10-Q 1 qlys20220930_10q.htm FORM 10-Q qlys20220930_10q.htm
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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

__________________

FORM 10-Q

__________________

 

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

 

For the Quarterly Period Ended September 30, 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.

 

 

 
 

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

 

 

 

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.

 

 

 

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.

 

 

 

 

 

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.

 

 

 

 

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.

 

 

 

 

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.

 

 

 

 

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.

 

 

 

 

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.

 

9

 

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.

 

10

 
 

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  

 

11

 
   

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  

 

12

 

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 o€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.

 

13

 

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 )

 

14

 
 

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

    (