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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 March 31, 2021

☐	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 April 29, 2021 was 39,141,887.

Table of Contents

Qualys, Inc.

TABLE OF CONTENTS

		Page
Risk Factor Summary		3
PART I – FINANCIAL INFORMATION
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets	4
	Condensed Consolidated Statements of Operations	5
	Condensed Consolidated Statements of Comprehensive Income	6
	Condensed Consolidated Statements of Cash Flows	7
	Condensed Consolidated Statements of Stockholders' Equity	8
	Notes to Condensed Consolidated Financial Statements	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	31
Item 4.	Controls and Procedures	32
PART II – OTHER INFORMATION
Item 1.	Legal Proceedings	33
Item 1A.	Risk Factors	33
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	49
Item 3.	Defaults upon Senior Securities	49
Item 4.	Mine Safety Disclosures	49
Item 5.	Other Information	49
Item 6.	Exhibits	50
	Signatures	51

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RISK FACTOR SUMMARY

Our business is subject to significant risks and uncertainties that make an investment in us speculative and risky. Below we summarize what we believe are the principal risk factors but these risks are not the only ones we face, and you should carefully review and consider the full discussion of our risk factors in the section titled “Risk Factors,” together with the other information in this Quarterly Report on Form 10-Q. If any of the following risks actually occurs (or if any of those listed elsewhere in this Quarterly Report on Form 10-Q occur), our business, reputation, financial condition, results of operations, revenue, and future prospects could be seriously harmed. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, may also become important factors that adversely affect our business.

	•	The continued spread of COVID-19, or any similar widespread infectious disease outbreak, could harm our business, financial condition and results of operations.
	•	Our quarterly operating results may vary from period to period, which could result in our failure to meet expectations with respect to operating results and cause the trading price of our stock to decline.
	•	If we do not successfully anticipate market needs and opportunities or are unable to enhance our solutions and develop new solutions that meet those needs and opportunities on a timely or cost-effective basis, we may not be able to compete effectively and our business and financial condition may be harmed.
	•	If we fail to continue to effectively scale and adapt our platform to meet the performance and other requirements of our customers, our operating results and our business would be harmed.
	•	If we are unable to renew existing subscriptions for our IT, security and compliance solutions, sell additional subscriptions for our solutions and attract new customers, our operating results would be harmed.
	•	If the market for cloud solutions for IT, security and compliance does not evolve as we anticipate, our revenues may not grow and our operating results would be harmed.
	•	Our current research and development efforts may not produce successful products or enhancements to our platform that result in significant revenue, cost savings or other benefits in the near future.
	•	Our platform, website and internal systems may be subject to intentional disruption or other security incidents that could result in liability and adversely impact our reputation and future sales.
	•	Our sales cycle can be long and unpredictable, and our sales efforts require considerable time and expense. As a result, revenues may vary from period to period, which may cause our operating results to fluctuate and could harm our business.
	•	Adverse economic conditions or reduced IT spending may adversely impact our business.
	•	Our IT, security and compliance solutions are delivered from eight data centers, and any disruption of service at these facilities would interrupt or delay our ability to deliver our solutions to our customers which could reduce our revenues and harm our operating results.
	•	We face competition in our markets, and we may lack sufficient financial or other resources to maintain or improve our competitive position.
	•	If our solutions fail to detect vulnerabilities or incorrectly detect vulnerabilities, our brand and reputation could be harmed, which could have an adverse effect on our business and results of operations.
	•	If we are unable to continue the expansion of our sales force, sales of our solutions and the growth of our business would be harmed.
	•	We rely on third-party channel partners to generate a substantial amount of our revenues, and if we fail to expand and manage our distribution channels, our revenues could decline and our growth prospects could suffer.
	•	A significant portion of our customers, channel partners and employees are located outside of the United States, which subjects us to a number of risks associated with conducting international operations, and if we are unable to successfully manage these risks, our business and operating results could be harmed.
	•	Our business and operations have experienced significant growth, and if we do not appropriately manage any future growth, or are unable to improve our systems and processes, our operating results may be negatively affected.
	•	A portion of our revenues are generated by sales to government entities, which are subject to a number of challenges and risks.
	•	Undetected software errors or flaws in our solutions could harm our reputation, decrease market acceptance of our solutions or result in liability.
	•	Our solutions could be used to collect and store personal information of our customers’ employees or customers, and therefore privacy and other data handling concerns could result in additional cost and liability to us or inhibit sales of our solutions.
	•	Our solutions contain third-party open source software components, and our failure to comply with the terms of the underlying open source software licenses could restrict our ability to sell our solutions.
	•	We use third-party software and data that may be difficult to replace or cause errors or failures of our solutions that could lead to lost customers or harm to our reputation and our operating results.
	•	Failure to protect our proprietary technology and intellectual property rights could substantially harm our business and operating results.
	•	Assertions by third parties of infringement or other violations by us of their intellectual property rights could result in significant costs and harm our business and operating results.

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PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements

Qualys, Inc.

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

(in thousands, except per share data)

	*March 31,*			*December 31,*
	*2021*			*2020*
Assets
Current assets:
Cash and cash equivalents	$	108,753		$	74,132
Short-term marketable securities		247,982			281,892
Accounts receivable, net of allowance of $809 and $725 as of March 31, 2021 and December 31, 2020, respectively		85,222			100,179
Prepaid expenses and other current assets		22,099			19,142
Total current assets		464,056			475,345
Long-term marketable securities		101,474			98,458
Property and equipment, net		64,143			64,850
Operating leases - right of use asset		42,113			44,838
Deferred tax assets, net		20,786			15,811
Intangible assets, net		10,361			12,006
Goodwill		7,447			7,447
Restricted cash		1,200			1,200
Other noncurrent assets		18,362			16,864
Total assets	$	729,942		$	736,819
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	1,164		$	731
Accrued liabilities		27,836			29,833
Deferred revenues, current		218,898			213,494
Operating lease liabilities, current		11,846			11,672
Total current liabilities		259,744			255,730
Deferred revenues, noncurrent		29,010			30,540
Operating lease liabilities, noncurrent		42,692			45,700
Other noncurrent liabilities		1,388			367
Total liabilities		332,834			332,337
Commitments and contingencies (Note 8)
Stockholders’ equity:
Preferred stock, $0.001 par value; 20,000 shares authorized, no shares issued and outstanding at March 31, 2021 and December 31, 2020		—			—
Common stock, $0.001 par value; 1,000,000 shares authorized; 39,203 and 39,253 shares issued and outstanding at March 31, 2021 and December 31, 2020, respectively		39			39
Additional paid-in capital		420,950			401,359
Accumulated other comprehensive income (loss)		120			(484	)
Retained earnings (accumulated deficit)		(24,001	)		3,568
Total stockholders’ equity		397,108			404,482
Total liabilities and stockholders’ equity	$	729,942		$	736,819

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

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Qualys, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

(in thousands, except per share data)

	*Three Months Ended*
	*March 31,*
	*2021*			*2020*
Revenues	$	96,756		$	86,263
Cost of revenues		21,680			18,495
Gross profit		75,076			67,768
Operating expenses:
Research and development		17,749			17,983
Sales and marketing		17,989			18,230
General and administrative		42,043			11,124
Total operating expenses		77,781			47,337
Income (loss) from operations		(2,705	)		20,431
Other income (expense), net:
Interest expense		(4	)		(3	)
Interest income		746			1,924
Other income (expense), net		(244	)		(135	)
Total other income, net		498			1,786
Income (loss) before income taxes		(2,207	)		22,217
Income tax provision (benefit)		(2,435	)		3,523
Net income	$	228		$	18,694
Net income per share:
Basic	$	0.01		$	0.48
Diluted	$	0.01		$	0.46
Weighted average shares used in computing net income per share:
Basic		39,209			39,112
Diluted		40,430			40,846

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

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Qualys, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)

(in thousands)

	*Three Months Ended*
	*March 31,*
	*2021*			*2020*
Net income	$	228		$	18,694
Other comprehensive income, net of tax:
Net change in unrealized gains (losses) on available-for-sale debt securities, net of tax		(389	)		266
Net change in unrealized gains (losses) on cash flow hedges, net of tax		993			125
Other comprehensive income, net of tax		604			391
Comprehensive income	$	832		$	19,085

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

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Qualys, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)

	*Three Months Ended*
	*March 31,*
	*2021*			*2020*
Cash flow from operating activities:
Net income	$	228		$	18,694
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization expense		9,078			7,747
Bad debt expense		138			148
Stock-based compensation		38,202			9,997
Amortization of premiums (accretion of discounts) on marketable securities		967			(64	)
Deferred income taxes		(5,162	)		1,784
Changes in operating assets and liabilities:
Accounts receivable		14,819			5,190
Prepaid expenses and other assets		(6,083	)		(1,629	)
Accounts payable		107			(262	)
Accrued liabilities		1,686			253
Deferred revenues		3,874			10,577
Net cash provided by operating activities		57,854			52,435
Cash flow from investing activities:
Purchases of marketable securities		(115,610	)		(85,567	)
Sales and maturities of marketable securities		145,044			129,651
Purchases of property and equipment		(6,259	)		(7,271	)
Net cash provided by investing activities		23,175			36,813
Cash flow from financing activities:
Repurchases of common stock		(31,029	)		(28,926	)
Proceeds from exercise of stock options		2,264			4,714
Payments for taxes related to net share settlement of equity awards		(17,643	)		(5,000	)
Principal payments under finance lease obligations		—			(30	)
Net cash used in financing activities		(46,408	)		(29,242	)
Net increase in cash, cash equivalents and restricted cash		34,621			60,006
Cash, cash equivalents and restricted cash at beginning of period		75,332			88,759
Cash, cash equivalents and restricted cash at end of period	$	109,953		$	148,765

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

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Qualys, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(unaudited)

(in thousands)

									*Accumulated*			*Retained*
	*Common Stock*					*Additional*			*Other*			*Earnings*			*Total*
						*Paid-In*			*Comprehensive*			*(Accumulated*			*Stockholders’*
	*Shares*			*Amount*		*Capital*			*Income (Loss)*			*Deficit)*			*Equity*
Balances at December 31, 2020		39,253		$	39	$	401,359		$	(484	)	$	3,568		$	404,482
Net income		—			—		—			—			228			228
Other comprehensive income, net of tax		—			—		—			604			—			604
Issuance of common stock upon exercise of stock options		69			—		2,264			—			—			2,264
Repurchase of common stock		(269	)		—		(3,232	)		—			(27,797	)		(31,029	)
Issuance of common stock upon vesting of restricted stock units		305			—		—			—			—			—
Taxes related to net share settlement of equity awards		(155	)		—		(17,643	)		—			—			(17,643	)
Stock-based compensation		—			—		38,202			—			—			38,202
Balances at March 31, 2021		39,203		$	39	$	420,950		$	120		$	(24,001	)	$	397,108

									*Accumulated*
	*Common Stock*					*Additional*			*Other*					*Total*
						*Paid-In*			*Comprehensive*		*Retained*			*Stockholders’*
	*Shares*			*Amount*		*Capital*			*Income*		*Earnings*			*Equity*
Balances at December 31, 2019		39,146		$	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		145			—		4,714			—		—			4,714
Repurchase of common stock		(346	)		—		(4,160	)		—		(24,766	)		(28,926	)
Issuance of common stock upon vesting of restricted stock units		138			—		—			—		—			—
Taxes related to net share settlement of equity awards		(58	)		—		(5,000	)		—		—			(5,000	)
Stock-based compensation		—			—		10,054			—		—			10,054
Balances at March 31, 2020		39,025		$	39	$	368,016		$	1,553	$	17,122		$	386,730

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

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Qualys, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

NOTE 1.

Description of Business 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, 2020, 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 statement of the financial position, results of operations and cash flows for the interim periods. The results of operations for the three months ended March 31, 2021 are not necessarily indicative of the results of operations expected for the entire year ending December 31, 2021 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, 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, leases, stock-based compensation and income tax provision. Actual results could differ from those estimates and such differences may be material to the accompanying unaudited condensed consolidated financial statements.

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Revenue Recognition

The Company derives revenues from subscriptions that require customers to pay a fee in order to access the Company’s cloud solutions. Contract period with customers generally ranges from less than a year to five years. The subscription fee entitles the customer to an unlimited number of scans for a specified number of networked devices or web applications and, if requested by a customer as part of their subscription, a specified number of physical or virtual scanner appliances. The Company’s physical and virtual scanner appliances are requested by certain customers as part of their subscriptions in order to scan IT infrastructures within their firewalls and do not function without, and are not sold separately from, subscriptions for the Company’s solutions. In some limited cases, the Company also provides certain computer equipment used to extend its Qualys Cloud Platform into its customers’ private cloud environment. Customers are required to return physical scanner appliances and computer equipment if they do not renew their subscriptions.

The Company determines revenue recognition through the following steps:

•

Identification of the contract, or contracts, with a customer;

•

Identification of the performance obligations in the contract;

•

Determination of the transaction price

•

Allocation of the transaction price to the performance obligations in the contract; and

•

Recognition of revenue when, or as, the Company satisfies a performance obligation.

At the inception of a customer contract, the Company makes an assessment as to that customer's ability to pay for the services provided. The Company assesses collectability based on several factors, including credit worthiness of the customer along with past transaction history. In addition, the Company performs periodic evaluations of its customers’ financial condition.

Most of the Company’s revenue contracts are subscription based and contain a single performance obligation. The subscription contracts typically do not offer to the customers any future rights that would constitute material rights under ASC 606. Contract prices are generally composed of fixed consideration for a specific period of time as the Company in general does not offer refunds, volume rebates, customer loyalty programs or other forms of customer incentive payments. In limited situations, contract prices are contingent on future events, such as actual usage during the contract terms, which are accounted for as variable consideration. Total contract price is estimated at contract inception and updated periodically when additional information becomes available.

As the Company's cloud-based subscription services are delivered to customers electronically and over time, revenue is generally recognized ratably over the contract terms. A cumulative catch-up adjustment is made when there is a change in the estimate of variable consideration. In addition, the Company recognizes revenues for certain limited scan arrangements on an as-used basis. When physical equipment are provided to the customers as part of the subscription service contract, the Company applies the practical expedient allowed under ASC 842 Leases to combine lease and nonlease components as a combined component to be accounted for under ASC 606, as the Company determined that the software subscription is the predominant component of the combined components. Therefore, the Company recognizes revenue for the physical equipment ratably over the related subscription period.

Deferred revenues consist of customer contracts billed or cash received that will be recognized in the future under subscriptions existing at the balance sheet date. The current portion of deferred revenues represents amounts that are expected to be recognized within one year of the balance sheet date.

Costs of shipping and handling charges incurred by the Company associated with physical scanner appliances and other computer equipment are included in cost of revenues. Sales taxes and other taxes collected from customers to be remitted to government authorities are excluded from revenues.

Incremental direct costs of obtaining a contract, which consist of sales commissions primarily for new business and upsells, are deferred and amortized over the estimated life of the customer relationship if renewals are expected and the renewal commission is not commensurate with the initial commission. The Company elected the practical expedient to expense commissions on renewals where the specific anticipated contract term amortization period is one year or less. The Company amortizes the capitalized commission cost as a selling expense on a straight-line basis over a period of five years. The Company classifies deferred commissions as current or noncurrent based on the timing of when it expects to recognize the expense. The current and noncurrent portions of deferred commissions are included in prepaid expenses and other current assets and other noncurrent assets, respectively, in its consolidated balance sheets.

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 Company accounts for the investment at cost less impairment and will measure the investment at fair value when the Company identifies observable price changes. The investment is assessed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. No impairment has been incurred related to the investment. The investment is included in other noncurrent assets on the condensed consolidated balance sheets. The Company has not received any dividends from the investment.

Recently Adopted Accounting Pronouncements

In December 2019, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("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 adopted ASU 2019-12 in the first quarter of 2021 with no material impact on the Company's condensed consolidated financial statements.

Recently Issued Accounting Pronouncements Not Yet Adopted

Although there were several other new accounting pronouncements issued by the FASB during the three months ended March 31, 2021, the Company does not believe any of these accounting pronouncements had or will have a material impact on its condensed consolidated financial statements.

There have been no other material changes to the Company’s significant accounting policies set forth in "Note 1" of Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.

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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 accrued 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 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 and liabilities, including quoted prices for identical assets or liabilities in less active or inactive markets, quoted prices for similar assets or liabilities in active markets, or inputs other than quoted prices that are observable 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.

The Company's financial instruments consist of assets and liabilities measured using Level 1 and 2 inputs. Level 1 assets include a highly liquid money market fund, which is valued using unadjusted quoted prices that are available in an active market for an identical asset. Level 2 assets include fixed-income U.S. and foreign 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 of identical instruments in less active or inactive markets, quoted prices of similar instruments in active markets, or 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.

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

	*March 31, 2021*
			*Unrealized*		*Unrealized*
	*Amortized Cost*		*Gains*		*Losses*			*Fair Value*
	(in thousands)
Cash and cash equivalents:
Cash	$	36,632	$	—	$	—		$	36,632
Money market funds		67,922		—		—			67,922
Commercial paper		4,199		—		—			4,199
Total		108,753		—		—			108,753
Short-term marketable securities:
Commercial paper		10,946		—		—			10,946
Corporate bonds		21,821		147		—			21,968
Asset-backed securities		3,092		7		—			3,099
U.S. government agencies		211,724		245		—			211,969
Total		247,583		399		—			247,982
Long-term marketable securities:
Asset-backed securities		26,253		88		(10	)		26,331
U.S. government agencies		11,008		12		(1	)		11,019
Foreign government agencies		1,001		27		—			1,028
Corporate bonds		62,515		614		(33	)		63,096
Total		100,777		741		(44	)		101,474
Total	$	457,113	$	1,140	$	(44	)	$	458,209

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	*December 31, 2020*
			*Unrealized*		*Unrealized*
	*Amortized Cost*		*Gains*		*Losses*			*Fair Value*
	(in thousands)
Cash and cash equivalents:
Cash	$	33,105	$	—	$	—		$	33,105
Money market funds		38,028		—		—			38,028
Commercial paper		2,999		—		—			2,999
Total		74,132		—		—			74,132
Short-term marketable securities:
Commercial paper		6,147		—		—			6,147
Corporate bonds		24,368		170		—			24,538
Asset-backed securities		6,263		18		—			6,281
U.S. government agencies		244,568		369		(11	)		244,926
Total		281,346		557		(11	)		281,892
Long-term marketable securities:
Asset-backed securities		38,456		160		(3	)		38,613
U.S. government agencies		6,884		17		—			6,901
Foreign government agencies		1,006		31		—			1,037
Corporate bonds		51,068		839		—			51,907
Total		97,414		1,047		(3	)		98,458
Total	$	452,892	$	1,604	$	(14	)	$	454,482

As of March 31, 2021 and December 31, 2020, there were no marketable securities that had been in a continuous unrealized loss position for 12 months or longer. The Company had the ability and intent to hold all marketable securities that were in an unrealized loss position until recovery of the amortized cost basis. 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:

	*March 31, 2021*
	*Level 1*		*Level 2*		*Fair Value*
	(in thousands)
Money market funds	$	67,922	$	—	$	67,922
Commercial paper		—		15,145		15,145
U.S. government agencies		—		222,988		222,988
Foreign government agencies		—		1,028		1,028
Corporate bonds		—		85,064		85,064
Asset-backed securities		—		29,430		29,430
Total	$	67,922	$	353,655	$	421,577

	*December 31, 2020*
	*Level 1*		*Level 2*		*Fair Value*
	(in thousands)
Money market funds	$	38,028	$	—	$	38,028
Commercial paper		—		9,146		9,146
U.S. government agencies		—		251,827		251,827
Foreign government agencies		—		1,037		1,037
Corporate bonds		—		76,445		76,445
Asset-backed securities		—		44,894		44,894
Total	$	38,028	$	383,349	$	421,377

The following summarizes the fair value of marketable securities by contractual maturity as of March 31, 2021:

	*March 31, 2021*
	*Mature within*		*Mature after One Year*		*Mature over*
	*One Year*		*through Two Years*		*Two Years*		*Fair Value*
	(in thousands)
Commercial paper	$	15,145	$	—	$	—	$	15,145
U.S. government agencies		211,969		11,019		—		222,988
Foreign government agencies		—		1,028		—		1,028
Corporate bonds		21,968		43,855		19,241		85,064
Asset-backed securities		3,099		12,112		14,219		29,430
Total	$	252,181	$	68,014	$	33,460	$	353,655

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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 Accumulated other comprehensive income ("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.

As of March 31, 2021, the Company had designated cash flow hedge forward contracts with notional amounts of €23.2 million,£8.3 million and Rs.2,200.7 million. As of December 31, 2020, the Company had designated cash flow hedge forward contracts with notional amounts of €25.9 million, £8.7 million and Rs.1,933.5 million. As of March 31, 2021, a net amount of unrealized losses of $1.5 million before tax on the foreign currency forward contracts for GBP and Euro reported in AOCI is expected to be reclassified into revenue within the next 12 months. As of March 31, 2021, a net amount of unrealized gains of $0.5 million before tax on the foreign currency forward contracts for INR reported in AOCI is expected to be reclassified into operating expenses within the next 12 months.

Non-designated forward contracts

As of March 31, 2021, the Company had non-designated forward contracts with notional amounts of €20.9 million, £6.5 million and Rs.35.4 million. As of December 31, 2020, the Company had non-designated forward contracts with notional amounts of €17.7 million, £6.5 million and Rs.32.8 million.

The following summarizes derivative financial instruments as of March 31, 2021 and December 31, 2020:

	*March 31,*			*December 31,*
	*2021*			*2020*
Assets	*(in thousands)*
Foreign currency forward contracts designated as cash flow hedge	$	1,015		$	511
Foreign currency forward contracts not designated as hedging instruments		853			27
Total	$	1,868		$	538
Liabilities
Foreign currency forward contracts designated as cash flow hedge	$	(877	)	$	(2,200	)
Foreign currency forward contracts not designated as hedging instruments		(161	)		(1,677	)
Total	$	(1,038	)	$	(3,877	)

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 (expense), net on the condensed consolidated statements of operations:

	*Three Months Ended*
	*March 31,*
	*2021*			*2020*
	(in thousands)
Net gains from non-designated forward contracts	$	1,085		$	804
Other foreign currency transactions losses		(1,258	)		(871	)
Total foreign exchange losses, net		(173	)		(67	)
Other expenses		(71	)		(68	)
Other income (expense), net	$	(244	)	$	(135	)

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NOTE 3.

Accumulated Other Comprehensive Income (Loss)

The components and changes in accumulated other comprehensive income (loss) for the three months ended March 31, 2021 and 2020 were as follows:

	*Available-for-sale debt securities*			*Cash flow hedges*			*Total*

Balances at December 31, 2020	$	1,224		$	(1,708	)	$	(484	)
Change in unrealized gains (losses) during the period		(501	)		1,092			591
Net losses (gains) reclassified into income during the period		8			192			200
Income tax benefit (provision)		104			(291	)		(187	)
Net change during the period		(389	)		993			604
Balances at March 31, 2021	$	835		$	(715	)	$	120

Balances at December 31, 2019	$	822		$	340		$	1,162
Change in unrealized gains (losses) during the period		455			410			865
Net losses (gains) reclassified into income during the period		(110	)		(248	)		(358	)
Income tax benefit (provision)		(79	)		(37	)		(116	)
Net change during the period		266			125			391
Balances at March 31, 2020	$	1,088		$	465		$	1,553

The effects on income (loss) before income taxes of amounts reclassified from AOCI to the condensed consolidated statements of operations were as follows:

	*Three Months Ended*
	*March 31,*
	*2021*			*2020*
	(in thousands)
Reclassification of AOCI - Available-for-sale debt securities
Other income (expense), net	$	(8	)	$	110

Reclassification of AOCI - Cash flow hedges
Revenues		(217	)		(249	)
Cost of revenues		5			(5	)
Research and development expenses		17			(16	)
Sales and marketing expenses		1			(1	)
General and administrative expenses		2			(2	)
Total	$	(192	)	$	(273	)

NOTE 4.

Property and Equipment, Net

Property and equipment, net, which includes assets under finance leases, consists of the following:

	*March 31,*			*December 31,*
	*2021*			*2020*
	(in thousands)
Computer equipment	$	141,072		$	136,286
Computer software		26,157			26,164
Leasehold improvements		21,107			21,107
Scanner appliances		17,348			16,749
Furniture, fixtures and equipment		6,703			6,599
Finance leases - right of use asset		3,503			3,503
Total property and equipment		215,890			210,408
Less: accumulated depreciation and amortization		(151,747	)		(145,558	)
Property and equipment, net	$	64,143		$	64,850

As of March 31, 2021 and December 31, 2020, physical scanner appliances and other computer equipment that are or will be subject to leases by customers had a net carrying value of $7.3 million and $7.5 million, respectively, including assets that had not been placed in service of $1.7 million and $1.9 million, respectively. Depreciation and amortization expenses relating to property and equipment were $7.3 million and $6.1 million for the three months ended March 31, 2021 and 2020, respectively.

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NOTE 5.

Revenue from Contracts with Customers

The Company records deferred revenue when cash payments are received or due in advance of its performance offset by revenue recognized in the period. Revenues of $83.5 million and $73.8 million were recognized during the three months ended March 31, 2021 and 2020, respectively, which amounts were included in the deferred revenue balances as of December 31, 2020 and 2019, respectively.

The Company's payment terms vary by the type and location of its customers and the products or services offered. The term between invoicing and when payment is due is not significant. For certain products or services and customer types, the Company requires payment before the products or services are delivered to the customer.

The following table sets forth the expected revenue from all remaining performance obligations as of March 31, 2021:

	(in thousands)
2021 (remaining nine months)	$	84,748
2022		82,466
2023		47,585
2024		4,255
2025		1,613
2026 and thereafter		194
Total	$	220,861

Revenues allocated to remaining performance obligations represents the transaction price of noncancelable orders for which service has not been performed, which include deferred revenue and the amounts that will be invoiced and recognized as revenues in future periods from open contracts and excludes unexercised renewals. The Company applied the short-term contract exemption to exclude the remaining performance obligations that are part of a contract that has an original expected duration of one year or less.

From time to time, the Company enters into contracts with customers that extend beyond one year, with certain of its customers electing to pay for more than one year of services upon contract execution. For any discounts associated with these multiple year contracts, the Company concluded its contracts did not contain a financing component.

Revenues by sales channel are as follows:

	*Three Months Ended*
	*March 31,*
	*2021*		*2020*
	(in thousands)
Direct	$	57,952	$	50,005
Partner		38,804		36,258
Total	$	96,756	$	86,263

The Company utilizes partners to enable and accelerate the adoption of its cloud platform by increasing its distribution capabilities and market awareness of its cloud platform as well as by targeting geographic regions outside the reach of its direct sales force. The Company's channel partners maintain relationships with their customers throughout the territories in which they operate and provide their customers with services and third-party solutions to help meet those customers’ evolving security and compliance requirements. As such, these partners may offer the Company's IT security and compliance solutions in conjunction with one or more of their own products or services and act as a conduit through which the Company can connect with these prospective customers to offer its solutions. For sales involving a channel partner, the channel partner engages with the prospective customer directly and involves the Company's sales team as needed to assist in developing and closing an order. When a channel partner secures a sale, the Company sells the associated subscription to the channel partner who in turn resells the subscription to the customer. Sales to channel partners are made at a discount and revenues are recorded at this discounted price over the subscription terms. The Company does not have any influence or specific knowledge of its partners' selling terms with their customers. See Note 12, "Segment Information and Information about Geographic Area" for disaggregation of revenue by geographic area.

Capitalized costs to obtain contracts, current and noncurrent are as follows:

	March 31, 2021		December 31, 2020
	(in thousands)
Commission asset, current	$	3,622	$	3,459
Commission asset, noncurrent	$	6,886	$	6,906

For the three months ended March 31, 2021 and 2020, the Company recognized $0.9 million and $0.7 million of commission expense from amortization of its commission assets, respectively. During the same periods, there was no impairment loss related to the capitalized costs.

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NOTE 6.

Intangible Assets, Net

Intangible assets consist primarily of developed technology and patent licenses acquired from business or asset acquisitions. Acquired intangibles are amortized on a straight-line basis over the respective estimated useful lives of the assets.

The carrying values of intangible assets are as follows:

			*March 31, 2021*
		*Weighted*
	*Weighted*	*Average*
	*Average Life*	*Remaining*			*Accumulated*			*Net Book*
(in thousands)	*(Years)*	*Life (Years)*	*Cost*		*Amortization*			*Value*
Developed technology	4.4	1.5	$	27,356	$	(17,709	)	$	9,647
Patent licenses	14.0	3.4		1,387		(1,046	)		341
Non-compete agreements	2.0	1.3		500		(167	)		333
Total intangibles subject to amortization			$	29,243	$	(18,922	)		10,321
Intangible assets not subject to amortization									40
Total intangible assets, net								$	10,361

			*December 31, 2020*
		*Weighted*
	*Weighted*	*Average*
	*Average Life*	*Remaining*			*Accumulated*			*Net Book*
(in thousands)	*(Years)*	*Life (Years)*	*Cost*		*Amortization*			*Value*
Developed technology	4.4	1.8	$	27,356	$	(16,152	)	$	11,204
Patent licenses	14.0	3.7		1,387		(1,021	)		366
Non-compete agreements	2.0	1.6		500		(104	)		396
Total intangibles subject to amortization			$	29,243	$	(17,277	)		11,966
Intangible assets not subject to amortization									40
Total intangible assets, net								$	12,006

Intangible asset amortization expense was $1.6 million and $1.5 million for the three months ended March 31, 2021 and 2020, respectively, which were primarily recorded in cost of revenues in the condensed consolidated statements of operations.

As of March 31, 2021, the Company expects amortization expense in future periods to be as follows:

	*Amortization Expense*
	(in thousands)
2021 (remaining nine months)	$	4,936
2022		4,823
2023		350
2024		212
Total expected future amortization expense	$	10,321

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NOTE 7.

Leases

The Company leases certain offices, computer equipment and its data center facilities under non-cancelable operating leases for varying periods through 2028. While under the Company's lease agreements the Company has options to extend its certain leases, the Company has not included renewal options in determining the lease terms for calculating its lease liabilities, as these options are not reasonably certain of being exercised. Lease expense was $3.6 million and $4.4 million for the three months ended March 31, 2021 and 2020, respectively. The Company's finance leases are immaterial.

Supplemental cash flow information related to operating leases was as follows:

	*Three Months Ended*
	*March 31,*
	*2021*		*2020*
	(in thousands)
Cash payments included in the measurement of lease liabilities:	$	3,308	$	2,791
Lease liabilities arising from obtaining right-of-use assets:	$	39	$	562

The weighted average remaining lease term and the weighted average discount rate of the Company's operating leases were as follows:

March 31,

2021

December 31,

2020

Weighted average remaining lease term (years)

3.9

4.1

Weighted average discount rates

4.8

NOTE 8.

Commitments and Contingencies

Indemnifications

The Company from time to time enters into certain types of contracts that contingently require it to indemnify various parties against claims from third parties. These contracts primarily relate to (i) the Company's by-laws, under which it must indemnify directors and executive officers, and may indemnify other officers and employees, for liabilities arising out of their relationship, (ii) contracts under which the Company must indemnify directors and certain officers for liabilities arising out of their relationship, and (iii) contracts under which the Company may be required to indemnify customers or resellers from certain liabilities arising from potential infringement of intellectual property rights, as well as potential damages caused by limited product defects. To date, the Company has not incurred and has not recorded any liability in connection with such indemnifications.

The Company maintains director and officer insurance, which may cover certain liabilities arising from its obligation to indemnify its directors.

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NOTE 9.

Stockholders' Equity and Stock-Based Compensation

Equity Incentive Plans

2012 Equity Incentive Plan

Under the 2012 Equity Incentive Plan (the "2012 Plan"), the Company is authorized to grant to eligible participants incentive stock options (“ISOs”), non-statutory stock options (“NSOs”), stock appreciation rights ("SARs"), restricted stock awards ("RSAs"), restricted stock units ("RSUs"), performance units and performance shares equivalent to up to 17,662 thousand shares of common stock as of March 31, 2021, including 1,963 thousand shares authorized during the three months ended March 31, 2021. Options may be granted with an exercise price that is at least equal to the fair market value of the Company's stock at the date of grant and are exercisable when vested. As of March 31, 2021, 8,678 thousand shares were available for grant under the 2012 Plan.

2000 Equity Incentive Plan

Under the 2000 Equity Incentive Plan (the "2000 Plan"), the Company was authorized to grant to eligible participants either ISOs or NSOs. The 2000 Plan was terminated in connection with the closing of the Company's initial public offering, and accordingly, no shares are currently available for grant under the 2000 Plan. The 2000 Plan continues to govern outstanding awards granted thereunder.

Stock-Based Compensation

The following table shows a summary of the stock-based compensation expense included in the condensed consolidated statements of operations:

	*Three Months Ended*
	*March 31,*
	*2021*		*2020*
	(in thousands)
Cost of revenues	$	875	$	614
Research and development		2,215		3,437
Sales and marketing		1,628		1,560
General and administrative		33,484		4,386
Total stock-based compensation	$	38,202	$	9,997

As of March 31, 2021, the Company had $13.6 million of total unrecognized stock-based compensation cost related to unvested options which was expected to be recognized over a weighted-average period of 2.7 years, and $54.4 million of unrecognized stock-based compensation cost related to unvested RSUs which was expected to be recognized over a weighted-average period of 2.8 years.

Performance-Based Stock Options and Restricted Stock Units

On December 10, 2020, the compensation committee of the Company's board of directors (Compensation Committee) granted the equity award for 2021 to the Company’s former Chief Executive Officer, Philippe Courtot (Mr. Courtot). The first portion of the award consists of 69,401 RSUs that were scheduled to vest in 16 quarterly installments beginning on November 1, 2020. The second portion of the award consists of a target number of 223,744 performance-based stock options ("PSOs"), which were scheduled to vest at the end of the three-year performance period from January 2021 through December 2023. The actual number of PSOs eligible to vest range from 0% to 200% of the target number, depending on the level of achievement of goals related to revenue growth and free cash flow per share growth during the performance period.

On November 2, 2019, the Compensation Committee granted the equity award for 2020 to Mr. Courtot. The first portion of the award consists of 48,683 RSUs that were scheduled to vest in 16 quarterly installments beginning on December 1, 2019. The second portion of the award consists of a target number of 123,856 PSOs, which were scheduled to vest at the end of the three-year performance period from January 2020 through December 2022. The actual number of PSOs eligible to vest range from 0% to 200% of the target number, depending on the level of achievement of goals related to revenue growth and free cash flow per share growth during the performance period.

On December 21, 2018, the Compensation Committee granted the equity award for 2019 to Mr. Courtot. The first portion of the award consists of 56,250 RSUs that were scheduled to vest in 16 quarterly increments beginning on January 1, 2019. The second portion of the award consists of a target number of 33,089 performance-based restricted stock units ("PSUs"), which were scheduled to vest at the end of the three-year performance period from January 2019 through December 2021. The actual number of PSUs eligible to vest range from 0% to 200% of the target number, depending on the level of achievement of goals related to revenue growth during the three-year performance period from January 2019 through December 2021 and Adjusted EBITDA margin for the fiscal year of 2021. The third portion of the award consists of a target number of 33,088 PSUs, one third of which (11,030 target PSUs) will vest at the end of each fiscal year of 2019, 2020 and 2021. The actual number of PSUs eligible to vest at each vesting date range from 0% to 200% of the target number, depending on the level of achievement of goals related to revenue growth and Adjusted EBITDA margin for each of those years.

The vesting of these awards is conditioned on Mr. Courtot’s continued service through the vesting dates or, for PSOs and PSUs, the dates that performance is certified in addition to the achievement of performance goals. If Mr. Courtot’s employment is terminated (a) by reason of death or disability or (b) by the Company for reasons other than cause or good reason within 12 months following a change in control, then 100% of any unvested portions of these awards will vest. The PSOs will be exercisable for 12 months after vesting due to termination by reason of death or disability and 3 months after vesting under all other circumstances.

In February 2021 and February 2020, 22,060 shares (representing 200% of target number of awards) and 14,684 shares (representing 135% of target number of awards) under the equity award for 2019 vested as a result of the Company achieving the corresponding level of performance goals for fiscal 2020 and 2019, respectively.

On March 19, 2021, Mr. Courtot resigned from the Company due to health issues. The Compensation Committee determined that Mr. Courtot’s termination of employment was on account of disability. In accordance with the grant agreements of the equity awards for 2021, 2020 and 2019, all remaining outstanding RSUs, PSUs and PSOs under these grants were subject to accelerated vesting and became fully vested at 100% of the target number of awards as of the date of his termination of employment, which consist of 126,659 RSUs, 44,119 PSUs and 347,600 PSOs. As a result, the Company recognized $27.3 million of stock-based compensation expense due to the accelerated vesting in the condensed consolidated statements of operations for the three months ended March 31, 2021.

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Stock Option Plan Activity

A summary of the Company’s stock option activity is as follows:

						Weighted
						Average
				*Weighted*		*Remaining*
	*Outstanding*			*Average*		*Contractual*		*Aggregate*
	*Options*			*Exercise Price*		*Life (Years)*		*Intrinsic Value*
								(in thousands)
Balance as of December 31, 2020		2,215,442		$	59.07		6.5	$	139,121
Granted		86,150		$	124.64
Exercised		(69,239	)	$	32.69
Canceled		(30,229	)	$	95.57
Balance as of March 31, 2021		2,202,124		$	61.97		5.1	$	97,555
Vested and expected to vest - March 31, 2021		2,059,134		$	59.05		4.8	$	96,419
Exercisable - March 31, 2021		1,632,597		$	48.58		3.8	$	91,751

Restricted Stock

A summary of the Company’s RSU activity is as follows: