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Item 2. Management’s Discussion and Analysis

2020-11-04 compared with 2020-08-10 · 126 added, 98 removed, 182 unchanged (55% of the section changed)

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

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, 2019, filed with the Securities and Exchange Commission, or SEC, on February 21, 2020.

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.

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.

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:

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our expectations, assumptions and conclusions related to our provision for income taxes, our deferred tax assets and our effective tax rate;

• 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.

other factors discussed in this Quarterly Report on Form 10-Q in the sections titled “

Risk Factors”

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 and those discussed in other documents we file with the SEC.

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.

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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.

We are a pioneer and leading provider of a cloud-based platform delivering IT, security and compliance solutions that enable organizations to identify security risks to their IT infrastructures, help protect their IT systems and a pplications from ever-evolving cyber-attacks and achieve compliance with internal policies and external

We are a pioneer and leading provider of a cloud-based platform delivering 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.

Our 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, containers and serverless IT models, and the proliferation of geographically dispersed IT assets.

Our integrated suite of IT, security and compliance solutions delivered on our Qualys Cloud Platform enables our customers to identify and manage their IT assets, collect and analyze large amounts of IT security data, discover and prioritize vulnerabilities, recommend remediation actions and verify the implementati on 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 distributed IT infrastructures as our solution offers a single platform for information technology, information security, application security, endpoint, developer security and cloud teams.

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These Cloud Apps address and include:

• 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);

Vulnerability Management (VM), Vulnerability Management, Detection and Response (VMDR), Threat Protection (TP), Continuous Monitoring (CM), Patch Management (PM), Multi-Vector Endpoint Detection and Response (EDR), Indication of Compromise (IOC), Certificate Assessment (CRA);

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);

• Global IT Asset Management:

Asset Inventory (AI), CMDB Sync (SYN), Certificate Inventory (CRI);

Asset Management:

Global IT Asset Inventory (AI), CMDB Sync (SYN), Certificate Inventory (CRI);

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.

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 nine months ended September 30, 2020 and 2019, respectively.

We provide our solutions through a software-as-a-service model, primarily with renewable annual subscriptions.

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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.

In each of the six months ended June 30, 2020 and 2019, approximately 64% of our revenues were derived from customers in the United States based on our customers' billing addresses.

In each of the nine months ended September 30, 2020 and 2019, approximately 64% 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.

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

continue to actively monitor the situation and may take further actions that alter our business operations as may be required by federal, state or local authorities or that we determine are in the best interests of our employees, customers, partners, suppliers and stockholders.

We will continue to actively monitor the situation and may take further actions that alter our business operations as may be required by federal, state or local authorities or that we determine are in the best interests of our employees, customers, partners, suppliers and stockholders.

While we have not incurred significant disruptions from the COVID-19 outbreak, we are unable to accurately predict the full impact that COVID-19 will have due to numerous uncertainties, including the duration of the outbreak, actions that may be taken by governmental authorities and the impact to the business of our customers and partners.

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In some limited cases, we also provide certain computer equipment used to extend our Qualys Cloud Platform into our customers' private cloud environment.

Customers are required to return physical scanner appliances and computer equipment if they do not renew their subscript ions.

Customers are required to return physical scanner appliances and computer equipment if they do not renew their subscriptions.

We typically invoice our customers for the entire subscription amount at the start of the subscription term.

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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.

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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.

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.

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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.

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.

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Provision for Income Taxes

We are subject to federal, state and foreign income taxes for jurisdictions in which we operate, and we use estimates in determining our provision for these income taxes and deferred tax assets.

We are subject to federal, state and foreign income taxes for jurisdictions in which we operate, and we use estimates in determining our provision for these income taxes and deferred tax assets.

Earnings from our non-U.S.

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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,

2020 2019 2020 2019

Revenues 100 % 100 % 100 % 100 %

Three Months Ended

Nine Months Ended

September 30,

Cost of revenues

Gross profit 79 78 79 77

Operating expenses:

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Provision for income taxes

Net income 30 % 21 % 26 % 20 %

Comparison of Three and Six Months Ended June 30, 2020 and 2019

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

2020 2019 $ % 2020 2019 $ %

Comparison of Three and Nine Months Ended September 30, 2020 and 2019

Three Months Ended

Nine Months Ended

September 30,

(in thousands, except percentages)

Revenues $ 88,830 $ 78,929 $ 9,901 12.5 % $ 175,093 $ 154,272 $ 20,821 13.5 %

Revenues increased $9.9 million for the three months ended June 30, 2020 compared to the three months ended June 30, 2019, due to an increase in the purchase of subscriptions from existing customers and new customer subscriptions entered into after June 30, 2019 .

Of the total increase of $9.9 million, $6.3 million was from customers in the United States and the remaining $3.6 million was from customers in foreign countries.

Revenues increased $20.8 million for the six months ended June 30, 2020 compared to the six months ended June 30, 2019, due to an increase in the purchase of subscriptions from existing customers and new customer subscriptions entered into after June 30, 2019.

Of the total increase of $20.8 million, $12.6 million was from customers in the United States and the remaining $8.2 million was from customers in foreign countries.

Revenues increased $10.4 million for the three months ended September 30, 2020 compared to the three months ended September 30, 2019, due to an increase in the purchase of subscriptions from existing customers and new customer subscriptions entered into after September 30, 2019.

Of the total increase of $10.4 million, $6.0 million was from customers in the United States and the remaining $4.4 million was from customers in foreign countries.

Revenues increased $31.2 million for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019, due to an increase in the purchase of subscriptions from existing customers and new customer subscriptions entered into after September 30, 2019.

Of the total increase of $31.2 million, $18.7 million was from customers in the United States and the remaining $12.5 million was from customers in foreign countries.

We expect revenue growth from existing and new customers to continue.

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Cost of Revenues

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

2020 2019 $ % 2020 2019 $ %

Three Months Ended

Nine Months Ended

September 30,

(in thousands, except percentages)

Cost of revenues

Cost of revenues increased $1.4 million for the three months ended June 30, 2020 compared to the three months ended June 30, 2019.

The increase was primarily due to an increase in licenses and software services of $0.5 million, an increase in data center costs of $0.3 million to meet growing demand, an increase in personnel expenses 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.

Cost of revenues increased $2.1 million for the six months ended June 30, 2020 compared to the six months ended June 30, 2019.

The increase was primarily due to an increase in licenses and software services of $0.9 million, an increase in data center costs of $0.8 million and an increase in equipment repair and maintenance expense of $0.6 million.

Cost of revenues increased $3.5 million for the three months ended September 30, 2020 compared to the three months ended September 30, 2019.

The increase was primarily due to an increase in personnel costs of $1.3 million driven by the headcount increase to support the growth of our business, an increase in data center costs of $0.6 million to meet growing demand, an increase in depreciation and amortization expenses of $0.4 million as more computer equipment was placed in service in the three months ended September 30, 2020, a $0.4 million increase in allocation of overhead costs to the cost of revenue related to increased leasing expenses for our new office in India and data centers, an increase in shipping costs of $0.3 million and an increase in licenses and software services of $0.3 million. 

Cost of revenues increased $5.7 million for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019.

The increase was primarily due to an increase in personnel costs of $1.4 million driven by the headcount increase to support the growth of our business, an increase in data center costs of $1.3 million to meet growing demand, an increase in licenses and software services of $1.2 million, an increase in equipment repairs and maintenance costs of $0.9 million and a $0.8 million increase in allocation of overhead costs to the cost of revenue related to increased leasing expenses for our new office in India and data centers. 

Research and Development Expenses

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

2020 2019 $ % 2020 2019 $ %

Three Months Ended

Nine Months Ended

September 30,

(in thousands, except percentages)

Research and development

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 million driven by additional employees hired to support the growth of our business and an increase in depreciation and amortization expenses of $0.2 million as a result of increased purchase of computer equipment.

These increases were partially offset by a decrease in acquisition-related expense of $1.1 million.

Research and development 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 million driven by the headcount increase to support the growth of our business, an increase in allocation of overhead costs to the research and development department of $1.5 million mainly caused by 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.

Research and development expenses increased $1.0 million for the three months ended September 30, 2020 compared to the three months ended September 30, 2019, primarily due to a $0.6 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, increases in stock-based compensation expense of $0.4 million and in personnel costs of $0.2 million driven by additional employees hired to support the growth of our business and an increase in depreciation and amortization expense of $0.2 million as more computer equipment was placed in service in the three months ended September 30, 2020. These increases were partially offset by a decrease in acquisition-related expense of $0.5 million.

Research and development expenses increased $3.5 million for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019, primarily due to a $2.1 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 $2.1 million driven by additional employees hired to support the growth of our business, an increase in depreciation and amortization expense of $0.6 million and an increase in licenses and software services of $0.4 million.

These increases were partially offset by a decrease in acquisition-related expense of $1.7 million.

Sales and Marketing Expenses

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

2020 2019 $ % 2020 2019 $ %

Three Months Ended

Nine Months Ended

September 30,

(in thousands, except percentages)

Sales and marketing

Sales and marketing expenses decreased $1.4 million for the three months ended June 30, 2020 compared to the three months ended June 30, 2019, 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 million, driven by additional employees hired to support the growth of our business.

Sales and marketing expenses decreased $0.9 million for the three months ended September 30, 2020 compared to the three months ended September 30, 2019, primarily due to decreases in trade show related costs of $1.3 million and travel related expenses of $0.9 million driven by the COVID-19 pandemic, partially offset by an increase in personnel costs of $1.3 million due to additional employees hired to support the growth of our business.

Sales and marketing expenses decreased $1.4 million for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019, primarily due to decreases in trade show related costs of $2.4 million and travel related expenses of $1.7 million driven by the COVID-19 pandemic and a $0.4 million decrease in marketing related expenses, partially offset by an increase in personnel costs of $1.4 million due to additional employees hired to support the growth of our business, a $1.0 million increase in commission expenses and a $0.7 million increase in stock-based compensation driven by an increase in headcount. 

General and Administrative Expenses

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

2020 2019 $ % 2020 2019 $ %

Three Months Ended

Nine Months Ended

September 30,

(in thousands, except percentages)

General and administrative

General and administrative expenses increased $0.2 million for the three months ended June 30, 2020 compared to the three months ended June 30, 2019, primarily due to an increase in legal fees of $0.3 million and $0.3 million increase in personnel costs due to additional employees hired to support the growth of our business, partially offset by 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 million and an increase in personnel costs of $0.5 million driven by an increase in headcount, partially offset by a decrease in miscellaneous expense of $0.3 million.

General and administrative expenses increased $3.1 million for the three months ended September 30, 2020 compared to the three months ended September 30, 2019, primarily due to an increase in performance-based stock compensation of $1.8 million as a result of the modification of certain awards in June 2020 and a higher forecasted performance level, an increase in legal fees of $1.1 million and a $0.5 million increase in personnel costs due to additional employees hired to support the growth of our business, partially offset by a decrease in miscellaneous expense of $0.3 million.

General and administrative expenses increased by $4.0 million for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019, primarily due to an increase in performance-based stock compensation of $1.8 million as a result of the modification of certain awards in June 2020 and a higher forecasted performance level, an increase in legal fees of $1.7 million and a $1.0 million increase in personnel costs due to additional employees hired to support the growth of our business, partially offset by a decrease in miscellaneous expense of $0.5 million. 

Total Other Income, Net

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

2020 2019 $ % 2020 2019 $ %

Three Months Ended

Nine Months Ended

September 30,

(in thousands, except percentages)

Total other income, net

T otal 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.

Total other income, net decreased by $0.5 million and $1.3 million for the three and nine months ended September 30, 2020, respectively, compared to the same periods ended September 30, 2019, primarily due to a decrease in interest income driven by lower yield.

Provision for Income Taxes

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

2020 2019 $ % 2020 2019 $ %

Three Months Ended

Nine Months Ended

September 30,

(in thousands, except percentages)

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Effective tax rate

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, 2020 compared to the same periods ended June 30, 2019 were primarily due to higher excess tax benefits from stock-based compensation in the current period.

We recorded an income tax provision of $4.9 million and $5.2 million for the three months ended September 30, 2020 and 2019, respectively, and $9.2 million and $10.0 million for the nine months ended September 30, 2020 and 2019, respectively.

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

Key Non-GAAP Metric

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Furthermore, we use this measure to establish budgets and operational goals for managing our business and evaluating our performance.

We also believe that Adjusted

EBITDA provides an additional tool for investors to use in comparing our recurring core business operating results over multiple periods with other companies in our industry.

We also believe that Adjusted EBITDA provides an additional tool for investors to use in comparing our recurring core business operating results over multiple periods with other companies in our industry.

Adjusted EBITDA should not be considered in isolation from, or as a substitute for, financial information prepared in accordance with U.S.

We calculate Adjusted EBITDA as net income before (1) other (income) expense, net, which includes interest income, interest expense and other income and expense, (2) provision for (benefit from) income taxes, (3) depreciation of property and equipment, (4) amortization of intangible assets, (5) stock-based compensation, (6) non-recurring expenses and (7) cash acquisition-related expense that do not reflect ongoing costs of operating the business.

We calculate Adjusted EBITDA as net income before (1) other (income) expense, net, which includes interest income, interest expense and other income and expense, (2) provision for (benefit from) income taxes, (3) depreciation of property and equipment, (4) amortization of intangible assets, (5) stock-based compensation and (6) non-recurring expenses that do not reflect ongoing costs of operating the business.

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.

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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.

Three Months Ended Six Months Ended

June 30, June 30,

2020 2019 2020 2019

Three Months Ended

Nine Months Ended

September 30,

(in thousands, except percentages)

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Percentage of revenues

The following unaudited table presents the reconciliation of net income to Adjusted EBITDA 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 unaudited table presents the reconciliation of net income to Adjusted EBITDA for the three and nine months ended September 30, 2020 and 2019:

Three Months Ended

Nine Months Ended

September 30,

(in thousands)

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

Depreciation and amortization of property and equipment

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Other income, net

Acquisition-related expenses (1) (2) (3)

— 1,059 20 1,253

Adjusted EBITDA

(1) For six months ended June 30, 2020, includes $0.02 million of compensation related to acquisitions in 2019 and 2018.

(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.

Liquidity and Capital Resources

At June 30, 2020 , our principal source of liquidity was cash, cash equivalents, and marketable securities of $445.3 million, including $29.3 million held outside of the United States.

We do not anticipate that we will need

funds generated from foreign operations to fund our domestic operations.

At September 30, 2020, our principal source of liquidity was cash, cash equivalents, and marketable securities of $452.0 million, including $32.1 million held outside of the United States.

We do not anticipate that we will need funds generated from foreign operations to fund our domestic operations.

However, if we repatriate these funds, we could be subject to foreign withholding taxes.

We generated positive cash flows from operations during each of the six months ended June 30, 2020 and 2019.

We generated positive cash flows from operations during each of the nine months ended September 30, 2020 and 2019.

We believe our existing cash, cash equivalents, marketable securities, and cash from operations will be sufficient to fund our operations for at least the next twelve months.

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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

Nine Months Ended

September 30,

(in thousands)

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Operating Activities

For the six months ended June 30, 2020, cash flows from 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 during the six months ended June 30, 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.

For the nine months ended September 30, 2020, cash flows from operating activities of $141.3 million primarily resulted from our net income of approximately $67.8 million, as adjusted for non-cash items including stock-based compensation of $29.9 million and depreciation and amortization expense of $24.0 million;

and cash flows from working capital of $14.0 million mainly due to a stronger cash collection and the continued growth in our deferred revenues during the nine months ended September 30, 2020.

For the nine months ended September 30, 2019, cash flows from operating activities of $126.9 million primarily resulted from our net income of approximately $48.7 million, as adjusted for non-cash items including stock-based compensation of $25.2 million and depreciation and amortization expense of $23.5 million;

and cash flows from working capital of $23.4 million mainly attributable to the continued growth in our deferred revenues and timing of customer payments.

Investing Activities

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.

For the six months ended June 30, 2019, 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.

For the nine months ended September 30, 2020, cash used in investing activities of $51.5 million was mainly attributable to $27.2 million of cash used for purchases of marketable securities, net of sales and maturities, and $22.7 million of cash used for capital expenditures, including computer equipment to support our growth and development.

Additionally, we paid $1.5 million in connection with our acquisition of the assets of Spell Security and payment of deferred consideration to Adya. 

For the nine months ended September 30, 2019, cash used in investing activities of $17.4 million was mainly attributable to $19.5 million of cash used for capital expenditures, including computer hardware and software for our data centers to support our growth and development, and to purchase physical scanner appliances and computer hardware provided to certain customers as part of their subscriptions.

Additionally, we paid $1.8 million in connection with our acquisition of the assets of Adya and a holdback payment for an acquisition in a prior year, as well as $0.6 million to acquire a convertible security issued by privately-held company.

These decreases in investing activities were partially offset by a $4.6 million increase in cash from sales and maturities of marketable securities, net of purchases. 

Financing Activities

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 payroll 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.

For 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.

For the nine months ended September 30, 2020, cash used in financing activities of $84.3 million was attributable to share repurchases of $91.9 million and the payment of employee payroll taxes related to the net share settlement of equity awards of $16.3 million, which were partially offset by the proceeds received from the exercise of stock options of $24.0 million.

For the nine months ended September 30, 2019, cash used in financing activities of $75.0 million was attributable to share repurchases of $73.9 million, the payment of employee payroll taxes related to the net share settlement of equity awards of $10.9 million, and principal payments under finance lease obligations of $1.3 million.

These decreases were partially offset by the proceeds received from the exercise of stock options of $11.0 million.

C ontractual Obligation and Commitments

We presented our contractual obligations in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

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, 2020 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.

We presented our contractual obligations in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

Our contractual obligations consist of operating leases, purchase commitments and other contractual obligations.

During the nine months ended September 30, 2020, we recorded lease liabilities of approximately$15.7  

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 nine months ended September 30, 2020 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.

Off-Balance Sheet Arrangements

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What changed 10-Q

Item 2. Management’s Discussion and Analysis