10-Q 1 qlys20210930_10q.htm FORM 10-Q qlys20210930_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, 2021

 

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

 

For the transition period from          to

Commission file number 001-35662

__________________

QUALYS, INC.

(Exact name of registrant as specified in its charter)

__________________

 

Delaware

 

77-0534145

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification Number)

 

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

(Address of principal executive offices, including zip code)

 

(650) 801-6100

(Registrant’s telephone number, including area code)

__________________

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

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common stock, $0.001 par value per share

QLYS

The NASDAQ Stock Market LLC

 

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

 

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

 

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

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

 

Smaller reporting company

   

Emerging growth company

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

 

 

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

The number of shares of the registrant's common stock outstanding as of October 28, 2021 was 38,824,104.

 

 

 

 

Qualys, Inc.

 

TABLE OF CONTENTS

 

   

Page

Risk Factor Summary 3

PART I – FINANCIAL INFORMATION

Item 1.

Financial Statements

 
 

Condensed Consolidated Balance Sheets

4

 

Condensed Consolidated Statements of Operations

5

 

Condensed Consolidated Statements of Comprehensive Income

6

 

Condensed Consolidated Statements of Cash Flows

7

 

Condensed Consolidated Statements of Stockholders' Equity

8

 

Notes to Condensed Consolidated Financial Statements

9

Item 2.

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

22

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

31

Item 4.

Controls and Procedures

32

PART II – OTHER INFORMATION

Item 1.

Legal Proceedings

32

Item 1A.

Risk Factors

32

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

49

Item 3.

Defaults upon Senior Securities

49

Item 4.

Mine Safety Disclosures

49

Item 5.

Other Information

49

Item 6.

Exhibits

50

 

Signatures

51

 

 

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 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 fromseven data centers, and any disruption of service at these facilities would interrupt or delay our ability to deliver our solutions to our customers which could reduce our revenues and harm our operating results.

 

We face competition in our markets, and we may lack sufficient financial or other resources to maintain or improve our competitive position.

 

If our solutions fail to detect vulnerabilities or incorrectly detect vulnerabilities, our brand and reputation could be harmed, which could have an adverse effect on our business and results of operations.

 

If we are unable to continue the expansion of our sales force, sales of our solutions and the growth of our business would be harmed.

 

We rely on third-party channel partners to generate a substantial amount of our revenues, and if we fail to expand and manage our distribution channels, our revenues could decline and our growth prospects could suffer.

 

A significant portion of our customers, channel partners and employees are located outside of the United States, which subjects us to a number of risks associated with conducting international operations, and if we are unable to successfully manage these risks, our business and operating results could be harmed.

 

Our business and operations have experienced significant growth, and if we do not appropriately manage any future growth, or are unable to improve our systems and processes, our operating results may be negatively affected.

 

A portion of our revenues are generated by sales to government entities, which are subject to a number of challenges and risks.

 

Undetected software errors or flaws in our solutions could harm our reputation, decrease market acceptance of our solutions or result in liability.

 

Our solutions could be used to collect and store personal information of our customers’ employees or customers, and therefore privacy and other data handling concerns could result in additional cost and liability to us or inhibit sales of our solutions.

 

Our solutions contain third-party open source software components, and our failure to comply with the terms of the underlying open source software licenses could restrict our ability to sell our solutions.

 

We use third-party software and data that may be difficult to replace or cause errors or failures of our solutions that could lead to lost customers or harm to our reputation and our operating results.

 

Failure to protect our proprietary technology and intellectual property rights could substantially harm our business and operating results.

 

Assertions by third parties of infringement or other violations by us of their intellectual property rights could result in significant costs and harm our business and operating results.

 

 

 

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,

 
   

2021

   

2020

 

Assets

               

Current assets:

               

Cash and cash equivalents

  $ 145,740     $ 74,132  

Short-term marketable securities

    199,947       281,892  

Accounts receivable, net of allowance of $680 and $725 as of September 30, 2021 and December 31, 2020, respectively

    84,267       100,179  

Prepaid expenses and other current assets

    22,899       19,142  

Total current assets

    452,853       475,345  

Long-term marketable securities

    136,124       98,458  

Property and equipment, net

    63,257       64,850  

Operating leases - right of use asset

    37,795       44,838  

Deferred tax assets, net

    31,367       15,811  

Intangible assets, net

    8,250       12,006  

Goodwill

    7,447       7,447  

Restricted cash

    1,200       1,200  

Other noncurrent assets

    17,887       16,864  

Total assets

  $ 756,180     $ 736,819  

Liabilities and Stockholders’ Equity

               

Current liabilities:

               

Accounts payable

  $ 1,099     $ 731  

Accrued liabilities

    33,878       29,833  

Deferred revenues, current

    237,539       213,494  

Operating lease liabilities, current

    12,176       11,672  

Total current liabilities

    284,692       255,730  

Deferred revenues, noncurrent

    27,528       30,540  

Operating lease liabilities, noncurrent

    37,320       45,700  

Other noncurrent liabilities

    3,654       367  

Total liabilities

    353,194       332,337  

Commitments and contingencies (Note 8)

               

Stockholders’ equity:

               

Preferred stock, $0.001 par value; 20,000 shares authorized, no shares issued and outstanding at September 30, 2021 and December 31, 2020

           

Common stock, $0.001 par value; 1,000,000 shares authorized; 38,864 and 39,253 shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively

    39       39  

Additional paid-in capital

    433,814       401,359  

Accumulated other comprehensive income (loss)

    828       (484 )

Retained earnings (accumulated deficit)

    (31,695 )     3,568  

Total stockholders’ equity

    402,986       404,482  

Total liabilities and stockholders’ equity

  $ 756,180     $ 736,819  

 

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,

 
   

2021

   

2020

   

2021

   

2020

 

Revenues

  $ 104,934     $ 93,069     $ 301,392     $ 268,162  

Cost of revenues

    22,479       20,619       65,711       58,005  

Gross profit

    82,455       72,450       235,681       210,157  

Operating expenses:

                               

Research and development

    21,336       17,864       58,890       53,905  

Sales and marketing

    18,569       16,060       54,328       50,073  

General and administrative

    10,573       12,223       63,829       33,937  

Total operating expenses

    50,478       46,147       177,047       137,915  

Income from operations

    31,977       26,303       58,634       72,242  

Other income (expense), net:

                               

Interest expense

          (1 )     (4 )     (4 )

Interest income

    525       1,123       1,838       4,439  

Other income (expense), net

    (451 )     209       (775 )     268  

Total other income, net

    74       1,331       1,059       4,703  

Income before income taxes

    32,051       27,634       59,693       76,945  

Income tax provision

    4,282       4,891       10,554       9,189  

Net income

  $ 27,769     $ 22,743     $ 49,139     $ 67,756  

Net income per share:

                               

Basic

  $ 0.71     $ 0.58     $ 1.26     $ 1.73  

Diluted

  $ 0.70     $ 0.56     $ 1.22     $ 1.66  

Weighted average shares used in computing net income per share:

                               

Basic

    38,925       39,238       39,077       39,171  

Diluted

    39,938       40,764       40,147       40,843  

 

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,

 
   

2021

   

2020

   

2021

   

2020

 

Net income

  $ 27,769     $ 22,743     $ 49,139     $ 67,756  

Other comprehensive income (loss), net of tax

                               

Net change in unrealized gains (losses) on available-for-sale debt securities, net of tax

    (192 )     (511 )     (783 )     833  

Net change in unrealized gains (losses) on cash flow hedges, net of tax

    1,285       (849 )     2,095       (920 )

Other comprehensive income (loss), net of tax

    1,093       (1,360 )     1,312       (87 )

Comprehensive income

  $ 28,862     $ 21,383     $ 50,451     $ 67,669  

 

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,

 
   

2021

   

2020

 

Cash flow from operating activities:

               

Net income

  $ 49,139     $ 67,756  

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

               

Depreciation and amortization expense

    26,752       23,975  

Bad debt expense

    247       392  

Loss on disposal of property and equipment

    12       9  

Stock-based compensation

    56,218       29,930  

Amortization of premiums on marketable securities

    2,985       163  

Deferred income taxes

    (15,962 )     5,061  

Changes in operating assets and liabilities:

               

Accounts receivable

    15,665       13,351  

Prepaid expenses and other assets

    (5,460 )     (6,071 )

Accounts payable

    200       326  

Accrued liabilities

    9,912       72  

Deferred revenues

    21,033       6,333  

Net cash provided by operating activities

    160,741       141,297  

Cash flow from investing activities:

               

Purchases of marketable securities

    (255,051 )     (290,534 )

Sales and maturities of marketable securities

    295,336       263,296  

Purchases of property and equipment

    (20,089 )     (22,742 )

Proceeds from disposal of property and equipment

    6        

Purchases of intangible assets

    (1,080 )     (1,500 )

Net cash provided by (used in) investing activities

    19,122       (51,480 )

Cash flow from financing activities:

               

Repurchases of common stock

    (94,919 )     (91,881 )

Proceeds from exercise of stock options

    10,948       23,962  

Payments for taxes related to net share settlement of equity awards

    (24,194 )     (16,338 )

Principal payments under finance lease obligations

    (90 )     (92 )

Net cash used in financing activities

    (108,255 )     (84,349 )

Net increase in cash, cash equivalents and restricted cash

    71,608       5,468  

Cash, cash equivalents and restricted cash at beginning of period

    75,332       88,759  

Cash, cash equivalents and restricted cash at end of period

  $ 146,940     $ 94,227  

 

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, 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 income, 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  

 

                           

Accumulated

                 
    Common Stock     Additional     Other             Total  
                   

Paid-In

   

Comprehensive

   

Retained

   

Stockholders’

 
   

Shares

   

Amount

   

Capital

   

Income

   

Earnings

   

Equity

 

Balances at December 31, 2019

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

Net income

                            18,694       18,694  

Other comprehensive income, net of tax

                      391             391  

Issuance of common stock upon exercise of stock options

    145             4,714                   4,714  

Repurchase of common stock

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

Issuance of common stock upon vesting of restricted stock units

    138                                

Taxes related to net share settlement of equity awards

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

Stock-based compensation

                10,054                   10,054  

Balances at March 31, 2020

    39,025     $ 39     $ 368,016     $ 1,553     $ 17,122     $ 386,730  

Net income

                            26,319       26,319  

Other comprehensive income, net of tax

                      882             882  

Issuance of common stock upon exercise of stock options

    448       1       15,715                   15,716  

Repurchase of common stock

    (243 )     (1 )     (2,912 )           (22,343 )     (25,256 )

Issuance of common stock upon vesting of restricted stock units

    146                                

Taxes related to net share settlement of equity awards

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

Stock-based compensation

                9,498                   9,498  

Balances at June 30, 2020

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

Net income

                            22,743       22,743  

Other comprehensive loss, net of tax

                      (1,360 )           (1,360 )

Issuance of common stock upon exercise of stock options

    102             3,532                   3,532  

Repurchase of common stock

    (352 )           (4,229 )           (33,470 )     (37,699 )

Issuance of common stock upon vesting of restricted stock units

    98                                

Taxes related to net share settlement of equity awards

    (44 )           (5,223 )                 (5,223 )

Stock-based compensation

                10,532                   10,532  

Balances at September 30, 2020

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

 

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 pioneer and leading provider of cloud-based information technology ("IT"), security and compliance solutions that enable organizations to identify security risks to their IT infrastructures, help protect their IT systems and applications from ever-evolving cyber-attacks and achieve compliance with internal policies and external regulations. The Company’s cloud solutions address the growing security and compliance complexities and risks that are amplified by the dissolving boundaries between internal and external IT infrastructures and web environments, the rapid adoption of cloud computing and the proliferation of geographically dispersed IT assets. Organizations can use the Company’s integrated suite of solutions delivered on its Qualys Cloud Platform to cost-effectively obtain a unified view of their security and compliance posture across globally-distributed IT infrastructures.

 

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements and condensed footnotes have been prepared in accordance with accounting principles generally accepted in the United States ("U.S. GAAP") for interim financial information as well as the instructions to Form 10-Q and the rules and regulations of the U.S. Securities and Exchange Commission ("SEC"). Certain information and disclosures normally included in the financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. The condensed consolidated balance sheet as of December 31, 2020, included herein, was derived from the audited financial statements as of that date but does not include all disclosures, including notes required by U.S. GAAP. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, which include only normal recurring adjustments, necessary for the fair statement of the financial position, results of operations and cash flows for the interim periods. The results of operations for the three and nine months ended September 30, 2021 are not necessarily indicative of the results of operations expected for the entire year ending December 31, 2021 or for any other future annual or interim periods. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.

 

Risks and Uncertainties

 

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

 

Use of Estimates

 

The preparation of the unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of assets and liabilities at the date of the condensed consolidated financial statements and the reported results of operations during the reporting period. The Company’s management regularly assesses these estimates, which primarily affect revenue recognition, 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.

 

Revenue Recognition

 

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

 

The Company determines revenue recognition through the following steps:

 

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

 

Identification of the performance obligations in the contract;

 

Determination of the transaction price

 

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

 

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

 

9

 

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

 

Most of the Company’s revenue contracts are subscription based and contain a single performance obligation. The subscription contracts typically do not offer to the customers any future rights that would constitute material rights under ASC 606. Contract prices are generally composed of fixed consideration for a specific period of time as the Company in general does not offer refunds, volume rebates, customer loyalty programs or other forms of customer incentive payments. In limited situations, contract prices are contingent on future events, such as actual usage during the contract terms, which are accounted for as variable consideration and estimated based on the most likely amount of consideration that the Company is expected to be entitled to. Estimates are included in the contract price to the extent that it is considered probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. Such estimates are made at contract inception and updated periodically when additional information becomes available.

 

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

 

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

 

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

 

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

 

Non-Marketable Securities

 

During the fiscal year ended December 31, 2018, the Company invested $2.5 million in preferred stock of a privately-held company. The fair value of the investment is not readily available, and there are no quoted market prices for the investment. The Company accounts for the investment at cost less impairment and will measure the investment at fair value when the Company identifies observable price changes. The investment is assessed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. No impairment has been incurred related to the investment. The investment is included in other noncurrent assets on the condensed consolidated balance sheets. The Company has not received any dividends from the investment.

 

Recently Adopted Accounting Pronouncements

 

In December 2019, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU") No. 2019-12, Simplifying the Accounting for Income Taxes ("ASU 2019-12"), which simplifies the accounting for income taxes, eliminates certain exceptions within ASC 740, Income Taxes, and clarifies certain aspects of the current guidance to promote consistency among reporting entities. ASU 2019-12 is effective for the Company for fiscal years beginning after December 15, 2020. Most amendments within the standard are required to be applied on a prospective basis, while certain amendments must be applied on a retrospective or modified retrospective basis. The Company adopted ASU 2019-12 in the first quarter of 2021 with no material impact on the Company's condensed consolidated financial statements.

 

Recently Issued Accounting Pronouncements Not Yet Adopted

 

The Company does not believe any other 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 other material changes to the Company’s significant accounting policies set forth in "Note 1" of Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.

 

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, 2021

 
      

Unrealized

  

Unrealized

     
  

Amortized Cost

  

Gains

  

Losses

  

Fair Value

 
  

(in thousands)

 

Cash and cash equivalents:

                

Cash

 $48,721  $  $  $48,721 

Money market funds

  95,819         95,819 

Commercial paper

  1,200         1,200 

Total

  145,740         145,740 

Short-term marketable securities:

                

Commercial paper

  20,541   1      20,542 

Corporate bonds

  31,013   172      31,185 

Asset-backed securities

  3,753   2      3,755 

U.S. Treasury and government agencies

  144,420   46   (1)  144,465 

Total

  199,727   221   (1)  199,947 

Long-term marketable securities:

                

Asset-backed securities

  14,747   23   (21)  14,749 

U.S. Treasury and government agencies

  62,969   3   (13)  62,959 

Foreign government

  1,002   20      1,022 

Corporate bonds

  57,048   367   (21)  57,394 

Total

  135,766   413   (55)  136,124 

Total

 $481,233  $634  $(56) $481,811 

 

11

 
  

December 31, 2020

 
      

Unrealized

  

Unrealized

     
  

Amortized Cost

  

Gains

  

Losses

  

Fair Value

 
  

(in thousands)

 

Cash and cash equivalents:

                

Cash

 $33,105  $  $  $33,105 

Money market funds

  38,028         38,028 

Commercial paper

  2,999         2,999 

Total

  74,132         74,132 

Short-term marketable securities:

                

Commercial paper

  6,147         6,147 

Corporate bonds

  24,368   170      24,538 

Asset-backed securities

  6,263   18      6,281 

U.S. Treasury and government agencies

  244,568   369   (11)  244,926 

Total

  281,346   557   (11)  281,892 

Long-term marketable securities:

                

Asset-backed securities

  38,456   160   (3)  38,613 

U.S. Treasury and government agencies

  6,884   17      6,901 

Foreign government

  1,006   31      1,037 

Corporate bonds

  51,068   839      51,907 

Total

  97,414   1,047   (3)  98,458 

Total

 $452,892  $1,604  $(14) $454,482 

 

As of September 30, 2021 and December 31, 2020, there were no marketable securities that had been in a continuous unrealized loss position for 12 months or longer. The Company had the ability and intent to hold all marketable securities that were in an unrealized loss position until recovery of the amortized cost basis. The Company considered the extent to which fair value was less than amortized cost basis and conditions related to security’s industry and geography and changes to the ratings, if any, and concluded the decline in fair value compared to carrying value was not related to credit loss.

 

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

 

  

September 30, 2021

 
  

Level 1

  

Level 2

  

Fair Value

 
  

(in thousands)

 

Money market funds

 $95,819  $  $95,819 

Commercial paper

     21,742   21,742 

U.S. Treasury and government agencies

     207,424   207,424 

Foreign government

     1,022   1,022 

Corporate bonds

     88,579   88,579 

Asset-backed securities

     18,504   18,504 

Total

 $95,819  $337,271  $433,090 

 

  

December 31, 2020

 
  

Level 1

  

Level 2

  

Fair Value

 
  

(in thousands)

 

Money market funds

 $38,028  $  $38,028 

Commercial paper

     9,146   9,146 

U.S. Treasury and government agencies

     251,827   251,827 

Foreign government

     1,037   1,037 

Corporate bonds

     76,445   76,445 

Asset-backed securities

     44,894   44,894 

Total

 $38,028  $383,349  $421,377 

 

The following summarizes the fair value of marketable securities by contractual maturity as of September 30, 2021:

 

  

September 30, 2021

 
  

Mature within

  

Mature after One Year

  

Mature over

     
  

One Year

  

through Two Years

  

Two Years

  

Fair Value

 
  

(in thousands)

 

Commercial paper

 $21,742  $  $  $21,742 

U.S. Treasury and government agencies

  144,465   62,959      207,424 

Foreign government

     1,022      1,022 

Corporate bonds

  31,185   34,574   22,820   88,579 

Asset-backed securities

  3,755   5,736   9,013   18,504 

Total

 $201,147  $104,291  $31,833  $337,271 

 

12

 

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 fluctuation from certain forecasted subscription revenue orders billed in British Pound ("GBP") and Euro and operation 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 hit earnings.

 

As of  September 30, 2021, the Company had designated cash flow hedge forward contracts with notional amounts of €25.6 million, £9.3 million and Rs.2,730.7 million. As of  December 31, 2020, the Company had designated cash flow hedge forward contracts with notional amounts of €25.9 million, £8.7 million and Rs.1,933.5 million. As of September 30, 2021, a net amount of unrealized losses of $0.2 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, 2021, a net amount of unrealized gains of $0.2 million before tax on the foreign currency forward contracts for INR reported in AOCI is expected to be reclassified into operating expenses within the next 12 months.

 

Non-designated forward contracts

 

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

 

As of  September 30, 2021, the Company had non-designated forward contracts with notional amounts o€21.9 million, £9.5 million, Rs.31.0 million and Swiss Franc ("CHF") 2.0 million. As of  December 31, 2020, the Company had non-designated forward contracts with notional amounts of €17.7 million, £6.5 million and Rs.32.8 million.

 

The following summarizes derivative financial instruments as of September 30, 2021 and December 31, 2020:

 

  

September 30,

  

December 31,

 
  

2021

  

2020

 

Assets

 

(in thousands)

 

Foreign currency forward contracts designated as cash flow hedge

 $1,538  $511 

Foreign currency forward contracts not designated as hedging instruments

  1,943   27 

Total

 $3,481  $538 

Liabilities

        

Foreign currency forward contracts designated as cash flow hedge

 $(213) $(2,200)

Foreign currency forward contracts not designated as hedging instruments

  (851)  (1,677)

Total

 $(1,064) $(3,877)

 

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

 

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

 

  

Three Months Ended

  

Nine Months Ended

 
  

September 30,

  

September 30,

 
  

2021

  

2020

  

2021

  

2020

 
  

(in thousands)

 

Net gains (losses) from non-designated forward contracts

 $748  $(688) $1,792  $(108)

Other foreign currency transactions gains (losses)

  (1,132)  961   (2,360)  565 

Total foreign exchange gains (losses), net

  (384)  273   (568)  457 

Other expenses

  (67)  (64)  (207)  (189)

Other income (expense), net

 $(451) $209  $(775) $268 

 

13

 
 

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, 2021 and 2020 were as follows:

 

    Available-for-sale debt securities    

Cash flow hedges

   

Total

 
    (in thousands)  

Balances at December 31, 2020

  $ 1,224     $ (1,708 )   $ (484 )

Change in unrealized gains (losses) during the period

    (501 )     1,092       591  

Net losses reclassified into income during the period

    8       192       200  

Income tax benefit (provision)

    104       (291 )     (