable securities that were in an unrealized loss position until maturity or recovery. The Company considered the extent to which fair value was less than amortized cost basis and conditions related to security’s industry and geography and changes to the ratings, if any, and concluded the decline in fair value compared to carrying value was not related to credit loss.

 

The following table sets forth by level within the fair value hierarchy the fair value of the Company's cash equivalents and marketable securities measured on a recurring basis:

 

  

September 30, 2020

 
  

Level 1

  

Level 2

  

Fair Value

 
  

(in thousands)

 

Money market funds

 $58,511  $  $58,511 

Commercial paper

     1,599   1,599 

U.S. government agencies

     226,575   226,575 

Foreign government agencies

     1,034   1,034 

Corporate bonds

     84,540   84,540 

Asset-backed securities

     46,196   46,196 

Total

 $58,511  $359,944  $418,455 

 

  

December 31, 2019

 
  

Level 1

  

Level 2

  

Fair Value

 
  

(in thousands)

 

Money market funds

 $58  $  $58 

Commercial paper

     5,638   5,638 

U.S. government agencies

     220,362   220,362 

Corporate bonds

     65,596   65,596 

Asset-backed securities

     42,642   42,642 

Total

 $58  $334,238  $334,296 

 

There were no transfers between Level 1 and Level 2 of the fair value hierarchy, as determined at the end of each reporting period.

 

The following summarizes the fair value of marketable securities by contractual maturity as of September 30, 2020 and December 31, 2019:

 

  

September 30, 2020

 
  

Mature within

  

Mature after One Year

  

Mature over

     
  

One Year

  

through Two Years

  

Two Years

  

Fair Value

 
  

(in thousands)

 

Commercial paper

 $1,599  $  $  $1,599 

U.S. government agencies

  188,790   37,600   185   226,575 

Foreign government agencies

        1,034   1,034 

Corporate bonds

  

30,756

   33,505   20,279   84,540 

Asset-backed securities

  5,539   17,788   22,869   46,196 

Total

 $226,684  $88,893  $44,367  $359,944 

 

13

 

Qualys, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

  

December 31, 2019

 
  

Mature within

  

Mature after One Year

  

Mature over

     
  

One Year

  

through Two Years

  

Two Years

  

Fair Value

 
  

(in thousands)

 

Commercial paper

 $5,638  $  $  $5,638 

U.S. government agencies

  173,546   46,816      220,362 

Corporate bonds

  33,098   23,251   9,247   65,596 

Asset-backed securities

  2,449   15,550   24,643   42,642 

Total

 $214,731  $85,617  $33,890  $334,238 

 

Derivative Financial Instruments

 

Designated cash flow hedges

 

The Company uses a hedging strategy to reduce its exposure to foreign currency exchange rate fluctuations for forecasted subscription renewals and new orders in British Pound ("GBP") and Euro. The Company uses forward currency contracts accounted for as cash flow hedges against a designated portion of forecasted subscription renewals and new orders. Unrealized foreign exchange gains or losses related to those designated cash flow hedge contracts are recorded in AOCI and will be reclassified into revenues in the same periods when the hedged contracts are recognized into revenues.

 

In addition, the Company uses a hedging strategy to reduce its exposure associated with costs incurred in Indian Rupee ("INR"). Unrealized foreign exchange gains or losses related to those designated cash flow hedge contracts are recorded in AOCI and will be reclassified into operating expenses when the associated hedged expenses are incurred.

 

At September 30, 2020, the Company had 39 open designated cash flow hedge contracts with notional amounts of €22.5 million,£8.8 million and Rs.1,745.0 million. At December 31, 2019, the Company had 26 open designated cash flow hedge contracts with notional amounts of €24.2 million and £9.7 million.

 

The following table shows the gains and losses, before tax, of the Company's derivative instruments designated as cash flow hedges in AOCI and the condensed consolidated statements of operations for the three and nine months ended September 30, 2020 and 2019:

 

  

Three Months Ended September 30,

  

Nine Months Ended September 30,

 

Derivative instruments designated as cash flow hedges:

 

2020

  

2019

  

2020

  

2019

 
  

(in thousands)

 
Net unrealized gains (losses) recognized in AOCI:                

Foreign currency forward contracts (GBP, Euro and INR)

 $(931) $1,385  $(662) $1,827 
                 

Net unrealized (gains) losses reclassified from AOCI into income:

                

Foreign currency forward contracts (GBP and Euro)

  (297)  (79)  (873)  (10)

Foreign currency forward contracts (INR)

  127      342    

Net change in AOCI before tax

 $(1,101) $1,306  $(1,193) $1,817 

 

As of September 30, 2020, the net amount of unrealized gains and losses on the foreign currency forward contracts for GBP and Euro reported in AOCI that is expected to be reclassified into revenue within the next 12 months is a loss of $0.5 million (before tax). As of September 30, 2020, the net amount of unrealized gains and losses on the foreign currency forward contracts for INR reported in AOCI that is expected to be reclassified into operating expenses is a gain of $0.1 million (before tax).

 

14

 

Qualys, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

Non-designated forward contracts

 

At September 30, 2020, the Company had 18 outstanding non-designated forward contracts with notional amounts of €13.9 million, £8.0 million and Rs.173.6 million. At December 31, 2019, the Company had 15 outstanding non-designated forward contracts with notional amounts of €20.0 million, £5.6 million and Rs.756.0 million.

 

The following summarizes derivative financial instruments as of September 30, 2020 and December 31, 2019:

 

  

September 30,

  

December 31,

 
  

2020

  

2019

 

Assets

 

(in thousands)

 

Foreign currency forward contracts designated as cash flow hedge

 $396  $427 

Foreign currency forward contracts not designated as hedging instruments

  292   515 

Total

 $688  $942 

Liabilities

        

Foreign currency forward contracts designated as cash flow hedge

 $(1,227) $(524)

Foreign currency forward contracts not designated as hedging instruments

  (665)  (550)

Total

 $(1,892) $(1,074)

 

All foreign currency forward contracts were valued at fair value using Level 2 inputs.

 

The following summarizes the gains (losses) recognized from forward contracts and other foreign currency transactions in other income, net on the condensed consolidated statements of operations:

 

  

Three Months Ended

  

Nine Months Ended

 
  

September 30,

  

September 30,