What changed in this filing

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Item 1. Financial Statements

2020-11-04 compared with 2020-08-10 · 582 added, 284 removed, 453 unchanged (66% of the section changed)

2 unchanged sentences

(in thousands, except share and per share data)

June 30, 2020 December 31, 2019

September 30,

Current assets:

Cash and cash equivalents

$ 93,027  

$ 87,559  

Short-term marketable securities

Accounts receivable, net of allowance of $643 and $585 as of June 30, 2020 and December 31, 2019, respectively 75,938 78,034

225,734  

211,331  

Accounts receivable, net of allowance of $ 664 and $ 585 as of September 30, 2020 and December 31, 2019, respectively

64,291  

78,034  

Prepaid expenses and other current assets

22,480  

18,692  

Total current assets

405,532  

395,616  

Long-term marketable securities

133,260  

119,508  

Property and equipment, net

67,574  

60,579  

Operating leases - right of use asset

47,985  

40,551  

Deferred tax assets, net

13,581  

18,830  

Intangible assets, net

Goodwill 7,447 7,447

13,651  

16,795  

Restricted cash

Other noncurrent assets

Total assets $ 707,015 $ 675,608

Liabilities and Stockholders’ Equity

16,854  

15,082  

$ 707,084  

$ 675,608  

Liabilities and Stockholders’

Current liabilities:

Accounts payable

$ 2,223  

Accrued liabilities

24,772  

22,784  

Deferred revenues, current

200,283  

192,172  

Operating lease liabilities, current

11,777  

Total current liabilities

239,055  

223,467  

Deferred revenues, noncurrent

19,157  

20,935  

Operating lease liabilities, noncurrent

48,392  

44,015  

Other noncurrent liabilities

Total liabilities

306,785  

288,805  

Commitments and contingencies (Note 9)

Stockholders’ equity:

Stockholders’

Preferred stock, $ 0.001 par value;

20,000,000 shares authorized, no shares issued and outstanding at June 30, 2020 and December 31, 2019

20,000,000 shares authorized, no shares issued and outstanding at September 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

39,119,169 and 39,146,272 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively

Additional paid-in capital

388,814  

362,408  

Accumulated other comprehensive income

Retained earnings

Total stockholders’ equity 407,774 386,803

Total liabilities and stockholders’ equity $ 707,015 $ 675,608

10,371  

23,194  

Total stockholders’

400,299  

386,803  

Total liabilities and stockholders’

$ 707,084  

$ 675,608  

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

1 unchanged sentence

(in thousands, except per share data)

Three Months Ended Six Months Ended

June 30, June 30,

2020 2019 2020 2019

Revenues $ 88,830 $ 78,929 $ 175,093 $ 154,272

Three Months Ended

Nine Months Ended

September 30,

Cost of revenues

Gross profit 69,939 61,392 137,707 119,026

Operating expenses:

7 unchanged sentences

Interest income

Other income, net 194 231 59 8

Other income (expense), net

Total other income, net

1 unchanged sentence

Provision for income taxes

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

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

1 unchanged sentence

(in thousands)

Three Months Ended Six Months Ended

June 30, June 30,

2020 2019 2020 2019

Net income $ 26,319 $ 16,232 $ 45,013 $ 29,498

Three Months Ended

Nine Months Ended

September 30,

$ 22,743  

$ 19,174  

$ 67,756  

$ 48,672  

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

Changes in net unrealized gains (losses), net of tax effects of $ 183 and ($ 6 ) in the three months ended September 30, 2020 and 2019, respectively, and ($ 245 ) and ($ 257 ) in the nine months ended September 30, 2020 and 2019, respectively.

( 619 )  

Reclassification adjustments for net realized (gains) losses included in net income, net of tax effects of ($ 32 ) and $ 0 in the three months ended September 30, 2020 and 2019, respectively, and ($ 2 ) and ($ 6 ) in the nine months ended September 30, 2020 and 2019, respectively.

( 18 )  

Total changes in unrealized gains (losses) on marketable securities, net of tax

( 511 )  

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

Changes in net unrealized gains (losses), net of tax effects of $ 213 and ($ 313 ) in the three months ended September 30, 2020 and 2019, respectively, and $ 152 and ($ 404 ) in the nine months ended September 30, 2020 and 2019, respectively.

( 718 )  

( 510 )  

Reclassification adjustments for net realized (gains) losses included in net income, net of tax effects of $ 39 and $ 16 in the three months ended September 30, 2020 and 2019, respectively, and $ 121 and $ 0 in the nine months ended September 30, 2020 and 2019, respectively.

( 131 )  

( 63 )  

( 410 )  

Total changes in unrealized gains (losses) on cash flow hedges, net of tax

Other comprehensive income, net of tax 882 930 1,273 1,826

( 849 )  

( 920 )  

Other comprehensive income (loss), net of tax

( 1,360 )  

( 87 )  

Comprehensive income

$ 21,383  

$ 20,205  

$ 67,669  

$ 51,529  

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

1 unchanged sentence

(in thousands)

Six Months Ended

Nine Months Ended

September 30,

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

Loss on disposal of property and equipment — 183

Bad debt expense

Loss on disposal of property and equipment

Stock-based compensation

Accretion of discounts on marketable securities ( 21 ) ( 1,060 )

Amortization of premiums (accretion of discounts) on marketable securities

Deferred income taxes

5 unchanged sentences

Deferred revenues

Other noncurrent liabilities — 150

Net cash provided by operating activities

1 unchanged sentence

Purchases of marketable securities

( 162,912 ) ( 184,829 )

Sales and maturities of marketable securities

Purchases of property and equipment

Business combinations

Acquisition of businesses, net of cash acquired, and purchases of intangible assets

Purchase of privately-held investment

Net cash used in investing activities

4 unchanged sentences

Principal payments under finance lease obligations

( 61 ) ( 836 )

Net cash used in financing activities

3 unchanged sentences

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

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’

EQUITY  

(in thousands, except share data)

Common Stock Additional

Capital Accumulated Other

Comprehensive

Income Retained Earnings Total

Stockholders’

Shares Amount

Stockholders’

Balances at December 31, 2019

Net income — — — — 18,694 18,694

Other comprehensive income, net of tax

5 unchanged sentences

Balances at March 31, 2020

Net income — — — — 26,319 26,319

Other comprehensive income, net of tax

5 unchanged sentences

Balances at June 30, 2020

Common Stock Additional

Capital Accumulated

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 September 30, 2020

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’

EQUITY  

(in thousands, except share data)

Comprehensive

Income (Loss) Retained Earnings Total

Stockholders’

Shares Amount

Stockholders’

Balances at December 31, 2018

Net income — — — — 13,266 13,266

Other comprehensive income, net of tax

5 unchanged sentences

Balances at March 31, 2019

Net income — — — — 16,232 16,232

Other comprehensive income, net of tax

5 unchanged sentences

Balances at June 30, 2019

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 September 30, 2019

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

2 unchanged sentences

Description of Business

(the “Company”, "we", "us", "our") was incorporated in the state of Delaware on December 30, 1999.

The Company is headquartered in Foster City, California and has wholly-owned subsidiaries throughout the world.

The Company is a pioneer and leading provider of cloud-based information technology ("IT"), security and compliance solutions that enable organizations to identify security risks to their IT infrastructures, help protect their IT systems and applications from ever-evolving cyber-attacks and achieve compliance with internal policies and external regulations.

The Company’s cloud solutions address the growing security and compliance complexities and risks that are amplified by the dissolving boundaries between internal and external IT infrastructures and web environments, the rapid adoption of cloud computing and the proliferation of geographically dispersed IT assets.

Organizations can use the Company’s integrated suite of solutions delivered on its Qualys Cloud Platform to cost-effectively obtain a unified view of their security and compliance posture across globally distributed IT infrastructures.

Basis of Presentation

3 unchanged sentences

Certain information and disclosures normally included in the financial statements prepared in accordance with U.S.

GAAP have been condensed or omitted pursuant to such rules and regulations.

The condensed consolidated balance sheet as of December 31, 2019, included herein, was derived from the audited financial statements as of that date but does not include all disclosures, including notes required by U.S.

GAAP have been condensed or omitted pursuant to such rules and regulations. The condensed consolidated balance sheet as of December 31, 2019 , included herein, was derived from the audited financial statements as of that date but does not include all disclosures, including notes required by U.S.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, which include only normal recurring adjustments, necessary for the fair presentation of the financial position, results of operations and cash flows for the interim periods.

The results of operations for the three and six months ended June 30, 2020 are not necessarily indicative of the results of operations expected for the entire year ending December 31, 2020 or for any other future annual or interim periods.

These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, filed with the SEC on February 21, 2020.

The results of operations for the three and nine months ended September 30, 2020 are not necessarily indicative of the results of operations expected for the entire year ending December 

31, 2020 or for any other future annual or interim periods.

These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10 -K for the year ended December 31, 2019 , filed with the SEC on February 21, 2020.

Risks and Uncertainties

In March 2020, the World Health Organization declared the outbreak of a novel strain of coronavirus (“COVID-19”) as a pandemic.

In March 2020, the World Health Organization declared the outbreak of a novel strain of coronavirus (“COVID- 19”

) as a pandemic.

As a result of COVID- 19, the Company has modified certain aspects of its business, including restricting employee travel, requiring employees to work from home, and canceling certain events and meetings, among other modifications.

5 unchanged sentences

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, the valuation of accounts receivable, goodwill and intangible assets, capitalization of internally developed software, stock-based compensation and the provision for

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

income taxes.

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Derivative Financial Instruments

13 unchanged sentences

Non-Marketable Securities

During the fiscal year ended December 31, 2018 , the Company invested $ 2.5 million in preferred stock of a privately-held company.

The fair value of the investment is not readily available, and there are no quoted market prices for the investment.

During the fiscal year ended December 31, 2018 , the Company invested $ 2.5 million in preferred stock of a privately-held company. The fair value of the investment is not readily available, and there are no quoted market prices for the investment.

The investment is included in other noncurrent assets on the condensed consolidated balance sheets and measured at cost less impairment, adjusted for observable price changes.

The investment is assessed for impairment annually or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.

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.

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 September 30, 2020 and December 31, 2019 , no impairment was recorded for the investments.

Recently Adopted Accounting Pronouncements

In August 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40):

In August 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2018 - 15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350 - 40 ):

Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.

3 unchanged sentences

The adoption did not have a material impact on the Company's condensed consolidated financial statements.

In June 2016, the FASB issued ASU No.

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,

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Current Expected Credit Losses ("CECL").

2018 - 19, 2019 - 04 and 2019 - 05,  which introduces a new accounting model, Current Expected Credit Losses ("CECL").

CECL requires earlier recognition of credit losses, while also providing additional transparency about credit risk.

1 unchanged sentence

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 adjustme nt, if any, to the opening balance of retained earnings to be recognized on the date of adoption with prior periods not restated.

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.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Recently Issued Accounting Pronouncements Not Yet Adopted

In January 2020, the FASB issued ASU No.

2020-01, Investments—Equity Securities (Topic 321), Investments—Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) ("ASU 2020-01").

In January 2020, the FASB issued ASU No.

2020 - 01,  Investments—Equity Securities (Topic 321 ), Investments—Equity Method and Joint Ventures (Topic 323 ), and Derivatives and Hedging (Topic 815 ) ("ASU 2020 - 01" ).

This ASU clarifies the interaction of the accounting for equity securities under Topic 321, the accounting for equity method investments in Topic 323, and the accounting for certain forward contracts and purchased options in Topic 815.

2 unchanged sentences

In December 2019, the FASB issued ASU No.

2019-12, Simplifying the Accounting for Income Taxes ("ASU 2019-12"), which simplifies the accounting for income taxes, eliminates certain exceptions within ASC 740, Income Taxes, and clarifies certain aspects of the current guidance to promote consistency among reporting entities.

2019 - 12, Simplifying the Accounting for Income Taxes ("ASU 2019 - 12" ), which simplifies the accounting for income taxes, eliminates certain exceptions within ASC 740, Income Taxes, and clarifies certain aspects of the current guidance to promote consistency among reporting entities.

ASU 2019 - 12 is effective for the Company for fiscal years beginning after December 15, 2020.

3 unchanged sentences

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

For certain of the Company’s financial instruments, including certain cash equivalents, accounts receivable, accounts payable and other current liabilities, the carrying amounts approximate their fair values due to the relatively short maturity of these balances.

The Company measures and reports certain cash equivalents, marketable securities, derivative foreign currency forward contracts and commitments associated with prior business combinations at fair value in accordance with the provisions of the authoritative accounting guidance that addresses fair value measurements.

3 unchanged sentences

Level 2 -Valuations based on other than quoted prices in active markets for identical assets or liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3- Valuations based on inputs that are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The Company's Level 1 assets include a highly liquid money market funds, which are valued using unadjusted quoted prices that are available in an active market for an identical asset.

Level 3 - Valuations based on inputs that are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The Company's Level 1 assets include highly liquid money market funds, which are valued using unadjusted quoted prices that are available in an active market for an identical asset.

Level 2 assets include fixed-income U.S.

1 unchanged sentence

The securities, bonds and commercial paper are valued using prices from independent pricing services based on quoted prices in active markets for similar instruments or on industry models using data inputs such as interest rates and prices that can be directly observed or corroborated in active markets.

The foreign currency forward contracts are valued usi ng observable inputs, such as quotations on forward foreign exchange points and foreign interest rates.

The foreign currency forward contracts are valued using observable inputs, such as quotations on forward foreign exchange points and foreign interest rates.

During the fiscal 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.

As of September 30, 2020 and December 31, 2019 , management estimated that the fair value of the investments equaled their carrying value.

The Company's cash and cash equivalents, and marketable securities consist of the following:

June 30, 2020

Amortized Cost Unrealized Gains Unrealized (Losses) Fair Value

September 30, 2020

Amortized Cost

(in thousands)

Cash and cash equivalents:

Cash $ 106,272 $ — $ — $ 106,272

$ 33,566  

Money market funds

58,511  

Commercial paper

Total 113,909 — — 113,909

93,027  

Short-term marketable securities:

1 unchanged sentence

Corporate bonds

30,508  

30,756  

Asset-backed securities

government agencies

Total 233,066 861 ( 5 ) 233,922

188,525  

188,790  

225,196  

225,734  

Long-term marketable securities:

Asset-backed securities

40,367  

40,657  

government agencies

37,414  

37,785  

Foreign government agencies

Corporate bonds

Total 95,532 1,951 — 97,483

Total $ 442,507 $ 2,812 $ ( 5 ) $ 445,314

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

52,870  

53,784  

131,652  

133,260  

$ 449,875  

$ 2,156  

$ ( 10 )  

$ 452,021  

December 31, 2019

Amortized Cost Unrealized Gains Unrealized (Losses) Fair Value

Amortized Cost

(in thousands)

Cash and cash equivalents:

Cash $ 84,102 $ — $ — $ 84,102

$ 84,102  

Money market funds

Commercial paper

Total 87,559 — — 87,559

87,559  

Short-term marketable securities:

1 unchanged sentence

Corporate bonds

33,048  

33,098  

Asset-backed securities

government agencies

Total 211,089 246 ( 4 ) 211,331

173,364  

173,545  

211,089  

211,331  

Long-term marketable securities:

Asset-backed securities

40,001  

40,193  

government agencies

46,447  

46,817  

Corporate bonds

Total 118,684 825 ( 1 ) 119,508

Total $ 417,332 $ 1,071 $ ( 5 ) $ 418,398

32,236  

32,498  

118,684  

119,508  

$ 417,332  

$ 1,071  

$ ( 5 )  

$ 418,398  

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

There were no marketable securities that had been in a continuous unrealized loss position for 12 months or longer.

As of June 30, 2020, the Company had the ability and intent to hold all marketable securities that were in an unrealized loss position until maturity or recovery.

The Company considered the extent to which fair value was less than amortized cost basis and conditions related to security’s industry and geography and changes to the ratings, if any, and concluded the decline in fair value compared to carrying value was not related to credit loss.

As of September 30, 2020 , the Company had the ability and intent to hold all marketable securities that were in an unrealized loss position until maturity or recovery.

The 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, 2020

Level 1 Level 2 Fair Value

September 30, 2020

(in thousands)

Money market funds

$ 58,511  

Commercial paper

government agencies

226,575  

Foreign government agencies

Corporate bonds

84,540  

Asset-backed securities

Total $ 5,638 $ 333,404 $ 339,042

46,196  

$ 58,511  

$ 359,944  

$ 418,455  

December 31, 2019

Level 1 Level 2 Fair Value

(in thousands)

2 unchanged sentences

government agencies

220,362  

Corporate bonds

65,596  

Asset-backed securities

Total $ 58 $ 334,238 $ 334,296

42,642  

$ 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.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following summarizes the fair value of marketable securities by contractual or effective maturity as of June 30, 2020 and December 31, 2019:

June 30, 2020

The following summarizes the fair value of marketable securities by contractual maturity as of September 30, 2020 and December 31, 2019 :

September 30, 2020

Mature within

One Year Mature after One Year through Two Years Mature over Two Years Fair Value

Mature after One Year

through Two Years

(in thousands)

Commercial paper

$ 1,599  

government agencies

188,790  

37,600  

226,575  

Foreign government agencies

Corporate bonds

33,505  

20,279  

84,540  

Asset-backed securities

Total $ 235,921 $ 57,764 $ 39,719 $ 333,404

17,788  

22,869  

46,196  

$ 226,684  

$ 88,893  

$ 44,367  

$ 359,944  

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2019

Mature within

One Year Mature after One Year through Two Years Mature over Two Years Fair Value

Mature after One Year

through Two Years

(in thousands)

Commercial paper

$ 5,638  

government agencies

173,546  

46,816  

220,362  

Corporate bonds

33,098  

23,251  

65,596  

Asset-backed securities

Total $ 214,731 $ 85,617 $ 33,890 $ 334,238

15,550  

24,643  

42,642  

$ 214,731  

$ 85,617  

$ 33,890  

$ 334,238  

Derivative Financial Instruments

2 unchanged sentences

The Company uses forward currency contracts accounted for as cash flow hedges against a designated portion of forecasted subscription renewals and new orders.

U nrealized 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.

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").

Unrealized foreign exchange gains or losses related to those designated cash flow hedge contracts are recorded in AOCI and will be reclassified into operating expenses when the associated hedged expenses are incurred.

At June 30, 2020, the Company had 39 open designated cash flow hedge contracts with notional amounts of € 21.8 million, £ 9.2 million and Rs.

At September 30, 2020 , the Company had 39 open designated cash flow hedge contracts with notional amounts of €22.5  million, £8.8  

million and Rs.

1,745.0 million.

At December 31, 2019, the Company had 26 open designated cash flow hedge contracts with notional amounts of € 24.2 million and £ 9.7 million.

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:

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Three Months Ended June 30, Six Months Ended June 30,

At December 31, 2019 , the Company had 26 open designated cash flow hedge contracts with notional amounts of €24.2 million and £9.7 million.

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 operations for the three and nine months ended September 30, 2020 and 2019 :

Three Months Ended September 30,

Nine Months Ended September 30,

Derivative instruments designated as cash flow hedges:

2020 2019 2020 2019

Net unrealized (losses) gains recognized in AOCI:

(in thousands)

Net unrealized gains (losses) recognized in AOCI:

Foreign currency forward contracts (GBP, Euro and INR)

$ ( 931 )  

$ 1,385  

$ ( 662 )  

$ 1,827  

Net unrealized (gains) losses reclassified from AOCI into income:

Foreign currency forward contracts (GBP and Euro)

( 297 )  

( 79 )  

( 873 )  

Foreign currency forward contracts (INR)

Net change in AOCI before tax

As of June 30, 2020, the net amount of unrealized gains and losses on the foreign currency forward contracts for GBP and Euro reported in AOCI that is expected to be reclassified into revenue within the next 12 months is a gain of $ 0.9 million (before tax).

As of June 30, 2020, the net amount of unrealized gains and losses 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).

$ ( 1,101 )  

$ 1,306  

$ ( 1,193 )  

$ 1,817  

As of September 30, 2020 , the net amount of unrealized gains and losses on the foreign currency forward contracts for GBP and Euro reported in AOCI that is expected to be reclassified into revenue within the next 

12 months is a loss of $ 0.5  million (before tax).

As of September 30, 2020 , the net amount of unrealized gains and losses on the foreign currency forward contracts for INR reported in AOCI that is expected to be reclassified into operating expenses is a gain of $ 0.1  million (before tax).

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Non-designated forward contracts

At June 30, 2020, the Company had 15 outstanding non-designated forward contracts with notional amounts of € 12.5 million, £ 7.9 million and Rs.

351.7 million.

At December 31, 2019, the Company had 15 outstanding non-designated forward contracts with notional amounts of € 20.0 million, £ 5.6 million and Rs.

756.0 million.

The following summarizes derivative financial instruments as of June 30, 2020 and December 31, 2019:

June 30, December 31,

At September 30, 2020 , the Company had 18  outstanding non-designated forward contracts with notional amounts of 

€13.9  million, £8.0  million and Rs.173.6  million.

At December 31, 2019 , the Company had 15 outstanding non-designated forward contracts with notional amounts of €20.0 million, £5.6 million and Rs.756.0 million.

The following summarizes derivative financial instruments as of September 30, 2020 and December 31, 2019 :

September 30,

(in thousands)

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Foreign currency forward contracts not designated as hedging instruments

Total $ 862 $ 942

Foreign currency forward contracts designated as cash flow hedge

$ ( 1,227 )  

Foreign currency forward contracts not designated as hedging instruments

Total $ ( 1,111 ) $ ( 1,074 )

( 665 )  

$ ( 1,892 )  

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, net on the condensed consolidated statement of operations:

Three Months Ended June 30, Six Months Ended June 30,

2020 2019 2020 2019

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

Three Months Ended

Nine Months Ended

September 30,

(in thousands)

Net (losses) gains from non-designated forward contracts $ ( 224 ) $ 44 $ 580 $ 66

Net gains (losses) from non-designated forward contracts

$ ( 688 )  

$ ( 108 )  

Other foreign currency transactions gains (losses)

Total foreign exchange gains, net 251 293 184 132

( 906 )  

Total foreign exchange gains (losses), net

( 264 )  

Other expenses

Other income, net $ 194 $ 231 $ 59 $ 8

( 64 )  

( 189 )  

Other income (loss), net

$ ( 328 )  

Accumulated Other Comprehensive Income

The components and changes in accumulated other comprehensive income, net of taxes, for the six months ended June 30, 2020 and 2019 were as follows:

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Unrealized gains (losses) on AFS debt securities Unrealized gains (losses) on cash flow hedges Total

The components and changes in accumulated other comprehensive income, net of taxes, for the nine months ended September 30, 2020 and 2019 were as follows:

gains (losses)

(in thousands)

Balances as of December 31, 2019

Other comprehensive income before reclassification 1,444 208 1,652

Reclassification of gains from Other comprehensive income ( 100 ) ( 279 ) ( 379 )

$ 1,162  

Other comprehensive income (loss) before reclassification

( 510 )  

Reclassification of (gains) losses from other comprehensive income

( 410 )  

Total change in unrealized gains (losses), net of tax

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

( 920 )  

Balances as of September 30, 2020

$ 1,655  

$ ( 580 )  

$ 1,075  

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

gains (losses)

(in thousands)

Balances as of December 31, 2018

$ ( 545 )  

$ ( 41 )  

Other comprehensive income before reclassification

Reclassification of losses from Other comprehensive income 43 53 96

Reclassification of (gains) losses from other comprehensive income

( 10 )  

Total change in unrealized gains, net of tax

Balances as of June 30, 2019 $ 877 $ 363 $ 1,240

Balances as of September 30, 2019

$ 1,372  

$ 2,271  

Property and Equipment, Net

Property and equipment, net, which includes assets under finance lease, consists of the following:

June 30, December 31,

Property and equipment, net, which includes assets under finance leases, consists of the following:

September 30,

(in thousands)

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Property and equipment, net

Physical scanner appliances and other computer equipment had a net carrying value of $ 8.2 million and $ 4.9 million at June 30, 2020 and December 31, 2019, respectively, including assets that had not been placed in service of $ 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.

Physical scanner appliances and other computer equipment had a net carrying value of $ 7.4  million and $ 4.9 million at September 30, 2020 and December 31, 2019 , respectively, including assets that had not been placed in service of $ 3.7  million and $ 0.9  million, respectively.

Depreciation and amortization expense relating to property and equipment, including assets under finance leases, was $ 6.7  million and $ 6.2  million for the three months ended September 30, 2020 and 2019 , respectively, and $ 19.3  million and $ 18.9  million for the nine months ended September 30, 2020 and 2019 , respectively.

Revenue from Contracts with Customers

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The Company recognizes revenue related to professional services based on time and materials or completion of milestones stated in the contracts.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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.

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.

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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 are included in cost of revenues.

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.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Costs of shipping and handling charges associated with physical scanner appliances and other computer equipment are included in cost of revenues.

Sales taxes and other taxes collected from customers to be remitted to government authorities are excluded from revenues.

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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

September 30, 2020

December 31, 2019

(in thousands)

Commission asset, current

$ 3,213  

$ 2,568  

Commission asset, noncurrent

For the three months ended June 30, 2020 and 2019, the Company recognized $ 0.7 million and $ 0.5 million, respectively, of commission expense from amortization of its commission assets.

For the six months ended June 30, 2020 and 2019, the Company recognized $ 1.4 million and $ 0.9 million, respectively, of commission expense from amortization of its commission assets.

$ 6,783  

$ 6,454  

For the three months ended September 30, 2020 and 2019 , the Company recognized $ 0.8  million and $ 0.5 million, respectively, of commission expense from amortization of its commission assets.

For the nine months ended September 30, 2020 and 2019 , the Company recognized $ 2.2  million and $ 1.4  million, respectively, of commission expense from amortization of its commission assets.

During the same periods, there was no impairment loss related to capitalized costs.

The Company records deferred revenue when cash payments are received or due in advance of its performance offset by revenue recognized in the period.

Revenue of $ 55.9 million and $ 49.1 million was recognized during the three months ended June 30, 2020 and 2019, respectively, which amounts were included in the deferred revenue balances as of December 31, 2019 and 2018, respectively.

Revenue of $ 129.7 million and $ 113.3 million was recognized during the six months ended June 30, 2020 and 2019, respectively, which amounts were included in the deferred revenue balances as of December 31, 2019 and 2018, respectively.

Revenue of $ 38.3  million and $ 31.3  million was recognized during the three months ended September 30, 2020 and 2019 , respectively, which amounts were included in the deferred revenue balances as of December 31, 2019 and 2018 , respectively.

Revenue of $ 168.0  million and $ 144.6  million was recognized during the nine months ended September 30, 2020 and 2019 , respectively, which amounts were included in the deferred revenue balances as of December 31, 2019 and 2018 , respectively.

The Company's payment terms vary by the type and location of its customer and the products or services offered.

For certain products or services and customer types, the Company requires payment before the products or services are delivered to the customer.

The following table sets forth the expected revenue from all remaining performance obligations as of June 30, 2020:

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Total Expected Revenue

The following table sets forth the expected revenue from all remaining performance obligations as of September 30, 2020 :

Total Expected Revenue  

(in thousands)

2020 (remaining six months) $ 46,130

2020 (remaining three months)

$ 28,515  

82,348  

50,129  

18,779  

2025 and thereafter

Total $ 152,675

Remaining performance obligations represent the transaction price of noncancelable orders for which service has not been performed and excludes unexercised renewals.

$ 181,126  

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Revenues allocated to remaining performance obligations represents contracted revenues that have not yet been recognized, 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 performed 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.

2 unchanged sentences

Revenues by sales channel are as follows:

Three Months Ended Six Months Ended

June 30, June 30,

2020 2019 2020 2019

Three Months Ended

Nine Months Ended

September 30,

(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

$ 54,821  

$ 47,997  

$ 156,631  

$ 136,708  

38,248  

34,674  

111,531  

100,235  

$ 93,069  

$ 82,671  

$ 268,162  

$ 236,943  

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 third-party solutions to help meet those customers’ evolving security and compliance requirements.

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.

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The acquisition included a cloud application management platform, which enables security and compliance audits of SaaS applications.

Total purchase consideration was $ 1.0 million, including $ 0.2 million of deferred consideration due eighteen months from the closing date of the acquisition, subject to potential adjustment from possible indemnity claims.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

forma financial information for this acquisition has not been presented because it is not material to the Company's condensed consolidated financial statements.

Total purchase consideration was $ 1.0 million, including $ 0.2 million of deferred consideration due 18  months from the closing date of the acquisition, subject to potential adjustment from possible indemnity claims.

During the three months ended September 30, 2020, 

the $ 0.2 million of deferred consideration was fully paid to Adya.

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.

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 15  months from the closing date of the acquisition, subject to potential adjustment from possible indemnity claims.

The Company accounted for this transaction as an asset purchase.

The Company recognized intangible assets of $ 1.0 million for developed technology and $ 0.5 million for non-compete agreements, which will be amortized over four and two years, respectively.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Intangible Assets, Net

2 unchanged sentences

The carrying values of intangible assets are as follows:

June 30, 2020

September 30, 2020

(in thousands, except for years)

Weighted Average Life (Years) Weighted Average Remaining Life (Years) Cost Accumulated Amortization Net Book Value

Developed technology

$ 27,356  

$ ( 14,593 )  

$ 12,763  

Patent licenses

( 997 )  

Non-compete agreements  

( 42 )  

Total intangibles subject to amortization

$ 27,743 $ ( 14,028 ) 13,715

$ 29,243  

$ ( 15,632 )  

13,611  

Intangible assets not subject to amortization

Total intangible assets, net

$ 13,651  

December 31, 2019

(in thousands, except for years)

Weighted Average Life (Years) Weighted Average Remaining Life (Years) Cost Accumulated Amortization Net Book Value

Developed technology

$ 26,356  

$ ( 10,066 )  

$ 16,290  

Patent licenses

( 922 )  

Total intangibles subject to amortization

$ 27,743 $ ( 10,988 ) 16,755

$ 27,743  

$ ( 10,988 )  

16,755  

Intangible assets not subject to amortization

Total intangible assets, net

Intangible asset amortization expense wa s $ 1.5 million for each of the three months ended June 30, 2020 and 2019, and $ 3.0 million for each of the six months ended June 30, 2020 and 2019.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

As of June 30, 2020 , the Company expects amortization expense in future periods to be as follows:

Amortization Expense

$ 16,795  

Intangible asset amortization expense was $ 1.6  million and $ 1.5 million for the three months ended September 30, 2020 and 2019 , respectively, and $ 4.6  million for each of the nine months ended September 30, 2020 and 2019 .

As of September 30, 2020 , the Company expects amortization expense in future periods to be as follows:

(in thousands)

2020 (remaining six months) $ 3,041

2020 (remaining three months)

$ 1,645  

Total expected future amortization expense

$ 13,611  

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

On 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.

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.

10 unchanged sentences

Therefore, the Company must estimate an incremental borrowing rate to discount the lease payments based on information available at lease commencement.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

Operating lease assets Operating lease - right of use asset $ 42,930 $ 40,551

Finance lease assets Property and equipment, net 715 1,299

September 30,

(in thousands)

Classification on the Balance Sheet

Operating lease assets

Operating lease - right of use asset

$ 47,985  

$ 40,551  

Finance lease assets

Property and equipment, net

Total lease assets

Operating Operating lease liabilities, current $ 9,161 $ 7,663

Finance Accrued liabilities 117 124

Operating Operating lease liabilities, noncurrent 45,050 44,015

Finance Other noncurrent liabilities — 54

$ 48,408  

$ 41,850  

Operating lease liabilities, current

$ 11,777  

$ 7,663  

Accrued liabilities

Operating lease liabilities, noncurrent

48,392  

44,015  

Other noncurrent liabilities

Total lease liabilities

$ 60,255  

$ 51,856  

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The Company leases certain offices, computer equipment and its data center facilities under non-cancelable operating leases for varying periods through 2028.

Lease expense was $ 4.5 million and $ 3.4 million for the three months ended June 30, 2020 and 2019, respectively, and $ 8.9 million and $ 6.4 million for the six months ended June 30, 2020 and 2019, respectively.

Lease expense was $ 4.6  million and $ 3.3  million for the three months ended September 30, 2020 and 2019 , respectively, and $ 13.5  million and $ 9.6  million for the nine months ended September 30, 2020 and 2019 , respectively.

Supplemental cash flow information related to operating leases was as follows:

Six Months Ended

June 30, 2020 June 30, 2019

Nine Months Ended

September 30,  

(in thousands)

Cash paid for amounts included in the measurement of lease liabilities:

Cash payments included in the measurement of lease liabilities:

Operating cash flows from operating leases

$ 9,183  

$ 6,469  

Lease liabilities arising from obtaining right-of-use assets:

Operating leases

Operating and financing cash flows from finance leases were immaterial during the six months ended June 30, 2020.

$ 15,735  

$ 1,553  

Operating and financing cash flows from finance leases were immaterial during the nine months ended September 30, 2020 and 2019 .

The weighted average remaining lease term and the weighted average discount rate of the Company's leases were as follows:

June 30, 2020 June 30, 2019

September 30, 2020

September 30, 2019

Weighted average remaining lease term (years)

4 unchanged sentences

Finance leases

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Commitments and Contingencies

7 unchanged sentences

2012 Equity Incentive Plan

Under the 2012 Equity Incentive Plan (the "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 million shares of common stock as of June 30, 2020.

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 million shares were available for grant under the 2012 Plan.

As of September 30, 2020 , 7.2 million shares were available for grant under the 2012 Plan.

2000 Equity Incentive Plan

3 unchanged sentences

Stock-Based Compensation

The following table shows a summary of the stock-based compensation expense included in the condensed consolidated statements of 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

The following table shows a summary of the stock-based compensation expense included in the condensed consolidated statements of operations for the three and nine months ended September 30, 2020 and 2019 :

Three Months Ended

Nine Months Ended

September 30,

(in thousands)

Cost of revenues

$ 1,967  

$ 1,674  

Research and development

1 unchanged sentence

General and administrative

13,776  

12,024  

Total stock-based compensation

As of June 30, 2020 , the Company had $ 16.7 million of total unrecognized stock-based compensation cost related to unvested options which was expected to be recognized over a weighted-average period of 2.2 years, and $ 54.3 million of unrecognized stock-based compensation cost related to unvested RSUs which was expected to be recognized over a weighted-average period of 2.5 years.

$ 10,489  

$ 8,383  

$ 29,930  

$ 25,163  

As of September 30, 2020 , the Company h ad $ 16.6  million of total unrecognized stock-based compensation cost related to unvested options which was expected to be recognized over a weighted-average period of 2.2 years, and $ 54.1 million of unrecognized stock-based compensation cost related to unvested RSUs which was expected to be recognized over a weighted-average period of 2.4  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.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Stock Option Plan Activity

A 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

A summary of the Company’s stock option activity is as follows:

Exercise Price

Intrinsic Value

(in thousands)

Balance as of December 31, 2019

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

2,866,675  

$ 40.54  

$ 125,647  

269,950  

$ 107.01  

( 695,468 )  

$ 34.46  

( 84,486 )  

$ 86.08  

Balance as of September 30, 2020

2,356,671  

$ 48.32  

$ 120,055  

Vested and expected to vest - September 30, 2020

2,208,860  

$ 45.07  

$ 118,883  

Exercisable - September 30, 2020

1,666,292  

$ 30.49  

$ 112,502  

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Restricted Stock

A summary of the Company’s RSU activity is as follows:

Outstanding RSUs Weighted Average Grant Date Fair Value Per Share

A summary of the Company’s RSU activity is as follows:

Average Grant

Date Fair Value

Balance as of December 31, 2019

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

1,214,818  

$ 67.99  

214,380  

$ 106.72  

( 382,011 )  

$ 61.84  

( 194,576 )  

$ 75.60  

Balance as of September 30, 2020

852,611  

$ 81.33  

Outstanding and expected to vest - September 30, 2020

640,166  

$ 79.28  

Performance-Based Stock Options and Restricted Stock Units

On November 2, 2019, the Compensation Committee of the Company's board of directors granted the equity award for 2020, which consisted of time-based RSUs and performance-based non-statutory stock options ("NSOs"), to the Company’s Chairman and Chief Executive Officer, Philippe Courtot.

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 linked to metrics designed to drive the creation of shareholder value.

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The second portion of the award consists of 123,856 NSOs that will vest at the end of the performance period based on 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 through the date that performance is certified.

Courtot’s employment (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.

The Compensation Committee, in consultation with its

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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.

Courtot’s continued status as a service provider through the date that performance is certified for the relevant increment.

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 change in control terminations conditioned upon the effectiveness of a release of claims in favor of the Company (2018 performance-based RSUs).

During the six months ended June 30, 2020, 14,864 shares, which represent 135 % of the target number of 11,030 shares under the 2018 performance-based RSUs, vested as a result of the Company achieving the performance goals for fiscal 2019.

Courtot’s continued status as a service provider through the date that performance is certified.

On December 

21, 2018, the Compensation Committee granted the equity award for 2019, which consisted of time-based and performance-based RSUs, to Mr.

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 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 three 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 change in control terminations conditioned upon the effectiveness of a release of claims in favor of the Company ( 2018 performance-based RSUs).

During the nine months ended September 30, 2020 , 14,864 shares, which represent 135 % of the target number of 11,030 shares under the 2018 performance-based RSUs, vested as a result of the Company achieving the performance goals for fiscal 2019 .

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

On June 10, 2020, the board of directors approved changes in the performance targets for the 2019 and 2018 performance-based awards.

Based on the current projected performance levels expected to be achieved for those awards, the modification resulted in an incremental expense of $ 7.5 million, which is expected to be recognized over 12 quarters.

Based on the projected performance levels expected to be achieved for those awards as of June 10, 2020, the modification resulted in an incremental expense of $ 7.5  million, which is expected to be recognized over 12 quarters beginning with the quarter ended June 30, 2020.

This amount may change based upon actual performance achieved and updates to estimates of future performance during the remainder of the performance periods.

The modifications did not have a material impact on the 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.

During the three and 

nine months ended September 30, 2020 , $ 0.9 million and $ 1.1  million, respectively, of incremental expenses due to the modification were recognized.

During the three months ended September 30, 2020 and 2019 , stock-based compensation costs of $ 2.0  million, including changes due to modifications, and $ 0.2  million, respectively, were recognized for the performance-based NSOs and RSUs.

During the nine months ended September 30, 2020 and 2019 , stock-based compensation costs of $ 2.8 million, including changes due to modifications, and $ 0.7  million, respectively, were recognized for the performance-based NSOs and RSUs.

Share Repurchase Program

On February 5, 2018, the Company's board of directors authorized a $ 100.0 million two-year share repurchase program, which was announced on February 12, 2018.

On October 30, 2018, October 30, 2019 and May 7, 2020, 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 million.

On February 5, 2018, the Company's board of directors authorized a $ 100.0 million 

two -year share repurchase program, which was announced on February 12, 2018.

On October 30, 2018, October 30, 2019 and May 7, 2020, 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 million.

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 ("Rule 10b5 - 1" ), until April 28, 2022.

2 unchanged sentences

The excess amount that is retired over its par value is first allocated as a reduction to additional paid-in capital based on the initial public offering price of the stock, with the remaining excess to retained earnings.

During the six months ended June 30, 2020, the Company repurchased 588,750 shares of its common stock for approximately $ 54.2 million.

During the 

nine months ended September 30, 2020 , the Company repurchased 

940,750  shares of its common stock for approximately $ 91.9 million.

All share repurchases were made using cash resources.

As of June 30, 2020, approximately $ 174.4 million remained available for share repurchases pursuant to the Company's share repurchase program.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

As of September 30, 2020 , approximately $ 136.7 million remained available for share repurchases pursuant to the Company's share repurchase program.

Net income Per Share

The computations for basic and diluted net income per share are as follows:

Three Months Ended June 30, Six Months Ended June 30,

2020 2019 2020 2019

Three Months Ended

Nine Months Ended

September 30,

(in thousands, except per share data)

Net income $ 26,319 $ 16,232 $ 45,013 $ 29,498

$ 22,743  

$ 19,174  

$ 67,756  

$ 48,672  

Weighted-average shares used in computing net income per share:

Basic 39,161 39,198 39,137 39,143

39,238  

39,014  

39,171  

39,099  

Effect of potentially dilutive securities:

1 unchanged sentence

Restricted stock units

Diluted 40,919 41,530 40,928 41,570

40,764  

41,162  

40,907  

41,447  

Net income per share:

$ 0.67 $ 0.41 $ 1.15 $ 0.75

$ 0.64 $ 0.39 $ 1.10 $ 0.71

$ 0.58  

$ 0.49  

$ 1.73  

$ 1.24  

$ 0.56  

$ 0.47  

$ 1.66  

$ 1.17  

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Potentially dilutive securities not included in the calculation of diluted net income per share because doing so would be anti-dilutive are as follows:

Three Months Ended June 30, Six Months Ended June 30,

2020 2019 2020 2019

Three Months Ended

Nine Months Ended

September 30,

(in thousands)

1 unchanged sentence

Restricted stock units

454 473 603 443

The Company's provision for income taxes 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.

4 unchanged sentences

federal income tax credits and foreign-derived intangible income deduction.

The Company recorded an income tax provision of $ 0.8 million and $ 2.3 million for the three months ended June 30, 2020 and 2019, respectively, resulting in an effective tax rate of 2.9 % and 12.3 %, respectively.

The tax provision for the three months ended June 30, 2020 as compared to the tax provision for the three months ended June 30, 2019 changed primarily due to higher excess tax benefits from stock-based compensation in the current period.

The Company recorded an income tax provision of $ 4.3 million and $ 4.8 million for the six months ended June 30, 2020 and 2019, respectively, resulting in an effective tax rate of 8.7 % and 14.1 %, respectively.

The tax provision for the six months ended June 30, 2020 as compared to the tax provision for the six months ended June 30, 2019 changed primarily due to higher excess tax benefits from stock-based compensation in the current period.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

As of June 30, 2020 , the Company had unrecognized tax bene fits of $ 8.4 million, of which $ 4.2 million , if recognized, would favorably impact the Company's effective ta x rate.

The Company recorded an income tax provision of $ 4.9  million and $ 5.2  million for the three months ended September 30, 2020 and 2019 , respectively, resulting in an effective tax rate of 17.7 % and 21.2 %, respectively.

The tax provision for the three months ended September 30, 2020 as compared to the tax provision for the three months ended September 30, 2019 changed primarily due to higher excess tax benefits from stock-based compensation, offset by an increase in pre-tax income.

The Company recorded an income tax provision of $ 9.2  million and $ 10.0  million for the nine months ended September 30, 2020 and 2019 , respectively, resulting in an effective tax rate of 11.9 % and 17.1 %, respectively.

The tax provision for the nine months ended September 30, 2020 as compared to the tax provision for the nine months ended September 30, 2019 changed primarily due to higher excess tax benefits from stock-based compensation, offset by an increase in pre-tax income.

As of September 30, 2020 , the Company had unrecognized tax benefits of $ 8.7  million, of which $ 4.4  million, if recognized, would favorably impact the Company's effective tax rate.

As of December 31, 2019 , the Company had unrecognized tax benefits of $ 7.8 million, of which $ 4.2 million, if recognized, would favorably impact the Company's effective tax rate.

The Company does not anticipate a mate rial change in its unrecognized tax benefits in the next 12 months.

The Company does not anticipate a material change in its unrecognized tax benefits in the next 12 months.

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 $5 million annually for 2020, 2021 and 2022.

2 unchanged sentences

The Company operates in one segment.

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.

The Company’s principal operating and decision-making functions are located in the United States.

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.

The Company’s principal operating and decision-making functions are located in the United States.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Revenue by geographic area, based on the customer's billing address, is as follows:

Three Months Ended June 30, Six Months Ended June 30,

2020 2019 2020 2019

Three Months Ended

Nine Months Ended

September 30,

(in thousands)

United States

Foreign 31,815 28,225 63,115 54,947

Total $ 88,830 $ 78,929 $ 175,093 $ 154,272

$ 59,152  

$ 53,132  

$ 171,130  

$ 152,457  

33,917  

29,539  

97,032  

84,486  

$ 93,069  

$ 82,671  

$ 268,162  

$ 236,943  

Property and equipment, net, by geographic area, is as follows:

June 30, December 31,

September 30,

(in thousands)

United States

India 11,255 9,221

Foreign 5,560 5,258

$ 47,014  

$ 46,100  

12,907  

Total property and equipment, net

$ 67,574  

$ 60,579  

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements