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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 September 30, 2022

☐	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 28, 2022 was 37,988,029.

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	26
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	35
Item 4.	Controls and Procedures	35
PART II – OTHER INFORMATION
Item 1.	Legal Proceedings	36
Item 1A.	Risk Factors	36
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	55
Item 3.	Defaults upon Senior Securities	55
Item 4.	Mine Safety Disclosures	55
Item 5.	Other Information	55
Item 6.	Exhibits	55
	Signatures	56

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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 occur (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 Coronavirus Disease 2019 ("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 11 shared cloud platforms, 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)

	*September 30,*			*December 31,*
	*2022*			*2021*
Assets
Current assets:
Cash and cash equivalents	$	193,902		$	137,328
Short-term marketable securities		191,378			267,960
Accounts receivable, net of allowance of $1,085 and $793 as of September 30, 2022 and December 31, 2021, respectively		98,717			108,998
Prepaid expenses and other current assets		38,736			32,112
Total current assets		522,733			546,398
Long-term marketable securities		70,997			111,198
Property and equipment, net		53,935			61,854
Operating leases - right of use asset		31,454			37,016
Deferred tax assets, net		39,802			25,087
Intangible assets, net		2,019			6,545
Goodwill		7,447			7,447
Restricted cash		1,200			1,200
Other noncurrent assets		18,044			17,814
Total assets	$	747,631		$	814,559
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	1,308		$	1,296
Accrued liabilities		42,816			32,504
Deferred revenues, current		278,947			257,872
Operating lease liabilities, current		10,959			12,608
Total current liabilities		334,030			304,280
Deferred revenues, noncurrent		24,182			32,753
Operating lease liabilities, noncurrent		28,911			35,914
Other noncurrent liabilities		5,322			4,898
Total liabilities		392,445			377,845
Commitments and contingencies (Note 8)
Stockholders’ equity:
Preferred stock, $0.001 par value; 20,000 shares authorized, no shares issued and outstanding at September 30, 2022 and December 31, 2021		—			—
Common stock, $0.001 par value; 1,000,000 shares authorized; 38,124 and 39,112 shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively		38			39
Additional paid-in capital		510,557			477,323
Accumulated other comprehensive income		43			1,007
Accumulated deficit		(155,452	)		(41,655	)
Total stockholders’ equity		355,186			436,714
Total liabilities and stockholders’ equity	$	747,631		$	814,559

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*						*Nine Months Ended*
	*September 30,*						*September 30,*
	*2022*			*2021*			*2022*			*2021*
Revenues	$	125,561		$	104,934		$	358,874		$	301,392
Cost of revenues		25,992			22,479			75,040			65,711
Gross profit		99,569			82,455			283,834			235,681
Operating expenses:
Research and development		25,478			21,336			73,376			58,890
Sales and marketing		25,047			18,569			68,919			54,328
General and administrative		15,698			10,573			41,665			63,829
Total operating expenses		66,223			50,478			183,960			177,047
Income from operations		33,346			31,977			99,874			58,634
Other income (expense), net:
Interest expense		—			—			—			(4	)
Interest income		1,568			525			2,925			1,838
Other income (expense), net		(1,076	)		(451	)		(3,496	)		(775	)
Total other income (expense), net		492			74			(571	)		1,059
Income before income taxes		33,838			32,051			99,303			59,693
Income tax provision		6,178			4,282			19,637			10,554
Net income	$	27,660		$	27,769		$	79,666		$	49,139
Net income per share:
Basic	$	0.72		$	0.71		$	2.06		$	1.26
Diluted	$	0.71		$	0.70		$	2.01		$	1.22
Weighted average shares used in computing net income per share:
Basic		38,317			38,925			38,680			39,077
Diluted		39,220			39,938			39,634			40,147

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*						*Nine Months Ended*
	*September 30,*						*September 30,*
	*2022*			*2021*			*2022*			*2021*
Net income	$	27,660		$	27,769		$	79,666		$	49,139
Other comprehensive income (loss), net of tax
Net change in unrealized losses on available-for-sale debt securities, net of tax		(492	)		(192	)		(3,553	)		(783	)
Net change in unrealized gains on cash flow hedges, net of tax		1,160			1,285			2,589			2,095
Other comprehensive income (loss), net of tax		668			1,093			(964	)		1,312
Comprehensive income	$	28,328		$	28,862		$	78,702		$	50,451

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)

	*Nine Months Ended*
	*September 30,*
	*2022*			*2021*
Cash flow from operating activities:
Net income	$	79,666		$	49,139
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization expense		25,773			26,752
Bad debt expense		493			247
Loss on disposal of property and equipment		5			12
Stock-based compensation		37,856			56,218
Amortization of premiums on marketable securities		1,127			2,985
Deferred income taxes		(15,599	)		(15,962	)
Changes in operating assets and liabilities:
Accounts receivable		9,788			15,665
Prepaid expenses and other assets		(1,412	)		(5,460	)
Accounts payable		841			200
Accrued liabilities		3,968			9,912
Deferred revenues		12,504			21,033
Net cash provided by operating activities		155,010			160,741
Cash flow from investing activities:
Purchases of marketable securities		(178,788	)		(255,051	)
Sales and maturities of marketable securities		290,949			295,336
Purchases of property and equipment		(12,391	)		(20,089	)
Proceeds from disposal of property and equipment		—			6
Purchases of intangible assets		(120	)		(1,080	)
Net cash provided by investing activities		99,650			19,122
Cash flow from financing activities:
Repurchases of common stock		(212,839	)		(94,919	)
Proceeds from exercise of stock options		23,161			10,948
Payments for taxes related to net share settlement of equity awards		(12,853	)		(24,194	)
Proceeds from issuance of common stock through employee stock purchase plan		4,445			—
Principal payments under finance lease obligations		—			(90	)
Net cash used in financing activities		(198,086	)		(108,255	)
Net increase in cash, cash equivalents and restricted cash		56,574			71,608
Cash, cash equivalents and restricted cash at beginning of period		138,528			75,332
Cash, cash equivalents and restricted cash at end of period	$	195,102		$	146,940

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, 2021		39,112		$	39		$	477,323		$	1,007		$	(41,655	)	$	436,714
Net income		—			—			—			—			25,410			25,410
Other comprehensive loss, net of tax		—			—			—			(1,677	)		—			(1,677	)
Issuance of common stock upon exercise of stock options		66			—			2,569			—			—			2,569
Repurchase of common stock		(368	)		—			(4,416	)		—			(42,165	)		(46,581	)
Issuance of common stock upon vesting of restricted stock units		70			—			—			—			—			—
Taxes related to net share settlement of equity awards		(28	)		—			(3,631	)		—			—			(3,631	)
Issuance of common stock through employee stock purchase plan		23						2,086									2,086
Stock-based compensation		—			—			11,745			—			—			11,745
Balances at March 31, 2022		38,875		$	39		$	485,676		$	(670	)	$	(58,410	)	$	426,635
Net income		—			—			—			—			26,596			26,596
Other comprehensive income, net of tax		—			—			—			45			—			45
Issuance of common stock upon exercise of stock options		146			—			6,504			—			—			6,504
Repurchase of common stock		(561	)		—			(6,745	)		—			(64,487	)		(71,232	)
Issuance of common stock upon vesting of restricted stock units		90			—			—			—			—			—
Taxes related to net share settlement of equity awards		(33	)		—			(4,530	)		—			—			(4,530	)
Stock-based compensation		—			—			12,820			—			—			12,820
Balances at June 30, 2022		38,517		$	39		$	493,725		$	(625	)	$	(96,301	)	$	396,838
Net income		—			—			—			—			27,660			27,660
Other comprehensive income, net of tax		—			—			—			668			—			668
Issuance of common stock upon exercise of stock options		217			—			14,088			—			—			14,088
Repurchase of common stock		(684	)		(1	)		(8,214	)		—			(86,811	)		(95,026	)
Issuance of common stock upon vesting of restricted stock units		87			—			—			—			—			—
Taxes related to net share settlement of equity awards		(36	)		—			(4,692	)		—			—			(4,692	)
Issuance of common stock through employee stock purchase plan		23						2,359									2,359
Stock-based compensation		—			—			13,291			—			—			13,291
Balances at September 30, 2022		38,124		$	38		$	510,557		$	43		$	(155,452	)	$	355,186

									*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
Net income		—			—		—			—			21,142			21,142
Other comprehensive loss, net of tax		—			—		—			(385	)		—			(385	)
Issuance of common stock upon exercise of stock options		57			—		2,174			—			—			2,174
Repurchase of common stock		(316	)		—		(3,796	)		—			(28,427	)		(32,223	)
Issuance of common stock upon vesting of restricted stock units		84			—		—			—			—			—
Taxes related to net share settlement of equity awards		(33	)		—		(3,374	)		—			—			(3,374	)
Stock-based compensation		—			—		8,553			—			—			8,553
Balances at June 30, 2021		38,995		$	39	$	424,507		$	(265	)	$	(31,286	)	$	392,995
Net income		—			—		—			—			27,769			27,769
Other comprehensive loss, net of tax		—			—		—			1,093			—			1,093
Issuance of common stock upon exercise of stock options		117			—		6,510			—			—			6,510
Repurchase of common stock		(290	)		—		(3,489	)		—			(28,178	)		(31,667	)
Issuance of common stock upon vesting of restricted stock units		74			—		—			—			—			—
Taxes related to net share settlement of equity awards		(32	)		—		(3,177	)		—			—			(3,177	)
Stock-based compensation		—			—		9,463			—			—			9,463
Balances at September 30, 2021		38,864		$	39	$	433,814		$	828		$	(31,695	)	$	402,986

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 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, 2021, 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 and nine months ended September 30, 2022 are not necessarily indicative of the results of operations expected for the entire year ending December 31, 2022 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, 2021 filed with the SEC on February 22, 2022.

Risks and Uncertainties

In March 2020, the World Health Organization declared the outbreak of COVID-19 as a pandemic. As a result of COVID-19, the Company temporarily 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. While the Company has resumed in-office work, employee travel, and in-person events and meetings, the Company will continue to actively monitor the situation and may take 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 ongoing COVID-19 pandemic to date and does not expect the pandemic will have a significant impact on the Company's business throughout the remainder of 2022, the Company is unable to accurately predict the full impact that the ongoing effects of COVID-19 will have on our business 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 the Company's customers and partners. The Company continues to evaluate the nature and extent of the impact to its business, financial position, results of operations and cash flows.

Additionally, the uncertainty surrounding macroeconomic factors in the U.S. and globally characterized by the supply chain environment, inflationary pressure, rising interest rates, labor shortages, significant volatility of global markets and geopolitical conflicts could have a material adverse effect on the Company's long-term business and could lead to further economic disruption and expose the Company to greater risk as its current and potential customers may reduce or eliminate their overall spending on IT security.

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, allowance for credit loss, the valuation of 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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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

None.

Recently Issued Accounting Pronouncements Not Yet Adopted

The Company does not believe any new accounting pronouncements issued by the FASB that have not become effective will have a material impact on its condensed consolidated financial statements.

There have been no 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, 2021.

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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. Treasury and government agency securities, commercial paper, corporate bonds, asset-backed securities, foreign government 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:

	*September 30, 2022*
			*Unrealized*		*Unrealized*
	*Amortized Cost*		*Gains*		*Losses*			*Fair Value*
	(in thousands)
Cash and cash equivalents:
Cash	$	46,591	$	—	$	—		$	46,591
Money market funds		147,311		—		—			147,311
Total		193,902		—		—			193,902
Short-term marketable securities:
Corporate bonds		33,249		4		(352	)		32,901
U.S. Treasury and government agencies		159,056		—		(1,576	)		157,480
Foreign government		1,003		—		(6	)		997
Total		193,308		4		(1,934	)		191,378
Long-term marketable securities:
Corporate bonds		35,440		—		(1,122	)		34,318
Asset-backed securities		19,389		—		(188	)		19,201
U.S. Treasury and government agencies		17,977		—		(499	)		17,478
Total		72,806		—		(1,809	)		70,997
Total	$	460,016	$	4	$	(3,743	)	$	456,277

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	*December 31, 2021*
			*Unrealized*		*Unrealized*
	*Amortized Cost*		*Gains*		*Losses*			*Fair Value*
	(in thousands)
Cash and cash equivalents:
Cash	$	61,220	$	—	$	—		$	61,220
Money market funds		75,258		—		—			75,258
Commercial paper		850		—		—			850
Total		137,328		—		—			137,328
Short-term marketable securities:(1)
Commercial paper		18,046		—		—			18,046
Corporate bonds		28,869		101		(7	)		28,963
Asset-backed securities		3,952		—		—			3,952
U.S. Treasury and government agencies		217,160		2		(163	)		216,999
Total		268,027		103		(170	)		267,960
Long-term marketable securities:
Corporate bonds		57,762		160		(182	)		57,740
Asset-backed securities		14,941		6		(36	)		14,911
U.S. Treasury and government agencies		37,664		—		(136	)		37,528
Foreign government		1,007		12		—			1,019
Total		111,374		178		(354	)		111,198
Total	$	516,729	$	281	$	(524	)	$	516,486

(1) Revised for correction of classification of amounts and security types disclosed in Note 2 to the consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.

As of September 30, 2022 the total unrealized loss from marketable securities that had been in a continuous unrealized loss position for 12 months or longer was $573 thousand. 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. As of December 31, 2021, there were no marketable securities that had been in a continuous unrealized loss position for 12 months or longer.

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, 2022*
	*Level 1*		*Level 2*		*Fair Value*
	(in thousands)
Money market funds	$	147,311	$	—	$	147,311
Corporate bonds		—		67,219		67,219
Asset-backed securities		—		19,201		19,201
U.S. Treasury and government agencies		—		174,958		174,958
Foreign government		—		997		997
Total	$	147,311	$	262,375	$	409,686

	*December 31, 2021*
	*Level 1*		*Level 2*		*Fair Value*
	(in thousands)
Money market funds	$	75,258	$	—	$	75,258
Commercial paper		—		18,896		18,896
Corporate bonds		—		86,703		86,703
Asset-backed securities		—		18,863		18,863
U.S. Treasury and government agencies		—		254,527		254,527
Foreign government		—		1,019		1,019
Total	$	75,258	$	380,008	$	455,266

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The following summarizes the fair value of marketable securities by contractual maturity:

	*September 30, 2022*
	*Mature within*		*Mature after One Year*		*Mature over*
	*One Year*		*through Two Years*		*Two Years*		*Fair Value*
	(in thousands)
Corporate bonds	$	32,901	$	31,706	$	2,612	$	67,219
Asset-backed securities		—		9,799		9,402		19,201
U.S. Treasury and government agencies		157,480		17,478		—		174,958
Foreign government		997		—		—		997
Total	$	191,378	$	58,983	$	12,014	$	262,375

Derivative Financial Instruments

Designated cash flow hedges

The Company enters into foreign currency forward contracts to reduce the risk of variability in future cash flow due to foreign currency exchange rate fluctuations from certain forecasted subscription revenue orders billed in British Pound ("GBP") and Euro and operating expenses incurred in Indian Rupee ("INR"), which are designated as cash flow hedges. 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 or operating expenses, respectively, in the same periods when the hedged transactions are recognized in earnings.

As of September 30, 2022, the Company had designated cash flow hedge forward contracts with notional amounts of €31.0 million, £9.6 million and Rs.3,289.0 million. As of December 31, 2021, the Company had designated cash flow hedge forward contracts with notional amounts of €29.8 million, £9.4 million and Rs.2,955.3 million. As of September 30, 2022, a net amount of unrealized gain of $5.3 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 September 30, 2022, the net amount of unrealized loss on the foreign currency forward contracts for INR reported in AOCI of $1.9 million is expected to be reclassified into operating expense within the next 12 months.

Non-designated forward contracts

The Company also uses foreign currency forward contracts to hedge certain foreign currency denominated assets or liabilities, which are not designated as cash flow hedges.

As of September 30, 2022, the Company had non-designated forward contracts with notional amounts of €26.0 million, £13.1 million and Rs.205.0 million. As of December 31, 2021, the Company had non-designated forward contracts with notional amounts of €34.5 million, £11.6 million, Rs.74.9 million, C$2.5 million and CHF1.0 million.

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The following summarizes derivative financial instruments as of September 30, 2022 and December 31, 2021:

	*September 30,*			*December 31,*
	*2022*			*2021*
Assets	*(in thousands)*
Foreign currency forward contracts designated as cash flow hedge	$	4,898		$	1,737
Foreign currency forward contracts not designated as hedging instruments		8,276			1,599
Total	$	13,174		$	3,336
Liabilities
Foreign currency forward contracts designated as cash flow hedge	$	(1,942	)	$	(181	)
Foreign currency forward contracts not designated as hedging instruments		(1,067	)		(207	)
Total	$	(3,009	)	$	(388	)

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*						*Nine Months Ended*
	*September 30,*						*September 30,*
	*2022*			*2021*			*2022*			*2021*
	(in thousands)						(in thousands)
Net gains from non-designated forward contracts	$	3,608		$	748		$	8,573		$	1,792
Other foreign currency transaction gains (losses)		(4,518	)		(1,132	)		(11,856	)		(2,360	)
Total foreign exchange losses, net		(910	)		(384	)		(3,283	)		(568	)
Other expenses		(166	)		(67	)		(213	)		(207	)
Other expense, net	$	(1,076	)	$	(451	)	$	(3,496	)	$	(775	)

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NOTE 3.

Accumulated Other Comprehensive Income (Loss)

The components and changes in accumulated other comprehensive income (loss) for the three and nine months ended September 30, 2022 and 2021 were as follows:

	*Available-for-sale debt securities*			*Cash flow hedges*			*Total*
	(in thousands)
Balances at December 31, 2021	$	(185	)	$	1,192		$	1,007
Change in unrealized gains (losses) during the period		(2,070	)		648			(1,422	)
Net gains reclassified into income during the period		-			(60	)		(60	)
Income tax provision		(58	)		(137	)		(195	)
Net change during the period		(2,128	)		451			(1,677	)
Balances at March 31, 2022		(2,313	)		1,643			(670	)
Change in unrealized gains (losses) during the period		(933	)		1,548			615
Net gains reclassified into income during the period		-			(244	)		(244	)
Income tax provision		-			(326	)		(326	)
Net change during the period		(933	)		978			45
Balances at June 30, 2022		(3,246	)		2,621			(625	)