Company Quick10K Filing
Qualys
Price74.65 EPS2
Shares41 P/E49
MCap3,094 P/FCF24
Net Debt-77 EBIT73
TEV3,017 TEV/EBIT41
TTM 2019-09-30, in MM, except price, ratios
10-Q 2020-03-31 Filed 2020-05-07
10-K 2019-12-31 Filed 2020-02-21
10-Q 2019-09-30 Filed 2019-10-31
10-Q 2019-06-30 Filed 2019-08-02
10-Q 2019-03-31 Filed 2019-05-03
10-K 2018-12-31 Filed 2019-02-27
10-Q 2018-09-30 Filed 2018-11-05
10-Q 2018-06-30 Filed 2018-08-02
10-Q 2018-03-31 Filed 2018-05-08
10-K 2017-12-31 Filed 2018-02-23
10-Q 2017-09-30 Filed 2017-11-03
10-Q 2017-06-30 Filed 2017-08-03
10-Q 2017-03-31 Filed 2017-05-05
10-K 2016-12-31 Filed 2017-02-24
10-Q 2016-09-30 Filed 2016-11-04
10-Q 2016-06-30 Filed 2016-08-04
10-Q 2016-03-31 Filed 2016-05-05
10-K 2015-12-31 Filed 2016-02-26
10-Q 2015-09-30 Filed 2015-11-05
10-Q 2015-06-30 Filed 2015-08-06
10-Q 2015-03-31 Filed 2015-05-07
10-K 2014-12-31 Filed 2015-03-06
10-Q 2014-09-30 Filed 2014-11-06
10-Q 2014-06-30 Filed 2014-08-07
10-Q 2014-03-31 Filed 2014-05-08
10-K 2013-12-31 Filed 2014-02-28
10-Q 2013-09-30 Filed 2013-11-07
10-Q 2013-06-30 Filed 2013-08-08
10-Q 2013-03-31 Filed 2013-05-10
10-K 2012-12-31 Filed 2013-03-05
8-K 2020-06-12
8-K 2020-06-10
8-K 2020-05-21
8-K 2020-05-07
8-K 2020-02-12
8-K 2019-10-30
8-K 2019-08-16
8-K 2019-07-31
8-K 2019-06-14
8-K 2019-06-05
8-K 2019-05-01
8-K 2019-02-28
8-K 2019-02-12
8-K 2018-12-21
8-K 2018-12-07
8-K 2018-10-25
8-K 2018-07-26
8-K 2018-06-18
8-K 2018-05-01
8-K 2018-02-12

QLYS 10Q Quarterly Report

Part I. Financial Information
Item 1. Financial Statements
Note 1. The Company and Summary of Significant Accounting Policies
Note 2. Fair Value of Financial Instruments
Note 3. Accumulated Other Comprehensive Income (Loss)
Note 4. Property and Equipment, Net
Note 5. Revenue From Contracts with Customers
Note 6. Business Combination
Note 7. Intangible Assets, Net
Note 8. Leases
Note 9. Commitments and Contingencies
Note 10. Stockholders' Equity and Stock - Based Compensation
Note 11. Net Income per Share
Note 12. Income Taxes
Note 13. Segment Information and Information About Geographic Area
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-31.1 qlys-2020331xexhibit311.htm
EX-31.2 qlys-2020331xexhibit312.htm
EX-32.1 qlys-2020331xexhibit321.htm
EX-32.2 qlys-2020331xexhibit322.htm

Qualys Earnings 2020-03-31

Balance SheetIncome StatementCash Flow
0.70.60.40.30.10.02012201420172020
Assets, Equity
0.10.10.0-0.0-0.1-0.12012201420172020
Rev, G Profit, Net Income
0.10.10.0-0.0-0.1-0.12012201420172020
Ops, Inv, Fin

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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, 2020
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from          to
Commission file number 001-35662
__________________
QUALYS, INC.
(Exact name of registrant as specified in its charter)
__________________
Delaware
 
77-0534145
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification Number)

919 E. Hillsdale Boulevard, 4th Floor, Foster City, California 94404
(Address of principal executive offices, including zip code)

(650) 801-6100
(Registrant’s telephone number, including area code)
__________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common stock, $0.001 par value per share
QLYS
The NASDAQ Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    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  x    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
x
 
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. o
 

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

The number of shares of the Registrant's common stock outstanding as of April 30, 2020 was 38,958,981.



Qualys, Inc.
TABLE OF CONTENTS
 
 
Page
PART I – FINANCIAL INFORMATION
Item 1.
 
 
Condensed Consolidated Balance Sheets as of March 31, 2020 and December 31, 2019
 
Condensed Consolidated Statements of Operations for the three months ended March 31, 2020 and 2019
 
 
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2020 and 2019
 
 
 
 
 
Item 2.
Item 3.
Item 4.
PART II – OTHER INFORMATION
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
 



2


PART I. FINANCIAL INFORMATION
Item 1.
Financial Statements
Qualys, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands, except share and per share data)

 
March 31, 2020
 
December 31, 2019
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
147,565

 
$
87,559

Short-term marketable securities
184,387

 
211,331

Accounts receivable, net of allowance of $640 and $585 as of March 31, 2020 and December 31, 2019, respectively
72,696

 
78,034

Prepaid expenses and other current assets
20,490

 
18,692

Total current assets
425,138

 
395,616

Long-term marketable securities
102,777

 
119,508

Property and equipment, net
61,665

 
60,579

Operating leases - right of use asset
38,760

 
40,551

Deferred tax assets, net
16,930

 
18,830

Intangible assets, net
15,275

 
16,795

Goodwill
7,447

 
7,447

Restricted cash
1,200

 
1,200

Other noncurrent assets
15,300

 
15,082

Total assets
$
684,492

 
$
675,608

Liabilities and Stockholders’ Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
653

 
$
848

Accrued liabilities
23,753

 
22,784

Deferred revenues, current
201,861

 
192,172

Operating lease liabilities, current
7,968

 
7,663

Total current liabilities
234,235

 
223,467

Deferred revenues, noncurrent
21,823

 
20,935

Operating lease liabilities, noncurrent
41,486

 
44,015

Other noncurrent liabilities
218

 
388

Total liabilities
297,762

 
288,805

Commitments and contingencies (Note 9)


 


Stockholders’ equity:
 
 
 
Preferred stock, $0.001 par value; 20,000,000 shares authorized, no shares issued and outstanding at March 31, 2020 and December 31, 2019

 

Common stock, $0.001 par value; 1,000,000,000 shares authorized; 39,024,673 and 39,146,272 shares issued and outstanding at March 31, 2020 and December 31, 2019, respectively
39

 
39

Additional paid-in capital
368,016

 
362,408

Accumulated other comprehensive income (loss)
1,553

 
1,162

Retained earnings
17,122

 
23,194

Total stockholders’ equity
386,730

 
386,803

Total liabilities and stockholders’ equity
$
684,492

 
$
675,608


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


3


Qualys, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share data)

 
Three Months Ended
 
March 31,
 
2020
 
2019
Revenues
$
86,263

 
$
75,343

Cost of revenues
18,495

 
17,709

Gross profit
67,768

 
57,634

Operating expenses:
 
 
 
Research and development
17,983

 
15,837

Sales and marketing
18,230

 
17,315

General and administrative
11,124

 
10,431

Total operating expenses
47,337

 
43,583

Income from operations
20,431

 
14,051

Other income (expense), net:
 
 
 
Interest expense
(3
)
 
(42
)
Interest income
1,924

 
2,051

Other expense, net
(135
)
 
(223
)
Total other income, net
1,786

 
1,786

Income before income taxes
22,217

 
15,837

Provision for income taxes
3,523

 
2,571

Net income
$
18,694


$
13,266

Net income per share:
 
 
 
Basic
$
0.48

 
$
0.34

Diluted
$
0.46

 
$
0.32

Weighted average shares used in computing net income per share:
 
 
 
Basic
39,112

 
39,109

Diluted
40,846

 
41,546


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


4


Qualys, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
(in thousands)

 
Three Months Ended
 
March 31,
 
2020
 
2019
Net income
$
18,694

 
$
13,266

Other comprehensive income (loss):

 

Available-for-sale debt securities:
 
 
 
Changes in net unrealized gain, net of tax effects of ($104) and ($38) in the three months ended March 31, 2020 and 2019, respectively
351

 
655

Reclassification adjustments for net realized (gain) loss included in net income, net of tax effects of $25 and ($2) in the three months ended March 31, 2020 and 2019, respectively
(85
)
 
28

Total change in unrealized gain on marketable securities, net of tax
266

 
683

Cash flow hedges:
 
 
 
Changes in net unrealized gain, net of tax effects of ($94) and ($48) in the three months ended March 31, 2020 and 2019, respectively
316

 
203

Reclassification adjustments for net realized (gain) loss included in net income, net of tax effects of $57 and ($3) in the three months ended March 31, 2020 and 2019, respectively
(191
)
 
10

Total changes in unrealized gain on cash flow hedges, net of tax
125

 
213

Other comprehensive income, net of tax
391

 
896

Comprehensive income
$
19,085

 
$
14,162


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



5


Qualys, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)

 
Three Months Ended
 
March 31,
 
2020
 
2019
Cash flows from operating activities:
 
 
 
Net income
$
18,694

 
$
13,266

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization expense
7,747

 
7,935

Loss on disposal of property and equipment

 
105

Bad debt expense
148

 

Stock-based compensation
9,997

 
8,445

Amortization of accretion of discounts on marketable securities
(64
)
 
(580
)
Deferred income taxes
1,784

 
1,643

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
5,190

 
7,962

Prepaid expenses and other assets
(1,629
)
 
(3,205
)
Accounts payable
(262
)
 
(1,374
)
Accrued liabilities
253

 
332

Deferred revenues
10,577

 
9,855

Other non-current liabilities

 
(37
)
Net cash provided by operating activities
52,435


44,347

Cash flows from investing activities:
 
 
 
Purchases of marketable securities
(85,567
)
 
(66,224
)
Sales and maturities of marketable securities
129,651

 
91,046

Purchases of property and equipment
(7,271
)
 
(8,608
)
Business combinations

 
(850
)
Net cash provided by investing activities
36,813

 
15,364

Cash flows from financing activities:
 
 
 
Repurchase of common stock
(28,926
)
 
(7,871
)
Proceeds from exercise of stock options
4,714

 
4,047

Payments for taxes related to net share settlement of equity awards
(5,000
)
 
(3,367
)
Principal payments under finance lease obligations
(30
)
 
(419
)
Net cash used in financing activities
(29,242
)
 
(7,610
)
Net increase in cash, cash equivalents and restricted cash
60,006

 
52,101

Cash, cash equivalents and restricted cash at beginning of period
88,759

 
42,226

Cash, cash equivalents and restricted cash at end of period
$
148,765

 
$
94,327


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


6


Qualys, Inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY 
(unaudited)
(in thousands, except share data)

 
 
Common Stock
 
Additional
Paid-In
Capital
 
Accumulated Other
Comprehensive
Income (Loss)
 
Retained Earnings
 
Total
Stockholders’
Equity
 
 
Shares
 
Amount
 
Balances at December 31, 2019
 
39,146,272

 
$
39

 
$
362,408

 
$
1,162

 
$
23,194

 
$
386,803

Net income
 

 

 

 

 
18,694

 
18,694

Other comprehensive income, net of tax
 

 

 

 
391

 

 
391

Issuance of common stock upon exercise of stock options
 
144,989

 

 
4,714

 

 

 
4,714

Repurchase of common stock
 
(346,250
)
 

 
(4,160
)
 

 
(24,766
)
 
(28,926
)
Issuance of common stock upon vesting of restricted stock units
 
138,260

 

 

 

 

 

Taxes related to net share settlement of equity awards
 
(58,598
)
 

 
(5,000
)
 

 

 
(5,000
)
Stock-based compensation
 

 

 
10,054

 

 

 
10,054

Balances at March 31, 2020
 
39,024,673

 
$
39

 
$
368,016

 
$
1,553

 
$
17,122

 
$
386,730



 
 
Common Stock
 
Additional
Paid-In
Capital
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Retained Earnings
 
Total
Stockholders’
Equity
 
 
Shares
 
Amount
 
Balances at December 31, 2018
 
39,015,034

 
$
39

 
$
330,572

 
$
(586
)
 
$
27,964

 
$
357,989

Net income
 

 

 

 

 
13,266

 
13,266

Other comprehensive income, net of tax
 

 

 

 
896

 

 
896

Issuance of common stock upon exercise of stock options
 
152,164

 

 
4,047

 

 

 
4,047

Repurchase of common stock
 
(94,090
)
 

 
(1,129
)
 

 
(6,742
)
 
(7,871
)
Issuance of common stock upon vesting of restricted stock units
 
99,601

 

 

 

 

 

Taxes related to net share settlement of equity awards
 
(38,877
)
 

 
(3,367
)
 

 

 
(3,367
)
Stock-based compensation
 

 

 
8,443

 

 

 
8,443

Balances at March 31, 2019
 
39,133,832

 
$
39

 
$
338,566

 
$
310

 
$
34,488

 
$
373,403



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


7

Qualys, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)


NOTE 1.
The Company and Summary of Significant Accounting Policies

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

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

Risks and Uncertainties
In March 2020, the World Health Organization declared the outbreak of a novel strain of coronavirus (“COVID-19”) as a pandemic. As a result of COVID-19, the Company has modified certain aspects of our 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 consolidated financial statements and the reported results of operations during the reporting period. The Company’s management regularly assesses these estimates, which primarily affect revenue recognition, the valuation of accounts receivable, goodwill and intangible assets, capitalization of internally developed software, stock-based compensation and the provision for income taxes. Actual


8

Qualys, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)


results could differ from those estimates and such differences may be material to the accompanying unaudited condensed consolidated financial statements.

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

Stock-Based Compensation
The Company recognizes the fair value of its employee stock options and restricted stock units over the requisite service periods for those awards ultimately expected to vest. The fair value of each option is estimated on the date of grant using the Black-Scholes-Merton option pricing model and the fair value of each restricted stock unit ("RSU") is based on the price of the Company's stock on the date of grant. Forfeitures are estimated on the date of grant and revised if actual or expected forfeiture activity differs materially from original estimates.
The Company has issued performance-based awards and stock options, and accounts for these awards and options as stock-based compensation with multiple performance conditions. For these performance-based awards, the Company records compensation expense for only the performance milestones that are probable of being achieved, with such expense recorded on a straight-line basis over the expected vesting period. The Company reassesses performance-based estimates each reporting period and if there are any changes in the probability of achievement, the Company recognizes the cumulative effect in the period when the estimate changes.  

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

Recently Adopted Accounting Pronouncements
In August 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. This ASU aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs related to internal-use software. It also requires the Company to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement. The Company adopted this ASU prospectively to applicable implementation costs incurred since January 1, 2020. Applicable implementation costs capitalized during the three months ended March 31, 2020 were not material.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326) as modified by subsequently issued ASU No. 2018-19, 2019-04 and 2019-05, which introduces a new accounting model, Current


9

Qualys, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)


Expected Credit Losses (CECL). CECL requires earlier recognition of credit losses, while also providing additional transparency about credit risk. CECL utilizes a lifetime expected credit loss measurement objective for the recognition of credit losses at the time the financial asset is originated or acquired. The expected credit losses are adjusted each period for changes in expected lifetime credit losses. The Company adopted this ASU on January 1, 2020, using a modified retrospective transition method, which requires a cumulative-effect adjustment, if any, to the opening balance of retained earnings to be recognized on the date of adoption with prior periods not restated. The adoption did not have a material impact on the Company's consolidated financial statements.

Recently Issued Accounting Pronouncements Not Yet Adopted
In January 2020, the FASB issued ASU No. 2020-01, Investments—Equity Securities (Topic 321), Investments—Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) (ASU 2020-01). This ASU clarifies the interaction of the accounting for equity securities under Topic 321, the accounting for equity method investments in Topic 323, and the accounting for certain forward contracts and purchased options in Topic 815. It is effective for the Company beginning in the first quarter of fiscal 2021, and earlier adoption is permitted. The Company is currently evaluating the impact of its pending adoption of ASU 2020-01 on the Company's consolidated financial statements.
In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes (ASU 2019-12), which simplifies the accounting for income taxes, eliminates certain exceptions within ASC 740, Income Taxes, and clarifies certain aspects of the current guidance to promote consistency among reporting entities. ASU 2019-12 is effective for the Company for fiscal years beginning after December 15, 2020. Most amendments within the standard are required to be applied on a prospective basis, while certain amendments must be applied on a retrospective or modified retrospective basis. The Company is currently evaluating the impacts of the provisions of ASU 2019-12 on its consolidated financial statements.

NOTE 2.
Fair Value of Financial Instruments
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. For certain of the Company’s financial instruments, including certain cash equivalents, accounts receivable, accounts payable and other current liabilities, the carrying amounts approximate their fair values due to the relatively short maturity of these balances.
The Company measures and reports certain cash equivalents, marketable securities, derivative foreign currency forward contracts and commitments associated with prior business combinations at fair value in accordance with the provisions of the authoritative accounting guidance that addresses fair value measurements. This guidance establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. The hierarchy is broken down into three levels based on the reliability of inputs as follows:
Level 1-Valuations based on quoted prices in active markets for identical assets or liabilities.
Level 2-Valuations based on other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3-Valuations based on inputs that are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability.



10

Qualys, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)


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

The Company's cash and cash equivalents, and marketable securities consist of the following:
 
March 31, 2020
  
Amortized Cost
 
Unrealized Gains
 
Unrealized (Losses)
 
Fair Value
 
(in thousands)
Cash and cash equivalents:
 
 
 
 
 
 
 
Cash
$
94,365

 
$

 
$

 
$
94,365

Money market funds
35,033

 

 

 
35,033

U.S. government agencies
15,439

 
10

 

 
15,449

Commercial paper
1,200

 

 

 
1,200

Corporate bonds
1,517

 
1

 

 
1,518

Total
147,554

 
11

 

 
147,565

Short-term marketable securities:
 
 
 
 
 
 
 
Commercial paper
1,000

 

 

 
1,000

Corporate bonds
23,975

 
17

 
(84
)
 
23,908

Asset-backed securities
3,017

 
9

 

 
3,026

U.S. government agencies
155,316

 
1,137

 

 
156,453

Total
183,308

 
1,163

 
(84
)
 
184,387

Long-term marketable securities:
 
 
 
 
 
 
 
Asset-backed securities
39,983

 
79

 
(72
)
 
39,990

U.S. government agencies
16,409

 
544

 
(10
)
 
16,943

Corporate bonds
46,065

 
169

 
(390
)
 
45,844

Total
102,457

 
792

 
(472
)
 
102,777

Total
$
433,319

 
$
1,966

 
$
(556
)
 
$
434,729




11

Qualys, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)


 
December 31, 2019
  
Amortized Cost
 
Unrealized Gains
 
Unrealized (Losses)
 
Fair Value
 
(in thousands)
Cash and cash equivalents:
 
 
 
 
 
 
 
Cash
$
84,102

 
$

 
$

 
$
84,102

Money market funds
58

 

 

 
58

Commercial paper
3,399

 

 

 
3,399

Total
87,559

 

 

 
87,559

Short-term marketable securities:
 
 
 
 
 
 
 
Commercial paper
2,239

 

 

 
2,239

Corporate bonds
33,048

 
51

 
(1
)
 
33,098

Asset-backed securities
2,438

 
11

 

 
2,449

U.S. government agencies
173,364

 
184

 
(3
)
 
173,545

Total
211,089

 
246

 
(4
)
 
211,331

Long-term marketable securities:
 
 
 
 
 
 
 
Asset-backed securities
40,001

 
193

 
(1
)
 
40,193

U.S. government agencies
46,447

 
370

 

 
46,817

Corporate bonds
32,236

 
262

 

 
32,498

Total
118,684

 
825

 
(1
)
 
119,508

Total
$
417,332

 
$
1,071

 
$
(5
)
 
$
418,398


There were no marketable securities that had been in a continuous unrealized loss position for 12 months or longer. As of March 31, 2020, the Company had the ability and intent to hold all marketable securities that were in an unrealized loss position until maturity or recovery. The Company considered the extent to which fair value was less than amortized cost basis and conditions related to security’s industry and geography and changes to the ratings, if any, and concluded the decline in fair value compared to carrying value was not related to credit loss.
The following table sets forth by level within the fair value hierarchy the fair value of the Company's cash equivalents and marketable securities measured on a recurring basis:
 
March 31, 2020
 
Level 1
 
Level 2
 
Fair Value
 
(in thousands)
Money market funds
$
35,033

 
$

 
$
35,033

Commercial paper

 
2,200

 
2,200

U.S. government agencies

 
188,844

 
188,844

Corporate bonds

 
71,271

 
71,271

Asset-backed securities

 
43,016

 
43,016

Total
$
35,033

 
$
305,331

 
$
340,364


 
December 31, 2019
 
Level 1
 
Level 2
 
Fair Value
 
(in thousands)
Money market funds
$
58

 
$

 
$
58

Commercial paper

 
5,638

 
5,638

U.S. government agencies

 
220,362

 
220,362

Corporate bonds

 
65,596

 
65,596

Asset-backed securities

 
42,642

 
42,642

Total
$
58

 
$
334,238

 
$
334,296



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



12

Qualys, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)


The following summarizes the fair value of marketable securities by contractual or effective maturity as of March 31, 2020 and December 31, 2019:
 
March 31, 2020
 
Mature within
One Year
 
Mature after One Year through Two Years
 
Mature over Two Years
 
Fair Value
 
(in thousands)
Commercial paper
$
2,200

 
$

 
$

 
$
2,200

U.S. government agencies
171,901

 
15,712

 
1,231

 
188,844

Corporate bonds
25,428

 
24,156

 
21,687

 
71,271

Asset-backed securities
27,041

 
15,975

 

 
43,016

Total
$
226,570

 
$
55,843

 
$
22,918

 
$
305,331


 
December 31, 2019
 
Mature within
One Year
 
Mature after One Year through Two Years
 
Mature over Two Years
 
Fair Value
 
(in thousands)
Commercial paper
$
5,638

 
$

 
$

 
$
5,638

U.S. government agencies
173,546

 
46,816

 

 
220,362

Corporate bonds
33,098

 
23,251

 
9,247

 
65,596

Asset-backed securities
2,449

 
15,550

 
24,643

 
42,642

Total
$
214,731

 
$
85,617

 
$
33,890

 
$
334,238

Derivative Financial Instruments
Designated cash flow hedges
The Company uses a hedging strategy to reduce its exposure to foreign currency exchange rate fluctuations for forecasted subscription renewals and new orders in British Pound ("GBP") and Euro. The Company uses forward currency contracts accounted for as cash flow hedges against a designated portion of forecasted subscription renewals and new orders. Unrealized foreign exchange gains or losses related to those designated cash flow hedge contracts are recorded in AOCI and will be reclassified into revenue when the respective hedged transactions affect earnings.
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 costs are incurred.
At March 31, 2020, the Company had 39 open designated cash flow hedge contracts with notional amounts of 22.3 million, £9.4 million and Rs.1,560 million. At December 31, 2019, the Company had 26 open designated cash flow hedge contracts with notional amounts of 24.2 million and £9.7 million.
 
Three Months Ended March 31,
Derivative instruments designated as cash flow hedges:
2020
 
2019
Net unrealized gains (before tax) recognized in AOCI:
(in thousands)
   Foreign currency forward contracts (GBP, Euro and INR)
$
410

 
$
251

 
 
 
 
Net unrealized (gains) losses (before tax) reclassified from AOCI into income:
 
 
 
   Foreign currency forward contracts (GBP and Euro)
(248
)
 
13

Net change in AOCI before tax
162

 
264

Net tax impact on the change in AOCI
(37
)
 
(51
)
Net change in AOCI after tax
$
125

 
$
213


As of March 31, 2020, the net amount of unrealized gains and losses on the foreign currency forward contracts for GBP and Euro reported in AOCI that is expected to be reclassified into revenue within the next 12 months is a gain of $1.2 million (before tax). As of March 31, 2020, the net amount of unrealized gains and losses on the foreign currency


13

Qualys, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)


forward contracts for INR reported in AOCI that is expected to be reclassified into operating expenses is a loss of $1.0 million (before tax).
Non-designated forward contracts
At March 31, 2020, the Company had 13 outstanding non-designated forward contracts with notional amounts of 13.1 million, £6.2 million and Rs.443.4 million. At December 31, 2019, the Company had 15 outstanding non-designated forward contracts with notional amounts of 20.0 million, £5.6 million and Rs.756.0 million.
The following summarizes derivative financial instruments as of March 31, 2020 and December 31, 2019:
 
 
March 31,
 
December 31,
 
 
2020
 
2019
Assets:
 
(in thousands)
Foreign currency forward contracts designated as cash flow hedge
 
$
954

 
$
427

Foreign currency forward contracts not designated as hedging instruments
 
516

 
515

     Total
 
$
1,470

 
$
942

Liabilities:
 
 
 
 
Foreign currency forward contracts designated as cash flow hedge
 
$
(1,059
)
 
$
(524
)
Foreign currency forward contracts not designated as hedging instruments
 
(280
)
 
(550
)
     Total
 
$
(1,339
)
 
$
(1,074
)

All foreign currency forward contracts were valued at fair value using level 2 inputs.
The following summarizes the gains (losses) recognized from forward contracts and other foreign currency transactions in other income (expense), net on the condensed consolidated statement of operations:
 
Three Months Ended March 31,
 
2020
 
2019
 
(in thousands)
Net gain from non-designated forward contracts
$
804

 
$
23

Other foreign currency transactions loss
(871
)
 
(183
)
     Total foreign exchange loss, net
(67
)
 
(160
)
Other expenses
(68
)
 
(63
)
     Other expense, net
$
(135
)
 
$
(223
)


NOTE 3.
Accumulated Other Comprehensive Income (loss)
The components and changes in accumulated other comprehensive income (loss), net of taxes, for the three months ended March 31, 2020 and 2019 were as follows (in thousands):
 
 
Unrealized gains (losses) on AFS debt securities