What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2021-02-22 compared with 2020-02-21 · 1019 added, 378 removed, 662 unchanged (68% of the section changed)

12 unchanged sentences

We have audited the accompanying consolidated balance sheets of Qualys, Inc.

(a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2019 and 2018, the related consolidated statements of operations, comprehensive income, changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2019, and the related notes and financial statement schedule included under Item 15(a)(2) (collectively referred to as the “financial statements”).

(a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive income, stockholders’

equity, and cash flows for each of the three years in the period ended December 31, 2020, and the related notes (collectively referred to as the “financial statements”).

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated February 21, 2020 expressed an unqualified opinion.

Adoption of New Accounting Standard

As discussed in Note 1 to the financial statements, the Company has changed its method of accounting for leases in 2019 due to the adoption of the guidance in ASC Topic 842, Leases, using the current period adjustment method.

Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 22, 2021 expressed an unqualified opinion.

Basis for opinion

These financial statements are the responsibility of the Company’s management.

Our responsibility is to express an opinion on the Company’s financial statements based on our audits.

These financial statements are the responsibility of the Company’s management.

Our responsibility is to express an opinion on the Company’s financial statements based on our audits.

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S.

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We believe that our audits provide a reasonable basis for our opinion.

Critical audit matters

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that:

(1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Critical audit matter

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that:

(1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

As described further in Note 12 to the financial statements, the Company records income taxes using the asset and liability method, under which deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable income.

We identified the tax effects of temporary and permanent differences related to stock-based compensation as a critical audit matter.

The principal considerations for our determination that the tax effects of temporary and permanent differences as a critical audit matter are that auditing the application of executive compensation rules requires significant technical expertise, the

Company is generating excess tax deductions as a result of stock-based compensation and the stock-based compensation calculation is complex due to the required recordkeeping.

The principal considerations for our determination that the tax effects of temporary and permanent differences are a critical audit matter are that auditing the application of executive compensation rules requires significant technical expertise, the Company is generating excess tax deductions as a result of stock-based compensation and the stock-based compensation calculation is complex due to the required recordkeeping.

Our audit procedures related to the tax effects of temporary and permanent differences related to stock-based compensation included the following, among others.

Involved an employee compensation specialist to assess the application of executive compensation rules.

Obtained management’s permanent and temporary provision calculation and tied out inputs to supporting equity documentation.

Tested the completeness and accuracy of the calculation of permanent and temporary differences.

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/s/ GRANT THORNTON LLP

We have served as the Company’s auditor since 2005.

San Jose, California

February 21, 2020

February 22, 2021

Report of Independent Registered Public Accounting Firm

2 unchanged sentences

We have audited the internal control over financial reporting of Qualys, Inc.

(a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2019, based on criteria established in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in the 2013 Internal Control-Integrated Framework issued by COSO.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company as of and for the year ended December 31, 2019, and our report dated February 21, 2020 expressed an unqualified opinion on those financial statements.

(a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2020, based on criteria established in the 2013 Internal Control —

Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in the 2013 Internal Control —

Integrated Framework issued by COSO.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company as of and for the year ended December 31, 2020, and our report dated February 22, 2021 expressed an unqualified opinion on those consolidated financial statements.

Basis for opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting (“Management’s Report”).

Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S.

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Definition and limitations of internal control over financial reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;

(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company;

and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.

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San Jose, California

February 21, 2020

February 22, 2021

CONSOLIDATED BALANCE SHEETS

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Cash and cash equivalents

$ 74,132  

$ 87,559  

Short-term marketable securities

281,892  

211,331  

Accounts receivable, net of allowance of $ 725 and $ 585 at December 31, 2020 and 2019, respectively

100,179  

78,034  

Prepaid expenses and other current assets

19,142  

18,692  

Total current assets

475,345  

395,616  

Long-term marketable securities

98,458  

119,508  

Property and equipment, net

64,850  

60,579  

Operating leases - right of use asset

44,838  

40,551  

Deferred tax assets, net

15,811  

18,830  

Intangible assets, net

12,006  

16,795  

Restricted cash

Other noncurrent assets

Liabilities and Stockholders’ Equity

16,864  

15,082  

$ 736,819  

$ 675,608  

Liabilities and Stockholders’

Current liabilities:

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Accrued liabilities

29,833  

22,784  

Deferred revenues, current

213,494  

192,172  

Operating lease liabilities, current

11,672  

Total current liabilities

255,730  

223,467  

Deferred revenues, noncurrent

30,540  

20,935  

Operating lease liabilities, noncurrent

45,700  

44,015  

Other noncurrent liabilities

Total liabilities

332,337  

288,805  

Commitments and contingencies (Note 9)

Stockholders’ equity:

Stockholders’

Preferred stock:

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Additional paid-in capital

401,359  

362,408  

Accumulated other comprehensive income (loss)

( 484 )  

Retained earnings

Total stockholders’ equity

Total liabilities and stockholders’ equity

23,194  

Total stockholders’

404,482  

386,803  

Total liabilities and stockholders’

$ 736,819  

$ 675,608  

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

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Year Ended December 31,

$ 362,963  

$ 321,607  

$ 278,889  

Cost of revenues

79,226  

69,517  

66,185  

283,737  

252,090  

212,704  

Operating expenses:

Research and development

72,548  

68,239  

53,255  

Sales and marketing

67,965  

70,833  

70,039  

General and administrative

46,570  

40,765  

39,049  

Total operating expenses

187,083  

179,837  

162,343  

Income from operations

96,654  

72,253  

50,361  

Other income (expense), net:

Interest expense

( 106 )  

Interest income

Other income (expense), net

( 607 )  

Total other income (expense), net

Income before income taxes

102,037  

79,983  

55,468  

Provision for (benefit from) income taxes

10,465  

10,647  

$ 91,572  

$ 69,336  

$ 57,304  

Net income per share:

$ 2.34  

$ 1.77  

$ 1.47  

$ 2.24  

$ 1.68  

$ 1.37  

Weighted average shares used in computing net income per share:

39,167  

39,075  

38,876  

40,823  

41,345  

41,897  

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

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Year Ended December 31,

$ 91,572  

$ 69,336  

$ 57,304  

Other comprehensive income (loss):

Available-for-sale marketable securities:

Available-for-sale debt securities:

Change in net unrealized gain (loss), net of tax effect of ($ 128 ), ($ 243 ) and $ 0 in fiscal years 2020, 2019 and 2018, respectively

Reclassification adjustment for net loss realized and included in net income, net of tax effect of $0 in fiscal years 2019, 2018 and 2017

Total change in unrealized gain (loss) on marketable securities, net of tax

Reclassification adjustment for net (gain) loss realized and included in net income, net of tax effect of $ 6 , $ 0 and $ 0 in fiscal years 2020, 2019 and 2018

( 19 )  

Total change in unrealized gain on marketable securities, net of tax

Cash flow hedges:

Change in net unrealized gain (loss), net of tax effect of $ 486 , ($ 136 ) and $ 0 in fiscal years 2020, 2019 and 2018, respectively

( 1,613 )  

Reclassification adjustment for net gain realized and included in net income, net of tax effect of $ 129 , $ 35 and $ 0 in fiscal years 2020, 2019 and 2018, respectively

( 435 )  

( 134 )  

Total change in unrealized gain (loss) on cash flow hedges, net of tax

( 2,048 )  

Other comprehensive income (loss), net of tax

( 1,646 )  

Comprehensive income

$ 89,926  

$ 71,084  

$ 57,292  

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

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Cash flows from operating activities:

$ 91,572  

$ 69,336  

$ 57,304  

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

Depreciation and amortization expense

32,845  

31,201  

28,904  

Bad debt expense

1 unchanged sentence

Stock-based compensation

40,035  

34,892  

30,090  

Amortization of premiums and (accretion of discounts) on marketable securities

( 1,597 )  

Deferred income taxes

1 unchanged sentence

Accounts receivable

( 22,631 )  

( 2,456 )  

Prepaid expenses and other assets

( 2,329 )  

( 6,012 )  

Accounts payable

( 389 )  

( 1,076 )  

Accrued liabilities

Deferred revenues

30,927  

28,060  

24,725  

Other noncurrent liabilities

Net cash provided by operating activities

180,086  

160,607  

125,464  

Cash flows from investing activities:

Purchases of marketable securities

( 391,693 )  

( 331,131 )  

Sales and maturities of marketable securities

341,879  

328,350  

285,224  

Purchases of property and equipment

Business combinations

( 30,037 )  

( 27,573 )  

Proceeds from disposal of property and equipment  

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

( 1,500 )  

( 4,050 )  

Purchase of privately-held investment

( 625 )  

Net cash used in investing activities

( 80,932 )  

( 35,029 )  

Cash flows from financing activities:

Repurchase of common stock

( 126,729 )  

( 86,424 )  

Proceeds from exercise of stock options

34,461  

24,831  

24,053  

Payments for taxes related to net share settlement of equity awards

( 20,199 )  

( 15,743 )  

Principal payments under finance lease obligations

Net cash (used in) provided by financing activities

( 114 )  

( 1,709 )  

Net cash used in financing activities

( 112,581 )  

( 79,045 )  

Net increase (decrease) in cash and cash equivalents

( 13,427 )  

46,533  

Cash, cash equivalents and restricted cash at beginning of period

88,759  

42,226  

87,791  

Cash, cash equivalents and restricted cash at end of period

$ 75,332  

$ 88,759  

$ 42,226  

Supplemental disclosures of cash flow information

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

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’

EQUITY  

(in thousands, except share data)

Comprehensive

Income (Loss)

Retained Earnings (deficit)

Stockholders’

Additional Paid-In

Accumulated Other Comprehensive Income

Total Stockholders’

Balances at December 31, 2017

Cumulative effect of a change in accounting principle related to stock-based compensation

38,598,117  

$ 304,155  

$ ( 574 )  

$ 39,924  

$ 343,544  

Adjustment to opening retained earnings on adoption of ASC 606

57,304  

Other comprehensive loss, net of tax

( 12 )  

Issuance of common stock upon exercise of stock options

1,183,235  

24,052  

24,053  

Repurchase of common stock

( 1,088,899 )  

( 13,064 )  

( 71,975 )  

Issuance of common stock upon vesting of restricted stock units

Taxes related to net share settlement of equity awards and options

525,375  

Taxes related to net share settlement of equity awards

( 202,794 )  

( 14,879 )  

Stock-based compensation

30,308  

Balances at December 31, 2018

Adjustment to opening retained earnings on adoption of ASC 606

Other comprehensive loss, net of tax

39,015,034  

330,572  

( 586 )  

27,964  

357,989  

69,336  

Other comprehensive income, net of tax

Issuance of common stock upon exercise of stock options

901,290  

24,830  

24,831  

Repurchase of common stock

( 1,026,455 )  

( 12,317 )  

( 74,106 )  

Issuance of common stock upon vesting of restricted stock units

438,892  

Taxes related to net share settlement of equity awards

( 182,489 )  

( 15,743 )  

Stock-based compensation

35,066  

Balances at December 31, 2019

Other comprehensive income, net of tax

39,146,272  

362,408  

23,194  

386,803  

91,572  

Other comprehensive loss, net of tax

( 1,646 )  

Issuance of common stock upon exercise of stock options

1,129,845  

34,460  

34,461  

Repurchase of common stock

( 1,292,750 )  

( 15,530 )  

( 111,198 )  

Issuance of common stock upon vesting of restricted stock units

475,853  

Taxes related to net share settlement of equity awards

( 206,555 )  

( 20,199 )  

Stock-based compensation

40,220  

Balances at December 31, 2020

39,252,665  

$ 401,359  

$ ( 484 )  

$ 3,568  

$ 404,482  

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

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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 IT, security and compliance solutions that enable organizations to identify security risks to their IT infrastructures, help protect their IT systems and applications from ever-evolving cyber-attacks and achieve compliance with internal policies and external regulations.

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

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

Basis of Presentation

The accompanying consolidated financial statements and footnotes have been prepared in accordance with U.S.

GAAP as well as the instructions to Form 10-K and the rules and regulations of SEC.

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

GAAP as well as the instructions to Form 10 -K and the rules and regulations of the SEC.

The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries.

All intercompany transactions and balances have been eliminated upon consolidation.

Certain reclassifications have been made to the prior years' consolidated financial statements to conform to the current year presentation.

The reclassifications did not have material effects on the prior year’s consolidated financial statements.

Risks and Uncertainties

March 2020, 

the World Health Organization declared the outbreak of COVID- 19 as a pandemic.

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

The Company will continue to actively monitor the situation and 

take further actions that alter its business operations as 

be required by federal, state or local authorities or that the Company determines are in the best interests of its employees, customers, partners, suppliers and stockholders.

COVID- 19 has not had and is not expected to have a significant impact on the Company's business in 2021.

However, while the Company has 

not  incurred significant disruptions from the COVID- 19  outbreak, the Company is unable to accurately predict the full impact that COVID- 19  will have due to numerous uncertainties, including the duration of the outbreak, actions that 

be taken by governmental authorities and the impact to the business of its customers and partners.

The Company will continue to evaluate the nature and extent of the impact to its business, financial position, results of operations and cash flows.

Use of Estimates

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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 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 income taxes.

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

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As of December 31, 2020 and 2019 , no customer or channel partner accounted for more than 10% of the Company's revenues and accounts receivable balance.

Cash, Cash Equivalents, Short-Term and Long-Term Marketable Securities

Cash and cash equivalents include cash held in banks, highly liquid money market funds and commercial paper, all with original maturities of three months or less when acquired.

The Company’s short-term and long-term marketable securities consist of fixed-income U.S.

government agency securities, corporate bonds, asset-backed securities and commercial paper.

Cash, Cash Equivalents, Restricted cash and Short-Term and Long-Term Marketable Securities

Cash and cash equivalents include cash held in banks, highly liquid money market funds and commercial paper, all with original maturities of three months or less when acquired. The Company’s short-term and long-term marketable securities consist of fixed-income U.S.

and foreign government agency securities, corporate bonds, asset-backed securities and commercial paper.

Management determines the appropriate classification of the Company's investments at the time of purchase and reevaluates such designation at each balance sheet date.

The Company classifies its marketable securities as either short-term or long-term based on each instrument's underlying contractual maturity date.

The Company classifies its marketable securities as either short-term or long-term based on each instrument's underlying remaining contractual maturity date. 

As of both 

December 31, 2020 and 2019 , the Company has a restricted cash balance of $ 1.2 million in the form of a letter of credit issued to the landlord of the Company's California headquarter office lease as security deposit. 

Cash equivalents are stated at cost, which approximates fair market value.

Short-term and long-term marketable securities are classified as available-for-sale debt securities and are carried at fair value.

Unrealized gains and losses in fair value of the available-for-sale debt securities are reported in other comprehensive income (loss).

When the available-for-

Short-term and long-term marketable securities are classified as available-for-sale debt securities (AFS debt securities) and are carried at fair value.

Unrealized gains and losses in fair value of the AFS debt securities are reported in other comprehensive income (loss).

When the AFS debt securities are sold, cost is based on the specific identification method, and the realized gains and losses are included in other income (expense), net in the consolidated statements of operations.

AFS debt securities are reviewed quarterly for impairment.

An investment is considered impaired when its fair value is below its amortized cost.

Declines in fair value from amortized cost for AFS debt securities that the company intends to sell or will more likely than not be required to sell before the expected recovery of the amortized cost basis are charged to other income (expense), net in the period in which the loss occurs.

Otherwise, the credit loss component of the impairment is recorded as allowance for credit losses with an offsetting entry charged to other income (expense), net, while the remaining loss is recognized in other comprehensive income (loss).

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

sale debt securities are sold, cost is based on the specific identification method, and the realized gains and losses are included in other income (expense), net in the consolidated statements of operations.

Available-for-sale debt securities are reviewed quarterly for impairment that is deemed to be other-than-temporary.

An investment is considered other-than-temporarily impaired when its fair value is below its amortized cost and (1) there is an intent to sell the security, (2) it is “more likely than not” that the security will be sold before recovery of its amortized cost basis or (3) the present value of expected cash flows from the investment is not expected to recover the entire amortized cost basis.

Declines in value that are considered to be other-than-temporary are recorded in other income (expense), net.

Adjustments to amortized cost for the amortization of premiums, the accretion of discounts and Interest and dividends are recorded in interest income as earned.

Accounts Receivable

Accounts receivable are recorded at the invoiced amount and do not bear interest.

The allowance for doubtful accounts represents the Company’s best estimate of the amount of probable credit losses and is determined based on a review of existing accounts receivable by aging category to identify significant customers or invoices with collectability issues.

For those invoices not specifically reviewed, the reserve is calculated based on the age of the receivable and historical write-offs.

Any change in the assumptions used in analyzing a specific account receivable may result in an additional provision for doubtful accounts being recognized in the period in which the change occurs.

When the Company ultimately concludes that a receivable is uncollectible, the balance is written off against the allowance for doubtful accounts.

Payments subsequently received on such receivables are credited back to the allowance for doubtful accounts.

The allowance for credit losses is determined on a collective basis where similar risk characteristics exist and on an individual basis when we identify significant customers or invoices with collectability issues. The estimate for credit losses considers historical write-offs by aging category, that are adjusted for current conditions and reasonable and supportable forecasts of future losses. Any change in the assumptions used in analyzing credit losses may result in additional allowances being recognized in the period in which the change occurs.

When the Company ultimately concludes that a receivable is uncollectible, the balance is written off against the allowance for credit losses.

Payments subsequently received on such receivables are recognized in the period received. The allowance for credit losses recognized and write-offs charged against the allowance were not significant for the years ended 

December 31, 2020 and 2019 .

Non-marketable securities

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

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

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

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

The Company elected the measurement alternative to account for the investment at cost less impairment and will measure the investment at fair value when the Company identifies observable price changes.

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

The Company has not received any dividends or other-than-temporary impairment charges related to the investment.

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 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 consolidated balance sheet.

No  impairment has been incurred related to the investment.

The investment is included in other noncurrent assets on the consolidated balance sheets. The Company has not received any dividends from the investment. 

Property and Equipment, net

Property and equipment are stated at cost less accumulated depreciation and amortization.

Depreciation is computed using the straight-line method over the estimated useful lives of the assets, which range fr om three to five years.

Depreciation is computed using the straight-line method over the estimated useful lives of the assets, which range from three to five years.

Leasehold improvements are amortized on a straight-line basis over the lesser of the estimated useful life of the asset or the remaining lease term.

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Repairs and maintenance that do not extend the life of an asset are expensed as incurred and major improvements are capitalized as property and equipment.

The Company leases certain offices, computer equipment and its data center facilities under finance leases and non-cancelable operating leases.

On January 1, 2019, the Company adopted ASC 842 Leases using the current period adjustment method with an effective date of January 1, 2019.

For both operating and finance leases, we recognize a right-of-use asset, which represents our right to use the underlying asset for the lease term, and a lease liability, which represents the present value of our obligation to make payments arising over the lease term. Many of our leases include rental escalation clauses, renewal options and/or termination options that are factored into our determination of lease payments and lease terms when appropriate.

The present value of the lease payments is calculated using the incremental borrowing rate of the underlying leases determined at lease commencement.

As most of our leases do not provide a readily determinable implicit rate, the Company determines an incremental borrowing rate using a portfolio approach based on the rate of interest that the Company would have to pay to borrow an amount equal to the lease payments on a collateralized basis over a similar term as the leases. 

Where the Company is the lessee, the Company elects to account for non-lease components associated with its leases (e.g., common area maintenance costs) and lease components separately for substantially all of its asset classes, except for data centers, for which the Company elected to combine lease and non-lease components.

For leases with a term of one year or less, the Company has elected not to record the right-of-use asset or liability.

In arrangements where the Company is the lessor, the Company elected to apply the practical expedient to account for lease components (e.g., customer premise equipment) and non-lease components (e.g., service revenue) as combined components as revenue under ASC 606 as service revenues are the predominant components in the arrangements.

Impairment of Long-Lived Assets

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Impairment exists if the carrying amounts of such assets exceed the estimates of future undiscounted cash flows expected to be generated by such assets.

Should an impairment exist, the impairment loss would be measured based on the excess carrying value of the asset over the asset’s estimated fair value.

In each of 2020 , 2019 and 2018 , the Company had no impairment of long-lived assets.

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These tests are performed at the reporting unit level.

The Company’s operations are organized as one reporting unit.

In testing for a potential impairment of goodwill, the Company first performs a qualitative assessment of its reporting unit to determine if it is more likely than not (a more than 50% likelihood) that the fair value of the reporting unit is less than its carrying amount.

If the fair value is not considered to be less than the carrying amount, no further evaluation is necessary.

The Company performed the annual assessment on December 1, 2019 and 2018 and concluded there was no potential impairment of goodwill.

The Company performed the annual assessment on December 

1, 2020 and 2019 and concluded there was no potential impairment of goodwill.

In testing for a potential impairment of intangible assets with indefinite lives that are not subject to amortization, the Company first performs a qualitative assessment to determine if it is more likely than not (a more than 50% likelihood) that the fair value of the indefinite-lived intangible assets is less than the carrying amount.

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If the qualitative assessment indicates there is more than a 50% likelihood that the fair value is less than the carrying amount of the reporting unit or the intangible asset, the Company would perform a quantitative test.

Goodwill impairment is measured as the amount by which a reporting unit’s carrying value exceeds its fair value.

For indefinite-lived intangible assets, the Company would perform the quantitative impairment test by comparing the fair value of the indefinite-lived intangible asset with its carrying value.

Internally Developed Software

Costs incurred in the development phase are capitalized and amortized over the product’s estimated useful life, which is three years .

Costs incurred in the development phase are capitalized and amortized over the product’s estimated useful life, which is three years.

Capitalized costs include salaries, benefits and stock-based compensation charges for employees that are directly involved in developing its cloud security platform during the post planning and implementation phases.

Capitalized costs related to inter nally developed software under development are treated as construction in progress until the program, feature or functionality is ready for its intended use, at which time amortization commences.

Capitalized costs related to internally developed software under development are treated as construction in progress until the program, feature or functionality is ready for its intended use, at which time amortization commences.

These capitalized costs are included in other noncurrent assets on the consolidated balance sheets.

For the fiscal years 2019, 2018 and 2017, the Company capitalized $ 1.0 million , $ 1.3 million and $ 0.4 million of costs related to internally developed software (of which $ 0.2 million , $ 0.2 million and zero , respectively, were stock-based compensation), respectively.

As of December 31, 2019 and 2018, unamortized internally developed software costs totaled $ 2.0 million and $ 1.2 million , respectively.

For the fiscal years 2020 , 2019 and 2018 , the Company capitalized $ 1.0 million, $ 1.0  million and $ 1.3 million of costs related to internally developed software (of which $ 0.2 million, $ 0.2 million and $ 0.2 million, respectively, were stock-based compensation), respectively.

As of December 31, 2020 and 2019 , unamortized internally developed software costs totaled $ 2.6  million and $ 2.0 million, respectively.

Amortization of internally developed software is recorded in cost of revenues.

Costs associated with minor enhancements and maintenance are expensed as incurred.

Management evaluates the useful lives of these assets on an annual basis and tests for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets.

Costs associated with minor enhancements and maintenance are expensed as incurred. Management evaluates the useful lives of these assets on an annual basis and tests for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets. 

Business Combinations

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Derivative financial instruments are utilized by the Company to reduce foreign currency exchange risks.

The Company uses foreign currency forward contracts to mitigate the impact of foreign currency fluctuations of certain non-U.S.

dollar denominated asset positions, to date primarily cash and accounts receivable (non-designated forward contracts), as well as to manage foreign currency fluctuation risk related to forecasted transactions (designated cash flow hedges).

Open contracts are recorded within prepaid expenses and other current assets, other noncurrent assets, accrued liabilities, or other noncurrent liabilities in the consolidated balance sheets.

The Company uses foreign currency forward contracts, with maturities of 13 months or less, to mitigate the impact of foreign currency fluctuations of certain non-U.S.

dollar denominated net asset positions, to date primarily cash, accounts receivable and operating lease liabilities, as well as to manage foreign currency fluctuation risk related to forecasted transactions.

Open contracts are recorded within prepaid expenses and other current assets, other noncurrent assets, accrued liabilities or other noncurrent liabilities in the consolidated balance sheets.

Gains and losses resulting from currency exchange rate movements on non-designated forward contracts are recognized in other income (expense), net.

Any gains or losses from derivatives designated as cash flow hedges are first accumulated in AOCI and then reclassified to revenue when the hedged item impacts the consolidated statements of operations.

Any gains or losses from derivatives designated as cash flow hedges are first recorded within accumulated other comprehensive income ("AOCI") and then reclassified into revenue or operating expenses when the hedged item impacts the consolidated statements of operations.

Cash flows related to these forward contracts are classified in our consolidated statements of cash flows in the same manner as the underlying hedged transaction within cash flows from operating activities.

Stock-Based Compensation

The Company recognizes the fair value of its employee stock options and restricted stock units (RSUs) over the requisite service periods for those awards ultimately expected to vest.

The fair value of each option is estimated on date of grant using the Black-Scholes-Merton option pricing model and the fair value of each RSU is based on the fair value of the Company's stock on the date of grant.

The Company recognizes the fair value of its employee stock options and restricted stock units (RSU) on a straight-line basis over the requisite service periods for those awards ultimately expected to vest.

The fair value of each option is estimated on the date of grant using the Black-Scholes-Merton option pricing model and the fair value of each RSU is based on the price of the Company's stock on the date of grant.

Forfeitures are estimated on the date of grant and revised if actual or expected forfeiture activity differs materially from original estimates.

The Company recognizes compensation costs for performance-based non-qualified stock options and restricted stock units when it is probable that the performance conditions will be met.

The Company assesses these conditions on a quarterly basis.

For performance-based non-qualified stock options (PSO) and performance-based restricted stock units (PSU), we recognize compensation costs over the requisite service period when it is probable that the performance conditions will be met.

We assess these conditions on a quarterly basis.

Revenue Recognition

The Company derives revenues from subscriptions that require customers to pay a fee in order to access the Company’s cloud solutions.

Customers generally enter into one-year renewable subscriptions though some customers do enter into subscriptions with longer terms.

The subscription fee entitles the customer to an unlimited number of scans for a specified number of networked devices or web applications and, if requested by a customer as part of their subscription, a specified number of physical or virtual scanner appliances.

Revenue is recognized when control of these subscription services is transferred to its customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those services.

The Company’s physical and virtual scanner appliances are requested by certain customers as part of their subscriptions in order to scan IT infrastructures within their firewalls and do not function without, and are not sold separately from, subscriptions for the Company’s solutions.

In some limited cases, the Company also provides certain computer equipment used to extend its Qualys Cloud Platform into its customers’ private cloud environment.

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

Physical equipment (scanners and private cloud platforms) are accounted for as operating leases under ASC 842.

The company used the practical expedient to combine lease and nonlease components as a combined component under ASC 606 due to the software subscription nonlease components being the predominant component of the combined component.

Therefore, the Company recognizes revenue for the physical equipment ratably over the related subscription period.

The Company derives revenues from subscriptions that require customers to pay a fee in order to access the Company’s cloud solutions.

Contract period with customers generally ranges from less than a year to five years. The subscription fee entitles the customer to an unlimited number of scans for a specified number of networked devices or web applications and, if requested by a customer as part of their subscription, a specified number of physical or virtual scanner appliances. The Company’s physical and virtual scanner appliances are requested by certain customers as part of their subscriptions in order to scan IT infrastructures within their firewalls and do not function without, and are not sold separately from, subscriptions for the Company’s solutions.

In some limited cases, the Company also provides certain computer equipment used to extend its Qualys Cloud Platform into its customers’

private cloud environment.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The Company determines revenue recognition through the following steps:

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The Company assesses collectability based on a number of factors, including credit worthiness of the customer along with past transaction history.

In addition, the Company performs periodic evaluations of its customers’ financial condition.

In addition, the Company performs periodic evaluations of its customers’

financial condition. 

The vast majority of the Company’s revenue contracts are subscription based and contain a single performance obligation.

In the rare case that multiple performance obligations exist, the Company determines the standalone selling prices ("SSP") of each performance obligation at contract inception, using information that may include market conditions and other observable inputs.

As the Company, in general, 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, the contract prices are generally composed of fixed amount consideration for a specific period of time and typically do not include variable consideration.

The subscription contracts typically do not confer to the customers any future rights that would constitute material rights under ASC 606.

Revenue is recognized when control of the subscription service is transferred to its customers in an amount that reflects the consideration the Company expects to be entitled to in exchange for those services.

The Company's subscription services are typically satisfied ratably over the subscription term as its cloud-based offerings are delivered to customers electronically and over time.

In addition, the Company recognizes revenues for certain limited scan arrangements on an as-used basis.

The Company recognizes revenue related to professional services based on time and materials or completion of milestones stated in the contracts. When physical equipment are provided to the customers as part of the subscription service contract, the Company applies the practical expedient allowed under ASC 842 Leases to combine lease and nonlease components as a combined component to be accounted for under ASC 606, as the Company determined that the software subscription is the predominant component of the combined components. Therefore, the Company recognizes revenue for the physical equipment ratably over the related subscription period.

Deferred revenues consist of customer contracts billed or cash received that will be recognized in the future under subscriptions existing at the balance sheet date.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

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

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

Incremental direct costs of obtaining a contract, which consist of sales commissions primarily for new business and upsells, are deferred and amortized over the estimated life of the customer relationship if renewals are expected and the renewal commission is not commensurate with the initial commission.

The Company elected the practical expedient to expense commissions on renewals where the specific anticipated contract term amortization period is one year or less.

The Company amortizes the capitalized commission cost as a selling expense on a straight-line basis over a period of five years.

The Company classifies deferred commissions as current or noncurrent based on the timing of when it expects to recognize the expense.

The current and noncurrent portions of deferred commissions are included in prepaid expenses and other current assets and other noncurrent assets, respectively, in its consolidated balance sheets. 

Advertising Expenses

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The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date.

Income tax expense or benefit is recognized for the amount of taxes payable or refundable for the current year and for deferred tax assets and liabilities for the tax consequences of events that have been recognized in an entity’s financial statements or tax returns.

The Company must make significant assumptions, judgments and estimates to determine its current provision for (benefit from) income taxes, its deferred tax assets and liabilities, and any valuation allowance to be recorded against its deferred tax assets.

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The Company's estimates and assumptions may differ from the actual results as reflected on its income tax returns and will record the required adjustments when they are identified or resolved.

Changes in the Company's business, tax laws or interpretation of tax laws, and developments in current and future tax audits, could significantly impact the amounts provided for income taxes in the Company's results of operations, financial position, or cash flows.

Changes in the Company's business, tax laws or its interpretation of tax laws, and developments in current and future tax audits, could significantly impact the amounts provided for income taxes in the Company's results of operations, financial position, or cash flows.

Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to tax benefit carry-forwards and to differences between the financial statement amounts of assets and liabilities and their respective tax basis.

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The Company must reevaluate its income tax positions on a quarterly basis to consider factors such as changes in facts or circumstances, changes in tax law, effectively settled issues under audit, and new audit activity.

Such a change in recognition or measurement would result in recognition of a tax

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

benefit or an additional charge to the tax provision.

Such a change in recognition or measurement would result in recognition of a tax benefit or an additional charge to the tax provision.

The Company's policy is to recognize interest and penalties related to unrecognized tax benefits as a component of the provision for income taxes.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Comprehensive Income (Loss)

Other comprehensive income (loss) consists of unrealized gains (losses) on marketable securities, net of tax, and derivative financial instruments designated as cash flow hedges which are not included in the Company’s net income.

Total comprehensive income includes net income and other comprehensive income (loss) and is included in the consolidated statements of comprehensive income.

Foreign Currency Transactions

The Company’s operations are conducted in various countries around the world and the financial statements of its foreign subsidiaries are reported in the U.S.

dollar as their respective functional currency.

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dollars using the exchange rates in effect at the balance sheet date, and income and expenses are re-measured at average exchange rates during the period.

Foreign currency re-measurem ent gains and losses and foreign currency transaction gains and losses are recognized in other income (expense), net.

The Company recorded total foreign currency transaction losses of $ 0.4 million , $ 0.6 million and $ 0.4 million during 2019 , 2018 and 2017 , respectively.

Foreign currency re-measurement gains and losses and foreign currency transaction gains and losses are recognized in other income (expense), net.

The Company recorded total foreign currency transaction gain of $ 0.3 million and losses of $ 0.4 million and $ 0.6 million during 2020 , 2019 and 2018 , respectively.

Net Income Per Share

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The outstanding stock options and RSUs which would be anti-dilutive are excluded from the computation of diluted net income per common share.

Reclassification

Reclassification has been made to the shares issued for RSUs and taxes related to net share settlement of equity awards and options in the consolidated statement of stockholders' equity for the fiscal year 2017.

The reclassification had no effect on the total number of shares outstanding at the end of each period presented in the consolidated statements of stockholders' equity.

Recently Adopted Accounting Pronouncements

In August 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Updates (ASU) 2018-13, Disclosure Framework - Changes to the Disclosure requirements for Fair Value Measurement, which adds, modifies and removes certain fair value measurement disclosure requirements.

The ASU is effective for the Company for fiscal years beginning after December 15, 2019, including interim periods therein.

The Company early adopted the guidance in the fiscal year 2019.

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

In June 2018, the FASB issued ASU 2018-07, Compensation - Stock Compensation (Topic 718):

Improvements to Nonemployee Share-Based Payment Accounting.

This ASU expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees.

The Company adopted this guidance as of January 1, 2019.

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

In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment (Topic 350).

This standard eliminates Step 2 from the goodwill impairment test, instead requiring an entity to recognize a goodwill impairment charge for the amount by which the goodwill carrying amount exceeds the reporting unit’s fair value.

This ASU is effective for interim and annual goodwill impairment tests in fiscal years beginning after December 15, 2019 with early adoption permitted.

The Company adopted this ASU on a prospective basis during the first quarter of fiscal 2019 and the adoption did not have a material impact on the Company's consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires lessees to recognize all leases, including operating leases, on the balance sheet as a lease asset and lease liability, unless the lease is a short-term lease.

ASU 2016-02 also requires additional disclosures regarding leasing arrangements.

ASU 2016-02 is effective for the Company beginning in the first quarter of fiscal 2019 and early adoption is permitted.

In July 2018, the FASB issued ASU 2018-11,

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Targeted Improvements - Leases (Topic 842).

This update provides an optional transition method that allows entities to elect to apply the standard prospectively at its effective date, versus recasting the prior periods presented.

If elected, an entity would recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption.

Pursuant to the leasing criteria, most of the Company's leased space and equipment leases will be required to be accounted for as right-of-use assets (ROU) on the balance sheet with offsetting financing obligations.

In the statement of operations, what was formerly rent expense for operating leases will be lease expense;

and finance leases will be bifurcated into amortization of right-of-use assets and interest on lease liabilities.

The Company adopted the ASU utilizing the current period adjustment method on January 1, 2019, and recognized a ROU asset of $30.8 million and a lease liability of $41.6 million on its consolidated financial statements.

As of January 1, 2019, $3.9 million of deferred rent and $6.9 million related to tenant improvement allowance was removed upon adoption.

As part of this adoption, the Company elected the package of transitional practical expedients to not reassess (1) whether any contracts that existed prior to adoption have or contain leases, (2) the classification of existing leases or (3) initial direct costs for existing leases.

The Company also elected to make the accounting policy election for short-term leases, permitting the Company to not apply the recognition requirements of this standard to short-term leases with terms of 12 months or less.

Recently Issued Accounting Pronouncements Not Yet Adopted

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.

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

Most amendments within the standard are required to be applied on a prospective basis, while certain amendments must be applied on a retrospective or modified retrospective basis.

The Company is currently evaluating the impacts of the provisions of ASU 2019-12 on its consolidated financial statements.

In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40):

August 2018, 

the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 

2018 - 15,  Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 

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

This ASU aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs related to internal-use software.

ASU 2018-15 is effective for the Company beginning in the first quarter of fiscal 2020 and early adoption is permitted.

The Company is currently evaluating the impact of this ASU on its consolidated financial statements.

In June 2016, the FASB issued ASU No.

2016-13, Financial Instruments-Credit Losses (Topic 326) as modified by subsequently issued ASU No.

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

It also requires the Company to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement.

The Company adopted this ASU prospectively to applicable implementation costs incurred since 

January 1, 2020. 

The adoption did 

not  have a material impact on the Company's consolidated financial statements.

June 2016, 

the FASB issued ASU 

2016 - 13,  Financial Instruments-Credit Losses (Topic 

326 ) as modified by subsequently issued ASU 

2018 - 19,  

2019 - 04, 2019 - 05 and 

2019 - 11,  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.

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The expected credit losses are adjusted each period for changes in expected lifetime credit losses.

The ASUs are effective for the Company beginning in the first quarter of fiscal 2020.

The adoption of the ASUs is not expected to have a material impact on the Company's consolidated financial statements.

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 consolidated financial statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Recently Issued Accounting Pronouncements Not Yet Adopted

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.

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

Most amendments within the standard are required to be applied on a prospective basis, while certain amendments must be applied on a retrospective or modified retrospective basis.

The adoption of this ASU is not expected to have a material impact on the Company's consolidated financial statements.

Fair Value of Financial Instruments

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

For certain of the Company’s financial instruments, including certain cash equivalents, accounts receivable, accounts payable, and 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.

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

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

This guidance establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available.

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Level 1 -Valuations based on quoted prices in active markets for identical assets or liabilities.

Level 2 -Valuations based on other than quoted prices in active markets for identical assets and liabilities, 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.

Level 2 -Valuations based on other than quoted prices in active markets for identical assets and liabilities, including quoted prices for identical assets or liabilities in less active or inactive markets, quoted prices for similar assets or liabilities in active markets, or inputs other than quoted prices that are observable for substantially the full term of the assets or liabilities.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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Level 2 assets include fixed-income U.S.

government agency securities, commercial paper, corporate bonds, asset-backed securities and derivative financial instruments consisting of foreign currency forward contracts.

The securities, bonds and commercial paper are valued using prices from independent pricing services based on quoted prices 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 fair value of commitments from prior acquisitions was determined based on management’s estimate of fair value using a Monte Carlo simulation model, which uses Level 3 inputs for fair value measurements.

As of December 31, 2019, management estimated the fair value of such commitments to be zero.

During the fiscal year ended December 31, 2019 and 2018, the Company made investments of $ 0.6 million and $ 2.5 million in a convertible security and preferred stock issued by a privately-held company.

The estimated fair value of the investments was determined based on Level 3 inputs.

As of December 31, 2019, management estimated that the fair value of the investments equaled its carrying value.

and foreign government agency securities, commercial paper, corporate bonds, asset-backed securities and derivative financial instruments consisting of foreign currency forward contracts.

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

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

The Company's cash and cash equivalents, short-term marketable securities, and long-term marketable securities consist of the following:

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Cash and cash equivalents:

$ 33,105  

Money market funds

38,028  

Commercial paper

74,132  

Short-term marketable securities:

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Corporate bonds

24,368  

24,538  

Asset-backed securities

government agencies

244,568  

( 11 )  

244,926  

281,346  

( 11 )  

281,892  

Long-term marketable securities:

Asset-backed securities

38,456  

38,613  

government agencies

Foreign government agencies  

Corporate bonds

51,068  

51,907  

97,414  

98,458  

$ 452,892  

$ 1,604  

$ ( 14 )  

$ 454,482  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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Cash and cash equivalents:

$ 84,102  

Money market funds

Commercial paper  

87,559  

Short-term marketable securities:

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Corporate bonds

33,048  

33,098  

Asset-backed securities

government agencies

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

As of December 31, 2019 and 2018, the Company had no investments utilizing level 3 inputs, other than the aforementioned investments in the privately-held company.

32,236  

32,498  

118,684  

119,508  

$ 417,332  

$ 1,071  

$ ( 5 )  

$ 418,398  

December 31, 2020  and 2019 , there were 

no  marketable securities that had been in a continuous unrealized loss position for 

12  months or longer.

The Company had the ability and intent to hold all marketable securities that were in an unrealized loss position until recovery of the amortized cost basis.

The Company considered the extent to which fair value was less than amortized cost basis and conditions related to security’s industry and geography and changes to the ratings, if any, and concluded the decline in fair value compared to carrying value was 

not  related to credit loss.

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

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Money market funds

$ 38,028  

Commercial paper

government agencies

251,827  

Foreign government agencies  

Corporate bonds

76,445  

Asset-backed securities

44,894  

$ 38,028  

$ 383,349  

$ 421,377  

December 31, 2019

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government agencies

220,362  

Corporate bonds

65,596  

Asset-backed securities

42,642  

$ 334,238  

$ 334,296  

As of December 31, 2020 and 2019 , the Company had no investments utilizing level 3 inputs.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following summarizes the fair value of marketable securities classified as available-for-sale debt securities by contractual maturity:

The following summarizes the fair value of marketable securities classified as AFS debt securities by contractual maturity:

December 31, 2020

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Commercial paper

government agencies

$ 9,146  

government agencies  

244,925  

251,827  

Foreign government agencies  

Corporate bonds

24,538  

31,983  

19,924  

76,445  

Asset-backed securities

18,642  

19,970  

44,894  

$ 284,891  

$ 57,340  

$ 41,118  

$ 383,349  

Derivative Financial Instruments

Designated cash flow hedges

The Company uses a hedging strategy to reduce its exposure to foreign currency exchange rate fluctuations for forecasted subscription renewals and new orders in both GBP and Euro.

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

Upon executing a hedging contract and periodically thereafter, the Company assesses hedge effectiveness using regression analysis.

The Company includes time value in its effectiveness testing and the changes in the value of hedge contracts is recorded as unrealized gains or losses in AOCI within stockholders’ equity on the Company's consolidated balance sheet as of December 31, 2019.

The unrealized gains or losses in AOCI will be reclassified into revenue when the respective hedged transactions affect earnings.

As of December 31, 2019, the net amount of unrealized gains and losses related to the hedged forecasted transactions reported in AOCI that is expected to be reclassified into revenue within the next 12 months was $ 0.7 million gains, net of losses (before taxes).

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

During the fiscal year ended December 31, 2019, the Company recorded $ 0.7 million of unrealized foreign exchange gains, net of losses (before taxes) related to the designated cash flow hedge contracts in AOCI.

During the fiscal year ended December 31, 2019, $ 0.2 million of gains, net of losses (before tax) were realized and reclassified into revenue.

At December 31, 2018, the Company had 12 open cash flow hedge contracts with notional amount of € 12.9 million and £ 4.1 million .

The unrealized foreign exchange losses on these contracts recorded in AOCI were insignificant.

At December 31, 2019 , the Company had 15 outstanding non-designated forward contracts with notional amounts of € 20.0 million , £ 5.6 million and ₨ 756.0 million which will mature at various dates through January 2021.

At December 31, 2018 , the Company had two non-designated outstanding forward contracts with notional amounts of € 16.0 million and £ 6.3 million .

The Company uses forward currency contracts accounted for as cash flow hedges against a designated portion of forecasted subscription renewals and new orders. Unrealized foreign exchange gains or losses related to those designated cash flow hedge contracts are recorded in AOCI and will be reclassified into revenues in the same periods when the hedged contracts are recognized into revenues. 

In addition, the Company uses a hedging strategy to reduce its exposure associated with costs incurred in 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 December 31, 2020 , the Company had 39 open designated cash flow hedge forward contracts with notional amounts of 

€25.9  million, £8.7  million and Rs.

1,933.5 million. At December 31, 2019 , the Company had 26 open cash flow hedge contracts with notional amount of €24.2 million and £9.7 million.

December 31, 2020  and 

2019 , a net amount of unrealized losses of $ 1.8 million before tax and unrealized gains of $ 0.7 million before tax, respectively, on the foreign currency forward contracts for GBP and Euro reported in AOCI is expected to be reclassified into revenue within the next 

12  months.

December 31, 2020 , a net amount of unrealized gains of $ 1.5 million before tax on the foreign currency forward contracts for INR reported in AOCI is expected to be reclassified into operating expenses within the next 

12  months.

Non-designated forward contracts

At December 31, 2020 , the Company had 24 outstanding non-designated forward contracts with notional amounts of €17.7 million, £6.5 million and ₨.

32.8 million which will mature at various dates through January 2022.

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 December 31, 2020 and 2019 :

(in thousands)

Foreign currency forward contracts designated as cash flow hedge

1 unchanged sentence

Foreign currency forward contracts designated as cash flow hedge

$ ( 2,200 )  

Foreign currency forward contracts not designated as hedging instruments

( 1,677 )  

$ ( 3,877 )  

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

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

Year Ended December 31,

(in thousands)  

Net gains (losses) from forward contracts

Other foreign currency transaction (losses) gains

Total foreign exchange loss, net

$ ( 1,634 )  

Other foreign currency transaction gains (losses)

( 792 )  

Total foreign exchange gains (losses), net

( 354 )  

Other expenses

( 253 )  

Other income (expense), net

$ ( 607 )  

Accumulated Other Comprehensive Income

The components of AOCI were as follows:

(in thousands)

Unrealized gains (losses) on AFS debt securities

$ 1,224  

Unrealized gains (losses) on cash flow hedges

( 1,708 )  

Total accumulated other comprehensive income $ ( 484 ) $ 1,162

The effects on income before income taxes of amounts reclassified from AOCI to the consolidated statements of operations were as follows:

Year Ended December 31,  

(in thousands)

Reclassification of AOCI - AFS debt securities

Other income (expense), net

Reclassification of AOCI - cashflow hedges

Revenue  

Cost of revenues  

( 76 )  

Research and development expenses  

( 264 )  

Sales and marketing expenses  

( 20 )  

General and administrative expenses

( 36 )  

Property and Equipment, Net

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

(in thousands)

Computer equipment

$ 136,286  

$ 112,599  

Computer software

26,164  

26,137  

Scanner appliances

16,749  

15,864  

Furniture, fixtures and equipment

1 unchanged sentence

Leasehold improvements

21,107  

18,817  

Total property and equipment

210,408  

183,893  

accumulated depreciation and amortization

( 145,558 )  

Property and equipment, net

$ 64,850  

$ 60,579  

Physical scanner appliances and other computer equipment that are or will be subject to leases by customers have a net carrying value of $ 7.5 million and $ 4.9 million, respectively, including assets that have not been placed in service of $ 1.9 million and $ 0.9 million, respectively, as of December 31, 2020 and 2019 .

Depreciation and amortization expenses relating to property and equipment were $ 24.9 million , $ 25.1 million and $ 19.9 million for 2019 , 2018 and 2017 , respectively.

Depreciation and amortization expenses relating to property and equipment were $ 26.1 million, $ 24.9  million and $ 25.1  million for 2020 , 2019 and 2018 , respectively.

Revenue from Contracts with Customers

The Company's subscription contracts are typically satisfied ratably over the subscription term as its cloud-based offerings are delivered to customers electronically and over time.

In addition, the Company recognizes revenues for certain limited scan arrangements on an as-used basis.

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

As the vast majority of the Company’s offerings are subscription based, the Company rarely needs to allocate the transaction price to separate performance obligations.

In the rare case that allocation of the transaction price is needed, the Company recognizes revenue in proportion to the standalone selling prices (SSP) of the underlying services at contract inception.

If an SSP is not directly observable, the Company determines the SSP using information that may include market conditions and other observable inputs.

The Company's transaction prices typically do not include variable consideration and are a fixed amount for a specific period of time, and the majority of contracts are twelve months with certain customers signing longer term deals.

In general, the Company does not offer rights of return, performance bonuses, customer loyalty programs, payments via non-cash methods, refunds, volume rebates, incentive payments, penalties, price concessions or payments or discounts contingent on future events and the Company does not grant its customers any material rights.

For contracts that include leased scanners and PCPs, the Company applies the lease and non-lease component practical expedient under ASC 842 to account for non-lease components and lease components as combined components under the revenue recognition guidance in ASU 2014-09, "Revenue from Contracts with Customers" (Topic 606) as the subscriptions are the predominant components in the arrangements.

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

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

The Company elected the practical expedient to expense commissions on renewals where the specific anticipated contract term amortization period is one year or less.

The Company amortizes the capitalized commission cost as a selling expense on a straight-line basis over a period of five years.

The Company classifies deferred commissions as current or noncurrent based on the timing of when it expects to recognize the expense.

The current and noncurrent portions of deferred commissions are included in prepaid expenses and other current assets and other noncurrent assets, respectively, in its consolidated balance sheets.

Capitalized costs to obtain contracts, current and noncurrent are as follows (in thousands):

December 31, 2019

December 31, 2018

Commission asset, current

Commission asset, noncurrent

For the year ended December 31, 2019 and 2018 , the Company recognized $ 2.0 million and $ 1.2 million of commission expense from amortization of its commission assets.

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

Revenues of $ 188.6 million and $ 160.8 million were recognized during the years ended December 31, 2020 and December 31, 2019 , respectively, which amounts were included in the deferred revenue balances as of December 31, 2019 and December 31, 2018 , respectively.

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

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

The term between invoicing and when payment is due is not significant.

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 December 31, 2019 (in thousands):

Total Expected Revenue

The following table sets forth the expected revenue from all remaining performance obligations as of December 31, 2020 :

(in thousands)

$ 103,165  

70,381  

35,304  

2026 and thereafter

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.

$ 210,782  

Revenues allocated to remaining performance obligations represents the transaction price of noncancelable orders for which service has not been performed, which include deferred revenue and the amounts that will be invoiced and recognized as revenues in future periods from open contracts 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.

1 unchanged sentence

For any discounts associated with these multiple year contracts, the Company concluded its contracts did not contain a financing component.

Revenues by sales channel are as follows (in thousands):

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Revenues by sales channel are as follows:

Year Ended December 31,

(1) Revenue has not been adjusted under the modified retrospective method.

(in thousands)  

$ 212,296  

$ 186,130  

$ 164,084  

150,667  

135,477  

114,805  

$ 362,963  

$ 321,607  

$ 278,889  

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.

4 unchanged sentences

See Note 13, "Segment Information and Information about Geographic Area" for disaggregation of revenue by geographic area.

Business Combinations

The following table summarizes the purchase price allocation of the business acquisitions during the fiscal years 2019, 2018 and 2017 based on estimated fair values of the acquired assets as of the acquisition date (in thousands);

Capitalized costs to obtain contracts, current and noncurrent are as follows:

December 31, 2020

December 31, 2019

(in thousands)  

Commission asset, current

$ 3,459  

$ 2,568  

Commission asset, noncurrent

$ 6,906  

$ 6,454  

For the years ended December 31, 2020 , 

2019 ,and 

2018 , the Company recognized $ 3.0  million, $ 2.0 million and $ 1.2 million of commission expense from amortization of its commission assets, respectively.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following table summarizes the purchase price allocation of business and asset acquisitions during the fiscal years 2020 , 2019 and 2018 based on estimated fair values of the acquired assets as of the acquisition date:

Acquisition Date

Purchase Consideration

Assets Acquired/

(liabilities assumed)

Net Tangible Assets Acquired/ (liabilities assumed)

Purchased Intangible Assets

Deferred Tax Liability

(in thousands)

Spell security

July 24, 2020

$ 1,500  

January 10, 2019

$ 1,000  

Layered Insight

October 16, 2018

$ 13,434  

$ ( 80 )  

$ 9,600  

$ 5,498  

April 1, 2018

November 28, 2017

August 29, 2017

$ 4,000  

$ 3,700  

July 24, 2020, 

the Company acquired certain intangible assets of 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 

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.

On January 10, 2019, the Company acquired the assets of Adya, an India-based company.

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

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

Total purchase consideration included $ 0.2 million of deferred consideration due 18 months from the closing date of the acquisition, subject to potential adjustment from possible indemnity claims, which was fully paid to Adya during the fiscal year ended December 31, 2020.

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 .

Goodwill arising from the Adya acquisition is deductible for tax purposes over 

15  years. 

On October 16, 2018, the Company completed the acquisition of Layered Insight, a pioneer and global leader in container native application protection, providing accurate insight into container images, adaptive analysis of running containers, and automated enforcement of the container environment.

Of the total consideration, $ 1.6 million was paid during the fiscal year ended December 31, 2019 based on the terms and conditions of the purchase agreement.

Of the total consideration, $ 1.6 million was paid during the fiscal year ended December 31, 2019 

based on the terms and conditions of the purchase agreement.

All consideration was paid in cash.

The Company also paid additional $ 4.0 million as the acquired business had achieved certain integration milestones for the annual period ending December 31, 2019.

In addition, the Company initially recorded $ 1.5 million of the contingent consideration related to revenue milestone payments in accrued liabilities of the consolidated balance sheet as of December 31, 2018.

The entire amount was reversed during the fiscal year 2019 as the revenue milestone was not met.

The Company also paid additional $ 4.0 million as the acquired business had achieved certain integration milestones for the annual period ending December 31, 2019.

The acquired intangible asset relating to Layered Insight's developed technology is amortized over the estimated useful life of approximately four years.

1 unchanged sentence

On April 1, 2018, the Company acquired the assets of 1Mobility, a Singapore-based company.

The acquisition allowed the Company to provide enterprises of all sizes with the ability to create and continuously update an inventory of mobile devices on all versions of Android, iOS and Windows Mobile in their environment;

and to continuously assess their security and

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

compliance posture, while quarantining devices that were compromised or out-of-compliance.

Of the total purchase consideration, $ 0.6 million was paid during the fiscal year ended December 31, 2019 based on the terms and conditions of the purchase agreement.

The acquisition allowed the Company to provide enterprises of all sizes with the ability to create and continuously update an inventory of mobile devices on all versions of Android, iOS and Windows Mobile in their environment;

and to continuously assess their security and compliance posture, while quarantining devices that were compromised or out-of-compliance.

Of the total purchase consideration, $ 0.6 million was paid during the fiscal year ended December 31, 2019 

based on the terms and conditions of the purchase agreement.

The acquired intangible assets relating to 1Mobility's developed technology is being amortized over the estimated useful lives of approximately four years.

Goodwill arising from the 1Mobility acquisition is deductible for tax purposes over 15 years.

In 2017, the Company purchased certain assets of Nevis Networks (India) Private Limited (Nevis) and Defensative, LLC (NetWatcher).

The Nevis acquisition accelerated the Company's development of network security solutions for detection and awareness of external intrusions to computer networks.

The NetWatcher acquisition expanded the Company's threat protection and management capabilities and added new offerings to managed security service providers.

Of the total consideration, $ 1.0 million was paid during the fiscal year ended December 31, 2019 based on the terms and conditions of the purchase agreement.

Purchased intangible assets represented the fair value of purchased technology from the Company's acquisitions of Nevis and NetWatcher.

Goodwill generated from these acquisitions was primarily related to the acquired workforce, expected improvements in technology performance and additional product functionality.

The intangible assets have a useful life of 5 years .

Goodwill is deductible for tax purposes over 15 years .

Goodwill arising from the 1Mobility acquisition is deductible for tax purposes over 15 years. 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Pro forma financial information for these acquisitions in the fiscal years 2020 , 2019 and 2018 was not presented because the acquisitions were not material to the Company's consolidated financial statements, either individually or in aggregate.

Goodwill and Intangible Assets, Net

Intangible assets consist primarily of developed technology and patent licenses in business combinations.

Acquired intangibles are amortized on a straight-line basis over the respective estimated useful lives of the assets.

The carrying values of intangible assets as of December 31, 2019 are as follows (in thousands, except for years):

Changes in the carrying amount of goodwill for the years ended December 31, 2020 , 2019 and 2018 were as follows:

(in thousands)

Balance as of December 31, 2018

$ 7,225  

Goodwill acquired

Adjustment  

Balance as of December 31, 2019 and 2020

$ 7,447  

Intangible Assets, Net

Intangible assets consist primarily of developed technology and patent licenses acquired from business or asset acquisitions. Acquired intangibles are amortized on a straight-line basis over the respective estimated useful lives of the assets.

The carrying values of intangible assets are as follows:

December 31, 2020

Weighted Average Lives (Years)

Weighted Remaining Average Lives (Years)

Weighted Average Remaining Lives (Years)

Accumulated Amortization

Net Book Value

(in thousands)

Developed technology

1.8 $ 27,356 $ ( 16,152 ) $ 11,204

Patent licenses

( 1,021 )  

Non-compete agreements  

( 104 )  

Total intangibles subject to amortization

$ 29,243 $ ( 17,277 )  

Intangible assets not subject to amortization

Total intangible assets, net

December 31, 2019  

Weighted Average Lives (Years)

Weighted Remaining Average Lives (Years)

Weighted Average Remaining Lives (Years)

Accumulated Amortization

Net Book Value

(in thousands)  

Developed technology

$ 26,356  

$ ( 10,066 )  

$ 16,290  

Patent licenses

( 922 )  

Total intangibles subject to amortization

$ 27,743  

$ ( 10,988 )  

16,755  

Intangible assets not subject to amortization

Total intangible assets, net

$ 16,795  

Intangible assets amortization expenses were $ 6.3 million, $ 6.1 million and $ 3.7 million for 2020 , 2019 and 2018 respectively, which were recorded in cost of revenues in the consolidated statements of operations.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

As of December 31, 2019 , the Company expects amortization expense in future periods to be as follows (in thousands):

2025 and thereafter

As of December 31, 2020 , the Company expects amortization expense in future periods to be as follows:

(in thousands)  

$ 6,581  

Total expected future amortization expense

Goodwill, which is not subject to amortization, totaled $ 7.4 million and $ 7.2 million as of December 31, 2019 , and 2018 , respectively.

Changes in the carrying amount of goodwill for the years ended December 31, 2019 , 2018 and 2017 were as follows (in thousands):

Balance as of December 31, 2017

Goodwill acquired

Balance as of December 31, 2018

Goodwill acquired

Balance as of December 31, 2019

Commitments and Contingencies

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.

The Company adopted the standard using the current period adjustment method with an effective date of January 1, 2019.

Prior year financial statements were not restated under the new standard and, therefore, those amounts are not presented below.

For both operating and finance leases, the Company recognizes a right-of-use asset, which represents its right to use the underlying asset for the lease term, and a lease liability, which represents the present value of its obligation to make payments arising over the lease term.

The present value of the lease payments is calculated using the incremental borrowing rate for operating and finance leases.

The incremental borrowing rate is determined using a portfolio approach based on the rate of interest that the Company would have to pay to borrow an amount equal to the lease payments on a collateralized basis over a similar term.

Where the Company is the lessee, the Company elected to account for non-lease components associated with its leases (e.g., common area maintenance costs) and lease components separately for substantially all of the asset classes.

In arrangements where the Company is the lessor, the Company applies the lease and non-lease component practical expedient and the Company accounts for lease components (e.g., customer premise equipment) and non-lease components (e.g., service revenue) as combined components and account for the combined components under the revenue recognition guidance in Topic 606 as the service revenues are the predominant components in the arrangements.

The Company leases property and equipment under finance and operating leases.

For leases with terms greater than 12 months, the Company records the related asset and obligation at the present value of lease payments over the term.

Many of its leases include rental escalation clauses, renewal options and/or termination options that are factored into the determination of lease payments when appropriate.

When available, the Company uses the rate implicit in the lease to discount lease payments to present value;

however, most of the leases do not provide a readily determinable implicit rate.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The table below presents the lease-related assets and liabilities recorded on the balance sheet.

(in thousands)

$ 11,966  

The following table presents the lease-related assets and liabilities recorded on the balance sheet:

Classification on the Balance Sheet

Operating lease assets

Classification of Lease

(in thousands)

Operating lease - right of use asset

Finance lease assets

Operating leases

$ 44,838  

$ 40,551  

Property and equipment, net

Finance leases

Total lease assets

$ 44,969  

$ 41,850  

Operating lease liabilities, current

Operating leases

$ 11,672  

$ 7,663  

Accrued liabilities

Finance leases

Operating lease liabilities, noncurrent

Operating leases

45,700  

44,015  

Other noncurrent liabilities

Finance leases

Total lease liabilities

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

In January 2018, the Company entered into a $ 3.5 million financing arrangement for data center storage equipment, accounted for as a finance lease, with an implied interest rate of 5 % .

During the fourth quarter ended December 31, 2019, the Company entered into a new lease agreement (included in the table above) for a total of approximately 282,000 square feet of office space in Pune, India.

On the lease inception date of October 1, 2019, the Company recognized $ 14.7 million of lease liability and ROU assets, which will be amortized over the non-cancellable lease term through February 2025.

The following are the minimum annual lease payments due under operating leases at December 31, 2019 (in thousands):

$ 57,436  

$ 51,856  

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

 While under our lease agreements we have options to extend our leases up to four years, we have not included renewal options in determining the lease terms for calculating our lease liabilities, as these options have not been reasonably certain of exercise. 

Leases expense was $ 16.7 million, $ 13.9 million and $ 9.9 million for 2020 , 2019 and 2018 , respectively.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

Year Ended December 31,

(in thousands)

Operating cash flows included in the measurement of lease liabilities

13,403  

Lease liabilities arising from obtaining right of use assets

15,837  

17,359  

Maturities of the Company's operating lease liabilities at December 31, 2020  are as follows:

(in thousands)  

$ 14,186  

13,316  

11,297  

10,010  

2026 and thereafter

10,317  

Total minimum lease payments

65,533  

amount representing interest

Present value of minimum payments

57,372  

lease obligations, current

Lease obligations, noncurrent

Rent expense was $ 13.9 million , $ 9.9 million and $ 9.6 million for 2019 , 2018 and 2017 , respectively.

$ 45,700  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

December 31, 2019

Weighted average remaining lease term (years)

4 unchanged sentences

Finance leases

Commitment and Contingencies

Purchase Obligation

The Company has entered into agreements to purchase goods and services in the ordinary course of business, primarily through the next 12 months.

As of December 31, 2019, these remaining commitments were $ 25.3 million .

The Company has entered into agreements to purchase goods and services in the ordinary course of business.

December 31, 2020 , these remaining purchase commitments for future periods are as follows:

(in thousands)

$ 20,131  

Total purchase commitment

$ 43,236  

Indemnifications

2 unchanged sentences

To date, the Company has not incurred and has not recorded any liability in connection with such indemnifications.

The Company maintains director and officer insurance, which may cover certain liabilities arising from its obligation to indemnify its directors.

Legal Proceedings

From time to time the Company may become involved in legal proceedings or be subject to claims arising in the ordinary course of our business. The Company records a provision for a liability when it is both probable that a liability has been incurred and the amount can be reasonably estimated.

The Company provides disclosure if it is reasonably possible that a loss has been incurred and a range of loss or possible loss can be reasonably estimated.

Significant judgment is required to determine both probability and the estimated amount.

The Company reviews these provisions at least quarterly and adjust these provisions to reflect the impact of negotiations, settlements, rulings, advice of legal counsel, and updated information.

As of December 31, 2020 , there has not been at least a reasonable possibility that the Company has incurred a material loss from any ongoing legal proceedings, individually or taken together.

However, litigation is inherently unpredictable and is subject to significant uncertainties, some of which are beyond the Company's control.

Should any of these estimates and assumptions change or prove to have been incorrect, the Company could incur significant charges related to legal matters which could have a material impact on its results of operations, financial position and cash flows.

Stockholders' Equity and Stock-based Compensation

2 unchanged sentences

2000 Equity Incentive Plan

102,087  

2012 Equity Incentive Plan

3,160,057  

Shares available for future grants under an equity incentive plan

2012 Equity Incentive Plan

6,628,383  

Total shares reserved for future issuance

9,890,527  

Preferred Stock

2 unchanged sentences

As of December 31, 2020 , and 2019 , there were no issued or outstanding shares of preferred stock.

Stock Options

Equity Incentive Plan

2012 Equity Incentive Plan

The 2012 Equity Incentive Plan was adopted and approved in September 2012 and became effective on September 26, 2012.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

units and performance shares equivalent to up to 13,741,931 shares of common stock as of December 31, 2019 .

Under the 2012 Plan, the Company is authorized to grant to eligible participant's incentive stock options (ISOs), non-statutory stock options (NSOs), stock appreciation rights (SARs), restricted stock awards (RSAs), RSUs, performance units and performance shares equivalent to up to 15,699,245 shares of common stock as of December 31, 2020 .

The number of shares of common stock available for issuance under the 2012 Plan includes an annual increase on January 1 of each year by an amount equal to the least of 3,050,000 shares;

2 unchanged sentences

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.

Options granted generally vest over a period of up to four years , with a maximum term of ten years .

Options and RSU's granted generally vest over a period of up to four years.

ISOs may only be granted to employees and any subsidiary corporations' employees.

All other awards may be granted to employees, directors and consultants and subsidiary corporations' employees and consultants.

Options, SARs, RSUs, performance units and performance awards may be granted with vesting terms as determined by the Board of Directors and expire no more than ten years after the date of grant or earlier if employment or service is terminated.

Options, SARs, RSUs, performance units and performance awards may be granted with vesting terms as determined by the Board of Directors and expire no more than 

ten years after the date of grant or earlier if employment or service is terminated.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2000 Equity Incentive Plan

7 unchanged sentences

Upon termination of employment of an option holder, the Company has the right to repurchase at the original purchase price any issued but unvested common shares.

The amount s paid for shares purchased under an early exercise of stock options and subject to repurchase by the Company are not reported as a component of stockholders ’ equity (deficit) until those shares vest.

The amounts paid for shares purchased under an early exercise of stock options and subject to repurchase by the Company are not reported as a component of stockholders’

equity until those shares vest.

The amounts received in exchange for these shares are recorded as an accrued liability in the accompanying consolidated balance sheets and will be reclassified to common stock and additional paid-in capital as the shares vest.

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 fiscal years ended December 31, 2019, 2018 and 2017 :

Stock-based Compensation Expenses

The following table shows a summary of the stock-based compensation expense included in the consolidated statements of operations for the fiscal years ended December 31, 2020 , 2019 and 2018 :

Year Ended December 31,

1 unchanged sentence

Cost of revenues

$ 2,767  

$ 2,262  

$ 2,489  

Research and development

13,502  

11,151  

Sales and marketing

General and administrative

17,981  

16,495  

14,990  

Total stock-based employee compensation

Stock-based compensation cost is recognized over the service period.

Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures materially differ from those estimates.

As of December 31, 2019 , the Company ha d $ 17.5 million o f total unrecognized employee compensation cost related to unvested options that it expects to recognize over a weighted-average period of 2.5 years.

$ 40,035  

$ 34,892  

$ 30,090  

The income tax benefit related to the stock-based compensation expenses was $ 5.5 million, $ 5.5 million and $ 4.8 million for the years ended December 31, 2020, 2019 and 2018, respectively. As of December 31, 2020 , the Company had $ 21.8 million of unrecognized employee compensation cost related to unvested stock options and $ 71.3  million of unrecognized compensation cost related to unvested RSU's that it expects to recognize over a weighted-average period of 2.7 years and 2.6 years, respectively. 

The fair value of each option granted to employees is estimated on the date of grant using the Black-Scholes-Merton option-pricing model based on the following assumptions:

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Expected term (in years)

4.5 to 5.5  

4.4 to 6.6  

4.5 to 5.0  

38 % to 43 %  

40 % to 46 %  

45 % to 47 %  

Risk-free interest rate

0.3 % to 1.4 %  

1.5 % to 2.4 %  

2.5 % to 3.0 %  

Dividend yield

3 unchanged sentences

Treasury rates at the date of grant with maturity dates approximately equal to the expected term at the grant date.

Prior to the third quarter of 2017, volatility was based on a combination of the historical volatility of the Company and of several public entities that are similar to the Company.

The Company based volatility on this combination because it did not have sufficient historical transactions in its own shares on which to solely base expected volatility.

Beginning in the third quarter of 2017, the volatility was estimated using the historical volatility derived from the Company's common stock.

The volatility was estimated using the historical volatility derived from the Company's common stock.

The Company has not historically declared any dividends and does not expect to in the future.

Stock Option Plan Activity

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

Outstanding Shares

Weighted Average Exercise Price Per Share

Weighted Average Remaining Contractual Life (Years)

Aggregate Intrinsic Value

(in thousands)

Balance as of December 31, 2017

4,495,891  

$ 25.29  

$ 153,129  

366,786  

$ 79.79  

( 1,183,235 )  

$ 20.33  

( 250,133 )  

$ 39.61  

Balance as of December 31, 2018

3,429,309  

$ 31.79  

$ 149,935  

496,145  

$ 87.10  

( 901,290 )  

$ 27.55  

( 157,489 )  

$ 71.04  

Balance as of December 31, 2019

2,866,675  

$ 40.54  

$ 125,647  

593,694  

$ 99.77  

( 1,129,845 )  

$ 30.50  

( 115,082 )  

$ 87.91  

Balance as of December 31, 2020

Vested and expected to vest—December 31, 2019

Exercisable—December 31, 2019

2,215,442  

$ 59.07  

$ 139,121  

Vested and expected to vest—December 31, 2020

2,071,441  

$ 56.39  

$ 135,647  

Exercisable—December 31, 2020

1,290,452  

$ 34.69  

$ 112,502  

The following table summarizes the outstanding and vested stock options at December 31, 2020 :

Exercise Price

$4.10 - $13.50

$13.60 - $25.17

Number of Shares

Weighted Average Exercise Price Per Share

Weighted Average Remaining Contractual Life (Years)

Number of Shares

Weighted Average Exercise Price Per Share

266,447  

$ 13.25  

266,447  

$ 13.25  

22.31 - 25.17

130,550  

$ 24.16  

130,550  

$ 24.16  

25.56 - 25.56

264,824  

$ 25.56  

264,824  

$ 25.56  

26.86 - 34.97

227,072  

$ 30.72  

227,072  

$ 30.72  

232,792  

$ 40.24  

215,601  

$ 39.80  

59.95 - 86.35

307,387  

$ 80.11  

77,644  

$ 74.90  

87.26 - 89.55

189,217  

$ 88.48  

52,147  

$ 88.42  

93.08 - 93.08

223,744  

$ 93.08  

94.45 - 104.8

273,709  

$ 97.76  

56,167  

$ 94.91  

121.65 - 121.65

The weighted-average grant date fair value of the Company’s stock options granted during 2019 , 2018 and 2017 was $ 34.02 , $ 33.05 and $ 18.03 , respectively.

The aggregate grant date fair value of the Company’s stock options granted during 2019 , 2018 and 2017 was $ 12.2 million , $ 12.1 million and $ 7.4 million , respectively.

99,700  

$ 121.65  

2,215,442  

$ 59.07  

1,290,452  

$ 34.69  

The weighted-average grant date fair value of the Company’s stock options granted during 2020 , 2019 and 2018  was $ 35.49 , $ 34.02 and $ 33.05 , respectively. The total intrinsic value of options exercised during 2020 , 2019 and 2018  was $ 77.5 million, $ 52.1 million and $ 71.7  million, respectively.

Intrinsic value of an option is the difference between the fair value of the Company’s common stock at the time of exercise and the exercise price paid.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The intrinsic value of options exercised was $ 52.1 million , $ 71.7 million and $ 92.1 million during 2019 , 2018 and 2017 , respectively.

Intrinsic value of an option is the difference between the fair value of the Company’s common stock at the time of exercise and the exercise price paid.

Restricted Stock

The terms and conditions of RSUs include vesting criteria and timing are set by the Board of Directors.

The cost of RSUs is determined using the fair value of the Company’s common stock on the date of the grant.

Compensation cost is recognized on a straight-line basis over the requisite service period of each grant adjusted for estimated forfeitures.

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

Restricted Stock Unit Activity

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

Number of Shares

1 unchanged sentence

Balance as of December 31, 2017

1,410,588  

$ 40.34  

548,245  

$ 75.44  

( 525,375 )  

$ 39.87  

( 206,575 )  

$ 43.43  

Balance as of December 31, 2018

1,226,883  

$ 55.71  

595,985  

$ 81.59  

( 438,892 )  

$ 53.17  

( 169,158 )  

$ 65.51  

Balance as of December 31, 2019

1,214,818  

$ 67.99  

531,146  

$ 99.96  

( 475,853 )  

$ 62.57  

( 223,409 )  

$ 77.37  

Balance as of December 31, 2020

1,046,702  

$ 86.78  

Expected to vest as of December 31, 2020

As of December 31, 2019 , the Company had $ 66.0 million of unrecognized compensation cost related to unvested awards that it expects to recognize over a weighted-average period of 2.6 years.

961,926  

$ 86.02  

The aggregate vesting date fair value of RSUs vested during 2020, 2019 and 2018 was $ 46.5  million, $ 37.9 million and $ 38.9 million, respectively.

Performance-Based Stock Options and Restricted Stock Units

On November 2, 2019, the Board of Directors granted an award of time-based RSUs and performance-based NSOs to the Company’s Chairman and Chief Executive Officer, Philippe Courtot.

The Compensation Committee of the Board, 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 48,683 time-based RSUs that will vest in quarterly installments beginning on December 1, 2019, assuming continued service through each applicable vesting date.

The second portion of the award consists of 123,856 NSOs that will vest at the end of the 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 (a “double trigger” termination), 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 Board of Directors granted an award of time-based and performance-based restricted stock units to Mr.

The compensation committee of the Board, 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.

On December 10, 2020, the compensation committee of the Company's board of directors (Compensation Committee) granted the equity award for 2021  to the Company’s Chairman and Chief Executive Officer, Philippe Courtot (Mr.

The first portion of the award consists of 69,401  RSUs that will vest in 16 quarterly installments beginning on November 1, 2020. 

The second portion of the award consists of a target number of 223,744 PSO, which will vest at the end of the three -year performance period from January 2021 through December 2023.

The actual number of PSOs eligible to vest range from 0 % to 200 % of the target number, depending on the level of achievement of goals related to revenue growth and free cash flow per share growth during the performance period.

On November 2, 2019, the Compensation Committee granted the equity award for 2020 to Mr.

Courtot. The first portion of the award consists of 48,683 RSUs that will vest in 16 quarterly installments beginning on December 1, 2019.

The second portion of the award consists of a target number of 123,856 PSOs, which will vest at the end of the three -year performance period from January 2020 through December 2022.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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.

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 (a “double trigger” termination), 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).

The Company accounts for these awards as share-based compensation with multiple performance conditions and recognizes compensation costs when it is probable that the performance conditions are met.

The Company assesses these conditions on a quarterly basis.

During the year ended December 31, 2019, stock-based compensation costs of $ 0.3 million and $ 0.9 million were recognized for the 2019 performance-based NSOs and the 2018 performance-based RSUs, respectively.

On December 

21, 2018, the Compensation Committee granted the equity award for 2019  to Mr.

Courtot. The first portion of the award consists of 56,250 RSUs that will vest in 16 quarterly increments beginning on January 

The second portion of the award consists of a target number of 33,089 PSU, which will vest at the end of the three -year performance period from January 2019 through December 2021.

The actual number of PSUs eligible to vest range from 0 % to 200 % of the target number, depending on the level of achievement of goals related to revenue growth during the three -year performance period from January 2019 through December 2021 and Adjusted EBITDA margin for the fiscal year of 2021.

The third portion of the award consists of a target number of 33,088 PSUs, one third of which ( 11,030 target PSUs) will vest at the end of each fiscal year of 2019, 2020 and 2021.

 The actual number of PSUs eligible to vest at each vesting date range from 0 % to 200 % of the target number, depending on the level of achievement of goals related to revenue growth and Adjusted EBITDA margin for each of those years.

The Compensation Committee, in consultation with its independent compensation consultant, designed these awards so that in each year greater than 50 % of the compensation was based on the achievement of performance goals linked to metrics designed to drive the creation of shareholder value.

The vesting of these awards is conditioned on Mr. Courtot’s continued service through the vesting dates or, for PSOs and PSUs, the dates that performance is certified in addition to the achievement of performance goals. If Mr. Courtot’s employment is terminated (a) by reason of death or disability or (b) 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 these awards 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 .

During the year ended 

December 31, 2020 , 

14,864  PSUs, which represent 

135 % of the target, vested as a result of the Company achieving the corresponding level of performance goals for the fiscal year of 2019.

June 10, 2020, 

the board of directors approved changes in the performance targets for certain previously granted PSO and PSU.

Based on the projected performance levels expected to be achieved for those awards as of 

June 10, 2020, 

the modification resulted in a n incremental expense of $ 7.5  million, which is expected to be recognized over 

12  quarters beginning with the quarter ended 

June 30, 2020. 

T his amount 

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

During the year ended 

December 31, 2020 , $ 0.9  

million of incremental expenses due to the modification were recognized.

During the year ended December 31, 2020 , stock-based compensation expense of $ 0.2 million and $ 2.8 million, including changes due to modifications, were recognized for PSOs and PSUs. During the year ended December 

31, 2019 , stock-based compensation expense of $ 0.3 million and $ 0.9 million were recognized for PSOs and PSUs, respectively.

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, the Company announced that the board of directors had authorized an increase of $ 100.0 million to the original share repurchase program authorization.

Shares may be repurchased from time to time on the open market in accordance with Rule 10b-18 of the Exchange Act of 1934.

On October 24, 2019, the Company's board of directors authorized another increase of $ 100.0 million , which allows the Company to repurchase shares pursuant to a pre-set trading plan adopted in accordance with Rule 10b5-1 under the Exchange Act until October 30, 2020.

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 each of October 30, 2018, 

October 30, 2019 

May 7, 2020, the Company announced that its board of directors had authorized an increase of $ 100.0 million to the share repurchase program, 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, until February 14, 2022.

Repurchased shares are retired and reclassified as authorized and unissued shares of common stock.

1 unchanged sentence

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 year ended December 31, 2019, the Company repurchased 1,026,455 shares of its common stock for approximately $ 86.4 million .

During the year ended December 31, 2020 and 2019 , the Company repurchased 

1,292,750 and 1,026,455 shares of its common stock for approximately $ 126.7 million and $ 86.4 million, respectively.

All share repurchases were made using cash resources.

As of December 31, 2019, approximately $ 128.5 million remained available for share repurchases pursuant to the Company's share repurchase program.

December 31, 2020 and 2019 , approximately $ 101.8 million and $ 128.5 remained available for share repurchases pursuant to the Company's share repurchase program.

On February 10, 2021, the Company announced that its Board of Directors authorized an additional $ 100.0  million to the original share repurchase program authorization, increasing the total amount of authorized repurchase to $ 500.0 million.

Employee Benefits Plan

The Company’s 401(k) Plan was established in 2000 to provide retirement and incidental benefits for its employees.

The Company’s 401 (k) Plan was established in 2000 to provide retirement and incidental benefits for its employees.

As allowed under section 401 (k) of the Internal Revenue Code, the 401 (k) Plan provides tax-deferred salary deductions for eligible employees.

1 unchanged sentence

During the fiscal years ended December 31, 2020 , 2019 and 2018 , the Company made contributions to the 401 (k) Plan of $ 1.3 million, $ 1.3 million and $ 1.2 million, respectively.

The Company contributes to a Provident Fund Plan for its employees in India, which is defined contribution plan set up in accordance with local labor and tax laws.

The Company contributes to a Provident Fund Plan for its employees in India, which is a defined contribution plan set up in accordance with local labor and tax laws.

Gratuity is also paid by the Company to eligible employees in India in accordance with Payment of Gratuity Act, 1972.

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The Company’s geographical breakdown of income before income taxes is as follows:

Year Ended December 31,

(in thousands)

$ 94,099  

$ 72,124  

$ 50,010  

Income before income taxes

$ 102,037  

$ 79,983  

$ 55,468  

The provision for (benefit from) income taxes consists of the following:

1 unchanged sentence

(in thousands)

$ 1,944  

$ ( 90 )  

Total current provision

( 753 )  

( 441 )  

Total deferred (benefit) provision

Total provision for (benefit from) provision for income taxes

The reconciliation of the statutory federal income tax rate to the Company’s effective tax rate is as follows:

$ 10,465  

$ 10,647  

The reconciliation of the statutory federal income tax rate to the Company’s effective tax rate is as follows:

Year Ended December 31,

1 unchanged sentence

Stock-based compensation

Excess tax benefits related to stock-based compensation  

( 13.8 )  

( 11.2 )  

Foreign source income

Change in valuation allowance

Federal rate adjustment (due to 2017 Tax Act)

Foreign-derived intangible income deduction

( 1.7 )  

Federal and state research and development credit

( 2.6 )  

( 3.7 )  

Provision for (benefit from) income taxes

On December 22, 2017, the Tax Cuts and Jobs Act (the “2017 Tax Act”) was enacted into law.

The new legislation contains several key tax provisions that impact the Company, including the reduction of the corporate income tax rate from 35% to 21% effective January 1, 2018.

The new legislation also includes a variety of other changes, such as a one-time repatriation tax on accumulated foreign earnings (transition tax), acceleration of business asset expensing, and reduction in the amount of executive pay that could qualify as a tax deduction, among others.

The Company recognized a provisional income tax expense of $ 10.4 million in the fourth quarter of 2017, from the re-measurement of certain deferred tax assets and liabilities as a result of the reduction of the federal tax rate, which was included as a component of the income tax provision on its consolidated statement of income.

The Company completed its analysis of the impacts of the 2017 Tax Act in the fourth quarter of 2018 with no material change to its provisional estimate.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

1 unchanged sentence

Deferred income taxes reflect the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

The components of the Company’s deferred tax assets and liabilities are as follows:

(in thousands)

1 unchanged sentence

Net operating loss carryforwards

$ 1,325  

Research and development credit carryforwards

16,965  

20,182  

Foreign tax credit carryforwards

1 unchanged sentence

Deferred revenues

Lease Liability

Operating lease liabilities

15,924  

13,187  

Intangible assets

1 unchanged sentence

Gross deferred tax assets

49,552  

49,659  

Valuation allowance

( 11,188 )  

Net deferred tax assets

38,364  

39,565  

Deferred tax liabilities

( 7,017 )  

Operating leases - right of use asset

( 13,054 )  

Deferred commissions

Intangible assets

( 2,482 )  

Total deferred tax liabilities

( 22,553 )  

Net deferred tax assets

$ 15,811  

$ 18,830  

The realization of deferred tax assets is dependent upon the generation of sufficient taxable income of the appropriate character in future periods.

4 unchanged sentences

federal and state deferred tax assets are not more-likely-than- not to be realized.

Accordingly, the Company has recorded a valuation allowanc e of $ 10.1 million against such deferred tax assets.

The valuation allowance increased by $ 1.0 million and $ 3.3 million during the years ended December 31, 2019 and 2018, respectively.

At December 31, 2019, the Company had federal and state net operating loss carryforwards of approximately $ 5.0 million and $ 2.1 million , respectively, available to reduce federal and state taxable income.

Federal net operating losses do not expire but the net operating loss deduction is limited to 80% of taxable income.

The state net operating losses begin to expire in 2030 .

Utilization of the Company’s net operating loss carryforwards may be subject to an annual limitation due to the ownership change limitations provided by the Internal Revenue Code and similar state provisions.

Accordingly, the Company has recorded a valuation allowance of $ 11.2 million and $ 10.1 million against such deferred tax assets as of December 31, 2020 and 2019 , respectively.

The increase in valuation allowance was mainly associated with the California research and development credit generated during the year ended December 31, 2020  that will not likely be realized for the foreseeable future.

At December 31, 2020 , the Company had federal and state net operating loss carryforwards of approximately $ 1.4 million and $ 0.1 million, respectively, available to reduce federal and state taxable income. The federal net operating losses begin to expire in 2022 and the state net operating losses begin to expire in 2037.

Such an annual limitation could result in the expiration of the net operating loss carryforwards before utilization.

4 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following table summarizes the activity related to the Company’s unrecognized tax benefits (in thousands):

The following table summarizes the activity related to the Company’s unrecognized tax benefits:

Year Ended December 31,

(in thousands)  

Unrecognized tax benefits beginning balance

$ 7,778  

$ 6,406  

$ 5,112  

Gross increase for tax positions of prior years

Gross decrease for tax positions of prior years

( 12 )  

Gross increase for tax positions of current year

Lapse of statute of limitations

( 185 )  

Total unrecognized tax benefits

The unrecognized tax benefits, if recognized, would impact the income tax provision by $ 4.2 million , $ 3.5 million and $ 2.8 million as of December 31, 2019 , 2018 and 2017 , respectively.

The remaining amount would be offset by the reversal of related deferred tax assets which are subject to a full valuation allowance.

$ 8,855  

$ 7,778  

$ 6,406  

The unrecognized tax benefits, if recognized, would impact the income tax provision by $ 4.6 million, $ 4.2 million and $ 3.5 million as of December 31, 2020 , 2019 and 2018 , respectively. The remaining amount would result in the recognition of a corresponding deferred tax asset that is then offset by a full valuation allowance.

As of December 31, 2020 , the Company does not believe that its estimates, as otherwise provided for, on such tax positions will significantly increase or decrease within the next twelve months.

2 unchanged sentences

The Company files income tax returns in the United States, including various state jurisdictions.

The Company’s subsidiaries file tax returns in various foreign jurisdictions.

The tax years 2001 through 2018 remain open to examination by the major taxing jurisdictions in which the Company is subject to tax.

The Company’s subsidiaries file tax returns in various foreign jurisdictions.

The tax years 2001 through 2019  remain open to examination by the major taxing jurisdictions in which the Company is subject to tax.

The Company is also currently subject to tax audits in various jurisdictions.

2 unchanged sentences

If any issues addressed in the Company's tax audits are resolved in a manner inconsistent with its expectations, the Company could be required to adjust its provision for income taxes in the period such resolution occurs.

Although timing of resolution and/or closure of audits is not certain, the Company believes it is reasonably possible that its gross unrecognized tax benefits could increase or decrease in the next 12 months.

income tax has not been recognized on the excess of the amount for financial reporting over the tax basis of investments in foreign subsidiaries that is indefinitely reinvested outside the United States.

1 unchanged sentence

Segment Information and Information about Geographic Area

The Company operates in one segment.

The Company determines its reportable operating segments in accordance with the provisions in the FASB guidance on segment reporting, which establishes standards for, and requires disclosure of, certain financial information related to reportable operating segments and geographic regions.

The Company’s chief operating decision maker is the Chairman, President and Chief Executive Officer, who makes operating decisions, assesses performance and allocates resources on a consolidated basis.

All of the Company’s principal operations and decision-making functions are located in the United States.

Under ASC 280 Segment Reporting, Operating segments are defined as components of an entity about which separate financial information is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance.

The Company operates in one segment and has only one reportable 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.

All of the Company’s principal operations and decision-making functions are located in the United States.

Revenue by geographic area, based on the customers billing address, is as follows:

2 unchanged sentences

United States

$ 230,444  

$ 206,555  

$ 185,887  

132,519  

115,052  

93,002  

Total revenues

$ 362,963  

$ 321,607  

$ 278,889  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2 unchanged sentences

United States

$ 43,791  

$ 46,100  

12,465  

Rest of world

Total property and equipment, net

$ 64,850  

$ 60,579  

Net Income Per Share

2 unchanged sentences

(in thousands, except per share data)

$ 91,572  

$ 69,336  

$ 57,304  

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

39,167  

39,075  

38,876  

Effect of potentially dilutive securities:

2 unchanged sentences

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

$ 40,823  

$ 41,345  

$ 41,897  

Net income per share:

$ 2.34  

$ 1.77  

$ 1.47  

$ 2.24  

$ 1.68  

$ 1.37  

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

8 unchanged sentences

Three Months Ended

December 31, 2020

September 30, 2020

June 30, 2020

March 31, 2020

December 31, 2019

September 30, 2019

June 30, 2019

March 31, 2019

(in thousands, except per share data)

5 unchanged sentences

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-K

Item 8. Financial Statements and Supplementary Data