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 June 30, 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 Registrantregistrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes
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
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
The number of shares of the Registrant'sregistrant's common stock outstanding as of August 5, 2020
TABLE OF CONTENTS
Page | ||||||||
Risk Factor Summary | ||||||||
PART I – FINANCIAL INFORMATION | ||||||||
Item 1. | ||||||||
Condensed Consolidated Statements of Operations | ||||||||
Item 2. | ||||||||
Item 3. | ||||||||
Item 4. | ||||||||
PART II – OTHER INFORMATION | ||||||||
Item 1. | ||||||||
Item 1A. | ||||||||
Item 2. | ||||||||
Item 3. | ||||||||
Item 4. | ||||||||
Item 5. | ||||||||
Item 6. | ||||||||
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 from eight data centers, and any disruption of service at these facilities would interrupt or delay our ability to deliver our solutions to our customers which could reduce our revenues and harm our operating results. | |
• | We face competition in our markets, and we may lack sufficient financial or other resources to maintain or improve our competitive position. | |
• | If our solutions fail to detect vulnerabilities or incorrectly detect vulnerabilities, our brand and reputation could be harmed, which could have an adverse effect on our business and results of operations. | |
• | If we are unable to continue the expansion of our sales force, sales of our solutions and the growth of our business would be harmed. | |
• | We rely on third-party channel partners to generate a substantial amount of our revenues, and if we fail to expand and manage our distribution channels, our revenues could decline and our growth prospects could suffer. | |
• | A significant portion of our customers, channel partners and employees are located outside of the United States, which subjects us to a number of risks associated with conducting international operations, and if we are unable to successfully manage these risks, our business and operating results could be harmed. | |
• | Our business and operations have experienced significant growth, and if we do not appropriately manage any future growth, or are unable to improve our systems and processes, our operating results may be negatively affected. | |
• | A portion of our revenues are generated by sales to government entities, which are subject to a number of challenges and risks. | |
• | Undetected software errors or flaws in our solutions could harm our reputation, decrease market acceptance of our solutions or result in liability. | |
• | Our solutions could be used to collect and store personal information of our customers’ employees or customers, and therefore privacy and other data handling concerns could result in additional cost and liability to us or inhibit sales of our solutions. | |
• | Our solutions contain third-party open source software components, and our failure to comply with the terms of the underlying open source software licenses could restrict our ability to sell our solutions. | |
• | We use third-party software and data that may be difficult to replace or cause errors or failures of our solutions that could lead to lost customers or harm to our reputation and our operating results. | |
• | Failure to protect our proprietary technology and intellectual property rights could substantially harm our business and operating results. | |
• | Assertions by third parties of infringement or other violations by us of their intellectual property rights could result in significant costs and harm our business and operating results. |
PART I. FINANCIAL INFORMATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands, except share and per share data)
June 30, | December 31, | |||||||
2021 | 2020 | |||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 97,278 | $ | 74,132 | ||||
Short-term marketable securities | 262,941 | 281,892 | ||||||
Accounts receivable, net of allowance of $713 and $725 as of June 30, 2021 and December 31, 2020, respectively | 86,044 | 100,179 | ||||||
Prepaid expenses and other current assets | 21,979 | 19,142 | ||||||
Total current assets | 468,242 | 475,345 | ||||||
Long-term marketable securities | 110,890 | 98,458 | ||||||
Property and equipment, net | 65,959 | 64,850 | ||||||
Operating leases - right of use asset | 40,403 | 44,838 | ||||||
Deferred tax assets, net | 16,469 | 15,811 | ||||||
Intangible assets, net | 8,715 | 12,006 | ||||||
Goodwill | 7,447 | 7,447 | ||||||
Restricted cash | 1,200 | 1,200 | ||||||
Other noncurrent assets | 17,980 | 16,864 | ||||||
Total assets | $ | 737,305 | $ | 736,819 | ||||
Liabilities and Stockholders’ Equity | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 1,597 | $ | 731 | ||||
Accrued liabilities | 30,685 | 29,833 | ||||||
Deferred revenues, current | 228,180 | 213,494 | ||||||
Operating lease liabilities, current | 12,246 | 11,672 | ||||||
Total current liabilities | 272,708 | 255,730 | ||||||
Deferred revenues, noncurrent | 28,681 | 30,540 | ||||||
Operating lease liabilities, noncurrent | 40,422 | 45,700 | ||||||
Other noncurrent liabilities | 2,499 | 367 | ||||||
Total liabilities | 344,310 | 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 June 30, 2021 and December 31, 2020 | 0 | 0 | ||||||
Common stock, $0.001 par value; 1,000,000 shares authorized; 38,995 and 39,253 shares issued and outstanding at June 30, 2021 and December 31, 2020, respectively | 39 | 39 | ||||||
Additional paid-in capital | 424,507 | 401,359 | ||||||
Accumulated other comprehensive loss | (265 | ) | (484 | ) | ||||
Retained earnings (accumulated deficit) | (31,286 | ) | 3,568 | |||||
Total stockholders’ equity | 392,995 | 404,482 | ||||||
Total liabilities and stockholders’ equity | $ | 737,305 | $ | 736,819 |
June 30, 2020 | December 31, 2019 | ||||||||||
Assets | |||||||||||
Current assets: | |||||||||||
Cash and cash equivalents | $ | 113,909 | $ | 87,559 | |||||||
Short-term marketable securities | 233,922 | 211,331 | |||||||||
Accounts receivable, net of allowance of $643 and $585 as of June 30, 2020 and December 31, 2019, respectively | 75,938 | 78,034 | |||||||||
Prepaid expenses and other current assets | 24,338 | 18,692 | |||||||||
Total current assets | 448,107 | 395,616 | |||||||||
Long-term marketable securities | 97,483 | 119,508 | |||||||||
Property and equipment, net | 63,098 | 60,579 | |||||||||
Operating leases - right of use asset | 42,930 | 40,551 | |||||||||
Deferred tax assets, net | 16,971 | 18,830 | |||||||||
Intangible assets, net | 13,755 | 16,795 | |||||||||
Goodwill | 7,447 | 7,447 | |||||||||
Restricted cash | 1,200 | 1,200 | |||||||||
Other noncurrent assets | 16,024 | 15,082 | |||||||||
Total assets | $ | 707,015 | $ | 675,608 | |||||||
Liabilities and Stockholders’ Equity | |||||||||||
Current liabilities: | |||||||||||
Accounts payable | $ | 1,395 | $ | 848 | |||||||
Accrued liabilities | 24,810 | 22,784 | |||||||||
Deferred revenues, current | 199,732 | 192,172 | |||||||||
Operating lease liabilities, current | 9,161 | 7,663 | |||||||||
Total current liabilities | 235,098 | 223,467 | |||||||||
Deferred revenues, noncurrent | 19,070 | 20,935 | |||||||||
Operating lease liabilities, noncurrent | 45,050 | 44,015 | |||||||||
Other noncurrent liabilities | 23 | 388 | |||||||||
Total liabilities | 299,241 | 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 June 30, 2020 and December 31, 2019 | — | — | |||||||||
Common stock, $0.001 par value; 1,000,000,000 shares authorized; 39,315,337 and 39,146,272 shares issued and outstanding at June 30, 2020 and December 31, 2019, respectively | 39 | 39 | |||||||||
Additional paid-in capital | 384,202 | 362,408 | |||||||||
Accumulated other comprehensive income | 2,435 | 1,162 | |||||||||
Retained earnings | 21,098 | 23,194 | |||||||||
Total stockholders’ equity | 407,774 | 386,803 | |||||||||
Total liabilities and stockholders’ equity | $ | 707,015 | $ | 675,608 |
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 Six Months Ended June 30, June 30, 2021 2020 2021 2020 Revenues Cost of revenues Gross profit Operating expenses: Research and development Sales and marketing General and administrative Total operating expenses Income from operations Other income (expense), net: Interest expense Interest income Other income (expense), net Total other income, net Income before income taxes Income tax provision Net income Net income per share: Basic Diluted Weighted average shares used in computing net income per share: Basic Diluted The accompanying notes are an integral part of these Condensed Consolidated Financial Statements. $ 99,702 $ 88,830 $ 196,458 $ 175,093 21,552 18,891 43,232 37,386 78,150 69,939 153,226 137,707 19,805 18,058 37,554 36,041 17,770 15,783 35,759 34,013 11,213 10,590 53,256 21,714 48,788 44,431 126,569 91,768 29,362 25,508 26,657 45,939 0 0 (4 ) (3 ) 567 1,392 1,313 3,316 (80 ) 194 (324 ) 59 487 1,586 985 3,372 29,849 27,094 27,642 49,311 8,707 775 6,272 4,298 $ 21,142 $ 26,319 $ 21,370 $ 45,013 $ 0.54 $ 0.67 $ 0.55 $ 1.15 $ 0.53 $ 0.64 $ 0.53 $ 1.10 39,099 39,161 39,154 39,137 40,077 40,919 40,253 40,883 Three Months Ended Six Months Ended June 30, June 30, 2020 2019 2020 2019 Revenues $ 88,830 $ 78,929 $ 175,093 $ 154,272 Cost of revenues 18,891 17,537 37,386 35,246 Gross profit 69,939 61,392 137,707 119,026 Operating expenses: Research and development 18,058 17,695 36,041 33,532 Sales and marketing 15,783 17,165 34,013 34,480 General and administrative 10,590 10,424 21,714 20,855 Total operating expenses 44,431 45,284 91,768 88,867 Income from operations 25,508 16,108 45,939 30,159 Other income (expense), net: Interest expense — (28) (3) (70) Interest income 1,392 2,198 3,316 4,249 Other income, net 194 231 59 8 Total other income, net 1,586 2,401 3,372 4,187 Income before income taxes 27,094 18,509 49,311 34,346 Provision for income taxes 775 2,277 4,298 4,848 Net income $ 26,319 $ 16,232 $ 45,013 $ 29,498 Net income per share: Basic $ 0.67 $ 0.41 $ 1.15 $ 0.75 Diluted $ 0.64 $ 0.39 $ 1.10 $ 0.71 Weighted average shares used in computing net income per share: Basic 39,161 39,198 39,137 39,143 Diluted 40,919 41,530 40,928 41,570 45
Qualys, Inc. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited) (in thousands) Three Months Ended Six Months Ended June 30, June 30, 2021 2020 2021 2020 Net income Other comprehensive income (loss), net of tax: Net change in unrealized gains (losses) on available-for-sale debt securities, net of tax Net change in unrealized gains (losses) on cash flow hedges, net of tax Other comprehensive income (loss), net of tax Comprehensive income The accompanying notes are an integral part of these Condensed Consolidated Financial Statements. $ 21,142 $ 26,319 $ 21,370 $ 45,013 (202 ) 1,078 (591 ) 1,344 (183 ) (196 ) 810 (71 ) (385 ) 882 219 1,273 $ 20,757 $ 27,201 $ 21,589 $ 46,286 Three Months Ended Six Months Ended June 30, June 30, 2020 2019 2020 2019 Net income $ 26,319 $ 16,232 $ 45,013 $ 29,498 Other comprehensive income (loss): Available-for-sale debt securities: Changes in net unrealized gains, net of tax effects of ($324) and ($213) in the three months ended June 30, 2020 and 2019, respectively, and ($428) and ($251) in the six months ended June 30, 2020 and 2019, respectively. 1,093 724 1,444 1,379 Reclassification adjustments for net realized (gains) losses included in net income, net of tax effects of $5 and ($4) in the three months ended June 30, 2020 and 2019, respectively, and $30 and ($6) in the six months ended June 30, 2020 and 2019, respectively. (15) 15 (100) 43 Total changes in unrealized gains on marketable securities, net of tax 1,078 739 1,344 1,422 Cash flow hedges: Changes in net unrealized gains (losses), net of tax effects of $33 and ($43) in the three months ended June 30, 2020 and 2019, respectively, and ($61) and ($91) in the six months ended June 30, 2020 and 2019, respectively. (108) 148 208 351 Reclassification adjustments for net realized (gains) losses included in net income, net of tax effects of $25 and ($13) in the three months ended June 30, 2020 and 2019, respectively, and $82 and ($16) in the six months ended June 30, 2020 and 2019, respectively. (88) 43 (279) 53 Total changes in unrealized gains (losses) on cash flow hedges, net of tax (196) 191 (71) 404 Other comprehensive income, net of tax 882 930 1,273 1,826 Comprehensive income $ 27,201 $ 17,162 $ 46,286 $ 31,324 56
Qualys, Inc. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (in thousands) Six Months Ended June 30, 2021 2020 Cash flow from operating activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization expense Bad debt expense Loss on disposal of property and equipment Stock-based compensation Amortization of premiums (accretion of discounts) on marketable securities Deferred income taxes Changes in operating assets and liabilities: Accounts receivable Prepaid expenses and other assets Accounts payable Accrued liabilities Deferred revenues Net cash provided by operating activities Cash flow from investing activities: Purchases of marketable securities Sales and maturities of marketable securities Purchases of property and equipment Proceeds from disposal of property and equipment Net cash used in investing activities Cash flow from financing activities: Repurchases of common stock Proceeds from exercise of stock options Payments for taxes related to net share settlement of equity awards Principal payments under finance lease obligations Net cash used in financing activities Net increase in cash, cash equivalents and restricted cash Cash, cash equivalents and restricted cash at beginning of period Cash, cash equivalents and restricted cash at end of period The accompanying notes are an integral part of these Condensed Consolidated Financial Statements. $ 21,370 $ 45,013 17,869 15,633 152 299 12 0 46,755 19,441 2,029 (21 ) (722 ) 1,269 13,983 1,797 (6,014 ) (6,725 ) 947 220 3,032 (972 ) 12,827 5,695 112,240 81,649 (201,411 ) (162,912 ) 205,143 164,109 (12,911 ) (11,568 ) 6 0 (9,173 ) (10,371 ) (63,252 ) (54,182 ) 4,438 20,430 (21,017 ) (11,115 ) (90 ) (61 ) (79,921 ) (44,928 ) 23,146 26,350 75,332 88,759 $ 98,478 $ 115,109 Six Months Ended June 30, 2020 2019 Cash flow from operating activities: Net income $ 45,013 $ 29,498 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization expense 15,633 15,809 Loss on disposal of property and equipment — 183 Bad debt expense 299 86 Stock-based compensation 19,441 16,780 Accretion of discounts on marketable securities (21) (1,060) Deferred income taxes 1,269 3,047 Changes in operating assets and liabilities: Accounts receivable 1,797 12,555 Prepaid expenses and other assets (6,725) (6,896) Accounts payable 220 (1,189) Accrued liabilities (972) (85) Deferred revenues 5,695 12,397 Other noncurrent liabilities — 150 Net cash provided by operating activities 81,649 81,275 Cash flow from investing activities: Purchases of marketable securities (162,912) (184,829) Sales and maturities of marketable securities 164,109 193,270 Purchases of property and equipment (11,568) (14,138) Business combinations — (1,850) Net cash used in investing activities (10,371) (7,547) Cash flow from financing activities: Repurchases of common stock (54,182) (24,117) Proceeds from exercise of stock options 20,430 8,991 Payments for taxes related to net share settlement of equity awards (11,115) (7,411) Principal payments under finance lease obligations (61) (836) Net cash used in financing activities (44,928) (23,373) Net increase in cash, cash equivalents and restricted cash 26,350 50,355 Cash, cash equivalents and restricted cash at beginning of period 88,759 42,226 Cash, cash equivalents and restricted cash at end of period $ 115,109 $ 92,581 67
Qualys, Inc. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (unaudited) (in Paid-In Comprehensive (Accumulated Stockholders’ Shares Amount Capital Income (Loss) Deficit) Equity Balances at December 31, 2020 Net income Other comprehensive income, net of tax Issuance of common stock upon exercise of stock options Repurchase of common stock Issuance of common stock upon vesting of restricted stock units Taxes related to net share settlement of equity awards Stock-based compensation Balances at March 31, 2021 Net income Other comprehensive loss, net of tax Issuance of common stock upon exercise of stock options Repurchase of common stock Issuance of common stock upon vesting of restricted stock units Taxes related to net share settlement of equity awards Stock-based compensation Balances at June 30, 2021 Accumulated Paid-In Comprehensive Retained Stockholders’ Shares Amount Capital Income Earnings Equity The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.thousands, except share data)thousands) Accumulated Retained Common Stock Additional Other Earnings Total 39,253 $ 39 $ 401,359 $ (484 ) $ 3,568 $ 404,482 — 0 0 0 228 228 — 0 0 604 0 604 69 0 2,264 0 0 2,264 (269 ) 0 (3,232 ) 0 (27,797 ) (31,029 ) 305 0 0 0 0 0 (155 ) 0 (17,643 ) 0 0 (17,643 ) — 0 38,202 0 0 38,202 39,203 $ 39 $ 420,950 $ 120 $ (24,001 ) $ 397,108 — 0 0 0 21,142 21,142 — 0 0 (385 ) 0 (385 ) 57 0 2,174 0 0 2,174 (316 ) 0 (3,796 ) 0 (28,427 ) (32,223 ) 84 0 0 0 0 0 (33 ) 0 (3,374 ) 0 0 (3,374 ) — 0 8,553 0 0 8,553 38,995 $ 39 $ 424,507 $ (265 ) $ (31,286 ) $ 392,995 Common Stock Additional Other Total Common Stock Additional
Paid-In
CapitalAccumulated Other
Comprehensive
IncomeRetained Earnings Total
Stockholders’
Equity Shares Amount Balances at December 31, 2019 Balances at December 31, 2019 39,146,272 $ 39 $ 362,408 $ 1,162 $ 23,194 $ 386,803 39,146 $ 39 $ 362,408 $ 1,162 $ 23,194 $ 386,803 Net income Net income — — — — 18,694 18,694 — 0 0 0 18,694 18,694 Other comprehensive income, net of tax Other comprehensive income, net of tax — — — 391 — 391 — 0 0 391 0 391 Issuance of common stock upon exercise of stock options Issuance of common stock upon exercise of stock options 144,989 — 4,714 — — 4,714 145 0 4,714 0 0 4,714 Repurchase of common stock Repurchase of common stock (346,250) — (4,160) — (24,766) (28,926) (346 ) 0 (4,160 ) 0 (24,766 ) (28,926 ) Issuance of common stock upon vesting of restricted stock units Issuance of common stock upon vesting of restricted stock units 138,260 — — — — — 138 0 0 0 0 0 Taxes related to net share settlement of equity awards Taxes related to net share settlement of equity awards (58,598) — (5,000) — — (5,000) (58 ) 0 (5,000 ) 0 0 (5,000 ) Stock-based compensation Stock-based compensation — — 10,054 — — 10,054 — 0 10,054 0 0 10,054 Balances at March 31, 2020 Balances at March 31, 2020 39,024,673 39 368,016 1,553 17,122 386,730 39,025 $ 39 $ 368,016 $ 1,553 $ 17,122 $ 386,730 Net income Net income — — — — 26,319 26,319 — 0 0 0 26,319 26,319 Other comprehensive income, net of tax Other comprehensive income, net of tax — — — 882 882 — 0 0 882 0 882 Issuance of common stock upon exercise of stock options Issuance of common stock upon exercise of stock options 448,056 1 15,715 — — 15,716 448 1 15,715 0 0 15,716 Repurchase of common stock Repurchase of common stock (242,500) (1) (2,912) — (22,343) (25,256) (243 ) (1 ) (2,912 ) 0 (22,343 ) (25,256 ) Issuance of common stock upon vesting of restricted stock units Issuance of common stock upon vesting of restricted stock units 146,343 — — — — 146 0 0 0 0 0 Taxes related to net share settlement of equity awards Taxes related to net share settlement of equity awards (61,235) — (6,115) — — (6,115) (61 ) 0 (6,115 ) 0 0 (6,115 ) Stock-based compensation Stock-based compensation — — 9,498 — — 9,498 — 0 9,498 0 0 9,498 Balances at June 30, 2020 Balances at June 30, 2020 39,315,337 $ 39 $ 384,202 $ 2,435 $ 21,098 $ 407,774 39,315 $ 39 $ 384,202 $ 2,435 $ 21,098 $ 407,774 7 Common Stock Additional
Paid-In
CapitalAccumulated
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 Net income — — — — 16,232 16,232 Other comprehensive income, net of tax — — 930 — 930 Issuance of common stock upon exercise of stock options 192,687 — 4,944 — — 4,944 Repurchase of common stock (183,948) — (2,207) — (14,038) (16,245) Issuance of common stock upon vesting of restricted stock units 126,754 — — — — — Taxes related to net share settlement of equity awards (45,250) — (4,044) — — (4,044) Stock-based compensation — — 8,378 — — 8,378 Balances at June 30, 2019 39,224,075 $ 39 $ 345,637 $ 1,240 $ 36,682 $ 383,598
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 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 Risks and Uncertainties In March 2020, the World Health Organization declared the outbreak of 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 Revenue Recognition The Company derives revenues from subscriptions that require customers to pay a fee in order to access the Company’s cloud solutions. Contract period with customers generally ranges from less than a year to five years. The subscription fee entitles the customer to an unlimited number of scans for a specified number of networked devices or web applications and, if requested by a customer as part of their subscription, a specified number of physical or virtual scanner appliances. The Company’s physical and virtual scanner appliances are requested by certain customers as part of their subscriptions in order to scan IT infrastructures within their firewalls and do not function without, and are not sold separately from, subscriptions for the Company’s solutions. In some limited cases, the Company also provides certain computer equipment used to extend its Qualys Cloud Platform into its customers’ private cloud environment. Customers are required to return physical scanner appliances and computer equipment if they do not renew their subscriptions. The Company determines revenue recognition through the following steps: • Identification of the contract, or contracts, with a customer; • Identification of the performance obligations in the contract; • Determination of the transaction price • Allocation of the transaction price to the performance obligations in the contract; and • Recognition of revenue when, or as, the Company satisfies a performance obligation. At the inception of a customer contract, the Company makes an assessment as to that customer's ability to pay for the services provided. The Company assesses collectability based on several factors, including credit worthiness of the customer along with past transaction history. In addition, the Company performs periodic evaluations of its customers’ financial Most of the Company’s revenue contracts are 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 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 Non-Marketable Securities During the fiscal year ended December 31, 2018, Recently Adopted Accounting Pronouncements In Recently Issued Accounting Pronouncements Not Yet Adopted Although there were several other new accounting pronouncements issued by the FASB during the six months ended June 30, 2021, the Company does not believe any of There have been no other material changes to the Company’s significant accounting policies set forth in "Note 1" of Notes to Consolidated Financial 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 The Company measures and reports certain cash equivalents, marketable securities, derivative foreign currency forward contracts Level 1 Level 2 Level 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 The Company's cash and cash equivalents, and marketable securities consist of the following: June 30, 2021 Unrealized Unrealized Amortized Cost Gains Losses Fair Value (in thousands) Cash and cash equivalents: Cash Money market funds Commercial paper Total Short-term marketable securities: Commercial paper Corporate bonds Asset-backed securities U.S. Treasury and government agencies Total Long-term marketable securities: Asset-backed securities U.S. Treasury and government agencies Foreign government Corporate bonds Total Total December 31, 2020 Unrealized Unrealized Amortized Cost Gains Losses Fair Value (in thousands) Cash and cash equivalents: Cash Money market funds Commercial paper Total Short-term marketable securities: Commercial paper Corporate bonds Asset-backed securities U.S. Treasury and government agencies Total Long-term marketable securities: Asset-backed securities U.S. Treasury and government agencies Foreign government Corporate bonds Total Total As of June 30, 2021 and December 31, 2020, there were 0 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: June 30, 2021 Level 1 Level 2 Fair Value (in thousands) Money market funds Commercial paper U.S. Treasury and government agencies Foreign government Corporate bonds Asset-backed securities Total December 31, 2020 Level 1 Level 2 Fair Value (in thousands) Money market funds Commercial paper U.S. Treasury and government agencies Foreign government Corporate bonds Asset-backed securities Total The following summarizes the fair value of marketable securities by contractual June 30, 2021 Mature within Mature after One Year Mature over One Year through Two Years Two Years Fair Value (in thousands) Commercial paper U.S. Treasury and government agencies Foreign government Corporate bonds Asset-backed securities Total Derivative Financial Instruments Designated cash flow hedges The Company As of June 30, 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 June 30, The following summarizes derivative financial instruments as of June 30, June 30, December 31, 2021 2020 Assets (in thousands) Foreign currency forward contracts designated as cash flow hedge Foreign currency forward contracts not designated as hedging instruments Total Liabilities Foreign currency forward contracts designated as cash flow hedge Foreign currency forward contracts not designated as hedging instruments Total 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 Three Months Ended Six Months Ended June 30, June 30, 2021 2020 2021 2020 (in thousands) Net gains (losses) from non-designated forward contracts Other foreign currency transactions gains (losses) Total foreign exchange gains (losses), net Other expenses Other income (expense), net NOTE 3. Accumulated Other Comprehensive Income (Loss) The components and changes in accumulated other comprehensive income Cash flow hedges Total Balances at December 31, 2020 Change in unrealized gains (losses) during the period Net losses reclassified into income during the period Income tax benefit (provision) Net change during the period Balances at March 31, 2021 Change in unrealized losses during the period Net losses reclassified into income during the period Income tax benefit Net change during the period Balances at June 30, 2021 Balances at December 31, 2019 Change in unrealized gains during the period Net gains reclassified into income during the period Income tax provision Net change during the period Balances at March 31, 2020 Change in unrealized gains (losses) during the period Net gains reclassified into income during the period Income tax benefit (provision) Net change during the period Balances at June 30, 2020 The effects on income before income taxes of Three Months Ended Six Months Ended June 30, June 30, 2021 2020 2021 2020 (in thousands) Reclassification of AOCI - Available-for-sale debt securities Other income (expense), net Reclassification of AOCI - Cash flow hedges Revenues Cost of revenues Research and development expenses Sales and marketing expenses General and administrative expenses Total NOTE 4. Property and Equipment, Net Property and equipment, net, which includes assets under finance June 30, December 31, 2021 2020 (in thousands) Computer equipment Computer software Leasehold improvements Scanner appliances Furniture, fixtures and equipment Finance leases - right of use asset Total property and equipment Less: accumulated depreciation and amortization Property and equipment, net NOTE 5. Revenue from Contracts with Customers The Company records deferred revenue when cash payments are received or due in advance of its performance offset by revenue recognized in the period. The Company's payment terms vary by the type and location of its The following table sets forth the expected revenue from all remaining performance obligations as of June 30, (in thousands) 2021 (remaining six months) 2022 2023 2024 2025 2026 and thereafter Total Revenues allocated to remaining performance obligations represents From time to time, the Company enters into contracts with customers that extend beyond one year, with certain of its customers electing to pay for more than one year of services upon contract execution. For any discounts associated with these multiple year contracts, the Company concluded its contracts did not contain a financing component. Revenues by sales channel are as follows: Three Months Ended Six Months Ended June 30, June 30, 2021 2020 2021 2020 (in thousands) Direct Partner Total The Company utilizes partners to enable and accelerate the adoption of its cloud platform by increasing its distribution capabilities and market awareness of its cloud platform as well as by targeting geographic regions outside the reach of its direct sales force. The Company's channel partners maintain relationships with their customers throughout the territories in which they operate and provide their customers with services and Deferred costs to obtain contracts are as follows: June 30, 2021 December 31, 2020 (in thousands) Current Noncurrent NOTE 6. Intangible Assets, Net Intangible assets consist primarily of developed technology and patent licenses acquired from business The carrying values of intangible assets are as follows: June 30, 2021 Weighted Average Weighted Average Life Remaining Life Accumulated (in thousands) (Years) (Years) Cost Amortization Net Book Value Developed technology Patent licenses Non-compete agreements Total intangibles subject to amortization Intangible assets not subject to amortization Total intangible assets, net December 31, 2020 Weighted Average Weighted Average Life Remaining Life Accumulated (in thousands) (Years) (Years) Cost Amortization Net Book Value Developed technology Patent licenses Non-compete agreements Total intangibles subject to amortization Intangible assets not subject to amortization Total intangible assets, net Intangible asset amortization expense As of (in thousands) 2021 (remaining six months) 2022 2023 2024 Total expected future amortization expense NOTE 7. Leases The Company leases certain offices, computer equipment and its data center facilities under non-cancelable operating leases for varying periods through 2028. While under the Company's lease agreements the Company has options to extend its certain leases, the Company has not included renewal options in determining the lease terms for calculating its lease liabilities, as these options are not reasonably certain of being exercised. Lease expense was Supplemental cash flow information related to operating leases was as follows: Six Months Ended June 30, 2021 2020 (in thousands) Cash payments included in the measurement of lease liabilities Lease liabilities arising from obtaining right-of-use assets The weighted average remaining lease term and the weighted average discount rate of the Company's operating leases were as follows: June 30, 2021 December 31, 2020 Weighted average remaining lease term (years) Weighted average discount rate NOTE 8. Commitments and Contingencies Indemnifications The Company from time to time enters into certain types of contracts that contingently require it to indemnify various parties against claims from third parties. These contracts primarily relate to (i) the Company's The Company maintains director and officer insurance, which may cover certain liabilities arising from its obligation to indemnify its directors. NOTE 9. Stockholders' Equity and Stock-Based Compensation Equity Incentive Plans 2012 Equity Incentive Plan Under the 2012 Equity Incentive Plan (the 2000 Equity Incentive Plan Under the 2000 Equity Incentive Plan (the 2021 Employee Stock Purchase Plan On June 9, 2021, the Company’s stockholders approved the 2021 Employee Stock Purchase Plan (the “ESPP”). A total of 600 thousand shares were authorized for issuance to eligible participating employees upon adoption of the ESPP. The ESPP provides for consecutive 6-month offering periods beginning on or about August 16 and February 16 of each year. On each purchase date, eligible employees will purchase the shares at a price per share equal to 85% of the lesser of (i) the fair market value of the Company's stock on the first trading day of the offering period or (ii) the fair market value of the Company's stock on the purchase date (i.e., the last trading day of the offering period). Stock-Based Compensation The following table shows a summary of the stock-based compensation expense included in the condensed consolidated statements of Three Months Ended Six Months Ended June 30, June 30, 2021 2020 2021 2020 (in thousands) Cost of revenues Research and development Sales and marketing General and administrative Total stock-based compensation As of June 30, Performance-Based On On March 19,2021, the Company’s former Chief Executive Officer, Philippe Courtot, resigned from the Company In February 2021 and February 2020, 22 thousand shares (representing 200% of target number of awards) and 15 thousand shares (representing 135% of target number of awards) under the Stock Option Activity A summary of the Weighted Weighted Average Outstanding Average Remaining Aggregate Options Exercise Price Contractual Life Intrinsic Value Balance as of December 31, 2020 Granted Exercised Canceled Balance as of June 30, 2021 Vested and expected to vest - June 30, 2021 Exercisable - June 30, 2021 Restricted Stock Unit Activity A summary of the Weighted Average Grant Date Outstanding Fair Value RSUs Per Share Balance as of December 31, 2020 Granted Vested Canceled Balance as of June 30, 2021 Outstanding and expected to vest - June 30, 2021 Share Repurchase Program On February 5, 2018, the Company's board of directors authorized a $100.0 million Repurchased shares are retired and reclassified as authorized and unissued shares of common stock. On retirement of the repurchased shares, common stock is reduced by an amount equal to the number of shares being retired multiplied by the par value. The excess amount that is retired over its par value is first allocated as a reduction to additional paid-in During the six months ended June 30, NOTE 10. Net Income Per Share The computations for basic and diluted net income per share are as follows: Three Months Ended Six Months Ended June 30, June 30, 2021 2020 2021 2020 (in thousands, except per share data) Numerator: Net income Denominator: Basic weighted average shares Effect of potentially dilutive shares: Common stock options Restricted stock units Diluted weighted average shares Net income per share: Basic Diluted Potentially dilutive Three Months Ended Six Months Ended June 30, June 30, 2021 2020 2021 2020 (in thousands) Common stock options Restricted stock units Total anti-dilutive shares NOTE 11. Income Taxes The Company's The Company's quarterly tax provision, and estimate of its annual effective tax rate, is subject to variation due to several factors, including variability in pre-tax income (or loss), the mix of jurisdictions to which such income relates, changes in how the Company does business, and tax law developments. The Company's estimated effective tax rate for the year differs from the U.S. statutory rate of 21% primarily due to non-deductible stock-based compensation expense, state taxes, and the benefit of U.S. federal income tax credits and foreign-derived intangible income deduction. The Company recorded an income tax provision of The Company recorded an income tax provision of As of June 30, On June 29, 2020, the California governor signed into law the 2020 Budget Act, which temporarily suspends the utilization of net operating losses and limits the utilization of the research credit to NOTE 12. Segment Information and Information about Geographic Area Under ASC 280 Segment Revenue by geographic area, based on the customer's billing address, is as follows: Three Months Ended Six Months Ended June 30, June 30, 2021 2020 2021 2020 (in thousands) United States Foreign Total revenues Property and equipment, net, by geographic area, is as follows: June 30, December 31, 2021 2020 (in thousands) United States India Rest of world Total property and equipment, net This Quarterly Report on Form 10-Q, including this Management’s Discussion and Analysis of Financial Condition and Results of Operations, should be read in conjunction with (1) our unaudited condensed consolidated financial statements and the related notes included elsewhere in this report, and (2) the audited consolidated financial statements and the related notes and section titled "Management’s Discussion and Analysis of Financial Condition and Results of Operations" included in our Annual Report on Form 10-K for the fiscal year ended December 31, In addition to historical information, this Quarterly Report on Form 10-Q contains “forward-looking” statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Forward-looking statements generally relate to future events or our future financial or operating performance. In some cases, it is possible to identify forward-looking statements because they contain words such as “anticipates,” “believes,” “contemplates,” “continue,” “could,” “estimates,” “expects,” “future,” “intends,” “likely,” “may,” “plans,” “potential,” “predicts,” “projects,” “seek,” “should,” “target,” or “will,” or the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans or intentions. Forward-looking statements contained in this Quarterly Report on Form 10-Q include, but are not limited to, statements about: • our financial performance, including our revenues, costs, expenditures, growth rates, operating expenses and ability to generate positive cash flow to fund our operations and sustain profitability; • anticipated technology trends, such as the use of cloud solutions; • our ability to adapt to changing market conditions; • the impact of the ongoing COVID-19 pandemic and related public health measures on our business; • economic and financial conditions, including volatility in foreign exchange rates; • our ability to diversify our sources of revenues, including selling additional solutions to our existing customers and our ability to pursue new customers; • the effects of increased competition in our market; • our ability to innovate and enhance our cloud solutions and platform and introduce new solutions; • our ability to effectively manage our growth; • our anticipated investments in sales and marketing, our infrastructure, new solutions, and research and development, and acquisitions; • maintaining and expanding our relationships with channel partners; • our ability to maintain, protect and enhance our brand and intellectual property; • costs associated with defending intellectual property infringement and other claims; • our ability to attract and retain qualified employees and key personnel, including sales and marketing personnel; • our ability to successfully enter new markets and manage our international expansion; • our expectations, assumptions and conclusions related to our income tax provision, our deferred tax assets and our effective tax rate; and • other factors discussed in this Quarterly Report on Form 10-Q in the sections titled “Risk Factors” and “Management's Discussion and Analysis of Financial Condition and Results of Operations.” We have based the forward-looking statements contained in this Quarterly Report on Form 10-Q primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, results of operations and prospects. The results, events and circumstances reflected in these forward-looking statements are subject to risks, uncertainties, assumptions, and other factors including those described in Part II, Item 1A (Risk Factors) of this Quarterly Report on Form 10-Q and those discussed in other documents we file with the SEC. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements used herein. We cannot provide assurance that the results, events, and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results, events or circumstances could differ materially from those described in the forward-looking statements. Overview We We were founded and incorporated in December 1999 with a vision of transforming the way organizations secure and protect their IT infrastructure and applications and initially launched our first cloud solution, Vulnerability Management (VM), in 2000. As VM gained acceptance, we introduced additional solutions to help customers manage increasing IT, security and compliance requirements. Today, the suite of solutions that we offer on our cloud platform and refer to as the Qualys Cloud Apps helps our customers protect a range of assets across on-premises, endpoints, cloud, containers, and mobile environments. These Cloud Apps address and include: • IT Security: Vulnerability Management, Detection and Response (VMDR), Threat Protection (TP), Continuous Monitoring (CM), Patch Management (PM), Multi-Vector Endpoint Detection and Response (EDR), Certificate Assessment (CRA), SaaS Detection and Response (SaaSDR), Secure Enterprise Mobility (SEM); • Compliance: Policy Compliance (PC), Security Configuration Assessment (SCA), PCI Compliance (PCI), File Integrity Monitoring (FIM), Security Assessment Questionnaire (SAQ), Out-of-Band Configuration Assessment (OCA); • Web Application Security: Web Application Scanning (WAS), Web Application Firewall (WAF); • Asset Management: Global Asset View (AI), Cybersecurity Asset Management (CSAM), Certificate Inventory (CRI); and • Cloud/Container Security: Cloud Inventory (CI), Cloud Security Assessment (CSA), Container Security (CS). We provide our solutions through a software-as-a-service model, primarily with renewable annual subscriptions. These subscriptions require customers to pay a fee in order to access each of our cloud solutions. We generally invoice our customers for the entire subscription amount at the start of the subscription term, and the invoiced amounts are treated as deferred revenues and are recognized ratably over the term of each subscription. We continue to experience We market and sell our solutions to enterprises, government entities and small and medium-sized businesses across a broad range of industries, including education, financial services, government, healthcare, insurance, manufacturing, media, retail, technology and utilities. Impacts of COVID-19 In March 2020, the World Health Organization declared the outbreak of Revenues We derive revenues from the sale of subscriptions to our IT, security and compliance solutions, which are delivered on our cloud platform. Subscriptions to our solutions allow customers to access our cloud-based IT, security and compliance solutions through a unified, web-based interface. Customers generally enter into one-year renewable subscriptions. The subscription fee entitles the customer to an unlimited number of scans for a specified number of devices or web applications and, if requested by a customer as part of their subscription, a specified number of physical or virtual scanner appliances. Our 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 our We typically invoice our customers for the entire subscription amount at the start of the subscription term. Invoiced amounts are reflected on our condensed consolidated balance sheets as accounts receivable or as cash when collected, and as deferred revenues until earned and recognized ratably over the subscription period. Accordingly, deferred revenues represent the amount billed to customers that has not yet been earned or recognized as revenues, pursuant to subscriptions entered into in current and prior periods. Cost of Revenues Cost of revenues consists primarily of personnel expenses, comprised of salaries, benefits, Operating Expenses Research and Development Research and development expenses consist primarily of personnel expenses, comprised of salaries, benefits, performance-based compensation and stock-based compensation, for our research and development teams. Other expenses include third-party contractor fees, software and license fees, amortization of intangibles related to acquisitions and overhead allocations. Sales and Marketing Sales and marketing expenses consist primarily of personnel expenses, comprised of salaries, benefits, sales commissions, performance-based compensation and stock-based compensation for our worldwide sales and marketing teams. Other expenses include marketing and promotional events, lead-generation marketing programs, public relations, travel, software licenses and overhead allocations. Sales commissions related to new business and upsells are capitalized as an asset. We amortize the capitalized commission cost as a selling expense on a straight-line basis over a period of five years. We expense sales commissions related to contract General and Administrative General and administrative expenses consist primarily of personnel expenses, comprised of salaries, benefits, performance-based compensation and stock-based compensation for our executive, finance and accounting, IT, legal and human resources teams, as well as professional services, fees, software licenses and overhead allocations. We expect that general and administrative expenses will increase in absolute dollars, as we continue to add personnel and incur professional services to support our growth and compliance with legal requirements. Our other income (expense), net consists primarily of interest and investment income from our short-term and long-term marketable Income We are subject to federal, state and foreign income taxes for jurisdictions in which we operate, and we use estimates in determining our Our Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the tax impact of timing differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry-forwards. Deferred tax assets and liabilities are measured using statutory tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period when the statutory rate change is enacted into law. We assess the likelihood that deferred tax assets will be realized, and we recognize a valuation allowance if it is more likely than not that some portion of the deferred tax assets will not be recognized. This assessment requires judgment as to the likelihood and amounts of future taxable income. Results of Operations The following table sets forth selected condensed consolidated statements of operations data for each of the periods presented as a percentage of revenues. Three Months Ended Six Months Ended June 30, June 30, 2021 2020 2021 2020 Revenues Cost of revenues Gross profit Operating expenses: Research and development Sales and marketing General and administrative Total operating expenses Income from operations Total other income, net Income before income taxes Income tax provision Net income Comparison of Three and Six Revenues Three Months Ended Six Months Ended June 30, Change June 30, Change 2021 2020 $ % $ % (in thousands, except percentages) Revenues Revenues increased Cost of Revenues Three Months Ended Six Months Ended June 30, Change June 30, Change 2021 2020 $ % 2021 2020 $ % (in thousands, except percentages) Cost of revenues Cost of revenues increased by $2.7 million for the three months ended June 30, 2021 compared to the same period in 2020, due to an increase in personnel costs of $1.5 million driven by additional employees hired to support the growth of our business, an increase in data center and cloud costs of $0.8 million to meet growing demand and an increase in depreciation and amortization expense of $0.4 million as more computer equipment was placed in service. Cost of revenues increased by $5.8 million for the six months ended June 30, 2021 compared to the same period in 2020, due to an increase in personnel costs of $3.1 million driven by additional employees hired to support the growth of our business, an increase in data center and cloud costs of $1.5 million to meet growing demand and an increase in depreciation and amortization expense of $1.2 million as more computer equipment was placed in service. Research and Development Expenses Three Months Ended Six Months Ended June 30, Change June 30, Change 2021 2020 $ % 2021 2020 $ % (in thousands, except percentages) Research and development Research and development expenses increased by $1.7 million for the three months ended June 30, 2021 compared to the same period in 2020, due to an increase in personnel costs of Research and development expenses increased Sales and Marketing Expenses Three Months Ended Six Months Ended June 30, Change June 30, Change 2021 2020 $ % 2021 2020 $ % (in thousands, except percentages) Sales and marketing Sales and marketing expenses increased by $2.0 million for the three months ended June 30, Sales and marketing expenses General and Three Months Ended Six Months Ended June 30, Change June 30, Change 2021 2020 $ % 2021 2020 $ % (in thousands, except percentages) General and administrative General and administrative expenses increased by General and administrative expenses increased Total other income, net Three Months Ended Six Months Ended June 30, Change June 30, Change 2021 2020 $ % 2021 2020 $ % (in thousands, except percentages) Total other income, net Total other income, netdecreased by Income tax provision Three Months Ended Six Months Ended June 30, Change June 30, Change 2021 2020 $ % 2021 2020 $ % (in thousands, except percentages) Income tax provision Effective tax rate Income tax provision increased by $7.9 million for the three months ended June 30, Income tax provision increased by $2.0 million for the six months ended June 30, 2021 compared to the same period in 2020, primarily due to an increase in non-deductible stock-based compensation and a reduction in Key Non-GAAP Metric In addition to measures of financial performance presented in our condensed consolidated financial statements, we monitor the Adjusted EBITDA We monitor Adjusted EBITDA, a non-GAAP financial measure, to analyze our financial results and believe that it is useful to investors, as a supplement to U.S. GAAP measures, in evaluating our ongoing operational performance and enhancing an overall understanding of our past financial performance. We believe that Adjusted EBITDA helps illustrate underlying trends in our business that could otherwise be masked by the effect of the income or expenses that we exclude in Adjusted EBITDA. Furthermore, we use this measure to establish budgets and operational goals for managing our business and evaluating our performance. We also believe that Adjusted Adjusted EBITDA should not be considered in isolation from, or as a substitute for, financial information prepared in accordance with U.S. GAAP. Adjusted EBITDA has limitations as an analytical tool and should not be considered in isolation from or as a substitute for the measures presented in accordance with U.S. GAAP. Some of these limitations are: • • • • Because of these limitations, Adjusted EBITDA should be considered alongside other financial performance measures, including revenues, net income, cash flows from operating activities and our financial results presented in accordance with U.S. GAAP. Three Months Ended Six Months Ended June 30, June 30, 2021 2020 2021 2020 (in thousands) Net income Depreciation and amortization of property and equipment Amortization of intangible assets Income tax provision Stock-based compensation Total other income, net Adjusted EBITDA Percentage of revenues Liquidity and Capital Resources As of June 30, We generated positive cash flows Cash Flows The following summary of cash flows for the periods indicated has been derived from our condensed consolidated financial statements included elsewhere in this report: Six Months Ended June 30, 2021 2020 (in thousands) Cash provided by operating activities Cash used in investing activities Cash used in financing activities Net increase in cash, cash equivalents and restricted cash Operating Activities For the six months ended June 30, 2021, cash provided by operating activities of $112.2 million primarily resulted from our net income of $21.4 million, as adjusted for non-cash items including stock-based compensation of $46.8 million, depreciation and amortization expense of $17.9 million and cash flows from working capital of $24.8 million mainly due to stronger cash collections. For the six months ended June 30, 2020, cash Investing Activities For the six months ended June 30, For the six months ended June 30, 2020, cash used in investing activities of $10.4 million was mainly attributable to $11.6 million of cash used for capital expenditures, including computer equipment and leasehold improvements to support our growth and development, slightly offset by an increase of $1.2 million from sales and maturities of marketable securities, net of purchases. Financing Activities For the six months ended June 30, For the six months ended June 30, 2020, cash used in financing activities of $44.9 million was attributable to share repurchases of $54.2 million and the payment of employee income taxes related to the net share settlement of equity awards of $11.1 million, which were partially offset by the proceeds from the exercise of stock options of $20.4 million. C We presented our contractual obligations in our Annual Report on Form 10-K for the fiscal year ended December 31, Off-Balance Sheet Arrangements During the periods presented, we did not have, nor do we currently have, any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities. Recent Accounting Pronouncements See Note 1 to the unaudited condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for a discussion of recent accounting pronouncements. Critical Accounting Policies and Estimates Our condensed consolidated financial statements are prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. On an ongoing basis, we evaluate our estimates and assumptions. Our actual results may differ from these estimates under different assumptions or conditions. We believe that of our significant accounting policies, which are described in Note 1 to the unaudited condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q and the notes to our consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended December 31, Quantitative and Qualitative Disclosures about Market Risk We have domestic and international operations and we are exposed to market risks in the ordinary course of our business. These risks primarily include interest rate, foreign exchange and inflation risks, as well as risks relating to changes in the general economic conditions in the countries where we conduct business. To reduce certain of these risks, we monitor the financial condition of our large customers and limit credit exposure by collecting subscription fees in advance. Foreign Currency Risk Our results of operations and cash flows have been and will continue to be subject to fluctuations because of changes in foreign currency exchange rates, particularly changes in exchange rates between the U.S. dollar and the Euro, GBP, INR, C$ and Interest Rate Sensitivity We had Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of June 30, Changes in Internal Control over Financial Reporting There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rules 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. PART II. OTHER INFORMATION From time to time Risk Factors An investment in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below, and all other information contained in this Quarterly Report on Form 10-Q, including our condensed consolidated financial statements and the related notes, before making a decision to invest in our common stock. Our business, operating results, financial condition, or prospects could be materially and adversely affected by any Risks Related to Our Business and Industry The continued spread of COVID-19, or any similar widespread infectious disease outbreak, could harm our business, financial condition and results of operations. In December 2019, an outbreak of COVID-19 originated in Wuhan, China and has since spread to countries around the world. On March 11, 2020, the World Health Organization characterized COVID-19 as a pandemic. The continued spread of COVID-19 and the resurgence of infection rates in certain regions has resulted in authorities imposing, and businesses and individuals implementing, numerous unprecedented measures to try to contain the virus, such as travel bans and restrictions, quarantines, shelter-in-place/stay-at-home and social distancing orders, and shutdowns. These measures have impacted and may further impact our workforce and operations, the operations of our customers, and those of our respective vendors, suppliers, and partners. The pandemic has significantly increased economic and demand uncertainty. It is likely that the The ultimate extent of the impact of COVID-19 on our business, financial position, results of operations and cash flows will depend on future developments, which are highly uncertain and cannot be predicted at this 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. Our operating results have historically varied from period to period, and we expect that they will continue to do so as a result of a number of factors, many of which are outside of our control, including: • the level of demand for our solutions; • publicity regarding security breaches generally and the level of perceived threats to IT security; • expenses associated with our existing and new products and services; • changes in customer renewals of our solutions; • the extent to which customers subscribe for additional solutions; • seasonal buying patterns of our customers; Further, the interpretation and application of international laws and regulations in many cases is uncertain, and our legal and regulatory obligations in foreign jurisdictions are subject to frequent and unexpected changes, including the potential for various regulatory or other governmental bodies to enact new or additional laws or regulations or to issue rulings that invalidate prior laws or regulations. Each factor above or discussed elsewhere in this Quarterly Report on Form 10-Q or the cumulative effect of some of these factors may result in fluctuations in our operating results. This variability and unpredictability could result in our failure to meet expectations with respect to operating results, or those of securities analysts or investors, for a particular period. In addition, a significant percentage of our operating expenses are fixed in nature and based on forecasted trends in revenues. Accordingly, in the event of shortfalls in revenues, we are generally unable to mitigate the negative impact on margins in the short term by reducing our operating expenses. If we fail to meet or exceed expectations for our operating results for these or any other reasons, the trading price of our common stock could fall and we could face costly lawsuits, including securities class action suits. 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. The IT, security and compliance market is characterized by rapid technological advances, customer price sensitivity, short product and service life cycles, intense competition, changes in customer requirements, frequent new product introductions and enhancements and evolving industry standards and regulatory mandates. Any of these factors could create downward pressure on pricing and gross margins, and could adversely affect our renewal rates, as well as our ability to attract new customers. Our future success will depend on our ability to enhance existing solutions, introduce new solutions on a timely and cost-effective basis, meet changing customer needs, extend our core technology into new applications, and anticipate and respond to emerging standards and business models. We must also continually change and improve our solutions in response to changes in operating systems, application software, computer and communications hardware, networking software, data center architectures, programming tools and computer language technology. We may not be able to anticipate future market needs and opportunities or develop enhancements or new solutions to meet such needs or opportunities in a timely manner or at all. The market for cloud solutions for IT, security and compliance continues to evolve, and it is uncertain whether our new solutions will gain market acceptance. Our solution enhancements or new solutions could fail to attain sufficient market acceptance for many reasons, including: • • • inability to inter-operate effectively with the database technologies, file systems or web applications of our prospective customers; • • • • • • • Furthermore, diversifying our solutions and expanding into new IT, security and compliance markets will require significant investment and planning, require that our research and development and sales and marketing organizations develop expertise in these new markets, bring us more directly into competition with IT, security If we fail to anticipate market requirements or fail to develop and introduce solution enhancements or new solutions to satisfy those requirements in a timely manner, such failure could substantially decrease or delay market acceptance and sales of our present and future solutions and cause us to lose existing customers or fail to gain new customers, which would significantly harm our business, financial condition and results of operations. 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. Our future growth depends upon our ability to continue to meet the expanding needs of our customers as their use of our cloud platform grows. As these customers gain more experience with our solutions, the number of users and the number of locations where our solutions are being accessed may expand rapidly in the future. In order to ensure that we meet the performance and other requirements of our customers, we intend to continue to make significant investments to develop and implement new proprietary and third-party technologies at all levels of our cloud platform. These technologies, which include databases, applications and server optimizations, and network and hosting strategies, are often complex, new and unproven. We may not be successful in developing or implementing these technologies. To the extent that we do not effectively scale our platform to maintain performance as our customers expand their use of our platform, our operating results and our business may 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. We offer our Qualys Cloud Platform and integrated suite of solutions pursuant to In addition, our future growth depends in part upon increasing our customer base. Our ability to 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 success depends to a significant extent on the willingness of organizations to increase their use of cloud solutions for their IT, security and compliance. To date, some organizations have been reluctant to use cloud solutions because they have concerns regarding the risks associated with the reliability or security of the technology delivery model associated with these solutions. If other cloud service providers experience security incidents, loss of customer data, disruptions in service delivery or other problems, the market for cloud solutions as a whole, including our solutions, may be negatively impacted. Moreover, many organizations have invested substantial personnel and financial resources to integrate on-premise software into their businesses, and as a result may be reluctant or unwilling to migrate to a cloud solution. Organizations that use on-premise security products, such as network firewalls, security information and event management products or data loss prevention solutions, may also believe that these products sufficiently protect their IT infrastructure and deliver adequate security. Therefore, they may continue spending their IT security budgets on these products and may not adopt our IT, security and compliance solutions in addition to or as a replacement for such products. If customers do not recognize the benefits of our cloud solutions over traditional on-premise enterprise software products, and as a result we are unable to increase sales of subscriptions to our solutions, then our revenues may not grow or may decline, 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. We must continue to dedicate significant financial and other resources to our research and development efforts if we are to maintain our competitive position. However, developing products and enhancements to our platform is expensive and time consuming, and there is no assurance that such activities will result in significant new marketable products or enhancements to our platform, design improvements, cost savings, revenue or other expected benefits. If we spend significant resources on research and development and are unable to generate an adequate return on our investment, our business and results of operations may be materially and adversely affected. 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. We and our service providers face threats from a variety of sources, including attacks on our networks and systems from numerous sources, including traditional “hackers,” sophisticated nation-state and nation-state supported actors, other sources of malicious code (such as viruses and worms), ransomware, social engineering, denial of service attacks, and phishing attempts. We and our service providers could be a target of cyber-attacks or other malfeasance designed to impede the performance of our solutions, penetrate our network security or the security of our cloud platform or our internal systems, misappropriate proprietary information and/or cause interruptions to our services. We and our service providers have experienced and may continue to experience security incidents and attacks of varying degrees from time to time. For example, in December 2020, we were notified by a service provider, Accellion, of a zero-day vulnerability affecting an Accellion FTA server that we deployed to transfer information as part of our customer support system. In response to this incident, we engaged third-party forensic experts to investigate and determined that attackers illegally obtained certain information from the Accellion FTA server. We notified affected customers, as we deemed was required or appropriate. We have incurred costs to respond to this incident and may continue to incur costs to support our efforts to enhance our security measures. Our solutions, platforms, and system, and those of our service providers, may also suffer security incidents as a result of non-technical issues, including intentional or inadvertent acts or omissions by our employees or service providers. With the increase in personnel working remotely during the current COVID-19 pandemic, we and our service providers are at increased risk for security breaches. We are taking steps to monitor and enhance the security of our solutions, cloud platform, and other relevant systems, IT infrastructure, networks, and data; however, the unprecedented scale of remote work may require additional personnel and resources, which nevertheless cannot be guaranteed to fully safeguard our solutions, our cloud platform, or any systems, IT infrastructure networks, or data upon which we rely. Although we maintain insurance coverage that may be applicable to certain liabilities in the event of a security breach or other security incident, we cannot be certain that our insurance coverage will be adequate for liabilities that actually are incurred, that insurance will continue to be available to us on economically reasonable terms, or at all, or that any insurer will not deny coverage as to any future claim. The successful assertion of one or more large claims against us that exceed available insurance coverage or the occurrence of changes in our insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, could have a material and adverse effect on our business, including our financial condition, operating results and reputation. 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. The timing of sales of subscriptions for our solutions can be difficult to forecast because of the length and unpredictability of our sales cycle, particularly with large transactions. We sell subscriptions to our IT, security and compliance solutions primarily to IT departments that are managing a growing set of user and compliance demands, which has increased the complexity of customer requirements to be met and confirmed during the sales cycle and prolonged our sales cycle. Further, the length of time that potential customers devote to their testing and evaluation, contract negotiation and budgeting processes varies significantly, which has also made our sales cycle long and unpredictable. The length of the sales cycle for our solutions typically ranges from six to twelve months but can be more than eighteen months. In addition, we might devote substantial time and effort to a particular unsuccessful sales effort, and as a result we could lose other sales opportunities or incur expenses that are not offset by an increase in revenues, which could harm our business. Adverse economic conditions or reduced IT spending may adversely impact our business. Our business depends on the overall demand for IT and on the economic health of our current and prospective customers. Economic weakness, customer financial difficulties, and constrained spending on IT security may result Additionally, Uncertainty about future economic conditions also makes it difficult to forecast operating results and to make decisions about future investments. Future or continued economic weakness for us or our customers, failure of our customers and markets to recover from such weakness, customer financial difficulties, and reductions in spending on IT security could have a material adverse effect on demand for our platform and consequently on our business, financial condition and results of operations. Our IT, security and compliance solutions are delivered from We currently host substantially all of our solutions from third-party data centers located in the United States, Canada, Switzerland, the Netherlands, United Arab Emirates and India. These facilities are vulnerable to damage or interruption from earthquakes, hurricanes, floods, fires, cybersecurity attacks, terrorist attacks, employee negligence, power losses, telecommunications failures and similar events. The facilities also could be subject to break-ins, sabotage, intentional acts of vandalism and other misconduct. The occurrence of a natural disaster, an act of terrorism or misconduct, a decision to close the facilities without adequate notice or other unanticipated problems could result in interruptions in our services. Some of our data centers are not currently redundant and we may not be able to rapidly move our customers from one data center to another, which may increase delays in the restoration of our service for our customers if an adverse event occurs. Additionally, our existing data center facilities providers have no obligations to renew their agreements with us on commercially reasonable terms, or at all. If we are unable to renew our agreements with the facilities providers on commercially reasonable terms or if in the future we add additional data center facility providers, we may experience costs or downtime in connection with the loss of an existing facility or the transfer to, or addition of, new data center facilities. Any disruptions or other performance problems with our solutions could harm our reputation and business and may damage our customers’ businesses. Interruptions in our service delivery might reduce our revenues, cause us to issue credits to customers, subject us to potential liability and cause customers to terminate their subscriptions or not renew their subscriptions. We face competition in our markets, and we may lack sufficient financial or other resources to maintain or improve our competitive position. We compete with a large range of established and emerging vulnerability management vendors, compliance vendors and data security vendors in a highly fragmented and competitive environment. We face significant competition for each of our solutions from companies with broad product suites and greater name recognition and resources than we have, as well as from small companies focused on specialized security solutions. We compete with large and small public companies, such as Belden (Tripwire), Broadcom (Symantec Enterprise Security), CrowdStrike, F5 Networks, FireEye, We believe that the principal competitive factors affecting our markets include product functionality, breadth of offerings, flexibility of delivery models, ease of deployment and use, total cost of ownership, scalability and performance, customer support and extensibility of platform. Many of our existing and potential competitors have competitive advantages, including: • • • • • • • • • As a result, our competitors may be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards or customer requirements. With the introduction of new technologies, the evolution of our service and new market entrants, we expect competition to intensify in the future. In addition, some of our larger competitors have substantially broader product offerings and can bundle competing products and services with other software offerings. As a result, customers may choose a bundled product offering from our competitors, even if individual products have more limited functionality than our solutions. These competitors may also offer their products at a lower price as part of this larger sale, which could increase pricing pressure on our solutions and cause the average sales price for our solutions to decline. These larger competitors are also often in a better position to withstand any significant reduction in capital spending and will therefore not be as susceptible to economic downturns. Furthermore, our current and potential competitors may establish cooperative relationships among themselves or with third parties that may further enhance their resources and product and services offerings in the markets we address. In addition, current or potential competitors may be acquired by third parties with greater available resources. As a result of such relationships and acquisitions, our current or potential competitors might be able to adapt more quickly to new technologies and customer needs, devote greater resources to the promotion or sale of their products and services, initiate or withstand substantial price competition, take advantage of other opportunities The sales prices of our solutions are subject to competitive pressures and may decrease, which may reduce our gross profits and adversely impact our financial results. The sales prices for our solutions may decline for a variety of reasons, including competitive pricing pressures, discounts, a change in our mix of solutions and subscriptions, anticipation of the introduction of new solutions or subscriptions, or promotional programs. Competition continues to increase in the market segments in which we participate, and we expect competition to further increase in the future, thereby leading to increased pricing pressures. Larger competitors with more diverse product and service offerings may reduce the price of products or subscriptions that compete with ours or may bundle them with other products and subscriptions. Additionally, although we price our products and subscriptions worldwide in U.S. Dollars, Euros, British Pounds, Canadian Dollars, Japanese Yen and Indian Rupee, currency fluctuations in certain countries and regions may negatively impact actual prices that partners and customers are willing to pay in those countries and regions, or the effective prices we realize in our reporting currency. We cannot assure you that we will be successful in developing and introducing new offerings with enhanced functionality on a timely basis, or that our new product and subscription offerings, if introduced, will enable us to maintain our prices and gross profits at levels that will allow us to maintain positive gross margins and profitability. If our solutions fail to help our customers achieve and maintain compliance with regulations and industry standards, our revenues and operating results could be harmed. We generate a portion of our revenues from solutions that help organizations achieve and maintain compliance with regulations and industry standards. For example, many of our customers subscribe to our IT, security and compliance solutions to help them comply with the security standards developed and maintained by the Payment Card Industry Security Standards Council, or the PCI Council, which apply to companies that store cardholder data. Industry organizations like the PCI Council may significantly change their security standards with little or no notice, including changes that could make their standards more or less onerous for businesses. Governments may also adopt new laws or regulations, or make changes to existing laws or regulations, that could impact the demand for or value of our solutions. If we are unable to adapt our solutions to changing regulatory standards in a timely manner, or if our solutions fail to assist with or expedite our customers’ compliance initiatives, our customers may lose confidence in our solutions and could switch to products offered by our competitors. In addition, if regulations and standards related to data security, vulnerability management and other IT, security and compliance requirements are relaxed or the penalties for non-compliance are changed in a manner that makes them less onerous, our customers may view government and industry regulatory compliance as less critical to their businesses, and our customers may be less willing to purchase our solutions. In any of these cases, our revenues and operating results could be harmed. 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 our solutions fail to detect vulnerabilities in our customers’ IT infrastructures, or if our solutions fail to identify and respond to new and increasingly complex methods of attacks, our business and reputation may suffer. There is no guarantee that our solutions will detect all vulnerabilities. Additionally, our IT, security and compliance solutions may falsely detect vulnerabilities or threats that do not actually exist. For example, some of our solutions rely on Further, our solutions sometimes are tested against other security products, and may fail to perform as effectively, or to be perceived as performing as effectively, as competitive products for any number of reasons, including misconfiguration. To the extent current or potential customers, channel partners, or others believe there has been an occurrence of an actual or perceived failure of our solutions to detect a vulnerability or otherwise to function as effectively as competitive products in any particular test, In addition, our solutions do not currently extend to cover mobile devices or personal devices that employees may bring into an organization. As such, our solutions would not identify or address vulnerabilities in mobile devices, such as mobile phones or tablets, or personal devices, and our customers’ IT infrastructures may be compromised by attacks that infiltrate their networks through such devices. An actual or perceived security breach or theft of the sensitive data of one of our customers, regardless of whether the breach is attributable to the failure of our solutions, could adversely affect the market’s perception of our security solutions. 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 believe that our growth will depend, to a significant extent, on our success in recruiting and retaining a sufficient number of qualified sales personnel and their ability to obtain new customers, manage our existing customer base and expand the sales of our newer solutions. We plan to continue to expand our sales force and make a significant investment in our sales and marketing activities. Our recent hires and planned hires may not become as productive as quickly as we would like, and we may be unable to hire or retain sufficient numbers of qualified individuals in the future in the competitive markets where we do business. Competition for highly skilled personnel is frequently intense and we may not be able to compete for these employees. If we are unable to recruit and retain a sufficient number of productive sales personnel, sales of our solutions and the growth of our business may be harmed. Additionally, if our efforts do not result in increased revenues, our operating results could be negatively impacted due to the upfront operating expenses associated with expanding our sales force. 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. Our success significantly depends upon establishing and maintaining relationships with a variety of channel partners and we anticipate that we will continue to depend on these partners in order to grow our business. For the six months ended June 30, 2021, we derived approximately 41% of our revenues from sales of subscriptions for our solutions through channel partners, and the percentage of revenues derived from channel partners may increase in future periods. Our agreements with our channel partners are generally non-exclusive and do not prohibit them from working with our competitors or offering competing solutions, and many of our channel partners have more established relationships with our competitors. If our channel partners choose to place greater emphasis on products of their own or those offered by our competitors, do not effectively market and sell our solutions, or fail to meet the needs of our customers, then our ability to grow our business and sell our solutions may be adversely affected. In addition, the loss of one or more of our larger channel partners, who may cease marketing our solutions with limited or no notice, and our possible inability to replace them, could adversely affect our sales. Moreover, our ability to expand our distribution channels depends in part on our ability to educate our channel partners about our solutions, which can be complex. Our failure to recruit additional channel partners, or any reduction or delay in their sales of our solutions or conflicts between channel sales and our direct sales and marketing activities may harm our results of operations. Even if we are successful, these relationships may not result in greater customer usage of our solutions or increased revenues. In addition, the financial health of our channel partners and our continuing relationships with them are important to our success. Some of these channel partners may be unable to withstand adverse changes in economic conditions, which could result in insolvency and/or the inability of such distributors to obtain credit to finance purchases of our products and services. In addition, weakness in the end-user market could negatively affect the cash flows of our channel partners who could, in turn, delay paying their obligations to us, which would increase our credit risk exposure. Our business could be harmed if the financial condition of some of these channel partners substantially weakened and we were unable to timely secure replacement channel partners. 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. We market and sell subscriptions to our solutions throughout the world and have personnel in many parts of the world. In addition, we have sales offices and research and development facilities outside the United States and we conduct, and expect to continue to conduct, a significant amount of our business with organizations that are located outside the United States, particularly in Europe and Asia. Therefore, we are subject to risks associated with having international sales and worldwide operations, including: • • • • • • • • • • • • • • Our business, including the sales of subscriptions of our solutions, may be subject to foreign governmental regulations, which vary substantially from country to country and change from time to time. Failure to comply with these regulations could adversely affect our business. Further, in many foreign countries it is common for others to engage in business practices that are prohibited by our internal policies and procedures or U.S. regulations applicable to us. Although we have implemented policies and procedures designed to ensure compliance with these laws and policies, there can be no assurance that all of our employees, contractors, channel partners and agents have complied or will comply with these laws and policies. Violations of laws or key control policies by our employees, contractors, channel partners or agents could result in delays in revenue recognition, financial reporting misstatements, fines, penalties or the prohibition of the importation or exportation of our solutions and could have a material adverse effect on our business and results of operations. If we are unable to successfully manage the challenges of international operations, our business and operating results could be adversely affected. In addition, as of June 30, 2021, approximately We are exposed to fluctuations in currency exchange rates, which could negatively affect our financial condition and results of operations. Our reporting currency is the U.S. dollar and we generate a majority of our revenues in U.S. dollars. However, for the six months ended June 30, 2021, we incurred approximately 24% of our expenses in foreign currencies, primarily Euros, British Pounds, and Indian Rupee, principally with respect to salaries and related personnel expenses associated with our European and Indian operations. Additionally, for the six months ended June 30, 2021, approximately 22% of our revenues were generated in foreign currencies. Accordingly, changes in exchange rates may have a material adverse effect on our business, operating results and financial condition. The exchange rate between the U.S. dollar and foreign currencies has fluctuated substantially in recent years and may continue to fluctuate substantially in the future. We expect that a majority of our revenues will continue to be generated in U.S. dollars for the foreseeable future and that a significant portion of our expenses, including personnel costs, as well as capital and operating expenditures, will continue to be denominated in the Euro, British Pound and Indian Rupee. The results of our operations may be adversely affected by foreign exchange fluctuations. We use derivative financial instruments to reduce our foreign currency exchange risks. We use 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), as well as to manage foreign currency fluctuation risk related to forecasted transactions (designated). However, we may not be able to purchase derivative instruments that are adequate to insulate ourselves from foreign currency exchange risks. Additionally, our hedging activities may contribute to increased losses as a result of volatility in foreign currency markets. 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. We have experienced significant growth over the last several years. From 2018 to 2020, our revenues grew from $278.9 million to $363.0 million, and our headcount increased from 869 employees at the beginning of 2018 to 1,626 employees as of June 30, 2021. We rely on information technology systems to help manage critical functions such as order processing, revenue recognition and financial forecasts. To manage any future growth effectively we must continue to improve and expand our IT systems, financial infrastructure, and operating and administrative systems and controls, and continue to manage headcount, capital and processes in an efficient manner. We may not be able to successfully implement improvements to these systems and processes in a timely or efficient manner. Our failure to improve our systems and processes, or their failure to operate in the intended manner, may result in our inability to manage the growth of our business and to accurately forecast our revenues, expenses and earnings, or to prevent certain losses. In addition, as we continue to grow, our productivity and the quality of our solutions may also be adversely affected if we do not integrate and train our new employees quickly and effectively. Any future growth would add complexity to our organization and require effective coordination across our organization. Failure to manage any future growth effectively could result in increased costs, harm our results of operations and lead to investors losing confidence in our internal systems and processes. We depend on the continued services and performance of our senior management and other key employees, the loss of any of whom could adversely affect our business, operating results and financial condition. Our future performance depends on the continued services and continuing contributions of our senior management and other key employees, to execute on our business plan and to identify and pursue new opportunities and product innovations. We do not maintain key-man insurance for any member of our senior management team. Our senior management and key employees are generally employed on an at-will basis, which means that they could terminate their employment with us at any time. From time to time, there may be changes in our senior management team resulting from the termination or departure of executives. For example, our former chief executive officer resigned for health reasons in March 2021, and our current chief executive officer was appointed to the role in April 2021. The loss of the services of our senior management or other key employees for any reason could significantly delay or prevent the achievement of our development and strategic objectives and harm our business, financial condition and results of operations. If we are unable to hire, retain and motivate qualified personnel, our business may suffer. Our future success depends, in part, on our ability to continue to attract and retain highly skilled personnel. The loss of the services of any of our key personnel, the inability to attract or retain qualified personnel or delays in hiring required personnel, particularly in engineering and sales, may seriously harm our business, financial condition and results of operations. Any of our employees may terminate their employment at any time. Competition for highly skilled personnel is frequently intense, especially in the San Francisco Bay Area and Pune, India, locations in which we have a substantial presence and need for highly skilled personnel and we may not be able to compete for these employees. We are required under accounting principles generally accepted in the United States (U.S. GAAP) to recognize compensation expense in our operating results for employee stock-based compensation under our equity grant programs, which may negatively impact our operating results and may increase the pressure to limit stock-based compensation that we might otherwise offer to current or potential employees, thereby potentially harming our ability to attract or retain highly skilled personnel. In addition, to the extent we hire personnel from competitors, we may be subject to allegations that they have been improperly solicited or divulged proprietary or other confidential information, which could result in a diversion of management's time and our resources. A portion of our revenues are generated by sales to government entities, which are subject to a number of challenges and risks. Government entities have historically been particularly concerned about adopting cloud-based solutions for their operations, including security solutions, and increasing sales of subscriptions for our solutions to government entities may be more challenging than selling to commercial organizations. Selling to government entities can be highly competitive, expensive and time-consuming, often requiring significant upfront time and expense without any assurance that we will win a sale. We have invested in the creation of a cloud offering certified under the Federal Information Security Management Act for government usage but we cannot be sure that we will continue to sustain or renew this certification, that the government will continue to mandate such certification or that other government agencies or entities will use this cloud offering. Government demand and payment for our solutions may be impacted by public sector budgetary cycles and funding authorizations, with funding reductions or delays adversely affecting public sector demand for our solutions. Government entities may have contractual or other legal rights to terminate contracts with our channel partners for convenience or due to a default, and any such termination may adversely impact our future results of operations. Governments routinely investigate and audit government contractors’ administrative processes, and any unfavorable audit could result in the government refusing to continue buying our solutions, a reduction of revenues or fines or civil or criminal liability if the audit uncovers improper or illegal activities. Any such penalties could adversely impact our results of operations in a material way. Our success in acquiring and integrating other businesses, products or technologies could impact our financial position. In order to remain competitive, we have in the past and may in the future seek to acquire additional businesses, products, services or technologies. For example, we acquired 1Mobility on April 1, 2018, Layered Insight on October 16, 2018, Adya on January 10, 2019, and certain intellectual property of Spell Security on July 24, 2020. The environment for acquisitions in our industry is very competitive and acquisition candidate purchase prices may exceed what we would prefer to pay. Moreover, achieving the anticipated benefits of future acquisitions will depend in part upon whether we can integrate acquired operations, products and technology in a timely and cost-effective manner, and even if we achieve benefits from acquisitions, such acquisitions may still be viewed negatively by customers, financial markets or investors. The acquisition and integration process is complex, expensive and time-consuming, and may cause an interruption of, or loss of momentum in, product development and sales activities and operations of both companies, as well as divert the attention of management, and we may incur substantial cost and expense. We may issue equity securities which could dilute current stockholders’ ownership, incur debt, assume contingent or other liabilities and expend cash in acquisitions, which could negatively impact our financial position, stockholder equity and stock price. We may not find suitable acquisition candidates, and acquisitions we complete may be unsuccessful. If we consummate a transaction, we may be unable to integrate and manage acquired products and businesses effectively or retain key personnel. If we are unable to effectively execute acquisitions, our business, financial condition and operating results could be adversely affected. We rely on software-as-a-service vendors to operate certain functions of our business and any failure of such vendors to provide services to us could adversely impact our business and operations. We rely on third-party software-as-a-service vendors to operate certain critical functions of our business, including financial management and human resource management. If these services become unavailable due to extended outages or interruptions or because they are no longer available on commercially reasonable terms or prices, our expenses could increase, our ability to manage our finances could be interrupted and our processes for managing sales of our solutions and supporting our customers could be impaired until equivalent services, if available, are identified, obtained and integrated, all of which could harm our business. Delays or interruptions in the manufacturing and delivery of our physical scanner appliances by our sole source manufacturer may harm our business. Upon customer request, we provide physical or virtual scanner appliances on a subscription basis as an additional capability to the customer’s subscription for use during their subscription term. Our physical scanner appliances are built by a single manufacturer. Our reliance on a sole manufacturer involves several risks, including a potential inability to obtain an adequate supply of physical scanner appliances and limited control over pricing, quality and timely deployment of such scanner appliances. In addition, replacing this manufacturer may be difficult and could result in an inability or delay in deploying our solutions to customers that request physical scanner appliances as part of their subscriptions. Furthermore, our manufacturer’s ability to timely manufacture and ship our physical scanner appliances depends on a variety of factors, such as the availability of hardware components, supply shortages or contractual restrictions. In the event of an interruption from this manufacturer, we may not be able to develop alternate or secondary sources in a timely manner. If we are unable to purchase physical scanner appliances in quantities sufficient to meet our requirements on a timely basis, we may not be able to effectively deploy our solutions to new customers that request physical scanner appliances, which could harm our business. Incorrect or improper implementation or use of our solutions could result in customer dissatisfaction and harm our business and reputation. If our customers are unable to implement our solutions successfully, customer perceptions of our platform and solutions may be impaired or our reputation and brand may suffer. Our customers have in the past inadvertently misused our solutions, which triggered downtime in their internal infrastructure until the problem was resolved. Additionally, any failure to implement and configure our solutions correctly may result in our solutions failing to detect vulnerabilities or compliance issues, or otherwise to perform effectively, and may result in disruptions to our customers’ IT environments and businesses. Any misuse of our solutions, including any failure to implement and configure them appropriately, could result in disruption to our customers’ businesses, customer dissatisfaction, negative impacts on the perceived reliability or effectiveness of our solutions, and claims and litigation, and may result in negative press coverage, negative effects on our reputation and competitive position, a loss of sales, customers, and channel partners, and harm our financial results. We recognize revenues from subscriptions over the term of the relevant service period, and therefore any decreases or increases in bookings are not immediately reflected in our operating results. We recognize revenues from subscriptions over the term of the relevant service period, which is typically one year. As a result, most of our reported revenues in each quarter are derived from the recognition of deferred revenues relating to subscriptions entered into during previous quarters. Consequently, a shortfall in demand for our solutions in any period may not significantly reduce our revenues for that period, but could negatively affect revenues in future periods. Accordingly, the effect of significant downturns in bookings may not be fully reflected in our results of operations until future periods. We may be unable to adjust our costs and expenses to compensate for such a potential shortfall in revenues. Our subscription model also makes it difficult for us to rapidly increase our revenues through additional bookings in any period, as revenues are recognized ratably over the subscription period. Our business is subject to the risks of earthquakes, fire, power outages, floods and other catastrophic events, and to interruption by man-made problems such as terrorism. A significant natural disaster, such as an earthquake, fire or a flood, or a significant power outage could have a material adverse impact on our business, operating results and financial condition. Our corporate headquarters and a significant portion of our operations are located in the San Francisco Bay Area, a region known for seismic activity. In addition, natural disasters could affect our business partners’ ability to perform services for us on a timely basis. In the event we or our business partners are hindered by any of the events discussed above, our ability to provide our solutions to customers could be delayed, resulting in our missing financial targets, such as revenues and net income, for a particular quarter. Further, if a natural disaster occurs in a region from which we derive a significant portion of our revenues, customers in that region may delay or forego subscriptions of our solutions, which may materially and adversely impact our results of operations for a particular period. In addition, acts of terrorism could cause disruptions in our business or the business of our business partners, customers or the economy as a whole. All of the aforementioned risks may be exacerbated if the disaster recovery plans for us and our suppliers prove to be inadequate. To the extent that any of the above results in delays of customer subscriptions or commercialization of our solutions, our business, financial condition and results of operations could be adversely affected. Risks Related to Intellectual Property, Legal, Tax and Regulatory Matters Undetected software errors or flaws in our solutions could harm our reputation, decrease market acceptance of our solutions or result in liability. Our solutions may contain undetected errors or defects when first introduced or as new versions are released. We have experienced these errors or defects in the past in connection with new solutions and solution upgrades and we expect that these errors or defects will be found from time to time in the future in new or enhanced solutions after commercial release of these solutions. Since our customers use our solutions for IT, security and compliance reasons, any errors, defects, disruptions in service or other performance problems with our solutions, or any other failure of our solutions to detect vulnerabilities or compliance problems or otherwise to perform effectively, may result in disruptions or damage to the business of our customers, including security breaches or compliance failures. Additionally, any such issues, or the perception that they have occurred, whether or not relating to any actual or perceived error or defect in our solutions, could hurt our reputation and competitive position and we may incur significant costs, the attention of key personnel could be diverted, our customers may delay or withhold payment to us or elect not to renew, we could face a loss of sales, customers, and channel partners, and other significant problems with our relationships with customers and channel partners may arise. We may also be subject to liability claims for damages related to actual or perceived errors or defects in our solutions. A material liability claim or other occurrence that harms our reputation or decreases market acceptance of our solutions may harm our business, competitive and financial position, and operating results. Although we maintain insurance coverage that may be applicable to certain liabilities in connection with these matters, we cannot be certain that our insurance coverage will be adequate for liabilities that actually are incurred, that insurance will continue to be available to us on economically reasonable terms, or at all, or that any insurer will not deny coverage as to any future claim. The successful assertion of one or more large claims against us that exceed available insurance coverage or the occurrence of changes in our insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, could have a material and adverse effect on our business, including our financial condition, operating results and reputation. Our solutions could be used to collect and store personal information of our We collect the names and email addresses of our customers in connection with subscriptions to our solutions. Additionally, the data that our solutions collect to help secure and protect the IT infrastructure of our customers may include additional personal or confidential information of our customers’ employees and their customers. Personal privacy has become a significant issue in the United States and in many other countries where we offer our solutions. The regulatory framework for privacy issues worldwide is currently evolving and is likely to remain uncertain for the foreseeable future. Many federal, state and foreign government bodies and agencies have adopted or are considering adopting laws and regulations regarding the collection, use, disclosure and retention of personal information. In the United States, these include, for example, rules and regulations promulgated under the authority of the Federal Trade Commission, the Health Insurance Portability and Accountability Act of 1996, the Gramm-Leach-Bliley Act, and state breach notification laws. Internationally, virtually every jurisdiction in which we operate has established its own data security and privacy legal framework with which we or our customers must comply. These privacy, data protection and information security laws and regulations may result in ever-increasing regulatory and public scrutiny and escalating levels of enforcement and sanctions. Additionally, new laws and regulations relating to privacy and data protection continue to be proposed and enacted. For example, the European Union has adopted the GDPR. This regulation, which took effect in May of 2018, causes EU data protection requirements to be more stringent and provides for greater penalties. The GDPR may be subject to new or changing interpretations by courts, and our interpretation of the law and efforts to comply with the rules and regulations of the law may be ruled invalid. Noncompliance with the GDPR can trigger fines of up to €20 million or 4% of global annual revenues, whichever is higher. Similarly, California recently enacted the California Consumer Privacy Act (“CCPA”), which, among other things, requires covered companies to provide new disclosures to California consumers and afford such consumers new rights to opt-out of certain sales of personal information. The CCPA creates a private right of action for statutory damages for certain breaches of information. Aspects of the CCPA and its interpretation remain unclear. Additionally, a new privacy law, the California Privacy Rights Act The privacy, data protection, and information security laws and regulations we must comply with also are subject to change. For example, the United Kingdom enacted a Data Protection Act in May 2018 that substantially implements the GDPR, but the United Kingdom's exit from the European Union, commonly referred to as “Brexit,” could lead to further legislative and regulatory changes. It remains unclear how United Kingdom data protection laws or regulations will develop in the medium to longer term and how data transfers to and from the United Kingdom will be regulated. Additionally, we have joined the EU-U.S. Privacy Shield Framework and a related program, the Swiss-U.S. Privacy Shield Framework and make use of certain model clauses approved by the European Commission (the “SCCs”), with regard to certain transfers of personal data from the European Economic Area (“EEA”) to the U.S. Both the EU-U.S. Privacy Shield Framework and SCCs have been subject to legal challenge, however, and on July 16, 2020, the Court of Justice of the European Union (“CJEU”) issued a decision that invalidated the EU-U.S. Privacy Shield and imposed additional obligations on companies when relying on the SCCs. This CJEU decision may result in European data protection regulators applying differing standards for, and requiring ad hoc verification of, transfers of personal data from Europe to the U.S. We are analyzing the impacts of In addition to laws and regulations, privacy advocacy and industry groups or other private parties may propose new and different privacy standards that either legally or contractually apply to us. Because the interpretation and application of privacy and data protection laws, regulations, standards and contractual obligations are uncertain, it is possible that they may be interpreted and applied in a manner that is, or perceived to be, inconsistent with our data management practices or the features of our solutions. If so, in addition to the possibility of regulatory investigations and enforcement actions, fines, lawsuits and other claims, other forms of injunctive or operations-limiting relief, and damage to our reputations and loss of goodwill, we could be required to fundamentally change our business activities and practices or modify our solutions and may face limitations in our ability to develop new solutions and features, any of which could have an adverse effect on our business. Any inability to adequately address privacy concerns, even if unfounded, or any actual or perceived inability to comply with applicable privacy or data protection laws, regulations and privacy standards, could result in cost and liability to us, damage our reputation, inhibit sales of subscriptions and harm our business. Furthermore, the costs of compliance with, and other burdens imposed by, the laws, regulations, and privacy standards that are applicable to the businesses of our customers may limit the use and adoption of, and reduce the overall demand for, our solutions. Privacy concerns, whether valid or not valid, may inhibit market adoption of our solutions particularly in certain industries and foreign countries. 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. Our solutions contain software licensed to us by third-parties under so-called “open source” licenses, including the GNU General Public License, the GNU Lesser General Public License, the BSD License, the Apache License and others. From time to time, there have been claims against companies that distribute or use open source software in their products and services, asserting that such open source software infringes the claimants’ intellectual property rights. We could be subject to suits by parties claiming that what we believe to be licensed open source software infringes their intellectual property rights. Use and distribution of open source software may entail greater risks than use of third-party commercial software, as open source licensors generally do not provide warranties or other contractual protections regarding infringement claims or the quality of the code. In addition, certain open source licenses require that source code for software programs that are subject to the license be made available to the public and that any modifications or derivative works to such open source software continue to be licensed under the same terms. If we combine our proprietary software with open source software in certain ways, we could, in some circumstances, be required to release the source code of our proprietary software to the public. Disclosing the source code of our proprietary software could make it easier for cyber attackers and other third parties to discover vulnerabilities in or to defeat the protections of our solutions, which could result in our solutions failing to provide our customers with the security they expect from our services. This could harm our business and reputation. Disclosing our proprietary source code also could allow our competitors to create similar products with lower development effort and time and ultimately could result in a loss of sales for us. Any of these events could have a material adverse effect on our business, operating results and financial condition. Although we monitor our use of open source software in an effort both to comply with the terms of the applicable open source licenses and to avoid subjecting our solutions to conditions we do not intend, the terms of many open source licenses have not been interpreted by U.S. courts, and there is a risk that these licenses could be construed in a way that could impose unanticipated conditions or restrictions on our ability to commercialize our solutions. In this event, we could be required to seek 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. We license third-party software as well as security and compliance data from various third parties to deliver our solutions. In the future, this software or data may not be available to us on commercially reasonable terms, or at all. Any loss of the right to use any of this software or data could result in delays in the provisioning of our solutions until equivalent technology or data is either developed by us, or, if available, is identified, obtained and integrated, which could harm our business. In addition, any errors or defects in or failures of this third-party software or data could result in errors or defects in our solutions or cause our solutions to fail, which could harm our business and be costly to correct. Many of these providers attempt to impose limitations on their liability for such errors, defects or failures, and if enforceable, we may have additional liability to our customers or third-party providers that could harm our reputation and increase our operating costs. We will need to maintain our relationships with third-party software and data providers, and to obtain software and data from such providers that do not contain any errors or defects. Any failure to do so could adversely impact our ability to deliver effective solutions to our customers and could harm our operating results. Failure to protect our proprietary technology and intellectual property rights could substantially harm our business and operating results. The success of our business depends in part on our ability to protect and enforce our trade secrets, trademarks, copyrights, patents and other intellectual property rights. We attempt to protect our intellectual property under copyright, trade secret, patent and trademark laws, and through a combination of confidentiality procedures, contractual provisions and other methods, all of which offer only limited protection. We primarily rely on our unpatented proprietary technology and trade secrets. Despite our efforts to protect our proprietary technology and trade secrets, unauthorized parties may attempt to misappropriate, reverse engineer or otherwise obtain and use them. The contractual provisions that we enter into with employees, consultants, partners, vendors and customers may not prevent unauthorized use or disclosure of our proprietary technology or intellectual property rights and may not provide an adequate remedy in the event of unauthorized use or disclosure of our proprietary technology or intellectual property rights. Moreover, policing unauthorized use of our technologies, The process of obtaining patent protection is expensive and time-consuming, and we may not be able to prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner, if at all. We may choose not to seek patent protection for certain innovations and may choose not to pursue patent protection in certain jurisdictions. Furthermore, it is possible that our patent applications may not result in granted patents, that the scope of our issued patents will be limited or not provide the coverage originally sought, that our issued patents will not provide us with any competitive advantages, or that our patents and other intellectual property rights may be challenged by others or invalidated through administrative processes or litigation. In addition, issuance of a patent does not guarantee that we have an absolute right to practice the patented invention. As a result, we may not be able to obtain adequate patent protection or to enforce our issued patents effectively. From time to time, legal action by us may be necessary to enforce our patents and other intellectual property rights, to protect our trade secrets, to determine the validity and scope of the intellectual property rights of others or to defend against claims of infringement or invalidity. Such litigation could result in substantial costs and diversion of resources and could negatively affect our business, operating results and financial condition. If we are unable to protect our intellectual property rights, we may find ourselves at a competitive disadvantage to others who need not incur the additional expense, time and effort required to create the innovative solutions that have enabled us to be successful to date. 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. Patent and other intellectual property disputes are common in our industry. Some companies, including some of our competitors, own large numbers of patents, copyrights and trademarks, which they may use to assert claims against us. Third parties may in the future assert claims of infringement, misappropriation or other violations of intellectual property rights against us. They may also assert such claims against our customers or channel partners whom we typically indemnify against claims that our solutions infringe, misappropriate or otherwise violate the intellectual property rights of third parties. As the numbers of products and competitors in our market increase and overlaps occur, claims of infringement, misappropriation and other violations of intellectual property rights may increase. Any claim of infringement, misappropriation or other violation of intellectual property rights by a third party, even those without merit, could cause us to incur substantial costs defending against the claim and could distract our management from our business. The patent portfolios of our most significant competitors are larger than ours. This disparity may increase the risk that they may sue us for patent infringement and may limit our ability to counterclaim for patent infringement or settle through patent cross-licenses. In addition, future assertions of patent rights by third parties, and any resulting litigation, may involve patent holding companies or other adverse patent owners who have no relevant product revenues and against whom our own patents may therefore provide little or no deterrence or protection. There can be no assurance that we will not be found to infringe or otherwise violate any third-party intellectual property rights or to have done so in the past. An adverse outcome of a dispute may require us to: • pay substantial damages, including treble damages, if we are found to have willfully infringed a third party’s patents or copyrights; • cease making, licensing or using solutions that are alleged to infringe or misappropriate the intellectual property of others; • expend additional development resources to attempt to redesign our solutions or otherwise develop non-infringing technology, which may not be successful; • enter into potentially unfavorable royalty or license agreements in order to obtain the right to use necessary technologies or intellectual property rights; and • indemnify our partners and other third parties. In addition, royalty or licensing agreements, if required or desirable, may be unavailable on terms acceptable to us, or at all, and may require significant royalty payments and other expenditures. Some licenses may also be non-exclusive, and therefore our competitors may have access to the same technology licensed to us. Any of the foregoing events could seriously harm our business, financial condition and results of operations. Governmental export or import controls could subject us to liability if we violate them or limit our ability to compete in foreign markets. Our solutions are subject to U.S. export controls, If we are required to collect higher sales and Taxing jurisdictions, including state and Changes in our We are subject to income taxes in the United States and various foreign jurisdictions, and our domestic and international tax liabilities are subject to the allocation of expenses in differing jurisdictions. Our tax rate is affected by changes in the mix of earnings and losses in countries with differing statutory tax rates, certain non-deductible expenses arising from the requirement to expense stock options, excess tax benefits from stock-based compensation, and the valuation of deferred tax assets and liabilities, including our ability to utilize our federal and state net operating losses, which were Additionally, significant judgment is required in evaluating our tax positions and our worldwide provision for taxes. During the ordinary course of business, there are many activities and transactions for which the ultimate tax determination is uncertain. In addition, our tax obligations and effective tax rates could be adversely affected by changes in the relevant tax, accounting and other laws, regulations, principles and interpretations, including those relating to income tax nexus, by recognizing tax losses or lower than anticipated earnings in jurisdictions where we have lower statutory rates and higher than anticipated earnings in jurisdictions where we have higher statutory rates, by changes in foreign currency exchange rates, or by changes in the valuation of our deferred tax assets and liabilities. We may be audited in various jurisdictions, and such jurisdictions may assess additional taxes, sales taxes and value-added taxes against us. Although we believe our tax estimates are reasonable, the final determination of any tax audits or litigation could be materially different from our historical tax provisions and accruals, which could have a material adverse effect on our operating results or cash flows in the period or periods for which a determination is made. Risks Related to Market volatility may affect our stock price and the value of an investment in our common stock and could subject us to litigation. The trading price of our common stock has been, and may continue to be, subject to significant fluctuations in response to a number of factors, most of which we cannot predict or control, including: • announcements of new solutions, services or technologies, commercial relationships, acquisitions or other events by us or our competitors; • fluctuations in stock market prices and trading volumes of securities of similar companies; • general market conditions and overall fluctuations in U.S. equity markets; • variations in our operating results, or the operating results of our competitors; • changes in our financial guidance or securities analysts’ estimates of our financial performance; • changes in accounting principles; • sales of large blocks of our common stock, including sales by our executive officers, directors and significant stockholders; • additions or departures of any of our key personnel; • announcements related to litigation; • changing legal or regulatory developments in the United States and other countries; and • discussion of us or our stock price by the financial press and in online investor communities. In addition, the stock market in general, and the stocks of technology companies such as ours in particular, have experienced substantial price and volume volatility that is often seemingly unrelated to the operating performance of particular companies. These broad market fluctuations may cause the trading price of our common stock to decline. In the past, securities class action litigation has often been brought against a company after a period of volatility in the trading price of its common stock. We may become involved in this type of litigation in the future. Any securities litigation claims brought against us could result in substantial expenses and the diversion of our management’s attention from our business. Our actual operating results may differ significantly from our guidance. From time to time, we have released, and may continue to release, guidance in our quarterly earnings conference calls, quarterly earnings releases, or otherwise, regarding our future performance that represents our management's estimates as of the date of release. This guidance, which includes forward-looking statements, has been and will be based on projections prepared by our management. These projections are not prepared with a view toward compliance with published guidelines of the American Institute of Certified Public Accountants, and neither our registered public accountants nor any other independent expert or outside party compiles or examines the projections. Accordingly, no such person expresses any opinion or any other form of assurance with respect to the projections. Projections are based upon a number of assumptions and estimates that, while presented with numerical specificity, are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control and are based upon specific assumptions with respect to future business decisions, some of which will change. We intend to state possible outcomes as high and low ranges which are intended to provide a sensitivity analysis as variables are changed but are not intended to imply that actual results could not fall outside of the suggested ranges. The principal reason that we release guidance is to provide a basis for our management to discuss our business outlook with analysts and investors. We do not accept any responsibility for any projections or reports published by any such third parties. Guidance is necessarily speculative in nature, and it can be expected that some or all of the assumptions underlying the guidance furnished by us will not materialize or will vary significantly from actual results. Accordingly, our guidance is only an estimate of what management believes is realizable as of the date of release. Actual results may vary from our guidance and the variations may be material. In light of the foregoing, investors are urged not to rely upon our guidance in making an investment decision regarding our common stock. Any failure to successfully implement our operating strategy or the occurrence of any of the events or circumstances set forth in this “Risk Factors” section in this Quarterly Report on Form 10-Q could result in our actual operating results being different from our guidance, and the differences may be adverse and material. Concentration of ownership among our As Future sales of shares by existing stockholders could cause our stock price to decline. The market price of shares of our common stock could decline as a result of substantial sales of our common stock, particularly sales by our directors, executive officers, employees and significant stockholders, a large number of shares of our common stock becoming available for sale, or the perception in the market that holders of a large number of shares intend to sell their shares. As of June 30, In addition, as of June 30, We cannot guarantee that our stock repurchase program will be fully consummated or that it will enhance stockholder value, and any stock repurchases we make could affect the price of our common stock. In February 2018, we announced a $100.0 million stock repurchase program. We do not intend to pay dividends on our common stock and therefore any returns will be limited to the value of our stock. We have never declared or paid any cash dividend on our common stock. We currently anticipate that we will retain future earnings for the development, operation and expansion of our business and do not anticipate declaring or paying any cash dividends for the foreseeable future. Any return to stockholders will therefore be limited to the value of their stock. Anti-takeover provisions in our charter documents and under Delaware law could make an acquisition of us, which may be beneficial to our stockholders, more difficult and may prevent attempts by our stockholders to replace or remove our current management. Our amended and restated certificate of incorporation and amended and restated bylaws contain provisions that may delay or prevent an acquisition of us or a change in our management. These provisions include: • authorizing “blank check” preferred stock, which could be issued by our board of directors without stockholder approval and may contain voting, liquidation, dividend and other rights superior to our common stock, which would increase the number of outstanding shares and could thwart a takeover attempt; • a classified board of directors whose members can only be dismissed for cause; • the prohibition on actions by written consent of our stockholders; • the limitation on who may call a special meeting of stockholders; • the establishment of advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted upon at stockholder meetings; and • the requirement of at least two-thirds of the outstanding capital stock to amend any of the foregoing second through fifth provisions. In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which limits the ability of stockholders owning in excess of 15% of our outstanding voting stock to merge or combine with us. Although we believe these provisions collectively provide for an opportunity to obtain greater value for stockholders by requiring potential acquirers to negotiate with our board of directors, they would apply even if an offer rejected by our board were considered beneficial by some stockholders. In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the members of our management. General Risk Factors Disruptive technologies could gain wide adoption and supplant our cloud-based IT, security and compliance solutions, thereby weakening our sales and harming our results of operations. The introduction of products and services embodying new technologies could render our existing solutions obsolete or less attractive to customers. Our business could be harmed if new IT, security and compliance technologies are widely adopted. We may not be able to successfully anticipate or adapt to changing technology or customer requirements on a timely basis, or at all. If we fail to keep up with technological changes or to convince our customers and potential customers of the value of our solutions even in light of new technologies, our business could be harmed and our revenues may decline. We may not maintain profitability in the future. We may not be able to sustain or increase our growth or maintain profitability in the future. We plan to continue to invest in our infrastructure, new solutions, research and development and sales and marketing, and as a result, we cannot assure you that we will maintain profitability. We may incur losses in the future for a number of reasons, including without limitation, the other risks and uncertainties described in this Quarterly Report on Form 10-Q. Additionally, we may encounter unforeseen operating expenses, difficulties, complications, delays and other unknown factors that may result in losses in future periods. If our revenue growth does not meet our expectations in future periods, our financial performance may be harmed and we may not again achieve or maintain profitability in the future. Forecasts of market growth may prove to be inaccurate, and even if the markets in which we compete achieve the forecasted growth, there can be no assurance that our business will grow at similar rates, or at all. Growth forecasts relating to the expected growth in the market for IT, security and compliance and other markets are subject to significant uncertainty and are based on assumptions and estimates which may prove to be inaccurate. Even if these markets experience the forecasted growth, we may not grow our business at similar rates, or at all. Our growth is subject to many factors, including our success in implementing our business strategy, which is subject to many risks and uncertainties. Accordingly, forecasts of market growth should not be taken as indicative of our future growth. Our financial results are based in part on our estimates or judgments relating to our critical accounting policies. These estimates or judgments may prove to be incorrect, which could harm our operating results and result in a decline in our stock price. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, as provided in the section titled “Part I, Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the results of which form the basis for making judgments about the carrying values of assets, liabilities, equity, revenues and expenses that are not readily apparent from other sources. Our operating results may be adversely affected if our assumptions change or if actual circumstances differ from those in our assumptions, which could cause our operating results to fall below the expectations of securities analysts and investors, resulting in a decline in our stock price. Significant assumptions and estimates used in preparing our condensed consolidated financial statements include those related to revenue recognition, accounting for income taxes, stock-based compensation, fair value measurement and leases. Changes in financial accounting standards may cause adverse and unexpected revenue fluctuations and impact our reported results of operations. We prepare our financial statements in accordance with U.S. GAAP. These principles are subject to interpretation by the SEC and various bodies formed to interpret and create appropriate accounting principles. A change in these accounting standards or practices could harm our operating results and could have a significant effect on our reporting of transactions and reported results and may even retroactively affect previously reported transactions. New accounting pronouncements and varying interpretations of accounting pronouncements have occurred and may occur in the future. Changes to existing rules or the questioning of current practices may harm our operating results or require that we make significant changes to our systems, processes and controls or the way we conduct our business. If we fail to maintain an effective system of internal control over financial reporting, our ability to produce timely and accurate financial statements or comply with applicable regulations could be impaired. As a public company, we are subject to the reporting requirements of the Securities Exchange Act of 1934, or the Exchange Act, the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, and the rules and regulations of the NASDAQ Stock Market. To continue to comply with the requirements of being a public company, we may need to undertake various actions, such as implementing additional internal controls and procedures and hiring additional accounting or internal audit staff. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with U.S. GAAP. Our current controls and any new controls that we develop may become inadequate because of changes in conditions in our business. Any failure to maintain effective controls, or any difficulties encountered in their improvement, could harm our operating results or cause us to fail to meet our reporting obligations. Any failure to maintain effective internal control over financial reporting also could adversely affect the results of periodic management evaluations regarding the effectiveness of our internal control over financial reporting that we are required to include in our periodic reports we file with the SEC under Section 404 of the Sarbanes-Oxley Act. While we were able to assert in our Annual Report on Form 10-K that our internal control over financial reporting was effective as of December 31, 2020, we cannot predict the outcome of our testing in future periods. If we are unable to assert in any future reporting period that our internal control over financial reporting is effective (or if our independent registered public accounting firm is unable to express an opinion on the effectiveness of our internal controls), investors may lose confidence in our operating results and our stock price could decline. In addition, if we are unable to continue to meet these requirements, we may not be able to remain listed on the NASDAQ Stock Market. Unregistered Sales of Equity Securities and Use of Proceeds A summary of Total Number of Approximate Dollar Shares Purchased Value of Shares that Total Number of Average Price Paid as Part of Publicly Announced May Yet Be Purchased Period Shares Purchased per Share Plan or Program (1) under the Plan or Program April 1 - April 30, 2021 May 1 - May 31, 2021 June 1 - June 30, 2021 Total (1) On February 5, 2018, our board of directors authorized a $100.0 million two-year share repurchase program, which was announced on February 12, 2018. On each of October 30, 2018, October 30, 2019, Exhibits Exhibit Number Description 31.1 31.2 32.1 32.2 101 INS Inline XBRL Instance Document - the instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document. 101 SCH Inline XBRL Taxonomy Extension Schema Document 101 CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document. 101 DEF Inline XBRL Taxonomy Extension Definition Linkbase Document. 101 LAB Inline XBRL Taxonomy Extension Labels Linkbase Document. 101 PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document. 104 Cover Page Interactive Data File - formatted in Inline XBRL and included as Exhibit 101 Exhibits 32.1 and 32.2 are being furnished and shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to the liability of that section, nor shall such exhibits be deemed to be incorporated by reference in any registration statement or other document filed under the Securities Act of 1933, as amended, or the Exchange Act, except as otherwise specifically stated in such filing. Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Foster City, State of California on August QUALYS, INC. By: By: /s/ SAIKAT PAUL Name: Saikat Paul Title: Chief Accounting Officer (principal accounting officer)(unaudited)NOTE 1.The Company and Summary of Significant Accounting Policiesglobally distributedglobally-distributed IT infrastructures.10-Q10-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, 2019,2020, 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 presentationstatement of the financial position, results of operations and cash flows for the interim periods. The results of operations for the three and six months ended June 30, 20202021 are not necessarily indicative of the results of operations expected for the entire year ending December 31, 20202021 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-K10-K for the year ended December 31, 2019, filed with the SEC on February 21, 2020.(“COVID-19”("COVID-19") as a pandemic. As a result of COVID-19,COVID-19, the Company has modified certain aspects of its business, including restricting employee travel, requiring employees to work from home, and canceling certain events and meetings, among other modifications. The Company will continue to actively monitor the situation and may take further actions that alter its business operations as may be required by federal, state or local authorities or that the Company determines are in the best interests of its employees, customers, partners, suppliers and stockholders. While the Company has not incurred significant disruptions from the COVID-19 outbreak,COVID-19 pandemic, the Company is unable to accurately predict the full impact that COVID-19the pandemic will have due to numerous uncertainties, including the durationavailability and acceptance of COVID-19 vaccines as well as the effectiveness of the outbreak,vaccines to new variants of the disease, 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. accounts receivable, goodwill and intangible assets, capitalization of internally developed software,leases, stock-based compensation and the provision for9Qualys, Inc.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)(unaudited)taxes.tax provision. Actual results could differ from those estimates and such differences may be material to the accompanying unaudited condensed consolidated financial statements.Derivative Financial InstrumentsDerivativeinstrumentscondition. utilizedsubscription 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.reduce foreign currency exchange risks.be remitted to government authorities are excluded from revenues.uses foreign currency forward contractselected the practical expedient to mitigateexpense commissions on renewals where the impactspecific 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 foreign currency fluctuationsfive years. The Company classifies deferred commissions as current or noncurrent based on the timing of certain non-U.S. dollar denominated net asset positions,when it expects to date primarily cash, accounts receivablerecognize the expense. The current and operating lease liabilities, as well as to manage foreign currency fluctuation risk related to forecasted transactions. Open contractsnoncurrent portions of deferred commissions are recorded withinincluded in prepaid expenses and other current assets and other noncurrent assets, accrued liabilities or other noncurrent liabilitiesrespectively, in theits 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 into revenue or operating expenses when the hedged item impacts the condensed consolidated statements of operations.Stock-Based CompensationThe 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. , the Company invested $2.5$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 and measured at cost less impairment, adjusted for observable price changes.sheets. The investment is assessed for impairment annually or whenever events or changes in circumstances indicate thatCompany has not received any dividends from the carrying amount may not be recoverable. 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. As of June 30, 2020 and December 31, 2019, no impairment was recorded for the investments.August 2018, December 2019, the Financial Accounting Standards Board ("FASB") issued Accounting StandardsStandard Update ("ASU") 2018-15, Intangibles No.2019- 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. The adoption did not have a material impact on the Company's condensed consolidated financial statements.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,10Qualys, Inc.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)(unaudited)Current 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 condensed consolidated financial statements.Recently Issued Accounting Pronouncements Not Yet AdoptedIn 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 condensed consolidated financial statements.In December 2019, the FASB issued ASU No. 2019-12,12, Simplifying the Accounting for Income Taxes ("ASU 2019-12"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 2019-122019-12 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 evaluatingadopted ASU 2019-12 in the impactsfirst quarter of 2021 with no material impact on the provisionsCompany's condensed consolidated financial statements.ASU 2019-12these accounting pronouncements had or will have a material impact on its condensed consolidated financial statements.NOTE 2.Fair ValueInstrumentsother currentaccrued liabilities, the carrying amounts approximate their fair values due to the relatively short maturity of these balances. 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:orand liabilities, including quoted prices for identical assets or liabilities in less active or inactive markets, quoted prices for similar assets or liabilities in inactiveactive markets, or inputs other inputsthan quoted prices that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.3-11Qualys, Inc.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)(unaudited)funds,fund, which areis valued using unadjusted quoted prices that are available in an active market for an identical asset. Level 2 assets includefor 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 usingusing observable inputs, such as quotations on forward foreign exchange points and foreign interest rates. During the fiscal years 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 June 30, 2020 and December 31, 2019, management estimated that the fair value of the investments equaled their carrying value. June 30, 2020 Amortized Cost Unrealized Gains Unrealized (Losses) Fair Value (in thousands) Cash and cash equivalents: Cash $ 106,272 $ — $ — $ 106,272 Money market funds 5,638 — — 5,638 Commercial paper 1,999 — — 1,999 Total 113,909 — — 113,909 Short-term marketable securities: Commercial paper 1,847 2 — 1,849 Corporate bonds 24,289 227 — 24,516 Asset-backed securities 6,511 52 — 6,563 U.S. government agencies 200,419 580 (5) 200,994 Total 233,066 861 (5) 233,922 Long-term marketable securities: Asset-backed securities 35,441 407 — 35,848 U.S. government agencies 14,544 444 — 14,988 Foreign government agencies 1,005 34 — 1,039 Corporate bonds 44,542 1,066 — 45,608 Total 95,532 1,951 — 97,483 Total $ 442,507 $ 2,812 $ (5) $ 445,314 $ 49,521 $ — $ — $ 49,521 46,557 — — 46,557 1,200 — — 1,200 97,278 — — 97,278 25,133 0 (1 ) 25,132 33,002 191 0 33,193 4,504 4 0 4,508 199,971 139 (2 ) 200,108 262,610 334 (3 ) 262,941 15,236 41 (10 ) 15,267 41,178 9 (14 ) 41,173 1,006 24 0 1,030 52,970 472 (22 ) 53,420 110,390 546 (46 ) 110,890 $ 470,278 $ 880 $ (49 ) $ 471,109 1211Qualys, 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 $ 33,105 $ — $ — $ 33,105 38,028 — — 38,028 2,999 — — 2,999 74,132 — — 74,132 6,147 0 0 6,147 24,368 170 0 24,538 6,263 18 0 6,281 244,568 369 (11 ) 244,926 281,346 557 (11 ) 281,892 38,456 160 (3 ) 38,613 6,884 17 0 6,901 1,006 31 0 1,037 51,068 839 0 51,907 97,414 1,047 (3 ) 98,458 $ 452,892 $ 1,604 $ (14 ) $ 454,482 As of June 30, 2020, theThe Company had the ability and intent to hold all marketable securities that were in an unrealized loss position until maturity or recovery.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.June 30, 2020 Level 1 Level 2 Fair Value (in thousands) Money market funds $ 5,638 $ — $ 5,638 Commercial paper — 3,848 3,848 U.S. government agencies — 215,982 215,982 Foreign government agencies — 1,039 1,039 Corporate bonds — 70,124 70,124 Asset-backed securities — 42,411 42,411 Total $ 5,638 $ 333,404 $ 339,042 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.13Qualys, Inc.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)(unaudited) $ 46,557 $ 0 $ 46,557 0 26,332 26,332 0 241,281 241,281 0 1,030 1,030 0 86,613 86,613 0 19,775 19,775 $ 46,557 $ 375,031 $ 421,588 $ 38,028 $ 0 $ 38,028 0 9,146 9,146 0 251,827 251,827 0 1,037 1,037 0 76,445 76,445 0 44,894 44,894 $ 38,028 $ 383,349 $ 421,377 or effective maturity as of June 30, 2020 and December 31, 2019:2021: $ 26,332 $ 0 $ 0 $ 26,332 200,108 41,173 0 241,281 0 1,030 0 1,030 33,193 36,855 16,565 86,613 4,508 5,327 9,940 19,775 $ 264,141 $ 84,385 $ 26,505 $ 375,031 June 30, 2020 Mature within
One YearMature after One Year through Two Years Mature over Two Years Fair Value (in thousands) Commercial paper $ 3,848 $ — $ — $ 3,848 U.S. government agencies 200,994 14,988 — 215,982 Foreign government agencies — — 1,039 1,039 Corporate bonds 24,516 24,506 21,102 70,124 Asset-backed securities 6,563 18,270 17,578 42,411 Total $ 235,921 $ 57,764 $ 39,719 $ 333,404 December 31, 2019 Mature within
One YearMature 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 uses a hedging strategyenters into foreign currency forward contracts to reduce its exposurethe risk of variability in future cash flow due to foreign currency exchange rate fluctuations forfluctuation from certain forecasted subscription renewals and newrevenue orders billed in British Pound ("GBP") and Euro. The Company uses forward currency contracts accounted forEuro and operation expenses incurred in Indian Rupee ("INR"), which are designated 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 revenues in the same periods when the hedged contracts are recognized into revenues.In addition, the Company uses a hedging strategy to reduce its exposure associated with costs incurred in Indian Rupee ("INR").hedges. Unrealized foreign exchange gains or losses related to those designated cash flow hedge contracts are recorded in AOCIAccumulated other comprehensive income ("AOCI") and will be reclassified into revenues or operating expenses, respectively, in the same periods when the associated hedged expenses are incurred.At transactions hit earnings.2020,2021, the Company had 39 open designated cash flow hedge forward contracts with notional amounts of€24.3 million,£8.6million and Rs.2,507.7 million. As of December 31, 2020, the Company had designated cash flow hedge forward contracts with notional amounts of €21.8€25.9 million, £9.2£8.7 million and Rs.1,590Rs.1,933.5 million. At December 31, 2019, the Company had 26 open designated cash flow hedge contracts with notional amounts As of €24.2 million and £9.7 million.The following table shows the gains and losses, before tax, of the Company's derivative instruments designated as cash flow hedges in AOCI and the condensed consolidated statements of operation for the three and six months ended June 30, 2020 and 2019:14Qualys, Inc.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)(unaudited)Three Months Ended June 30, Six Months Ended June 30, Derivative instruments designated as cash flow hedges: 2020 2019 2020 2019 Net unrealized (losses) gains recognized in AOCI: (in thousands) Foreign currency forward contracts (GBP, Euro and INR) $ (141) $ 191 $ 269 $ 442 Net unrealized (gains) losses reclassified from AOCI into income: Foreign currency forward contracts (GBP and Euro) (328) 56 (576) 69 Foreign currency forward contracts (INR) 215 — 215 — Net change in AOCI before tax $ (254) $ 247 $ (92) $ 511 As of June 30, 2020, the, a net amount of unrealized gains and losses of $1.4 million before tax 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 $0.9 million (before tax). months. As of June 30, 2020, the2021, a net amount of unrealized gains and lossesof $0.1 million before tax on the foreign currency forward contracts for INR reported in AOCI that is expected to be reclassified into operating expenses is a loss of $0.6 million (before tax).At 2020,2021, the Company 15 outstanding non-designated forward contracts with notional amounts of €12.5of €22.2 million, £7.9£10.1 million, Rs.150.0 million, Canadian Dollar ("C$") 1.0 million and Rs.351.7Swiss Franc ("CHF") 2.0 million. At As of December 31, 2019,2020, the Company had 15 outstanding non-designated forward contracts with notional amounts of €20.0€17.7 million, £5.6£6.5 million and Rs.756.0Rs.32.8 million.20202021 and December 31, 2019:June 30, December 31, 2020 2019 Assets: (in thousands) Foreign currency forward contracts designated as cash flow hedge $ 453 $ 427 Foreign currency forward contracts not designated as hedging instruments 409 515 Total $ 862 $ 942 Liabilities: Foreign currency forward contracts designated as cash flow hedge $ (802) $ (524) Foreign currency forward contracts not designated as hedging instruments (309) (550) Total $ (1,111) $ (1,074) $ 664 $ 511 913 27 $ 1,577 $ 538 $ (581 ) $ (2,200 ) (548 ) (1,677 ) $ (1,129 ) $ (3,877 ) statementstatements of operations: $ (41 ) $ (224 ) $ 1,044 $ 580 30 475 (1,228 ) (396 ) (11 ) 251 (184 ) 184 (69 ) (57 ) (140 ) (125 ) $ (80 ) $ 194 $ (324 ) $ 59 Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 (in thousands) Net (losses) gains from non-designated forward contracts $ (224) $ 44 $ 580 $ 66 Other foreign currency transactions gains (losses) 475 249 (396) 66 Total foreign exchange gains, net 251 293 184 132 Other expenses (57) (62) (125) (125) Other income, net $ 194 $ 231 $ 59 $ 8 NOTE 3.Accumulated Other Comprehensive Incomenet of taxes,(loss) for the three and six months ended June 30, 2020 2021 and 20192020 were as follows:15Table Available-for-sale debt securities (in thousands) $ 1,224 $ (1,708 ) $ (484 ) (501 ) 1,092 591 8 192 200 104 (291 ) (187 ) (389 ) 993 604 835 (715 ) 120 (273 ) (394 ) (667 ) 8 152 160 63 59 122 (202 ) (183 ) (385 ) $ 633 $ (898 ) $ (265 ) $ 822 $ 340 $ 1,162 455 386 841 (110 ) (224 ) (334 ) (79 ) (37 ) (116 ) 266 125 391 1,088 465 1,553 1,417 (117 ) 1,300 (20 ) (137 ) (157 ) (319 ) 58 (261 ) 1,078 (196 ) 882 $ 2,166 $ 269 $ 2,435 Contents $ (8 ) $ 20 $ (16 ) $ 130 (456 ) 328 (673 ) 576 61 (36 ) 66 (41 ) 204 (127 ) 221 (143 ) 12 (10 ) 13 (11 ) 27 (18 ) 29 (20 ) $ (152 ) $ 137 $ (344 ) $ 361 Qualys, Inc.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)(unaudited)Unrealized gains (losses) on AFS debt securities Unrealized gains (losses) on cash flow hedges Total (in thousands) Balances as of December 31, 2019 $ 822 $ 340 $ 1,162 Other comprehensive income before reclassification 1,444 208 1,652 Reclassification of gains from Other comprehensive income (100) (279) (379) Total change in unrealized gains (losses), net of tax 1,344 (71) 1,273 Balances as of June 30, 2020 $ 2,166 $ 269 $ 2,435 Unrealized gains (losses) on AFS debt securities Unrealized gains (losses) on cash flow hedges Total (in thousands) Balances as of December 31, 2018 $ (545) $ (41) $ (586) Other comprehensive income before reclassification 1,379 351 1,730 Reclassification of losses from Other comprehensive income 43 53 96 Total change in unrealized gains, net of tax 1,422 404 1,826 Balances as of June 30, 2019 $ 877 $ 363 $ 1,240 NOTE 4.Property and Equipment, Netlease,leases, consists of the following: $ 151,878 $ 136,286 25,795 26,164 21,092 21,107 16,770 16,749 6,672 6,599 0 3,503 222,207 210,408 (156,248 ) (145,558 ) $ 65,959 $ 64,850 June 30, December 31, 2020 2019 (in thousands) Computer equipment $ 124,021 $ 112,599 Computer software 26,241 26,137 Furniture, fixtures and equipment 8,140 6,973 Finance leases - right of use asset 3,503 3,503 Scanner appliances 16,366 15,864 Leasehold improvements 20,311 18,817 Total property and equipment 198,582 183,893 Less: accumulated depreciation and amortization (135,484) (123,314) Property and equipment, net $ 63,098 $ 60,579 Physical scanner appliances and other computer equipment had a net carrying value As of $8.2 millionJune 30, 2021 and $4.9 million at June 30, 2020 and December 31, 2019, respectively, including assets that had not been placed in service of 2020$4.5 million and $0.9 million, respectively. Depreciation and amortization expense relating to property and equipment, including assets under finance leases, was $6.4 million and $6.3 million for the three months ended June 30, 2020 and 2019, respectively, and $12.6 million and $12.8 million for the six months ended June 30, 2020 and 2019, respectively.NOTE 5.Revenue from Contracts with CustomersThe Company's subscription contracts are typically satisfied ratably over the subscription term as its cloud-based offerings are delivered to customers electronically and over time. In addition, the Company recognizes revenues for certain limited scan arrangements on an as-used basis. The Company recognizes revenue related to professional services based on time and materials or completion of milestones stated in the contracts.16Qualys, Inc.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)(unaudited)As the vast majority of the Company’s offerings are subscription based, the Company rarely needs to allocate the transaction price to separate performance obligations. In the rare case that allocation of the transaction price is needed, the Company recognizes revenue in proportion to the standalone selling prices ("SSP") of the underlying services at contract inception. If an SSP is not directly observable, the Company determines the SSP using information that may include market conditions and other observable inputs. The Company's transaction prices typically do not include variable consideration and are a fixed amount for a specific period of time, and the majority of contracts are twelve months with certain customers signing longer term deals. In general, the Company does not offer rights of return, performance bonuses, customer loyalty programs, payments via non-cash methods, refunds, volume rebates, incentive payments, penalties, price concessions or payments or discounts contingent on future events and the Company does not grant its customers any material rights. For contracts that include leased scanners and PCPs, the Company applies the lease and non-lease component practical expedient under ASC 842 to account for non-lease components and lease components as combined components under the revenue recognition guidance in ASU 2014-09, "Revenue from Contracts with Customers" (Topic 606) as the subscriptions are the predominant components in the arrangements.Costs of shipping and handling charges associated with, physical scanner appliances and other computer equipment that are includedor will be subject to leases by customers had a net carrying value of $7.3 million and $7.5 million, respectively, including assets that had not been placed in costservice of revenues. Sales taxes$2.2 million and other taxes collected from customers$1.9 million, respectively. Depreciation and amortization expenses relating to be remitted to government authorities are excluded from revenues.Incremental direct costs of obtaining a contract, which consist of sales commissions primarilyproperty and equipment were $6.9 million and $6.4 million 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. Capitalized costs to obtain contracts, current and noncurrent are as follows:June 30, 2020 December 31, 2019 (in thousands) Commission asset, current $ 2,968 $ 2,568 Commission asset, noncurrent $ 6,604 $ 6,454 For the three months ended June 30, 2020 2021 and 2019, the Company recognized $0.72020, respectively, and $14.2 million and $0.5$12.6 million respectively, of commission expense from amortization of its commission assets. Forfor the six months ended June 30, 2020 2021 and 2019, the Company recognized $1.4 million2020, respectively. Assets under finance leases were acquired upon completion of lease term and $0.9 million, respectively,placed within computer equipment as of commission expense from amortizationJune 30, 2021.RevenueRevenues of $63.5 million and $55.9 million and $49.1 million waswere recognized during the three months ended June 30, 2020 2021 and 2019,2020, respectively, which amounts were included in the deferred revenue balances as of December 31, 2019 2020 and 2018,2019, respectively. Revenue of $129.7Revenues of $147.0 million and $113.3$129.7 million waswere recognized during the six months ended June 30, 2020 2021 and 2019,2020, respectively, which amounts were included in the deferred revenue balances as of December 31, 2019 2020 and 2018,2019, respectively.customercustomers. The term between invoicing and when payment is due is not significant. In certain circumstances, based on the products or services offered. For certain products or services andcredit quality of the customer, types, the Company requires payment before the products or services are delivered to the customer.2020:17Qualys, Inc.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)(unaudited)Total Expected Revenue (in thousands) 2020 (remaining six months) $ 46,130 2021 62,693 2022 34,525 2023 8,533 2024 610 2025 and thereafter 184 Total $ 152,675 $ 61,858 95,612 58,327 7,839 1,833 234 $ 225,703 contracted revenues that have the transaction price of noncancelable orders for which service has not yet been recognized,performed, which include deferred revenue and the amounts that will be invoiced and recognized as revenues in future periods from open contracts. Remaining performance obligations represent the transaction price of noncancelable orders for which service has not been performedcontracts and excludes unexercised renewals. The Company applied the short-term contract exemption to exclude the remaining performance obligations that are part of a contract that has an original expected duration of one year or less.Three Months Ended Six Months Ended June 30, June 30, 2020 2019 2020 2019 (in thousands) Direct $ 51,805 $ 45,672 $ 101,810 $ 88,711 Partner 37,025 33,257 73,283 65,561 Total $ 88,830 $ 78,929 $ 175,093 $ 154,272 $ 58,782 $ 51,805 $ 116,734 $ 101,810 40,920 37,025 79,724 73,283 $ 99,702 $ 88,830 $ 196,458 $ 175,093 third-partythird-party solutions to help meet those customers’ evolving security and compliance requirements. As such, these partners may offer the Company's IT security and compliance solutions in conjunction with one or more of their own products or services and act as a conduit through which the Company can connect with these prospective customers to offer its solutions. For sales involving a channel partner, the channel partner engages with the prospective customer directly and involves the Company's sales team as needed to assist in developing and closing an order. When a channel partner secures a sale, the Company sells the associated subscription to the channel partner who in turn resells the subscription to the customer. Sales to channel partners are made at a discount and revenues are recorded at this discounted price over the subscription terms. The Company does not have any influence or specific knowledge of its partners' selling terms with their customers. See Note 13,12, "Segment Information and Information about Geographic Area" for disaggregation of revenue by geographic area. $ 3,757 $ 3,459 $ 6,980 $ 6,906 For the three months ended NOTE 6.AcquisitionsOn January 10, 2019,, the Company acquiredrecognized $0.9 million and $0.7 million, respectively, of amortization expense relating to deferred costs to obtain contracts. For the assetssix months ended June 30, 2021 and 2020, the Company recognized $1.8 million and $1.4 million, respectively, of Adya, Inc. ("Adya"), an India-based company. The acquisition included a cloud application management platform, which enables security and compliance audits of SaaS applications.Total purchase considerationamortization expense relating to deferred costs to obtain contracts. During the same periods, there was $1.0 million, including $0.2 million of0 impairment loss related to the deferred consideration due eighteen months from the closing date of the acquisition, subjectcosts to potential adjustment from possible indemnity claims. Pro1815Qualys, Inc.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)(unaudited)forma financial information for this acquisition has not been presented because it is not material to the Company's condensed consolidated financial statements.The Company accounted for this transaction as a business combination and allocated $0.9 million of the purchase price to technology-based intangible assets and $0.1 million to goodwill. The acquired intangible assets relating to Adya's developed technology are being amortized over the estimated useful lives of approximately four years. Goodwill arising from the Adya acquisition is deductible for tax purposes over 15 years. On July 24, 2020, the Company acquired certain intangible assets of Spell Security Private Limited ("Spell Security"), a privately held company incorporated in India. Spell Security’s technology expands the Company's endpoint behavior detection, threat hunting, malware research and multi-layered response capabilities for its EDR application. The purchase consideration related to the acquisition was $1.5 million in cash, including $0.2 million of deferred consideration due fifteen months from the closing date of the acquisition, subject to potential adjustment from possible indemnity claims.NOTE 7.Intangible Assets, Netcombinations.or asset acquisitions. Acquired intangibles are amortized on a straight-line basis over the respective estimated useful lives of the assets.June 30, 2020 Weighted Average Life (Years) Weighted Average Remaining Life (Years) Cost Accumulated Amortization Net Book Value Developed technology 4.6 2.2 $ 26,356 $ (13,056) $ 13,300 Patent licenses 14.0 4.2 1,387 (972) 415 Total intangibles subject to amortization $ 27,743 $ (14,028) 13,715 Intangible assets not subject to amortization 40 Total intangible assets, net $ 13,755 December 31, 2019 Weighted Average Life (Years) Weighted Average Remaining Life (Years) Cost Accumulated Amortization Net Book Value Developed technology 4.6 2.7 $ 26,356 $ (10,066) $ 16,290 Patent licenses 14.0 4.7 1,387 (922) 465 Total intangibles subject to amortization $ 27,743 $ (10,988) 16,755 Intangible assets not subject to amortization 40 Total intangible assets, net $ 16,795 4.4 1.3 $ 27,356 $ (19,268 ) $ 8,088 14.0 3.2 1,387 (1,071 ) 316 2.0 1.1 500 (229 ) 271 $ 29,243 $ (20,568 ) 8,675 40 $ 8,715 4.4 1.8 $ 27,356 $ (16,152 ) $ 11,204 14.0 3.7 1,387 (1,021 ) 366 2.0 1.6 500 (104 ) 396 $ 29,243 $ (17,277 ) 11,966 40 $ 12,006 was $1.5was $1.6 million and $1.5 million for each of the three months ended June 30, 2020 2021 and 2019,2020, respectively, and $3.3 million and $3.0 million for each of the six months ended June 30, 2020 2021 and 2019.19Table, respectively. Intangible asset amortization expenses were primarily recorded in cost of Contentsrevenues in the condensed consolidated statements of operations.Qualys, Inc.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)(unaudited)20202021, the Company expects amortization expense in future periods to be as follows:Amortization Expense (in thousands) 2020 (remaining six months) $ 3,041 2021 6,081 2022 4,427 2023 100 2024 66 Total expected future amortization expense $ 13,715 NOTE 8.LeasesOn January 1, 2019, the Company adopted ASU No. 2016-02, “Leases (Topic 842),” which requires leases with durations greater than twelve months to be recognized on the balance sheet. We adopted the standard using the current period adjustment method with an effective date of January 1, 2019. For both operating and finance leases, we recognize a right-of-use asset, which represents our right to use the underlying asset for the lease term, and a lease liability, which represents the present value of our obligation to make payments arising over the lease term. The present value of the lease payments is calculated using the incremental borrowing rate for operating and finance leases. The incremental borrowing rate is determined using a portfolio approach based on the rate of interest that the Company would have to pay to borrow an amount equal to the lease payments on a collateralized basis over a similar term.Where the Company is the lessee, the Company elected to account for non-lease components associated with its leases (e.g., common area maintenance costs) and lease components separately for substantially all of its asset classes, except for data centers, for which the Company elected to combine lease and non-lease components. In arrangements where the Company is the lessor, the Company elected to apply the practical expedient which allows the Company to account for lease components (e.g., customer premise equipment) and non-lease components (e.g., service revenue) as combined components under the revenue recognition guidance in Topic 606 as service revenues are the predominant components in the arrangements.The Company leases property and equipment under finance and operating leases. For leases with terms greater than 12 months, the Company records the related asset and obligation at the present value of lease payments over the term. Many of its leases include rental escalation clauses, renewal options and/or termination options that are factored into our determination of lease payments when appropriate.When available, the Company uses the rate implicit in the lease to discount lease payments to present value; however, most of the leases do not provide a readily determinable implicit rate. Therefore, the Company must estimate an incremental borrowing rate to discount the lease payments based on information available at lease commencement. $ 3,290 4,823 350 212 $ 8,675 2016Qualys, Inc.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)(unaudited)The table below presents the lease-related assets and liabilities recorded on the balance sheet.June 30, December 31, (in thousands) Classification on the Balance Sheet 2020 2019 Assets Operating lease assets Operating lease - right of use asset $ 42,930 $ 40,551 Finance lease assets Property and equipment, net 715 1,299 Total lease assets $ 43,645 $ 41,850 Liabilities Current Operating Operating lease liabilities, current $ 9,161 $ 7,663 Finance Accrued liabilities 117 124 Noncurrent Operating Operating lease liabilities, noncurrent 45,050 44,015 Finance Other noncurrent liabilities — 54 Total lease liabilities $ 54,328 $ 51,856 $4.5$3.6 million and $3.4$4.5 million for the three months ended June 30, 2020 2021 and 2019,2020, respectively, and $7.2 million and $8.9 million and $6.4 million for the six months ended June 30, 2020 2021 and 2019,2020, respectively.Six Months Ended June 30, 2020 June 30, 2019 (in thousands) Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 5,106 $ 4,200 Lease liabilities arising from obtaining right-of-use assets: Operating leases $ 7,033 $ 1,525 Operating and financing cash flows from finance leases were immaterial during the six months ended June 30, 2020. $ 6,853 $ 5,106 $ 1,179 $ 7,033 3.6 4.1 4.8 % 4.8 % June 30, 2020 June 30, 2019 Weighted average remaining lease term (years) Operating leases 5.9 7.2 Finance leases 0.5 1.1 Weighted average discount rates Operating leases 4.9 % 4.6 % Finance leases 5.0 % 5.0 % 21Qualys, Inc.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)(unaudited)NOTE 9.Commitments and Contingenciesby-laws,bylaws, under which it must indemnify directors and executive officers, and may indemnify other officers and employees, for liabilities arising out of their relationship, (ii) contracts under which the Company must indemnify directors and certain officers for liabilities arising out of their relationship, and (iii) contracts under which the Company may be required to indemnify customers or resellers from certain liabilities arising from potential infringement of intellectual property rights, as well as potential damages caused by limited product defects. To date, the Company has not incurred and has not recorded any liability in connection with such indemnifications.NOTE 10.Stockholders' Equity and Stock-Based Compensation"2012"2012 Plan"), the Company is authorized to grant to eligible participants incentive stock options (“ISOs”), non-statutory stock options (“NSOs”), stock appreciation rights ("SARs"), restricted stock awards ("RSAs"), restricted stock units ("RSUs"), performance units and performance shares equivalent to up to 15.7 million17,662 thousand shares of common stock as of June 30, 2020.2021, including 1,963 thousand shares authorized during the six months ended June 30, 2021. Options may be granted with an exercise price that is at least equal to the fair market value of the Company's stock at the date of grant and are exercisable when vested. As of June 30, 2020, 7.2 million2021, 8,572 thousand shares were available for grant under the 2012 Plan."2000"2000 Plan"), the Company was authorized to grant to eligible participants either ISOs or NSOs. The 2000 Plan was terminated in connection with the closing of the Company's initial public offering, and accordingly, 0 shares are currently available for grant under the 2000 Plan. The 2000 Plan continues to govern outstanding awards granted thereunder.operations for the three and six months ended June 30, 2020 and 2019:Three Months Ended Six Months Ended June 30, June 30, 2020 2019 2020 2019 (in thousands) Cost of revenues $ 583 $ 552 $ 1,197 $ 1,097 Research and development 3,253 2,704 6,690 5,044 Sales and marketing 1,513 1,063 3,073 2,131 General and administrative 4,095 4,016 8,481 8,508 Total stock-based compensation $ 9,444 $ 8,335 $ 19,441 $ 16,780 $ 841 $ 583 $ 1,716 $ 1,197 2,582 3,253 4,797 6,690 1,086 1,513 2,714 3,073 4,044 4,095 37,528 8,481 $ 8,553 $ 9,444 $ 46,755 $ 19,441 20202021, the Company had $16.7had $14.5 million of total unrecognized stock-based compensation costexpense related to unvested options which wasare expected to be recognized over a weighted-average period of 2.22.7 years, and $54.3$53.8 million of unrecognized stock-based compensation costexpense related to unvested RSUs which wasare expected to be recognized over a weighted-average period of 2.52.7 years.Compensation cost is recognized over the service period. Forfeitures are estimated at the time of grant and revised in subsequent periods, if actual forfeitures differ from those estimates.22Qualys, Inc.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)(unaudited)Stock Option Plan ActivityA summary of the Company’s stock option activity is as follows:Outstanding Options Weighted Average Exercise Price Weighted Average Remaining Contractual Life (Years) Aggregate Intrinsic Value (in thousands) Balance as of December 31, 2019 2,866,675 $ 40.54 6.0 $ 125,647 Granted 155,300 $ 96.20 Exercised (593,045) $ 34.45 Canceled (26,083) $ 82.61 Balance as of June 30, 2020 2,402,847 $ 45.19 5.9 $ 141,415 Vested and expected to vest - June 30, 2020 2,246,671 $ 42.27 5.8 $ 138,778 Exercisable - June 30, 2020 1,704,504 $ 29.13 4.9 $ 127,656 Restricted StockA summary of the Company’s RSU activity is as follows:Outstanding RSUs Weighted Average Grant Date Fair Value Per Share Balance as of December 31, 2019 1,214,818 $ 67.99 Granted 124,633 $ 95.96 Vested (284,603) $ 61.04 Canceled (154,670) $ 71.00 Balance as of June 30, 2020 900,178 $ 75.99 Outstanding and expected to vest - June 30, 2020 668,594 $ 74.20 Stock Options and Restricted Stock UnitsNovember 2, 2019, April 27, 2021, the Compensation Committeecompensation committee of the Company's board of directors (Compensation Committee) granted the equity award for 2020, which consisted of time-based RSUs and performance-based non-statutory stock options ("NSOs"), to the Company’s ChairmanPresident and Chief Executive Officer Philippe Courtot.an equity award consisting of certain RSUs and a target number of 9,671 performance-based restricted stock units ("PSUs"). The Compensation Committee, in consultation with its independent compensation consultant, designed these awards so that greater than 50% of this compensation was based on the achievement of performance goals linkedPSUs are scheduled to metrics designed to drive the creation of shareholder value.The first portion of the award consists of 48,683 time-based RSUs that will vest in 16 quarterly installments beginning on December 1, 2019, assuming continued service through each applicable vesting date. The second portion of the award consists of 123,856 NSOs that will vest at the end of the three-year performance period basedfrom January 2021 through December 2023. The actual number of PSUs eligible to vest range from 0% to 200% of the target number, depending on the level of achievement of goals related to revenue growth and free cash flow per share growth during the three-year period from January 2020 through December 2022, generally conditioned on Mr. Courtot’s continued status as a service provider throughperformance period. If the date that performanceCompany's President and Chief Executive Officer is certified. If Mr. Courtot’s employmentterminated (a) is terminated by reason of death or disability or (b) is terminated by the Company for reasons other than cause within 12 months following a change in control, then 100% of any unvested portions of the award will vest, with any vesting in connection with change in control terminations conditioned upon the effectiveness of a release of claims in favor of the Company (2019 performance-based NSOs).On December 21, 2018, the Compensation Committee granted the equity award for 2019, which consisted of time-based and performance-based RSUs, to Mr. Courtot. The Compensation Committee, in consultation with its23Qualys, Inc.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)(unaudited)independent compensation consultant, designed these awards so that greater than 50% of this compensation was based on the achievement of performance goals linked to metrics designed to drive the creation of shareholder value.The first portion of the award consists of 56,250 time-based RSUs that will vest in 16 quarterly increments beginning on January 1, 2019, assuming continued service through each applicable vesting date. The second portion of the award consists of 33,089 performance-based RSUs that will vest based on achievement of goals related to revenue growth for a three-year period from January 2019 through December 2021 and Adjusted EBITDA margin for the 2021 fiscal year, generally conditioned on Mr. Courtot’s continued status as a service provider through the date that performance is certified. The third portion of the award consists of 33,088 performance-based RSUs that will vest in 3 increments based on the achievement of goals related to revenue growth and Adjusted EBITDA margin for each of the 2019, 2020 and 2021 fiscal years, generally conditioned on Mr. Courtot’s continued status as a service provider through the date that performance is certified for the relevant increment. If Mr. Courtot’s employment (a) is terminated by reason of death or disability or (b) is terminated by the Company for reasons other than cause or good reason within 12 months following a change in control, then 100% of any unvested portions of the award will vest, with any vesting in connection with terminations due to change in control terminations conditioned upon the effectiveness of a release of claims in favor of the Company.(2018 performance-based RSUs).Duringdue to health issues. The Compensation Committee determined that Mr. Courtot’s termination of employment was on account of disability. In accordance with the six months ended June 30, grant agreements of the equity awards for 2021,2020 14,864 shares, which represent 135% and 2019 for Mr. Courtot, all remaining outstanding RSUs, PSUs and performance stock options under these grants were subject to accelerated vesting and became fully vested at 100% of the target number of 11,030awards as of the date of his termination of employment, which consist of 127 thousand RSUs, 44 thousand PSUs and 348 thousand performance stock options. As a result, the Company recognized $27.3 million of stock-based compensation expense due to the accelerated vesting in the condensed consolidated statements of operations during the six months ended June 30, 2021.2018 performance-based RSUs,equity award for 2019 for Mr. Courtot, vested as a result of the Company achieving the corresponding level of performance goals for fiscal 2019.2020 and 2019, respectively.performance periods. The modifications did not have a material impact onCompany’s stock option activity is as follows: (in thousands) (Years) (in thousands) 2,215 $ 59.07 6.5 $ 139,121 205 $ 114.62 (126 ) $ 35.25 (62 ) $ 99.91 2,232 $ 64.37 5.1 $ 85,821 2,080 $ 61.38 4.8 $ 85,211 1,641 $ 50.67 3.7 $ 82,435 condensed consolidated statement of operations for the three or six months ended June 30, 2020.During the three months ended June 30, 2020 and 2019, stock-based compensation costs of $0.5 million, including changes due to modifications, and $0.3 million, respectively, were recognized for the performance-based NSOs and RSUs. During the six months ended June 30, 2020 and 2019, stock-based compensation costs of $0.6 million, including changes due to modifications, and $0.5 million, respectively, were recognized for the performance-based NSOs and RSUs. (in thousands) 1,047 $ 86.78 181 $ 112.67 (389 ) $ 84.51 (117 ) $ 83.01 722 $ 95.12 633 $ 93.74 two-yeartwo-year share repurchase program, which was announced on February 12, 2018. On each of October 30, 2018, October 30, 2019, and May 7, 2020 and February 10, 2021, the Company announced that its board of directors had authorized an increase of $100.0 million $100.0 million and $100.0 million, respectively, to the original share repurchase program, authorization, resulting in an aggregate authorization of $400.0$500.0 million. Shares may be repurchased from time to time on the open market in accordance with Rule 10b-1810b-18 of the Exchange Act of 1934, including pursuant to a pre-set trading plan adopted in accordance with Rule 10b5-110b5-1 under the Exchange Act, ("Rule 10b5-1"), until April 28,February 14, 2022.2020,2021, the Company repurchased 588,750585 thousand shares of its common stock for approximately $54.2$63.2 million. All share repurchases were made using cash resources. As of June 30, 2020,2021, approximately $174.4$138.6 million remained available for share repurchases pursuant to the Company's share repurchase program.2419Qualys, Inc.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)(unaudited)NOTE 11. Net income Per ShareThree Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 (in thousands, except per share data) Numerator: Net income $ 26,319 $ 16,232 $ 45,013 $ 29,498 Denominator: Weighted-average shares used in computing net income per share: Basic 39,161 39,198 39,137 39,143 Effect of potentially dilutive securities: Common stock options 1,382 1,890 1,410 1,950 Restricted stock units 376 442 381 477 Diluted 40,919 41,530 40,928 41,570 Net income per share: Basic $ 0.67 $ 0.41 $ 1.15 $ 0.75 Diluted $ 0.64 $ 0.39 $ 1.10 $ 0.71 $ 21,142 $ 26,319 $ 21,370 $ 45,013 39,099 39,161 39,154 39,137 831 1,382 851 1,402 147 376 248 344 40,077 40,919 40,253 40,883 $ 0.54 $ 0.67 $ 0.55 $ 1.15 $ 0.53 $ 0.64 $ 0.53 $ 1.10 securities shares not included in the calculation of diluted net income per share because doing so would be anti-dilutive are as follows: 675 452 524 517 153 2 96 34 828 454 620 551 Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 (in thousands) Common stock options 452 419 585 381 Restricted stock units 2 54 18 62 454 473 603 443 NOTE 12. Income Taxesprovision for income taxestax provision for interim periods is determined using an estimate of its annual effective tax rate, adjusted for discrete items, if any, that arise during the period. Each quarter, the Company updates its estimate of the annual effective tax rate, and if the estimated annual effective tax rate changes, the Company makes a cumulative adjustment in such period.$0.8$8.7 million and $2.3$0.8 million for the three months ended June 30, 2020 2021 and 2019,2020, respectively, resulting in an effective tax rate of 2.9%29.2% and 12.3%2.9%, respectively. The increase in income tax provision for the three months ended June 30, 2020 as2021 compared to the tax provision for the three months ended June 30, 20192020 changedwas primarily due to higheran increase in pre-tax income and a reduction in excess tax benefits from stock-based compensation in the current period.compensation.$4.3$6.3 million and $4.8$4.3 million for the six months ended June 30, 2020 2021 and 2019,2020, respectively, resulting in an effective tax rate of 8.7%22.7% and 14.1%8.7%, respectively. The increase in income tax provision for the six months ended June 30, 2020 as2021 compared to the tax provision for the six months ended June 30, 2019 changed2020 was primarily due to higheran increase in non-deductible stock-based compensation and a reduction in excess tax benefits from stock-based compensation in the current period.compensation.25Qualys, Inc.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)(unaudited)20202021, the Company had unrecognized tax benefitsbenefits of $8.4$9.4 million, of which $4.2$4.8 million,, if recognized, would favorably impact the Company's effective taxtax rate. As of December 31, 2019,2020, the Company had unrecognized tax benefits of $7.8$8.9 million, of which $4.2$4.6 million, if recognized, would favorably impact the Company's effective tax rate. The Company does not anticipate a materialmaterial change in its unrecognized tax benefits in the next 12 months.$5$5 million annually for 2020,2021 and 2022. The Company is continuing to assess the 2020 Budget Act, but currently does not expect any material impact to the condensed consolidated financial statements.NOTE 13.InformationReporting, operating segments are defined as components of an entity about which separate financial information is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and Information about Geographic Area1one reportable segment. The Company determines its reportable operating segments in accordance with the provisions in the FASB guidance on segment reporting, which establishes standards for, and requires disclosure of, certain financial information related to reportable operating segments and geographic regions. The Company’s chief operating decision maker is the Chairman and Chief Executive Officer, who makes operating decisions, assesses performance and allocates resources on a consolidated basis. TheAll of the Company’s principal operatingoperations and decision-making functions are located in the United States.Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 (in thousands) United States $ 57,015 $ 50,704 $ 111,978 $ 99,325 Foreign 31,815 28,225 63,115 54,947 Total $ 88,830 $ 78,929 $ 175,093 $ 154,272 $ 60,991 $ 57,015 $ 121,123 $ 111,978 38,711 31,815 75,335 63,115 $ 99,702 $ 88,830 $ 196,458 $ 175,093 June 30, December 31, 2020 2019 (in thousands) United States $ 46,283 $ 46,100 India 11,255 9,221 Foreign 5,560 5,258 Total property and equipment, net $ 63,098 $ 60,579 $ 45,535 $ 43,791 11,789 12,465 8,635 8,594 $ 65,959 $ 64,850 2621Item 2. Management's Discussion and Analysis of Financial Condition and Results of OperationsItem 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 2019, filed with the Securities and Exchange Commission, or SEC, on February 21, 2020.•our financial performance, including our revenues, costs, expenditures, growth rates, operating expenses and ability to generate positive cash flow to fund our operations and sustain profitability;•anticipated technology trends, such as the use of cloud solutions;•our ability to adapt to changing market conditions;•the impact of the ongoing COVID-19 pandemic and related public health measures on our business;•economic and financial conditions, including volatility in foreign exchange rates;•our ability to diversify our sources of revenues, including selling additional solutions to our existing customers and our ability to pursue new customers;•the effects of increased competition in our market;•our ability to innovate and enhance our cloud solutions and platform and introduce new solutions;•our ability to effectively manage our growth;•our anticipated investments in sales and marketing, our infrastructure, new solutions, and research and development, and acquisitions;•maintaining and expanding our relationships with channel partners;•our ability to maintain, protect and enhance our brand and intellectual property;•costs associated with defending intellectual property infringement and other claims;•our ability to attract and retain qualified employees and key personnel, including sales and marketing personnel;•our ability to successfully enter new markets and manage our international expansion;•our expectations, assumptions and conclusions related to our provision for income taxes, our deferred tax assets and our effective tax rate; and•other factors discussed in this Quarterly Report on Form 10-Q in the sections titled “Risk Factors” and “Management's Discussion and Analysis of Financial Condition and Results of Operations.”IT,information technology (IT), security and compliance solutions that enable organizations to identify security risks to their IT infrastructures, help protect their IT systems and applicationsapplications from ever-evolving cyber-attacks and achieve compliance with internal policies and external27implementationimplementation of such actions. Organizations use our integrated suite of solutions delivered on our Qualys Cloud Platform to cost-effectively obtain a unified view of their IT asset inventory as well as security and compliance posture across globally distributedglobally-distributed IT infrastructures as our solution offers a single platform for information technology, information security, application security, endpoint, developer security and cloud teams.•IT Security: Vulnerability Management (VM), Vulnerability Management, Detection, and Response (VMDR); Threat Protection (TP), Continuous Monitoring (CM), Patch Management (PM), Indication of Compromise (IOC);•Compliance Monitoring: Policy Compliance (PC), PCI Compliance (PCI), File Integrity Monitoring (FIM), Security Configuration Assessment (SCA), Security Assessment Questionnaire (SAQ), Out of-Band Configuration Assessment (OCA);•Web Application Security: Web Application Scanning (WAS), Web Application Firewall (WAF);•Global IT Asset Management: Asset Inventory (AI), CMDB Sync (SYN), Certificate Inventory (CRI); and,•Cloud/Container Security: Cloud Inventory (CI), Cloud Security Assessment (CSA), Container Security (CS).Our VM solutions (including VM, VMDR, CM, TP, Cloud Agent for VM, CS, allocated scanner revenue and Qualys Private Cloud Platform) have provided a substantial majority of our revenues to date, representing 72% and 73% of our revenues for the six months ended June 30, 2020 and 2019, respectively.significant revenue growth from our existing customers as they renew and purchase additional subscriptions,.In each ofFor the 2019, approximately 64%, respectively, of our revenues were derived from customers in the United States based on our customers' billing addresses. We sell our solutions to enterprises and government entities primarily through our field sales force and to small and medium-sized businesses through our inside sales force. We generate a significant portion of sales through our channel partners, including managed security service providers, value-added resellers and consulting firms in the United States and internationally.28outbreak,pandemic, we are unable to accurately predict the full impact that COVID-19the pandemic will have due to numerous uncertainties, including the durationavailability and acceptance of COVID-19 vaccines as well as the effectiveness of the outbreak,vaccines to new variants of the disease, actions that may be taken by governmental authorities and the impact to the business of our customers and partners. We will continue to evaluate the nature and extent of the impact to our business, financial position, results of operations and cash flows.subscriptions. amortization of capitalized internal-use software, performance-based compensation and stock-based compensation, for employees who operate our data centers and provide support services to our customers. Other expenses include depreciation of data center equipment, and physical scanner appliances and computer hardware provided to certain customers as part of their subscriptions, expenses related to the use of third-party data centers, amortization of third-party technology licensingsoftware and license fees, amortization of intangibles related to acquisitions, maintenance support, fees paid to contractors who supplement or support our operations center personnel and overhead allocations. We expect to continue to make capital investments to expand and support our data center operations, which will increase the cost of revenues in absolute dollars.We capitalize certain research and development costs related to new products' internal-use software development efforts. Capitalized costs include salaries, benefits, and stock-based compensation charges for employees that are directly involved in developing new products for our cloud security platform during the application development stage. Capitalized costs related to internally developed software under development are treated as construction in progress until the program, feature or functionality is ready for its intended use, at which time amortization commences. We expect to continue to devote substantial resources to research and development in an effort to continuously improve our existing solutions as well as develop new solutions and capabilities and expect that research and development expenses will increase in absolute dollars.29renewals.renewals as incurred. Our new sales personnel are typically not immediately productive, and the resulting increase in sales and marketing expenses we incur when we add new personnel may not result in increased revenues if these new sales personnel fail to become productive. The timing of our hiring of sales personnel, or the participation in new marketing events or programs, and the rate at which these generate incremental revenues, may affect our future operating results. We expect to continue to significantly invest in additional sales personnel worldwide and also in more marketing programs to support new solutions on our platform, which will increase sales and marketing expenses in absolute dollars.securities;securities and foreign exchange gains and losses, the majority of which result from fluctuations between the U.S. Dollar and the Euro, British PoundGBP and Indian Rupee; and gains and losses from disposal of property and equipment.Provision for INR.Taxesprovision for these income taxestax provision and deferred tax assets. Earnings from our non-U.S. activities are subject to income taxes in the local countries at rates which were generally similar to the U.S. statutory tax rate.provision for income taxestax provision for interim periods is determined using an estimate of our annual effective tax rate, adjusted for discrete items, if any, that arise during the period. Each quarter, we update our estimate of the annual effective tax rate, and if the estimated annual effective tax rate changes, we make a cumulative adjustment in such period. Our effective tax rate differs from the U.S. statutory rate of 21% primarily due to non-deductible stock-based compensation expense, state taxes, and the benefit of U.S. federal income tax credits and foreign-derived intangible income deduction.3025Three Months Ended Six Months Ended June 30, June 30, 2020 2019 2020 2019 Revenues 100 % 100 % 100 % 100 % Cost of revenues 21 22 21 23 Gross profit 79 78 79 77 Operating expenses: Research and development 20 22 21 22 Sales and marketing 18 22 19 22 General and administrative 12 13 13 13 Total operating expenses 50 57 53 57 Income from operations 29 21 26 20 Other income, net 2 3 2 3 Income before income taxes 31 24 28 23 Provision for income taxes 1 3 2 3 Net income 30 % 21 % 26 % 20 % 100 % 100 % 100 % 100 % 22 21 22 21 78 79 78 79 20 20 19 21 18 18 18 19 11 12 27 13 49 50 64 53 29 29 14 26 1 2 — 2 30 31 14 28 9 1 3 2 21 % 30 % 11 % 26 % 2020 2021 and 2019Three Months Ended June 30, Change Six Months Ended June 30, Change 2020 2019 $ % 2020 2019 $ % (in thousands, except percentages) Revenues $ 88,830 $ 78,929 $ 9,901 12.5 % $ 175,093 $ 154,272 $ 20,821 13.5 % 2021 2020 $ 99,702 $ 88,830 $ 10,872 12.2 % $ 196,458 $ 175,093 $ 21,365 12.2 % $9.9 by $10.9 million for the three months ended June 30, 20202021 compared to the three months ended June 30, 2019,same period in 2020, due to an increase in the purchase of subscriptions from new and existing customers and new customer subscriptions entered into after June 30, 2019. customers. Of the total increase of $9.9$10.9 million, $6.3$4.0 million was from customers in the United States and the remaining $3.6$6.9 million was from customers in foreign countries. $20.8 by $21.4 million for the six months ended June 30, 20202021 compared to the six months ended June 30, 2019,same period in 2020, due to an increase in the purchase of subscriptions from new and existing customers and new customer subscriptions entered into after June 30, 2019.customers. Of the total increase of $20.8$21.4 million, $12.6$9.1 million was from customers in the United States and the remaining $8.2$12.3 million was from customers in foreign countries. We expect revenue growth from existing and new customers to continue. The growth in revenues reflects the continued demand for our solutions.Three Months Ended June 30, Change Six Months Ended June 30, Change 2020 2019 $ % 2020 2019 $ % (in thousands, except percentages) Cost of revenues $ 18,891 $ 17,537 $ 1,354 7.7 % $ 37,386 $ 35,246 $ 2,140 6.1 % $ 21,552 $ 18,891 $ 2,661 14.1 % $ 43,232 $ 37,386 $ 5,846 15.6 % 3126 $ 19,805 $ 18,058 $ 1,747 9.7 % $ 37,554 $ 36,041 $ 1,513 4.2 % revenues$1.2 million primarily driven by additional employees hired to support the growth of our business, an increase in software costs of $0.3 million and an increase in depreciation and amortization expense of $0.2 million as more computer equipment was placed in service.$1.4by $1.5 million for the six months ended June 30, 2021 compared to the same period in 2020, due to an increase in personnel costs of $0.6 million primarily driven by additional employees hired to support the growth of our business, an increase in software costs of $0.6 million and an increase in depreciation and amortization expense of $0.4 million as more computer equipment was placed in service. $ 17,770 $ 15,783 $ 1,987 12.6 % $ 35,759 $ 34,013 $ 1,746 5.1 % 20202021 compared to the three months ended June 30, 2019. The increase was same period in 2020, primarily due to an increase in licenses and software servicespersonnel costs of $0.5$0.9 million primarily driven by additional employees hired to support the growth of our business, an increase in data centertrade show related costs of $0.3$0.6 million to meet growing demand,and an increase in personnelrecruiting costs of $0.2 million. of $0.3 million due to our continued business growth and a $0.3 million increase in allocation of overhead costs to the cost of revenue department related to increased leasing expenses for our new office in India. by Cost of revenues increased $2.1$1.7 million for the six months ended June 30, 20202021 compared to the six months ended June 30, 2019. The increase wassame period in 2020, primarily due to an increase in licenses and software services of $0.9 million, an increase in data centerpersonnel costs of $0.8 million and an increase in equipment repair and maintenance expense of $0.6 million.Research and Development ExpensesThree Months Ended June 30, Change Six Months Ended June 30, Change 2020 2019 $ % 2020 2019 $ % (in thousands, except percentages) Research and development $ 18,058 $ 17,695 $ 363 2.1 % $ 36,041 $ 33,532 $ 2,509 7.5 % Research and development expenses increased $0.4 million for the three months ended June 30, 2020 compared to the three months ended June 30, 2019, primarily due to a $0.7 million increase in allocation of overhead costs to the research and development department mainly caused by an increase in leasing expenses for our new office in India, an increase in stock-based compensation expense of $0.6$3.8 million driven by additional employees hired to support the growth of our business and an increase in depreciation and amortization expensesrecruiting costs of $0.2$0.5 million, as a result of increased purchase of computer equipment. These increases were partially offset by a decreasedecreases in acquisition-related expensetrade show related costs of $1.1 million.Research$1.4 million and developmenttravel related expenses increased $2.5 million for the six months ended June 30, 2020 compared to the six months ended June 30, 2019, primarily due to an increase in stock-based compensation expense of $1.7$1.1 million driven by the headcount increase to support the growth of our business, an increase in allocation of overhead costs to the researchCOVID-19 pandemic.development department of $1.5 million mainly causedAdministrative Expenses $ 11,213 $ 10,590 $ 623 5.9 % $ 53,256 $ 21,714 $ 31,542 145.3 % an increase in leasing expenses for our new office in India and an increase in depreciation and amortization expenses as a result of increased purchase of computer equipment of $0.4 million. These increases were partially offset by a decrease in acquisition-related expense of $1.2 million.Sales and Marketing ExpensesThree Months Ended June 30, Change Six Months Ended June 30, Change 2020 2019 $ % 2020 2019 $ % (in thousands, except percentages) Sales and marketing $ 15,783 $ 17,165 $ (1,382) (8.1) % $ 34,013 $ 34,480 $ (467) (1.4) % Sales and marketing expenses decreased $1.4$0.6 million for the three months ended June 30, 20202021 compared to the three months ended June 30, 2019, same period in 2020, primarily due to a decrease in trade show costs of $1.3 million driven by rescheduling or cancellation of events or changing to online events and a decrease in travel related expenses of $1.0 million due to the COVID-19 pandemic, partially offset by an increase in commission expense of $0.6 million and an increase in stock-based compensation expense of $0.5 million due to additional employees hired to support the growth of our business.Sales and marketing expenses decreased $0.5 million for the six months ended June 30, 2020 compared to the six months ended June 30, 2019, primarily due to a decrease in trade show costs of $1.0 million driven by rescheduling or cancellation of events or changing to online events, a decrease in travel related expenses of $0.8 million and a decrease in customer acquisition costs of $0.2 million. These decreases were partially offset by an increase in stock-based compensation expense of $0.9 million and an increase in personnel costs of $0.5$0.3 million driven by additional employees hired to support the growth of our business.32General and Administrative ExpensesThree Months Ended June 30, Change Six Months Ended June 30, Change 2020 2019 $ % 2020 2019 $ % (in thousands, except percentages) General and administrative $ 10,590 $ 10,424 $ 166 1.6 % $ 21,714 $ 20,855 $ 859 4.1 % $0.2 by $31.5 million for the threesix months ended June 30, 20202021 compared to the three months ended June 30, 2019,same period in 2020, primarily due to an increase in stock-based compensation expense of $29.0 million primarily driven by accelerated vesting relating to the resignation of the former CEO, an increase in legal fees of $0.3$1.4 million and $0.3 millionan increase in personnel costs due toof $0.9 million driven by additional employees hired to support the growth of our business, partially offsetbusiness. $ 487 $ 1,586 $ (1,099 ) (69.3 )% $ 985 $ 3,372 $ (2,387 ) (70.8 )% a decrease in miscellaneous expense of $0.3 million.General and administrative expenses increased by $0.9 million for the six months ended June 30, 2020 compared to the six months ended June 30, 2019, primarily due to an increase in legal fees of $0.7$1.1 million and an increase in personnel costs of $0.5$2.4 million driven by an increase in headcount, partially offset by a decrease in miscellaneous expense of $0.3 million.Total Other Income, NetThree Months Ended June 30, Change Six Months Ended June 30, Change 2020 2019 $ % 2020 2019 $ % (in thousands, except percentages) Total other income, net $ 1,586 $ 2,401 $ (815) (33.9) % $ 3,372 $ 4,187 $ (815) (19.5) % Total other income, net decreased by $0.8 million for each of the three and six months ended June 30, 2020 compared to the same periods ended June 30, 2019, primarily due to a decrease in interest income and accretion of discount from our marketable securities portfolio.Provision for Income TaxesThree Months Ended June 30, Change Six Months Ended June 30, Change 2020 2019 $ % 2020 2019 $ % (in thousands, except percentages) Provision for income taxes $ 775 $ 2,277 $ (1,502) (66.0) % $ 4,298 $ 4,848 $ (550) (11) % Effective tax rate 2.9 % 12.3 % 8.7 % 14.1 % We recorded an income tax provision of $0.8 million and $2.3 million for the three months ended June 30, 2020 and 2019, respectively, and $4.3 million and $4.8 million for the six months ended June 30, 2020 and 2019, respectively. The decreases in income tax provision for the three and six months ended June 30, 20202021, respectively, compared to the same periods in 2020, primarily due to a decrease in interest income driven by lower yield. $ 8,707 $ 775 $ 7,932 1023.5 % $ 6,272 $ 4,298 $ 1,974 45.9 % 29.2 % 2.9 % 22.7 % 8.7 % 2019 were2021 compared to the same period in 2020, primarily due to higheran increase in pre-tax income and a reduction in excess tax benefits from stock-based compensation.the current period.excess tax benefits from stock-based compensation.Non-GAAPnon-GAAP key metric set forth below to help us evaluate growth trends, establish budgets, measure the effectiveness of our sales and marketing efforts and assess operational efficiencies.33for (benefit from) income taxes,(benefit), (3) depreciation and amortization of property and equipment, (4) amortization of intangible assets and (5) stock-based compensation (6) non-recurring expenses and (7) cash acquisition-related expense that do not reflect ongoing costs of operating the business.•Adjusted EBITDA does not reflect certain cash and non-cash charges that are recurring;•Adjusted EBITDA does not reflect income tax payments that reduce cash available to us;•Adjusted EBITDA excludes depreciation and amortization of property and equipment and, although these are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future; and•Other companies, including companies in our industry, may calculate Adjusted EBITDA differently or not at all, which reduces its usefulness as a comparative measure.Adjusted EBITDA does not reflect certain cash and non-cash charges that are recurring; Adjusted EBITDA does not reflect income tax payments that reduce cash available to us; Adjusted EBITDA excludes depreciation and amortization of property and equipment and amortization of intangible assets, although these are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future; and Other companies, including companies in our industry, may calculate Adjusted EBITDA differently or not at all, which reduces its usefulness as a comparative measure. Three Months Ended Six Months Ended June 30, June 30, 2020 2019 2020 2019 (in thousands, except percentages) Adjusted EBITDA $ 42,838 $ 33,376 $ 81,033 $ 64,001 Percentage of revenues 48 % 42 % 46 % 41 % 20202021 and 2019:2020: $ 21,142 $ 26,319 $ 21,370 $ 45,013 7,145 6,366 14,578 12,593 1,646 1,520 3,291 3,040 8,707 775 6,272 4,298 8,553 9,444 46,755 19,441 (487 ) (1,586 ) (985 ) (3,372 ) $ 46,706 $ 42,838 $ 91,281 $ 81,013 47 % 48 % 46 % 46 % Three Months Ended Six Months Ended June 30, June 30, 2020 2019 2020 2019 (in thousands) Net income $ 26,319 $ 16,232 $ 45,013 $ 29,498 Depreciation and amortization of property and equipment 6,366 6,354 12,593 12,769 Amortization of intangible assets 1,520 1,520 3,040 3,040 Provision for income taxes 775 2,277 4,298 4,848 Stock-based compensation 9,444 8,335 19,441 16,780 Other income, net (1,586) (2,401) (3,372) (4,187) — 1,059 20 1,253 Adjusted EBITDA $ 42,838 $ 33,376 $ 81,033 $ 64,001 (1) For six months ended June 30, 2020, includes $0.02 million(2) For three months ended June 30, 2019, includes $0.1 million, $0.9 million and $0.04 million of compensation related to acquisitions in 2019, 2018 and 2017, respectively.(3) For six months ended June 30, 2019, includes $0.5 million, $2.1 million and $0.1 million of compensation related to acquisitions in 2019, 2018 and 2017, respectively, offset by $1.4 million of reversals of previous obligations.At 2020,2021, our principal source of liquidity was cash, cash equivalents and marketable securitiessecurities of $445.3$471.1 million, including $29.3$46.5 million of cash held outsideoutside of the United States. We do not anticipate that we will need34fromfrom operations during each offor the six months ended June 30, 20202021 and 2019.2020. We believe our existing cash, cash equivalents, short-term marketable securities, and cash from operations will be sufficient to fund our operations for at least the next twelve months. Our future capital requirements will depend on many factors, including our rate of revenue growth, the expansion of our sales and marketing activities, the timing, type and extent of our spending on research and development efforts, international expansion and investment in data centers. We may also seek to invest in or acquire complementary businesses or technologies. While the COVID-19 pandemic has not had a material adverse financial impact on our operations to date, the future impact of the pandemic cannot be predicted with certainty and may increase our costs of capital and otherwise adversely affect our business, result of operations, financial condition and liquidity.Six Months Ended June 30, 2020 2019 (in thousands) Cash provided by operating activities $ 81,649 $ 81,275 Cash used in investing activities $ (10,371) $ (7,547) Cash used in financing activities $ (44,928) $ (23,373) $ 112,240 $ 81,649 (9,173 ) (10,371 ) (79,921 ) (44,928 ) $ 23,146 $ 26,350 flows fromprovided by operating activities of $81.6 million primarily resulted from our net income of approximately $45.0 million, as adjusted for non-cash items including stock-based compensation of $19.4 million and depreciation and amortization expense of $15.6 million. Net working capital changes were not material duringmaterial.2020.For the six months ended June 30, 2019, cash flows from operating activities of $81.3 million primarily resulted from our net income of approximately $29.5 million, as adjusted for non-cash items including stock-based compensation of $16.8 million and depreciation and amortization expense of $15.8 million, and cash flows from working capital of $16.9 million mainly attributable to the continued growth in our deferred revenues and the timing of customer payments.Investing ActivitiesFor the six months ended June 30, 20202021, cash used in investing activities of $9.2 million was mainly attributable to $12.9 million of cash used for capital expenditures mainly related to computer equipment to support our growth and development, partially offset by $3.7 million of cash provided by sales and maturities of marketable securities, net of purchases.$10.42019, cash used in investing activities of $7.5 million was mainly attributable to $14.1 million of cash used for capital expenditures, including computer hardware and software for our data centers to support our growth and development and the purchase of physical scanner appliances and computer hardware provided to certain customers as part of their subscriptions, and $1.9 million cash paid in connection with our acquisition of the assets of Adya and acquisition-related holdback payment. These decreases were partially offset by $8.4 million cash obtained from sales and maturities of marketable securities, net of purchases.Financing ActivitiesFor the six months ended June 30, 20202021, cash used in financing activities of $44.9$79.9 million was mainly attributable to share repurchases of $54.2$63.3 million and the payment of employee payrollincome taxes related to the net share settlement of equity awards of $21.0 million, which were partially offset by the proceeds received from the exercise of stock options of $4.4 million.3529For the six months ended June 30, 2019, cash used in financing activities of $23.4 million was attributable to share repurchases of $24.1 million, the payment of employee payroll taxes related to the net share settlement of equity awards of $7.4 million, and principal payments under finance lease obligations of $0.8 million. These decreases were partially offset by the proceeds from the exercise of stock options of $9.0 million.2019.2020. Our contractual obligations consist of operating leases, purchase commitments and other contractual obligations. During the six months ended June 30, 2020, we recorded lease liabilities of approximately $7.0 million related to leasing of new data center space. There have been no material changes to these obligations outside the ordinary course of business during the six months ended June 30, 20202021 as compared to the contractual obligations disclosed in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of our Annual Report on Form 10-K for the year ended December 31, 2019. 2019, filed with the SEC on February 21, 2020, the accounting policies related to revenue recognition, leases, derivative instruments, income taxes and stock-based compensation involve the greatest degree of judgment and complexity and have the greatest potential impact on our condensed consolidated financial statements. A critical accounting policy is one that is material to the presentation of our condensed consolidated financial statements and requires us to make difficult, subjective or complex judgments for uncertain matters that could have a material effect on our financial condition and results of operations. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our financial condition and results of operations.3630Item 3.Quantitative and Qualitative Disclosures about Market RiskINR,CHF, the currencies of countries where we currently have our most significant international operations. A portion ofWe enter into foreign currency forward contracts to reduce our invoicing isexposure to foreign currency exchange rate fluctuations related to forecasted subscription revenue, operation expenses and foreign currency denominated in the Euro, GBP, Canadian Dollar and Japanese Yen. Our expenses in international locations are generally denominated in the currencies of the countries in which our operations are located.The cash flow effects of our derivative contracts for the six months ended June 30, 2020 and 2019 were included within net cash provided by operating activities on our condensed consolidated statements of cash flows.assets or liabilities. As of June 30, 2020,2021, we had 39 open designated cash flow hedge forward contracts with notional amounts of €21.8€24.3 million,, £9.2 £8.6 million and Rs.1,590Rs.2,507.7 million. During the six months ended June 30, 2020 and 2019, we recorded unrealized foreign currency translation gains of $0.1 million and unrealized foreign currency translation losses of $0.2 million(before taxes), respectively, in AOCI related to these contracts. As of December 31, 2019, we had 26 open designated cash flow hedgenon-designated forward contracts with notional amounts of €24.2€22.2 million, £10.1 million, Rs.150.0 million, C$1.0 million and £9.7CHF2.0 million.The With our hedging strategy applied, the effect of an immediate 10% adverse change in foreign exchange rates would not be material to our financial condition, operating results or cash flows.$445.3$471.1 million in cash, cash equivalents and short-term and long-term marketable securities atas of June 30, 2020.2021. Cash and cash equivalents include cash held in banks, highly liquid money market funds and commercial paper. Marketable securities consist of fixed-income U.S. Treasury and foreign government agency securities, commercial paper corporate bonds, asset-backed securities and commercial paper. We determine the appropriate balance sheet classification of our marketable securities at the time of purchase and reevaluate such designation at each balance sheet date. We classify our marketable securities as either short-term or long-term based on each instrument's underlying contractual maturity date.We do not believe thatAs of June 30, 2021, a 10%hypothetical 100 basis point increase orin interest rate would result in a decrease in interest rates would have a material impact onthe fair value of our operating results or cash flows.3731Item 4.Controls and Procedures2020.2021. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of June 30, 2020,2021, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.38Item 1. Legal ProceedingsItem 1. Legal Proceedings wethe Company may become involved in legal proceedings or be subject to claims arising in the ordinary course of our business. We areAs of June 30, 2021, there has not presentlybeen at least a party toreasonable possibility that the Company has incurred a material loss from any ongoing legal proceedings, that, if determined adversely to us, would individually or taken togethertogether. However, litigation is inherently unpredictable and is subject to significant uncertainties, some of which are beyond the Company's control. Should any of these estimates and assumptions change or prove to have been incorrect, the Company could incur significant charges related to legal matters which could have a material adverse effect on our business, operating results, financial condition or cash flows. Regardless of the outcome, litigation can have an adverse impact on us becauseits results of defenseoperations, financial position and settlement costs, diversion of management resources and other factors.Item 1A.Risk Factors % of these risks and uncertainties. In that case, the trading price of our common stock could decline, and you might lose all or part of your investment. In addition, the risks and uncertainties discussed below are not the only ones we face. Our business, operating results, financial performance or prospects could also be harmed by risks and uncertainties not currently known to us or that we currently do not believe are material.current outbreak and continued spread of COVID-19pandemic will cause an economic slowdown, and it is possible that it could cause a global recession, which could decrease demand for our solutions and negatively impact our operating results. There is a significant degree of uncertainty and lack of visibility as to the extent and duration of any such slowdown or recession.time.time, including but not limited to, the duration and geographic spread of the pandemic, its severity, the actions to contain the virus or treat its impact, future spikes of COVID-19 infections resulting in additional preventative measures to contain or mitigate the spread of the virus, the effectiveness, distribution and acceptance of COVID-19 vaccines, including the vaccines’ efficacy against emerging COVID-19 variants, and how quickly and to what extent normal economic and operating conditions can resume. These impacts, individually or in the aggregate, could have a material and adverse effect on our business, financial position, results of operations and cash flows. Such effect may be exacerbated in the event the pandemic and the measures taken in response to it persist for an extended period of time. Under any of these circumstances, the resumption of normal business operations may be delayed or hampered by lingering effects of COVID-19 on our operations, partners, and customers.Subscriptions to our Vulnerability Management solutions generate most of our revenues, and if we are unable to continue to renew and grow subscriptions for these solutions, our operating results would suffer.We derived approximately 72% and 73% of our revenues from subscriptions to our VM solutions for the six months ended June 30, 2020 and 2019, respectively.We expect to continue to derive a significant majority of our revenues from subscriptions to our VM solutions. As a result, the market demand for our VM solutions is critical to our continued success. Demand for these solutions is affected by a number of factors beyond our control, including continued market acceptance of our solution for existing and new use cases, the timing of development and release of new products or services by our competitors, technological change, and growth or contraction in our market. Our inability to renew or increase subscriptions for this solution or a decline in price of this solution would harm our business and operating results more seriously than if we derived significant revenues from a variety of solutions.3932•the level of demand for our solutions;•publicity regarding security breaches generally and the level of perceived threats to IT security;•expenses associated with our existing and new products and services;•changes in customer renewals of our solutions;•the extent to which customers subscribe for additional solutions;•seasonal buying patterns of our customers;•actual or perceived security breaches, technical difficulties or interruptions with our service;•changes in the growth rate of the IT, security and compliance market;•the timing and success of new product or service introductions by us or our competitors or any other changes in the competitive landscape of our industry, including consolidation among our competitors;•the introduction or adoption of new technologies that compete with our solutions;•decisions by potential customers to purchase IT, security and compliance products or services from other vendors;•the amount and timing of operating costs and capital expenditures related to the operations and expansion of our business;•the timing of sales commissions relative to the recognition of revenues;•the announcement or adoption of new regulations and policy mandates or changes to existing regulations and policy mandates;•failure of our products and services to operate as designed;•price competition;•the length of our sales cycle for our products and services;•insolvency or credit difficulties confronting our customers, affecting their ability to purchase or pay for our solutions;•timely invoicing or changes in billing terms of customers;•timing of deals signed within the quarter;•pace and cost of hiring employees;•changes in foreign currency exchange rates;•general economic conditions, both domestically and in the foreign markets in which we sell our solutions;•future accounting pronouncements or changes in our accounting policies;•our ability to integrate any products or services that we may acquire in the future into our product suite or migrate existing customers of any companies that we may acquire in the future to our products and services;•our effective tax rate;•the amount and timing of income tax benefits that we recognize resulting from excess tax benefits related to stock-based compensation;• actual or perceived security breaches, technical difficulties or interruptions with our service; • changes in the growth rate of the IT, security and compliance market; • the timing and success of new product or service introductions by us or our competitors or any other changes in the competitive landscape of our industry, including consolidation among our competitors; • the introduction or adoption of new technologies that compete with our solutions; • decisions by potential customers to purchase IT, security and compliance products or services from other vendors; • the amount and timing of operating costs and capital expenditures related to the operations and expansion of our business; • the timing of sales commissions relative to the recognition of revenues; • the announcement or adoption of new regulations and policy mandates or changes to existing regulations and policy mandates; • failure of our products and services to operate as designed; • price competition; • the length of our sales cycle for our products and services; • insolvency or credit difficulties confronting our customers, affecting their ability to purchase or pay for our solutions; • timely invoicing or changes in billing terms of customers; • timing of deals signed within the quarter; • pace and cost of hiring employees; • changes in foreign currency exchange rates; • general economic conditions, both domestically and in the foreign markets in which we sell our solutions; • future accounting pronouncements or changes in our accounting policies; • our ability to integrate any products or services that we may acquire in the future into our product suite or migrate existing customers of any companies that we may acquire in the future to our products and services; • our effective tax rate; • the amount and timing of income tax benefits that we recognize resulting from excess tax benefits related to stock-based compensation; • the timing of expenses related to the development or acquisition of technologies, services or businesses; and • potential goodwill and intangible asset impairment charges associated with acquired businesses. 4033•the timing of expenses related to the development or acquisition of technologies, services or businesses; and•potential goodwill and intangible asset impairment charges associated with acquired businesses.For example, a Data Protection Act that substantially implements the European Union’s General Data Protection Regulation ("GDPR") was implemented in the United Kingdom in May 2018, and "Brexit" could also lead to further legislative and regulatory changes. It is unclear, however, how United Kingdom data protection laws or regulations will develop in the medium to longer term, and how data transfers to and from the United Kingdom will be regulated.•failure to timely meet market demand for product functionality;•inability to identify and provide intelligence regarding the attacks or techniques used by cyber-attackers;•inability to inter-operate effectively with the database technologies, file systems or web applications of our prospective customers;•defects, errors or failures;•delays in releasing our enhancements or new solutions;•negative publicity about their performance or effectiveness;•introduction or anticipated introduction of products by our competitors;41•poor business conditions, causing customers to delay IT, security and compliance purchases;•easing or changing of external regulations related to IT, security and compliance; and•reluctance of customers to purchase cloud solutions for IT, security and compliance.failure to timely meet market demand for product functionality; inability to identify and provide intelligence regarding the attacks or techniques used by cyber-attackers; defects, errors or failures; delays in releasing our enhancements or new solutions; negative publicity about their performance or effectiveness; introduction or anticipated introduction of products by our competitors; poor business conditions, causing customers to delay IT, security and compliance purchases; easing or changing of external regulations related to IT, security and compliance; and reluctance of customers to purchase cloud solutions for IT, security and compliance. and compliance providers that may be better established or have greater resources than we do, require additional investment of time and resources in the development and training of our channel partners and entail significant risk of failure.additional solutions, our future revenue growth may be harmeda software-as-a-service model, and our businesscustomers purchase subscriptions from us that are generally one year in length. Our customers have no obligation to renew their subscriptions after their subscription period expires, and they may suffer.We will neednot renew their subscriptions at the same or higher levels or at all. As a result, our ability to increase the revenues that we derive from our current and future solutions for our business and revenues to grow as we expect. Revenues from our other solutions such as Policy Compliance, PCI Compliance, Web Application Scanning, Web Application Firewall, CMDB Sync, Security Assessment Questionnaire, File Integrity Monitoring, Indication of Compromise, Global IT Asset Inventory, Security Configuration Assessment, Cloud Security Assessment, Certificate Inventory, Container Security and Patch Management have been relatively modest compared to revenues from our VM solutions. Our future success depends in part on customers renewing their existing subscriptions and purchasing additional subscriptions and solutions. Our customers may choose not to renew their subscriptions to our solutions or purchase additional solutions due to a number of factors, including their satisfaction or dissatisfaction with our solutions, the prices of our solutions, the prices of products or services offered by our competitors, reductions in our customers’ spending levels due to the macroeconomic environment or other factors. If our customers do not renew their subscriptions to our solutions, renew on less favorable terms, or do not purchase additional solutions or subscriptions, our revenues may grow more slowly than expected or decline and our operating results would be harmed.sell subscriptions to these additional solutions to existing and new customers. This may require more costly sales and marketing efforts and may not resultachieve significant growth in additional sales. If our efforts to sell subscriptions to additional solutions to existing andrevenues in the future will depend, in large part, upon continually attracting new customers are not successful,and obtaining subscription renewals to our businesssolutions from those customers. If we fail to attract new customers, our revenues may suffer.4243Our business depends substantially on retaining our current customers, and any reduction in our customer renewals or revenues from such customers could harm our future operating results.We offer our Qualys Cloud Platform and integrated suite of solutions pursuant to a software-as-a-service model, and our customers purchase subscriptions from us that are generally one year in length. Our customers have no obligation to renew their subscriptions after their subscription period expires, and they may not renew their subscriptions at the same or higher levels or at all. As a result, our ability to grow depends in part on customers renewing their existing subscriptions and purchasing additional subscriptions and solutions. Our customers may choose not to renew their subscriptions to our solutions or purchase additional solutions due to a number of factors, including their satisfaction or dissatisfaction with our solutions, the prices of our solutions, the prices of products or services offered by our competitors, reductions in our customers’ spending levels due to the macroeconomic environment or other factors. If our customers do not renew their subscriptions to our solutions, renew on less favorable terms, or do not purchase additional solutions or subscriptions, our revenues may grow more slowly than expected or decline and our results of operations may be harmed.If we are unable to continue to attract new customers and grow our customer base, our growth could be slower than we expect and our business may be harmed.We believe that our future growth depends in part upon increasing our customer base. Our ability to achieve significant growth in revenues in the future will depend, in large part, upon continually attracting new customers and obtaining subscription renewals to our solutions from those customers. If we fail to attract new customers our revenues may grow more slowly than expected and our business may be harmed.44 concerns regarding the effects of the "Brexit" decision, uncertainties related to changes in public policies such as domestic and international regulations, taxes or international trade agreements, as well as geopolitical turmoil and other disruptions to global and regional economies and markets in many parts of the world, have and may continue to put pressure on global economic conditions and overall spending on IT security. We have operations, as well as current and potential customers, throughout most of Europe. If economic conditions in Europe and other key markets for our platform continue to remain uncertain or deteriorate further, many customers may delay or reduce their IT spending.sixeight 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.time frametime-frame and we may incur unplanned expenses.If we are unable to increase market awareness of our company and our new solutions, our revenues may not continue to grow, or may decline.We have a limited operating history, particularly in certain markets and solution offerings, and we believe that we need to continue to develop market awareness in the IT, security and compliance market. Market awareness of our capabilities and solutions is essential to our continued growth and success in all of our markets, particularly for4536the large enterprise, service provider and government markets. If our marketing programs are not successful in creating market awareness of our company and our full suite of solutions, our business, financial condition and results of operations may be adversely affected, and we may not be able to achieve our expected growth.Forescout Technologies, International Business Machines, McAfee, Micro Focus International, Rapid7, Palo Alto Networks, Rapid7, SentinelOne, Sumo Logic, Tenable Holdings and VMware, as well as privately held security providers including Barracuda Networks, BeyondTrust Software, Flexera, Forescout Technologies, Imperva, McAfee, Tanium, Trustwave Holdings, Venafi and Veracode. We also seek to replace IT, security and compliance solutions that organizations have developed internally. As we continue to extend our cloud platform’s functionality by further developing IT, security and compliance solutions, such as web application scanning and firewalls, we expect to face additional competition in these new markets. Our competitors may also attempt to further expand their presence in the IT, security and compliance market and compete more directly against one or more of our solutions.•greater brand name recognition;•larger sales and marketing budgets and resources;•broader distribution networks and more established relationships with distributors and customers;•access to larger customer bases;•greater customer support resources;•greater resources to make acquisitions;•greater resources to develop and introduce products that compete with our solutions;•greater resources to meet relevant regulatory requirements; and•substantially greater financial, technical and other resources.greater brand name recognition; larger sales and marketing budgets and resources; broader distribution networks and more established relationships with distributors and customers; access to larger customer bases; greater customer support resources; greater resources to make acquisitions; greater resources to develop and introduce products that compete with our solutions; greater resources to meet relevant regulatory requirements; and substantially greater financial, technical and other resources. 46We may not maintain profitability in the future.We may not be able to sustain or increase our growth or maintain profitability in the future. We plan to continue to invest in our infrastructure, new solutions, research and development and sales and marketing, and as a result, we cannot assure you that we will maintain profitability. We may incur losses in the future for a number of reasons, including without limitation, the other risks and uncertainties described in this Quarterly Report on Form 10-Q. Additionally, we may encounter unforeseen operating expenses, difficulties, complications, delays and other unknown factors that may result in losses in future periods. If our revenue growth does not meet our expectations in future periods, our financial performance may be harmed and we may not again achieve or maintain profitability in the future.The sales prices of our solutions are subject to competitive pressures and may decrease, which may reduce our gross profits and adversely impact our financial results.The sales prices for our solutions may decline for a variety of reasons, including competitive pricing pressures, discounts, a change in our mix of solutions and subscriptions, anticipation of the introduction of new solutions or subscriptions, or promotional programs. Competition continues to increase in the market segments in which we participate, and we expect competition to further increase in the future, thereby leading to increased pricing pressures. Larger competitors with more diverse product and service offerings may reduce the price of products or subscriptions that compete with ours or may bundle them with other products and subscriptions. Additionally, although we price our products and subscriptions worldwide in U.S. Dollars, Euros, GBP, Canadian Dollars, Japanese Yen and INR, currency fluctuations in certain countries and regions may negatively impact actual prices that partners and customers are willing to pay in those countries and regions, or the effective prices we realize in our reporting currency. We cannot assure you that we will be successful in developing and introducing new offerings with enhanced functionality on a timely basis, or that our new product and subscription offerings, if introduced, will enable us to maintain our prices and gross profits at levels that will allow us to maintain positive gross margins and profitability.47, or indicates our solutions do not provide significant value, our business, competitive position, and reputation could be harmed.foreign currency exchange fluctuations; trade and foreign exchange restrictions; economic or political instability in foreign markets, including as a result of increasing tensions between India and China; greater difficulty in enforcing contracts, accounts receivable collection and longer collection periods; changes in regulatory requirements; tax laws (including U.S. taxes on foreign subsidiaries); difficulties and costs of staffing and managing foreign operations; the uncertainty and limitation of protection for intellectual property rights in some countries; costs of compliance with foreign laws and regulations and the risks and costs of non-compliance with such laws and regulations; costs of complying with U.S. laws and regulations for foreign operations, including the Foreign Corrupt Practices Act, import and export control laws, tariffs, trade barriers, economic sanctions and other regulatory or contractual limitations on our ability to sell our solutions in certain foreign markets, and the risks and costs of non-compliance; heightened risks of unfair or corrupt business practices in certain geographies and of improper or fraudulent sales arrangements that may impact financial results and result in restatements of, and irregularities in, financial statements; the potential for political unrest, acts of terrorism, hostilities or war; management communication and integration problems resulting from cultural differences and geographic dispersion; and multiple and possibly overlapping tax structures. 74% of our employees were located outside of the United States, of which 64% of our employees were located in Pune, India. Accordingly, we are exposed to changes in laws governing our employee relationships in various U.S. and foreign jurisdictions, including laws and regulations regarding wage and hour requirements, fair labor standards, employee data privacy, unemployment tax rates, workers’ compensation rates, citizenship requirements and payroll and other taxes which may have a direct impact on our operating costs. We may continue to expand our international operations and international sales and marketing activities. Expansion in international markets has required, and will continue to require, significant management attention and resources. We may be unable to scale our infrastructure effectively or as quickly as our competitors in these markets and our revenues may not increase to offset any increased costs and operating expenses, which would cause our results to suffer.48customers’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.(CPRA)(“CPRA”), recently was certifiedapproved by the California Secretary of State to appear on the ballot forvoters in the November 3, 2020 election. If this initiative is approved by California voters,The CPRA modifies the CCPA significantly, creating obligations relating to consumer data beginning on January 1, 2022, with implementing regulations expected on or before July 1, 2022, and enforcement beginning July 1, 2023. Passage of the CPRA would significantly modify the CCPA, potentially resultinghas resulted in further uncertainty and requiringmay require us to incur additional costs and expenses.expenses in an effort to comply. In addition, other states have enacted or proposed legislation that regulates the collection, use, and sale of personal information, and such regimes might not be compatible with either the GDPR, the CCPA or the CCPA,CPRA or may require us to undertake additional practices. WeAccordingly, we cannot yet predict the impact of the CCPA, CRPA or impending legislationother evolving privacy and data protection obligations on our business or operations, but it may require us to modify our data processing practices and policies and incur substantial costs and expenses in an effort to comply.49usus. We may be unsuccessful in maintaining legitimate means for our transfer and receipt of personal data from the EEA or Switzerland. We may experience reluctance or refusal by current or prospective European customers to use our products, and we and our customers may face a risk of enforcement actions by data protection authorities in the EEA relating to personal data transfers to us and by us from the EEA. Any such enforcement actions could result in substantial costs and diversion of resources, distract management and technical personnel and negatively affect our business, operating results and financial condition. Some countries also are considering or have passed legislation requiring local storage and processing of data, or similar requirements, which could increase the cost and complexity of delivering our services.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 believe that our growth will depend, to a significant extent, on our success in recruiting and retaining a sufficient number of qualified sales personnel and their ability to obtain new customers, manage our existing customer base and expand the sales of our newer solutions. We plan to continue to expand our sales force and make a significant investment in our sales and marketing activities. Our recent hires and planned hires may not become as productive as quickly as we would like, and we may be unable to hire or retain sufficient numbers of qualified individuals in the future in the competitive markets where we do business. Competition for highly skilled personnel is frequently intense and we may not be able to compete for these employees. If we are unable to recruit and retain a sufficient number of productive sales personnel, sales of our solutions and the growth of our business may be harmed. Additionally, if our efforts do not result in increased revenues, our operating results could be negatively impacted due to the upfront operating expenses associated with expanding our sales force.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.We market and sell subscriptions to our solutions throughout the world and have personnel in many parts of the world. In addition, we have sales offices and research and development facilities outside the United States and we conduct, and expect to continue to conduct, a significant amount of our business with organizations that are located outside the United States, particularly in Europe and Asia. Therefore, we are subject to risks associated with having international sales and worldwide operations, including:•foreign currency exchange fluctuations;•trade and foreign exchange restrictions;•economic or political instability in foreign markets, including as a result of increasing tensions between India and China;50•greater difficulty in enforcing contracts, accounts receivable collection and longer collection periods;•changes in regulatory requirements;•tax laws (including U.S. taxes on foreign subsidiaries);•difficulties and costs of staffing and managing foreign operations;•the uncertainty and limitation of protection for intellectual property rights in some countries;•costs of compliance with foreign laws and regulations and the risks and costs of non-compliance with such laws and regulations;•costs of complying with U.S. laws and regulations for foreign operations, including the Foreign Corrupt Practices Act, import and export control laws, tariffs, trade barriers, economic sanctions and other regulatory or contractual limitations on our ability to sell our solutions in certain foreign markets, and the risks and costs of non-compliance;•heightened risks of unfair or corrupt business practices in certain geographies and of improper or fraudulent sales arrangements that may impact financial results and result in restatements of, and irregularities in, financial statements;•the potential for political unrest, acts of terrorism, hostilities or war;•management communication and integration problems resulting from cultural differences and geographic dispersion; and•multiple and possibly overlapping tax structures.Our business, including the sales of subscriptions of our solutions, may be subject to foreign governmental regulations, which vary substantially from country to country and change from time to time. Failure to comply with these regulations could adversely affect our business. Further, in many foreign countries it is common for others to engage in business practices that are prohibited by our internal policies and procedures or U.S. regulations applicable to us. Although we have implemented policies and procedures designed to ensure compliance with these laws and policies, there can be no assurance that all of our employees, contractors, channel partners and agents have complied or will comply with these laws and policies. Violations of laws or key control policies by our employees, contractors, channel partners or agents could result in delays in revenue recognition, financial reporting misstatements, fines, penalties or the prohibition of the importation or exportation of our solutions and could have a material adverse effect on our business and results of operations. If we are unable to successfully manage the challenges of international operations, our business and operating results could be adversely affected.In addition, as of June 30, 2020, approximately 71% of our employees were located outside of the United States, and 62% of our employees were located in Pune, India. Accordingly, we are exposed to changes in laws governing our employee relationships in various U.S. and foreign jurisdictions, including laws and regulations regarding wage and hour requirements, fair labor standards, employee data privacy, unemployment tax rates, workers’ compensation rates, citizenship requirements and payroll and other taxes which may have a direct impact on our operating costs. We may continue to expand our international operations and international sales and marketing activities. Expansion in international markets has required, and will continue to require, significant management attention and resources. We may be unable to scale our infrastructure effectively or as quickly as our competitors in these markets and our revenues may not increase to offset any increased costs and operating expenses, which would cause our results to suffer.Disruptive technologies could gain wide adoption and supplant our cloud-based IT, security and compliance solutions, thereby weakening our sales and harming our results of operations.The introduction of products and services embodying new technologies could render our existing solutions obsolete or less attractive to customers. Our business could be harmed if new IT, security and compliance technologies are widely adopted. We may not be able to successfully anticipate or adapt to changing technology or customer requirements on a timely basis, or at all. If we fail to keep up with technological changes or to convince our customers and potential customers of the value of our solutions even in light of new technologies, our business could be harmed and our revenues may decline.51Our 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.We have experienced significant growth over the last several years. From 2017 to 2019, our revenues grew from $230.8 million to $321.6 million and our headcount increased from 684 employees at the beginning of 2017 to 1,386 employees as of June 30, 2020. We rely on information technology systems to help manage critical functions such as order processing, revenue recognition and financial forecasts. To manage any future growth effectively we must continue to improve and expand our IT systems, financial infrastructure, and operating and administrative systems and controls, and continue to manage headcount, capital and processes in an efficient manner. We may not be able to successfully implement improvements to these systems and processes in a timely or efficient manner.Our failure to improve our systems and processes, or their failure to operate in the intended manner, may result in our inability to manage the growth of our business and to accurately forecast our revenues, expenses and earnings, or to prevent certain losses. In addition, as we continue to grow, our productivity and the quality of our solutions may also be adversely affected if we do not integrate and train our new employees quickly and effectively. Any future growth would add complexity to our organization and require effective coordination across our organization. Failure to manage any future growth effectively could result in increased costs, harm our results of operations and lead to investors losing confidence in our internal systems and processes.Forecasts of market growth may prove to be inaccurate, and even if the markets in which we compete achieve the forecasted growth, there can be no assurance that our business will grow at similar rates, or at all.Growth forecasts relating to the expected growth in the market for IT, security and compliance and other markets are subject to significant uncertainty and are based on assumptions and estimates which may prove to be inaccurate. Even if these markets experience the forecasted growth, we may not grow our business at similar rates, or at all. Our growth is subject to many factors, including our success in implementing our business strategy, which is subject to many risks and uncertainties. Accordingly, forecasts of market growth should not be taken as indicative of our future growth.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.Our success significantly depends upon establishing and maintaining relationships with a variety of channel partners, and we anticipate that we will continue to depend on these partners in order to grow our business. For the six months ended June 30, 2020, we derived approximately 42% of our revenues from sales of subscriptions for our solutions through channel partners, and the percentage of revenues derived from channel partners may increase in future periods. Our agreements with our channel partners are generally non-exclusive and do not prohibit them from working with our competitors or offering competing solutions, and many of our channel partners have more established relationships with our competitors. If our channel partners choose to place greater emphasis on products of their own or those offered by our competitors, do not effectively market and sell our solutions, or fail to meet the needs of our customers, then our ability to grow our business and sell our solutions may be adversely affected. In addition, the loss of one or more of our larger channel partners, who may cease marketing our solutions with limited or no notice, and our possible inability to replace them, could adversely affect our sales. Moreover, our ability to expand our distribution channels depends in part on our ability to educate our channel partners about our solutions, which can be complex. Our failure to recruit additional channel partners, or any reduction or delay in their sales of our solutions or conflicts between channel sales and our direct sales and marketing activities may harm our results of operations. Even if we are successful, these relationships may not result in greater customer usage of our solutions or increased revenues.In addition, the financial health of our channel partners and our continuing relationships with them are important to our success. Some of these channel partners may be unable to withstand adverse changes in economic conditions, which could result in insolvency and/or the inability of such distributors to obtain credit to finance purchases of our products and services. In addition, weakness in the end-user market could negatively affect the cash flows of our channel partners who could, in turn, delay paying their obligations to us, which would52increase our credit risk exposure. Our business could be harmed if the financial condition of some of these channel partners substantially weakened and we were unable to timely secure replacement channel partners.licenses licenses from third parties to continue offering our solutions, to make our proprietary code generally available in source code form, to re-engineer our solutions or to discontinue the sale of our solutions if re-engineering could not be accomplished on a timely basis, any of which could adversely affect our business, operating results and financial condition.We rely on software-as-a-service vendors to operate certain functions of our business and any failure of such vendors to provide services to us could adversely impact our business and operations.We rely on third-party software-as-a-service vendors to operate certain critical functions of our business, including financial management and human resource management. If these services become unavailable due to extended outages or interruptions or because they are no longer available on commercially reasonable terms or prices, our expenses could increase, our ability to manage our finances could be interrupted and our processes for managing sales of our solutions and supporting our customers could be impaired until equivalent services, if available, are identified, obtained and integrated, all of which could harm our business.53Delays or interruptions in the manufacturing and deliveryUpon customer request, we provide physical or virtual scanner appliances on a subscription basis as an additional capability to the customer’s subscription for use during their subscription term. Our physical scanner appliances are built by a single manufacturer. Our reliance on a sole manufacturer involves several risks, including a potential inability to obtain an adequate supply of physical scanner appliances and limited control over pricing, quality and timely deployment of such scanner appliances. In addition, replacing this manufacturer may be difficult and could result in an inability or delay in deploying our solutions to customers that request physical scanner appliances as part of their subscriptions.Furthermore, our manufacturer’s ability to timely manufacture and ship our physical scanner appliances depends on a variety of factors, such as the availability of hardware components, supply shortages or contractual restrictions. In the event of an interruption from this manufacturer, we may not be able to develop alternate or secondary sources in a timely manner. If we are unable to purchase physical scanner appliances in quantities sufficient to meet our requirements on a timely basis, we may not be able to effectively deploy our solutions to new customers that request physical scanner appliances, which could harm our business.We are exposed to fluctuations in currency exchange rates, which could negatively affect our financial condition and results of operations.Our reporting currency is the U.S. dollar and we generate a majority of our revenues in U.S. dollars. However, for the six months ended June 30, 2020, we incurred approximately 26% of our expenses in foreign currencies, primarily Euros, GBP, and INR, principally with respect to salaries and related personnel expenses associated with our European and Indian operations. Additionally, for the six months ended June 30, 2020, approximately 20% of our revenues were generated in foreign currencies. Accordingly, changes in exchange rates may have a material adverse effect on our business, operating results and financial condition. The exchange rate between the U.S. dollar and foreign currencies has fluctuated substantially in recent years and may continue to fluctuate substantially in the future. We expect that a majority of our revenues will continue to be generated in U.S. dollars for the foreseeable future and that a significant portion of our expenses, including personnel costs, as well as capital and operating expenditures, will continue to be denominated in the Euro, GBP and INR. The results of our operations may be adversely affected by foreign exchange fluctuations.We use derivative financial instruments to reduce our foreign currency exchange risks. We use 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), as well as to manage foreign currency fluctuation risk related to forecasted transactions (designated). However, we may not be able to purchase derivative instruments that are adequate to insulate ourselves from foreign currency exchange risks. Additionally, our hedging activities may contribute to increased losses as a result of volatility in foreign currency markets.54As of June 30, 2020, we had 20 issued patents and several pending U.S. patent applications, and we may file additional patent applications in the future. Additionally, we have an exclusive license to four third-party patents. •pay substantial damages, including treble damages, if we are found to have willfully infringed a third party’s patents or copyrights;•cease making, licensing or using solutions that are alleged to infringe or misappropriate the intellectual property of others;•expend additional development resources to attempt to redesign our solutions or otherwise develop non-infringing technology, which may not be successful;55•enter into potentially unfavorable royalty or license agreements in order to obtain the right to use necessary technologies or intellectual property rights; and•indemnify our partners and other third parties.If we are required to collect sales and use or other taxes on the solutions we sell, we may be subject to liability for past sales and our future sales may decrease.Taxing jurisdictions, including state and local entities, have differing rules and regulations governing sales and use or other taxes, and these rules and regulations are subject to varying interpretations that may change over time. In particular, the applicability of sales taxes to our subscription services in various jurisdictions is unclear. It is possible that we could face sales tax audits and that our liability for these taxes could exceed our estimates as tax authorities could still assert that we are obligated to collect additional amounts as taxes from our customers and remit those taxes to those authorities. We could also be subject to audits with respect to state and international jurisdictions for which we may not have accrued tax liabilities. A successful assertion that we should be collecting additional sales or other taxes on our services in jurisdictions where we have not historically done so and do not accrue for sales taxes could result in substantial tax liabilities for past sales, discourage customers from purchasing our solutions or otherwise harm our business and operating results.We depend on the continued services and performance of our senior management and other key employees, the loss of any of whom could adversely affect our business, operating results and financial condition.Our future performance depends on the continued services and continuing contributions of our senior management, particularly Philippe F. Courtot, our Chairman and Chief Executive Officer, and other key employees, to execute on our business plan and to identify and pursue new opportunities and product innovations. We do not maintain key-man insurance for Mr. Courtot or for any other member of our senior management team. From time to time, there may be changes in our senior management team resulting from the termination or departure of executives. Our senior management and key employees are generally employed on an at-will basis, which means that they could terminate their employment with us at any time. The loss of the services of our senior management, particularly Mr. Courtot, or other key employees for any reason could significantly delay or prevent the achievement of our development and strategic objectives and harm our business, financial condition and results of operations.If we are unable to hire, retain and motivate qualified personnel, our business may suffer.Our future success depends, in part, on our ability to continue to attract and retain highly skilled personnel. The loss of the services of any of our key personnel, the inability to attract or retain qualified personnel or delays in hiring required personnel, particularly in engineering and sales, may seriously harm our business, financial condition and results of operations. Any of our employees may terminate their employment at any time. Competition for highly skilled personnel is frequently intense, especially in the San Francisco Bay Area and Pune, India, locations in which we have a substantial presence and need for highly skilled personnel and we may not be able to compete for these employees.We are required under U.S. GAAP to recognize compensation expense in our operating results for employee stock-based compensation under our equity grant programs, which may negatively impact our operating results and may increase the pressure to limit stock-based compensation that we might otherwise offer to current or potential employees, thereby potentially harming our ability to attract or retain highly skilled personnel. In addition, to the extent we hire personnel from competitors, we may be subject to allegations that they have been improperly solicited or divulged proprietary or other confidential information, which could result in a diversion of management’s time and our resources.5644Changes in laws or regulations related to the Internet may diminish the demand for our solutions and could have a negative impact on our business.We deliver our solutions through the Internet. Federal, state or foreign government bodies or agencies have in the past adopted, and may in the future adopt, laws or regulations affecting data privacy and the use of the Internet. In addition, government agencies or private organizations may begin to impose taxes, fees or other charges for accessing the Internet or on commerce conducted via the Internet. These laws or charges could limit the viability of Internet-based solutions such as ours and reduce the demand for our solutions.A portion of our revenues are generated by sales to government entities, which are subject to a number of challenges and risks.Government entities have historically been particularly concerned about adopting cloud-based solutions for their operations, including security solutions, and increasing sales of subscriptions for our solutions to government entities may be more challenging than selling to commercial organizations. Selling to government entities can be highly competitive, expensive and time-consuming, often requiring significant upfront time and expense without any assurance that we will win a sale. We have invested in the creation of a cloud offering certified under the Federal Information Security Management Act for government usage but we cannot be sure that we will continue to sustain or renew this certification, that the government will continue to mandate such certification or that other government agencies or entities will use this cloud offering. Government demand and payment for our solutions may be impacted by public sector budgetary cycles and funding authorizations, with funding reductions or delays adversely affecting public sector demand for our solutions. Government entities may have contractual or other legal rights to terminate contracts with our channel partners for convenience or due to a default, and any such termination may adversely impact our future results of operations. Governments routinely investigate and audit government contractors’ administrative processes, and any unfavorable audit could result in the government refusing to continue buying our solutions, a reduction of revenues or fines or civil or criminal liability if the audit uncovers improper or illegal activities. Any such penalties could adversely impact our results of operations in a material way.Our success in acquiringintegrating other businesses, products or technologies could impact our financial position.In order to remain competitive, we have in the past and may in the future seek to acquire additional businesses, products, services or technologies. For example, we acquired 1Mobility on April 1, 2018, Layered Insight on October 16, 2018, Adya on January 10, 2019, and certain intellectual property of Spell Security on July 24, 2020. The environment for acquisitions in our industry is very competitive and acquisition candidate purchase57prices may exceed what we would prefer to pay. Moreover, achieving the anticipated benefits of future acquisitions will depend in part upon whether we can integrate acquired operations, products and technology in a timely and cost-effective manner, and even if we achieve benefits from acquisitions, such acquisitions may still be viewed negatively by customers, financial markets or investors. The acquisition and integration process is complex, expensive and time-consuming, and may cause an interruption of, or loss of momentum in, product development and sales activities and operations of both companies, as well as divert the attention of management, and we may incur substantial cost and expense. We may issue equity securities which could dilute current stockholders’ ownership, incur debt, assume contingentuse or other liabilities and expend cash in acquisitions, which could negatively impact our financial position, stockholder equity and stock price. We may not find suitable acquisition candidates, and acquisitionstaxes on the solutions we complete may be unsuccessful. If we consummate a transaction,sell, we may be unablesubject to integrateliability for past sales and manage acquired productsour future sales may decrease.businesses effectivelylocal entities, have differing rules and regulations governing sales and use or retain key personnel. If we are unable to effectively execute acquisitions, our business, financial conditionother taxes, and operating results could be adversely affected.Our financial results are based in part on our estimates or judgments relating to our critical accounting policies. These estimates or judgments may prove to be incorrect, which could harm our operating resultsthese rules and result in a decline in our stock price.The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, as provided in the section titled “Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the results of which form the basis for making judgments about the carrying values of assets, liabilities, equity, revenues and expenses that are not readily apparent from other sources. Our operating results may be adversely affected if our assumptions change or if actual circumstances differ from those in our assumptions, which could cause our operating results to fall below the expectations of securities analysts and investors, resulting in a decline in our stock price. Significant assumptions and estimates used in preparing our condensed consolidated financial statements include those related to revenue recognition, accounting for income taxes, stock-based compensation, and fair value measurement.Changes in financial accounting standards may cause adverse and unexpected revenue fluctuations and impact our reported results of operations.We prepare our financial statements in accordance with U.S. GAAP. These principlesregulations are subject to interpretation byvarying interpretations that may change over time. In particular, the SECapplicability of sales taxes to our subscription services in various jurisdictions is unclear. It is possible that we could face sales tax audits and various bodies formedthat our liability for these taxes could exceed our estimates as tax authorities could still assert that we are obligated to interpretcollect additional amounts as taxes from our customers and create appropriate accounting principles.remit those taxes to those authorities. We could also be subject to audits with respect to state and international jurisdictions for which we may not accrued tax liabilities. A changesuccessful assertion that we should be collecting additional sales or other taxes on our services in these accounting standardsjurisdictions where we have not historically done so and do not accrue for sales taxes could result in substantial tax liabilities for past sales, discourage customers from purchasing our solutions or practices couldotherwise harm our operating resultsbusiness and could have a significant effect on our reporting of transactions and reported results and may even retroactively affect previously reported transactions. New accounting pronouncements and varying interpretations of accounting pronouncements have occurred and may occur in the future. Changes to existing rules or the questioning of current practices may harm our operating results or require that we make significant changes to our systems, processes and controls or the way we conduct our business.We recognize revenues from subscriptions over the term of the relevant service period, and therefore any decreases or increases in bookings are not immediately reflected in our operating results.We recognize revenues from subscriptions over the term of the relevant service period, which is typically one year. As a result, most of our reported revenues in each quarter are derived from the recognition of deferred revenues relating to subscriptions entered into during previous quarters. Consequently, a shortfall in demand for our solutions in any period may not significantly reduce our revenues for that period, but could negatively affect revenues in future periods. Accordingly, the effect of significant downturns in bookings may not be fully reflected in our results of operations until future periods. We may be unable to adjust our costs and expenses to compensate for such a potential shortfall in revenues. Our subscription model also makes it difficult for us to rapidly increase our revenues through additional bookings in any period, as revenues are recognized ratably over the subscription period.provision for income taxestax provision or adverse outcomes resulting from examination of our income tax returns could adversely affect our operating results. We could be subject to additional taxes.58$5.0$1.4 million and $2.1$0.1 million, respectively, as of December 31, 2019.2020. Increases in our effective tax rate could harm our operating results.Our business is subject to the risks of earthquakes, fire, power outages, floods and other catastrophic events, and to interruption by man-made problems such as terrorism.A significant natural disaster, such as an earthquake, fire or a flood, or a significant power outage could have a material adverse impact on our business, operating results and financial condition. Our corporate headquarters and a significant portion of our operations are located in the San Francisco Bay Area, a region known for seismic activity. In addition, natural disasters could affect our business partners’ ability to perform services for us on a timely basis. In the event we or our business partners are hindered by any of the events discussed above, our ability to provide our solutions to customers could be delayed, resulting in our missing financial targets, such as revenues and net income, for a particular quarter. Further, if a natural disaster occurs in a region from which we derive a significant portion of our revenues, customers in that region may delay or forego subscriptions of our solutions, which may materially and adversely impact our results of operations for a particular period. In addition, acts of terrorism could cause disruptions in our business or the business of our business partners, customers or the economy as a whole. All of the aforementioned risks may be exacerbated if the disaster recovery plans for us and our suppliers prove to be inadequate. To the extent that any of the above results in delays of customer subscriptions or commercialization of our solutions, our business, financial condition and results of operations could be adversely affected.If we fail to maintain an effective system of internal control over financial reporting, our ability to produce timely and accurate financial statements or comply with applicable regulations could be impaired.As a public company, we are subject to the reporting requirements of the Securities Exchange Act of 1934, or the Exchange Act, the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, and the rules and regulations of the NASDAQ Stock Market. To continue to comply with the requirements of being a public company, we may need to undertake various actions, such as implementing additional internal controls and procedures and hiring additional accounting or internal audit staff.Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with U.S. GAAP. Our current controls and any new controls that we develop may become inadequate because of changes in conditions in our business. Any failure to maintain effective controls, or any difficulties encountered in their improvement, could harm our operating results or cause us to fail to meet our reporting obligations. Any failure to maintain effective internal control over financial reporting also could adversely affect the results of periodic management evaluations regarding the effectiveness of our internal control over financial reporting that we are required to include in our periodic reports we file with the SEC under Section 404 of the Sarbanes-Oxley Act. While we were able to assert in our Annual Report on Form 10-K that our internal control over financial reporting was effective as of December 31, 2019, we cannot predict the outcome of our testing in future periods. If we are unable to assert in any future reporting period that our internal control over financial reporting is effective (or if our independent registered public5945accounting firm is unableexpress an opinion on the effectivenessOwnership of our internal controls), investors may lose confidence in our operating results and our stock price could decline. In addition, if we are unable to continue to meet these requirements, we may not be able to remain listed on the NASDAQOur Common Stock Market.•announcements of new solutions, services or technologies, commercial relationships, acquisitions or other events by us or our competitors;•fluctuations in stock market prices and trading volumes of securities of similar companies;•general market conditions and overall fluctuations in U.S. equity markets;•variations in our operating results, or the operating results of our competitors;•changes in our financial guidance or securities analysts’ estimates of our financial performance;•changes in accounting principles;•sales of large blocks of our common stock, including sales by our executive officers, directors and significant stockholders;•additions or departures of any of our key personnel;•announcements related to litigation;•changing legal or regulatory developments in the United States and other countries; and•discussion of us or our stock price by the financial press and in online investor communities.60 existing executive officers, directors and holders of 10% or more of2020,2021, our executiveexecutive officers, directors and holders of 10% or more of our outstanding common stock beneficially owned, in the aggregate, approximately 29%approximately 26.7% of our outstandingoutstanding common stock. As a result, such persons, acting together, have significant ability to control our management and affairs and substantially all matters submitted to our stockholders for approval, including the election and removal of directors and approval of any significant transaction. This concentration of ownership may have the effect of delaying, deferring or preventing a change in control, impeding a merger, consolidation, takeover or other business combination involving us, or discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of our business, even if such a transaction would benefit other stockholders.2020,2021, we had approximately 39.339.0 million shares of our common stock outstanding.2020,2021, there were approximately 0.90.7 million restricted stock units and options to purchase approximately 2.42.2 million shares of our common stock outstanding. If such options are exercised and restricted stock units are released, these additional shares will become available for sale. As of June 30, 2020,2021, we had an aggregate of 7.28.6 million shares of our common stock reserved for future issuance under our 2012 Equity Incentive Plan, which can be freely sold in the public market upon issuance. If a large number of these shares are sold in the public market, the sales could reduce the trading price of our common stock.InOn each of October 30, 2018, October 30, 2019, May 7, 2020 and May 2020,February 10, 2021, we announced that our authorization under this programboard of directors had increased byauthorized an increase of $100.0 million $100.0 million and $100.0 million, respectively.to the share repurchase program, resulting in an aggregate authorization of $500.0 million. Although our board of directors authorized this stock repurchase program, we are not obligated to repurchase any specific dollar amount or to acquire any specific number of shares. The stock repurchase program could affect the price of our common stock, increase volatility and diminish our cash reserves. In addition, it may be suspended or terminated at any time, which may result in a decrease in the price of our common stock. InDuring thethree and six months ended June 30, 2020,2021, we repurchased 242,500 and 588,7500.6 million shares of our common stock respectively, for an aggregate purchase price of approximately $25.3 million and $54.2 million, respectively.$63.2 million. As of June 30, 2020,2021, approximately $174.4$138.6 million remained available for share repurchases pursuant to our stockshare repurchase program.61•authorizing “blank check” preferred stock, which could be issued by our board of directors without stockholder approval and may contain voting, liquidation, dividend and other rights superior to our common stock, which would increase the number of outstanding shares and could thwart a takeover attempt;•a classified board of directors whose members can only be dismissed for cause;•the prohibition on actions by written consent of our stockholders;•the limitation on who may call a special meeting of stockholders;•the establishment of advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted upon at stockholder meetings; and•the requirement of at least two-thirds of the outstanding capital stock to amend any of the foregoing second through fifth provisions.6247Item 2.Equity Securities and Useour repurchases of Proceeds 105,000 $ 105.31 105,000 $ 159,714,379 101,000 $ 98.38 101,000 $ 149,780,015 110,000 $ 102.07 110,000 $ 138,550,268 316,000 316,000 and May 7, 2020 and February 10, 2021, we announced that our board of directors had authorized an increase of $100.0 million $100.0 million and $100.0 million, respectively, to the original share repurchase program, authorization, resulting in an aggregate authorization of $400.0 million.$500.0 million to date. Shares may be repurchased from time to time on the open market in accordance with Rule 10b-18 of the Exchange Act of 1934, including pursuant to a pre-set trading plan adopted in accordance with Rule 10b5-1 under the Exchange Act, until April 28, 2022.During the three months ended June 30, 2020,Act. On February 12, 2021, we repurchased 242,500shares of common stock for approximately $25.3 million.entered into a pre-set trading plan adopted in accordance with Rule 10b5-1 to effect repurchases under our share repurchase program. All share repurchases werehave been made using cash resources. As of June 30, 2020, approximately $174.4 million remained available for share repurchases pursuant to ourOur share repurchase program.A summary of our repurchases of common stock during the three months ended June 30, 2020 is as follows:Period Total Number of Shares Purchased Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Plan or Program Approximate Dollar Value of Shares that May Yet Be Purchased under the Plan or Program April 1 - April 30, 2020 116,000 $ 101.14 116,000 $ 187,873,920 May 1 - May 31, 2020 110,000 $ 107.63 110,000 $ 176,034,713 June 1 - June 30, 2020 16,500 $ 102.10 16,500 $ 174,350,069 Total 242,500 242,500 Item 3.Defaults upon Senior SecuritiesItem 4.Mine Safety DisclosuresItem 5.Other Information6349Item 6.ExhibitsExhibit NumberDescription10.1 10.132.1^32.2^^ Exhibits 32.1 and 32.2 are being furnished and shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to the liability of that section, nor shall such exhibits be deemed to be incorporated by reference in any registration statement or other document filed under the Securities Act of 1933, as amended, or the Exchange Act, except as otherwise specifically stated in such filing.645010, 2020.QUALYS, INC.By:/s/ PHILIPPE F. COURTOTName: Philippe F. CourtotTitle: Chairman and Chief Executive Officer(principal executive officer)By:/s/ JOO MI KIM Name: Joo Mi Kim Title: Chief Financial Officer (principal financial officer) 6551