QUALYS, INC. 10-K

Item 8. Financial Statements and Supplementary Data   Qualys, Inc. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS   Table of Contents     Page Reports of Independent Registered Public Accounting Firm 53 Consolidated Balance Sheets 55 Consolidated Statements of Operations 56 Consolidated Statements of Comprehensive Income 57 Consolidated Statements of Cash Flows 58 Consolidated Statements of Stockholders' Equity 59 Notes to Consolidated Financial Statements 60   52 Table of Contents   REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM   Board of Directors and Stockholders   Qualys, Inc.   Opinion on the financial statements We have audited the accompanying consolidated balance sheets of Qualys, Inc. (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, 2020, based on criteria established in the 2013 Internal Control —  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. 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. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.   We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.   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.   Income taxes 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 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. • Determined that the ending gross temporary difference agreed to the supporting equity documentation.   /s/ GRANT THORNTON LLP   We have served as the Company’s auditor since 2005.   San Jose, California February 22, 2021   53 Table of Contents   Report of Independent Registered Public Accounting Firm     Board of Directors and Stockholders   Qualys, Inc.   Opinion on internal control over financial reporting We have audited the internal control over financial reporting of Qualys, Inc. (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. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.   We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.   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. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.   /s/ GRANT THORNTON LLP   San Jose, California February 22, 2021   54 Table of Contents     Qualys, Inc. CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share data)       December 31,       2020     2019   Assets                 Current assets:                 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   Goodwill     7,447       7,447   Restricted cash     1,200       1,200   Other noncurrent assets     16,864       15,082   Total assets   $ 736,819     $ 675,608   Liabilities and Stockholders’ Equity                 Current liabilities:                 Accounts payable   $ 731     $ 848   Accrued liabilities     29,833       22,784   Deferred revenues, current     213,494       192,172   Operating lease liabilities, current     11,672       7,663   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     367       388   Total liabilities     332,337       288,805   Commitments and contingencies (Note 9)                     Stockholders’ equity:                 Preferred stock: $ 0.001 par value; 20,000,000 shares authorized, no shares issued and outstanding at December 31, 2020 and 2019     —       —   Common stock, $ 0.001 par value; 1,000,000,000 shares authorized, 39,252,665 and 39,146,272 shares issued and outstanding at December 31, 2020 and 2019, respectively     39       39   Additional paid-in capital     401,359       362,408   Accumulated other comprehensive income (loss)     ( 484 )     1,162   Retained earnings     3,568       23,194   Total stockholders’ equity     404,482       386,803   Total liabilities and stockholders’ equity   $ 736,819     $ 675,608     The accompanying notes are an integral part of these Consolidated Financial Statements.   55 Table of Contents     Qualys, Inc. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data)       Year Ended December 31,       2020     2019     2018   Revenues   $ 362,963     $ 321,607     $ 278,889   Cost of revenues     79,226       69,517       66,185   Gross profit     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     ( 9 )     ( 106 )     ( 172 ) Interest income     5,385       8,443       6,080   Other income (expense), net     7       ( 607 )     ( 801 ) Total other income (expense), net     5,383       7,730       5,107   Income before income taxes     102,037       79,983       55,468   Provision for (benefit from) income taxes     10,465       10,647       ( 1,836 ) Net income   $ 91,572     $ 69,336     $ 57,304   Net income per share:                         Basic   $ 2.34     $ 1.77     $ 1.47   Diluted   $ 2.24     $ 1.68     $ 1.37   Weighted average shares used in computing net income per share:                         Basic     39,167       39,075       38,876   Diluted     40,823       41,345       41,897     The accompanying notes are an integral part of these Consolidated Financial Statements.   56 Table of Contents     Qualys, Inc. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (in thousands)       Year Ended December 31,       2020     2019     2018   Net income   $ 91,572     $ 69,336     $ 57,304   Other comprehensive income (loss):                         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     421       1,367       ( 261 ) 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 )     —       289   Total change in unrealized gain on marketable securities, net of tax     402       1,367       28   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 )     515       ( 40 ) 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 )     381       ( 40 ) Other comprehensive income (loss), net of tax     ( 1,646 )     1,748       ( 12 ) Comprehensive income   $ 89,926     $ 71,084     $ 57,292     The accompanying notes are an integral part of these Consolidated Financial Statements.   57 Table of Contents     Qualys, Inc. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)       Year Ended December 31,       2020     2019     2018   Cash flows from operating activities:                         Net income   $ 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     486       247       86   Loss on disposal of property and equipment     106       202       9   Stock-based compensation     40,035       34,892       30,090   Amortization of premiums and (accretion of discounts) on marketable securities     826       ( 1,597 )     ( 1,136 ) Deferred income taxes     3,512       7,095       ( 2,521 ) Changes in operating assets and liabilities:                         Accounts receivable     ( 22,631 )     ( 2,456 )     ( 11,467 ) Prepaid expenses and other assets     ( 2,329 )     ( 6,012 )     ( 4,970 ) Accounts payable     ( 389 )     ( 1,076 )     3,515   Accrued liabilities     5,126       715       1,426   Deferred revenues     30,927       28,060       24,725   Other noncurrent liabilities     —       —       ( 501 ) 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 )     ( 339,862 ) Sales and maturities of marketable securities     341,879       328,350       285,224   Purchases of property and equipment     ( 30,037 )     ( 27,573 )     ( 22,775 ) Proceeds from disposal of property and equipment     419       —       —   Acquisition of businesses, net of cash acquired, and purchases of intangible assets     ( 1,500 )     ( 4,050 )     ( 13,633 ) Purchase of privately-held investment     —       ( 625 )     ( 2,500 ) Net cash used in investing activities     ( 80,932 )     ( 35,029 )     ( 93,546 ) Cash flows from financing activities:                         Repurchase of common stock     ( 126,729 )     ( 86,424 )     ( 85,040 ) 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 )     ( 14,879 ) Principal payments under finance lease obligations     ( 114 )     ( 1,709 )     ( 1,617 ) Net cash used in financing activities     ( 112,581 )     ( 79,045 )     ( 77,483 ) Net increase (decrease) in cash and cash equivalents     ( 13,427 )     46,533       ( 45,565 ) 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                         Cash paid for interest expense   $ 9     $ 107     $ 168   Cash paid for income taxes, net of refunds     8,058       3,031       2,693   Non-cash investing and financing activities                         Business acquisitions recorded in accrued liabilities and deferred tax liability     150       150       4,676   Purchases of property and equipment recorded in accounts payable and accrued liabilities     1,054       235       4,190     The accompanying notes are an integral part of these Consolidated Financial Statements.   58 Table of Contents     Qualys, Inc. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY   (in thousands, except share data)       Common Stock     Additional Paid-In     Accumulated Other Comprehensive Income     Retained     Total Stockholders’       Shares     Amount     Capital     (Loss)     Earnings     Equity   Balances at December 31, 2017     38,598,117     $ 39     $ 304,155     $ ( 574 )   $ 39,924     $ 343,544   Adjustment to opening retained earnings on adoption of ASC 606     —       —       —       —       2,711       2,711   Net income     —       —       —       —       57,304       57,304   Other comprehensive loss, net of tax     —       —       —       ( 12 )     —       ( 12 ) Issuance of common stock upon exercise of stock options     1,183,235       1       24,052       —       —       24,053   Repurchase of common stock     ( 1,088,899 )     ( 1 )     ( 13,064 )     —       ( 71,975 )     ( 85,040 ) Issuance of common stock upon vesting of restricted stock units     525,375       —       —       —       —       —   Taxes related to net share settlement of equity awards     ( 202,794 )     —       ( 14,879 )     —       —       ( 14,879 ) Stock-based compensation     —       —       30,308       —       —       30,308   Balances at December 31, 2018     39,015,034       39       330,572       ( 586 )     27,964       357,989   Net income     —       —       —       —       69,336       69,336   Other comprehensive income, net of tax     —       —       —       1,748       —       1,748   Issuance of common stock upon exercise of stock options     901,290       1       24,830       —       —       24,831   Repurchase of common stock     ( 1,026,455 )     ( 1 )     ( 12,317 )     —       ( 74,106 )     ( 86,424 ) 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 )     —       —       ( 15,743 ) Stock-based compensation     —       —       35,066       —       —       35,066   Balances at December 31, 2019     39,146,272       39       362,408       1,162       23,194       386,803   Net income     —       —       —       —       91,572       91,572   Other comprehensive loss, net of tax     —       —       —       ( 1,646 )     —       ( 1,646 ) Issuance of common stock upon exercise of stock options     1,129,845       1       34,460       —       —       34,461   Repurchase of common stock     ( 1,292,750 )     ( 1 )     ( 15,530 )     —       ( 111,198 )     ( 126,729 ) 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 )     —       —       ( 20,199 ) Stock-based compensation     —       —       40,220       —       —       40,220   Balances at December 31, 2020     39,252,665     $ 39     $ 401,359     $ ( 484 )   $ 3,568     $ 404,482     The accompanying notes are an integral part of these Consolidated Financial Statements.   59 Table of Contents   Qualys, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS     NOTE 1. The Company and Summary of Significant Accounting Policies   Description of Business   Qualys, Inc. (the “Company”, "we", "us", "our") was incorporated in the state of Delaware on December 30, 1999. The Company is headquartered in Foster City, California and has wholly-owned subsidiaries throughout the world. The Company is a pioneer and leading provider of cloud-based 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 the 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. 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   In  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  may  take further actions that alter its business operations as  may  be required by federal, state or local authorities or that the Company determines are in the best interests of its employees, customers, partners, suppliers and stockholders. 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  may  be taken by governmental authorities and the impact to the business of its customers and partners. The Company will continue to evaluate the nature and extent of the impact to its business, financial position, results of operations and cash flows.   Use of Estimates   The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of assets and liabilities at the date of the 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.   Concentration of Credit Risk   The Company invests its cash and cash equivalents with major financial institutions. Cash balances with any one institution at times may be in excess of federally insured limits. Cash equivalents are invested in high-quality investment grade financial instruments and are diversified. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk.   Credit risk with respect to accounts receivable is dispersed due to the large number of customers. Collateral is not required for accounts receivable. 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, 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 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 (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).   60 Table of Contents   Qualys, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)     Accounts Receivable   Accounts receivable are recorded at the invoiced amount and do not bear interest. 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 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. 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 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.   The Company purchases physical scanner appliances and other computer equipment that are provided to customers on a subscription basis. This equipment is recorded within property and equipment and the depreciation is recorded in cost of revenues over an estimated useful life of three years.   Upon retirement or disposal, the cost of assets and the related accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in the consolidated statements of operations. 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.   Leases   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   The Company evaluates its long-lived assets, which consist of property and equipment, and intangible assets subject to amortization, for indicators of possible impairment when events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. 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.   61 Table of Contents   Qualys, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)     Goodwill and Intangible Assets   Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired in a business combination and is not subject to amortization. Goodwill and other intangible assets with indefinite lives are not amortized, but tested for impairment at least annually or more frequently if certain circumstances indicate a possible impairment may exist. 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, 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. If the fair value is not considered to be less than the carrying amount, no further evaluation is necessary. The Company performs the annual qualitative assessment in the fourth quarter each fiscal year. There were no such impairment losses during 2020 , 2019 and 2018 .   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. 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 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 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.    Business Combinations   The Company applies the provisions of ASC 805, Business Combinations, in accounting for its acquisitions. It requires the Company to recognize separately from goodwill the assets acquired and the liabilities assumed at their acquisition date fair values. Goodwill as of the acquisition date is measured as the excess of consideration transferred over the net of the acquisition date fair values of the assets acquired and the liabilities assumed. While the Company uses its best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date as well as any contingent consideration, where applicable, its estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, the Company records adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to its consolidated statements of operations.   62 Table of Contents   Qualys, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)   Derivative Financial Instruments   Derivative financial instruments are utilized by the Company to reduce foreign currency exchange risks. 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 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 (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.   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. 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.      63 Table of Contents   Qualys, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)         The Company determines revenue recognition through the following steps:     • Identification of the contract, or contracts, with a customer;   • Identification of the performance obligations in the contract;   • Determination of the transaction price   • Allocation of the transaction price to the performance obligations in the contract; and   • Recognition of revenue when, or as, the Company satisfies a performance obligation.   At the inception of a customer contract, the Company makes an assessment as to that customer's ability to pay for the services provided. The Company assesses collectability based on 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.    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. The current portion of deferred revenues represents amounts that are expected to be recognized within one year of the balance sheet date.   64 Table of Contents   Qualys, Inc. 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.   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   Advertising costs are expensed as incurred and include costs of advertising and promotional materials. The Company incurred advertising costs of $ 207 thousand, $ 74 thousand and $ 87 thousand for 2020 , 2019 and 2018 , respectively.   Income Taxes   The Company provides for the effect of income taxes in its consolidated financial statements using the asset and liability method which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the consolidated financial statements. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, net operating loss carryovers, and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in 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. The Company's judgments, assumptions and estimates relating to the current provision for (benefit from) income taxes include the geographic mix and amount of income (loss), its interpretation of current tax laws, and possible outcomes of current and future audits conducted by foreign and domestic tax authorities. The Company's judgments also include anticipating the tax positions the Company will record in the consolidated financial statements before actually preparing and filing the tax returns. 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 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. The Company regularly reviews its deferred tax assets for recoverability and establishes a valuation allowance if it is more likely than not that some portion or all of the deferred tax assets will not be realized. To make this assessment, the Company takes into account predictions of the amount and category of taxable income from various sources and all available positive and negative evidence about these possible sources of taxable income. The weight given to the potential effect of negative and positive evidence is commensurate with the extent to which the strength of the evidence can be objectively verified.   The Company applies a two -step approach to determining the financial statement recognition and measurement of uncertain tax positions. The Company only recognizes an income tax expense or benefit with respect to uncertain tax positions in its financial statements that the Company judges is more likely than not to be sustained solely on its technical merits in a tax audit, including resolution of any related appeals or litigation processes. To make this judgment, the Company must interpret complex and sometimes ambiguous tax laws, regulations and administrative practices. If an income tax position meets the more likely than not recognition threshold, then the Company must measure the amount of the tax benefit to be recognized by determining the largest amount of tax benefit that has a greater than a 50% likelihood of being realized upon effective settlement with a taxing authority that has full knowledge of all of the relevant facts. It is inherently difficult and subjective to estimate such amounts, as this requires the Company to determine the probability of various possible settlement outcomes. To determine if a tax position is effectively settled after a tax examination has been completed, the Company must also estimate the likelihood that another taxing authority could review the respective tax position. The Company must also determine when it is reasonably possible that the amount of unrecognized tax benefits will significantly increase or decrease in the 12 months after each fiscal year-end. These judgments are difficult because a taxing authority may change its behavior as a result of the Company's disclosures in its financial statements. 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 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.   65 Table of Contents   Qualys, Inc. 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. Monetary assets and liabilities denominated in foreign currencies have been re-measured into U.S. 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-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   Basic net income per share is computed by dividing net income by the weighted-average number of common shares outstanding during the period. All participating securities are excluded from basic weighted average common shares outstanding. Diluted net income per share is computed by dividing net income by the weighted-average number of shares of common stock outstanding during the period, adjusted for the effects of potentially dilutive common shares, which are comprised of outstanding stock options and RSUs. The dilutive potential common shares are computed using the treasury stock method or the as-if converted method, as applicable. The outstanding stock options and RSUs which would be anti-dilutive are excluded from the computation of diluted net income per common share.   Recently Adopted Accounting Pronouncements   In  August 2018,  the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU")  2018 - 15,  Intangibles - Goodwill and Other - Internal-Use Software (Subtopic  350 - 40 ): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. This ASU aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs related to internal-use software. It also requires the Company to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement. The Company adopted this ASU prospectively to applicable implementation costs incurred since  January 1, 2020.  The adoption did  not  have a material impact on the Company's 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, 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. CECL utilizes a lifetime expected credit loss measurement objective for the recognition of credit losses at the time the financial asset is originated or acquired. The expected credit losses are adjusted each period for changes in expected lifetime credit losses. The Company adopted this ASU on  January 1, 2020,  using a modified retrospective transition method, which requires a cumulative-effect adjustment, if any, to the opening balance of retained earnings to be recognized on the date of adoption with prior periods  not  restated. The adoption did  not  have a material impact on the Company's consolidated financial statements.     66 Table of Contents   Qualys, Inc. 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.   NOTE 2. Fair Value of Financial Instruments   Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. For certain of the Company’s financial instruments, including certain cash equivalents, accounts receivable, accounts payable and accrued liabilities, the carrying amounts approximate their fair values due to the relatively short maturity of these balances.   The Company measures and reports certain cash equivalents, marketable securities, derivative foreign currency forward contracts at fair value in accordance with the provisions of the authoritative accounting guidance that addresses fair value measurements. This guidance establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. The hierarchy is broken down into three levels based on the reliability of inputs as follows:   Level 1 -Valuations based on quoted prices in active markets for identical assets or liabilities.   Level 2 -Valuations based on other than quoted prices in active markets for identical assets and liabilities, including quoted prices for identical assets or liabilities in less active or inactive markets, quoted prices for similar assets or liabilities in active markets, or inputs other than quoted prices that are observable for substantially the full term of the assets or liabilities.   Level 3 - Valuations based on inputs that are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability.   67 Table of Contents   Qualys, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)     The Company's financial instruments consist of assets and liabilities measured using Level 1 and 2 inputs. Level 1 assets include a highly liquid money market fund, which is valued using unadjusted quoted prices that are available in an active market for an identical asset. Level 2 assets include fixed-income U.S. 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:       December 31, 2020       Amortized Cost     Unrealized Gains     Unrealized Losses     Fair Value       (in thousands)   Cash and cash equivalents:                                 Cash   $ 33,105     $ —     $ —     $ 33,105   Money market funds     38,028       —       —       38,028   Commercial paper     2,999       —       —       2,999   Total     74,132       —       —       74,132   Short-term marketable securities:                                 Commercial paper     6,147       —       —       6,147   Corporate bonds     24,368       170       —       24,538   Asset-backed securities     6,263       18       —       6,281   U.S. government agencies     244,568       369       ( 11 )     244,926   Total     281,346       557       ( 11 )     281,892   Long-term marketable securities:                                 Asset-backed securities     38,456       160       ( 3 )     38,613   U.S. government agencies     6,884       17       —       6,901   Foreign government agencies     1,006       31       —       1,037   Corporate bonds     51,068       839       —       51,907   Total     97,414       1,047       ( 3 )     98,458   Total   $ 452,892     $ 1,604     $ ( 14 )   $ 454,482     68 Table of Contents   Qualys, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)       December 31, 2019       Amortized Cost     Unrealized Gains     Unrealized Losses     Fair Value       (in thousands)   Cash and cash equivalents:                                 Cash   $ 84,102     $ —     $ —     $ 84,102   Money market funds     58       —       —       58   Commercial paper     3,399       —       —       3,399   Total     87,559       —       —       87,559   Short-term marketable securities:                                 Commercial paper     2,239       —       —       2,239   Corporate bonds     33,048       51       ( 1 )     33,098   Asset-backed securities     2,438       11       —       2,449   U.S. government agencies     173,364       184       ( 3 )     173,545   Total     211,089       246       ( 4 )     211,331   Long-term marketable securities:                                 Asset-backed securities     40,001       193       ( 1 )     40,193   U.S. government agencies     46,447       370       —       46,817   Corporate bonds     32,236       262       —       32,498   Total     118,684       825       ( 1 )     119,508   Total   $ 417,332     $ 1,071     $ ( 5 )   $ 418,398     As of  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:       December 31, 2020       Level 1     Level 2     Fair Value       (in thousands)   Money market funds   $ 38,028     $ —     $ 38,028   Commercial paper     —       9,146       9,146   U.S. government agencies     —       251,827       251,827   Foreign government agencies     —       1,037       1,037   Corporate bonds     —       76,445       76,445   Asset-backed securities     —       44,894       44,894   Total   $ 38,028     $ 383,349     $ 421,377         December 31, 2019       Level 1     Level 2     Fair Value       (in thousands)   Money market funds   $ 58     $ —     $ 58   Commercial paper     —       5,638       5,638   U.S. government agencies     —       220,362       220,362   Corporate bonds     —       65,596       65,596   Asset-backed securities     —       42,642       42,642   Total   $ 58     $ 334,238     $ 334,296     As of December 31, 2020 and 2019 , the Company had no investments utilizing level 3 inputs.   69 Table of Contents   Qualys, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)     The following summarizes the fair value of marketable securities classified as AFS debt securities by contractual maturity:       December 31, 2020       Mature within One Year     After One Year through Two Years     Over Two Years     Fair Value       (in thousands)   Commercial paper   $ 9,146     $ —     $ —     $ 9,146   U.S. government agencies     244,925       6,715       187       251,827   Foreign government agencies     —       —       1,037       1,037   Corporate bonds     24,538       31,983       19,924       76,445   Asset-backed securities     6,282       18,642       19,970       44,894   Total   $ 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. 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.   At  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. At  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 :       December 31,       2020     2019       (in thousands)   Assets:                 Foreign currency forward contracts designated as cash flow hedge   $ 511     $ 427   Foreign currency forward contracts not designated as hedging instruments     27       515   Total   $ 538     $ 942   Liabilities:                 Foreign currency forward contracts designated as cash flow hedge   $ ( 2,200 )   $ ( 524 ) Foreign currency forward contracts not designated as hedging instruments     ( 1,677 )     ( 550 ) Total   $ ( 3,877 )   $ ( 1,074 )   All foreign currency forward contracts were valued at fair value using level 2 inputs.   70 Table of Contents   Qualys, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)     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,       2020     2019     2018       (in thousands)   Net gains (losses) from forward contracts   $ ( 1,634 )   $ 438     $ 543   Other foreign currency transaction gains (losses)     1,894       ( 792 )     ( 1,120 ) Total foreign exchange gains (losses), net     260       ( 354 )     ( 577 ) Other expenses     ( 253 )     ( 253 )     ( 224 ) Other income (expense), net   $ 7     $ ( 607 )   $ ( 801 )     NOTE 3 . Accumulated Other Comprehensive Income   The components of AOCI were as follows:     December 31,   2020   2019   (in thousands) Unrealized gains (losses) on AFS debt securities $ 1,224   $ 822 Unrealized gains (losses) on cash flow hedges   ( 1,708 )   340 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,       2020     2019     2018       (in thousands)   Reclassification of AOCI - AFS debt securities                         Other income (expense), net   $ 25     $ —     $ ( 289 )                           Reclassification of AOCI - cashflow hedges                         Revenue   $ 960     $ 134     $ —   Cost of revenues     ( 76 )     —       —   Research and development expenses     ( 264 )     —       —   Sales and marketing expenses     ( 20 )     —       —   General and administrative expenses     ( 36 )     —       —   Total   $ 564     $ 134     $ —       71 Table of Contents     NOTE 4. Property and Equipment, Net   Property and equipment, net, which includes assets under finance lease, consists of the following:        December 31,       2020     2019       (in thousands)   Computer equipment   $ 136,286     $ 112,599   Computer software     26,164       26,137   Scanner appliances     16,749       15,864   Furniture, fixtures and equipment     6,599       6,973   Equipment under capital lease     3,503       3,503   Leasehold improvements     21,107       18,817   Total property and equipment     210,408       183,893   Less: accumulated depreciation and amortization     ( 145,558 )     ( 123,314 ) 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 $ 26.1 million, $ 24.9  million and $ 25.1  million for 2020 , 2019 and 2018 , respectively.     NOTE 5. Revenue from Contracts with Customers   The Company records deferred revenue when cash payments are received or due in advance of its performance offset by revenue recognized in the period. 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 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, 2020 :       (in thousands)   2021   $ 103,165   2022     70,381   2023     35,304   2024     1,363   2025     401   2026 and thereafter     168   Total   $ 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.   From time to time, the Company enters into contracts with customers that extend beyond one year, with certain of its customers electing to pay for more than one year of services upon contract execution. For any discounts associated with these multiple year contracts, the Company concluded its contracts did not contain a financing component.   Revenues by sales channel are as follows:       Year Ended December 31,       2020     2019       2018       (in thousands)   Direct   $ 212,296     $ 186,130     $ 164,084   Partner     150,667       135,477       114,805   Total   $ 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. As such, these partners may offer the Company's IT security and compliance solutions in conjunction with one or more of their own products or services and act as a conduit through which the Company can connect with these prospective customers to offer its solutions. For sales involving a channel partner, the channel partner engages with the prospective customer directly and involves the Company's sales team as needed to assist in developing and closing an order. When a channel partner secures a sale, the Company sells the associated subscription to the channel partner who in turn resells the subscription to the customer. Sales to channel partners are made at a discount and revenues are recorded at this discounted price over the subscription terms. The Company does not have any influence or specific knowledge of its partners' selling terms with their customers. See Note 13, "Segment Information and Information about Geographic Area" for disaggregation of revenue by geographic area.   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.   72 Table of Contents   Qualys, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)         NOTE 6. Acquisitions   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:   Acquiree   Acquisition Date   Purchase Consideration     Net Tangible Assets Acquired/ (liabilities assumed)     Purchased Intangible Assets     Goodwill     Deferred Tax Liability         (in thousands) Spell security   July 24, 2020   $ 1,500     $ —     $ 1,500     $ —     $ —   Adya   January 10, 2019   $ 1,000     $ —     $ 900     $ 100     $ —   Layered Insight   October 16, 2018   $ 13,434     $ ( 80 )   $ 9,600     $ 5,498     $ ( 1,500 ) 1Mobility   April 1, 2018   $ 4,000     $ —     $ 3,700     $ 300     $ —     On  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, 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.    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. 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, which was reversed during the fiscal year 2019 as the revenue milestone was not met. The acquired intangible asset relating to Layered Insight's developed technology is amortized over the estimated useful life of approximately four years. Goodwill arising from the Layered Insight acquisition is not deductible for tax purposes.   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 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.    73 Table of Contents   Qualys, Inc. 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.   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     100   Adjustment     122   Balance as of December 31, 2019 and 2020   $ 7,447       NOTE 7. 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 Average Remaining Lives (Years) Cost Accumulated Amortization   Net Book Value           (in thousands) Developed technology   4.4   1.8 $ 27,356 $ ( 16,152 ) $ 11,204 Patent licenses   14.0   3.7   1,387   ( 1,021 )   366 Non-compete agreements   2.0   1.6   500   ( 104 )   396 Total intangibles subject to amortization         $ 29,243 $ ( 17,277 )   11,966 Intangible assets not subject to amortization                     40 Total intangible assets, net                   $ 12,006                         December 31, 2019       Weighted Average Lives (Years)     Weighted Average Remaining Lives (Years)     Cost     Accumulated Amortization     Net Book Value                         (in thousands)   Developed technology     4.6       2.7     $ 26,356     $ ( 10,066 )   $ 16,290   Patent licenses     14.0       4.7       1,387       ( 922 )     465   Total intangibles subject to amortization                   $ 27,743     $ ( 10,988 )     16,755   Intangible assets not subject to amortization                                     40   Total intangible assets, net                                   $ 16,795     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.   74 Table of Contents   Qualys, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)     As of December 31, 2020 , the Company expects amortization expense in future periods to be as follows:         (in thousands)   2021   $ 6,581   2022     4,823   2023     350   2024     212   Total expected future amortization expense   $ 11,966       NOTE 8. Leases   The following table presents the lease-related assets and liabilities recorded on the balance sheet:   Classification on the Balance Sheet   Classification of Lease   December 31,           2020     2019   Assets       (in thousands)   Operating lease - right of use asset   Operating leases   $ 44,838     $ 40,551   Property and equipment, net   Finance leases     131       1,299   Total lease assets       $ 44,969     $ 41,850                         Liabilities                     Current                     Operating lease liabilities, current   Operating leases   $ 11,672     $ 7,663   Accrued liabilities   Finance leases     64       124   Noncurrent                     Operating lease liabilities, noncurrent   Operating leases     45,700       44,015   Other noncurrent liabilities   Finance leases     —       54   Total lease liabilities   $ 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  2029 .  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.   75 Table of Contents   Qualys, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)   Supplemental cash flow information related to operating leases was as follows:       Year Ended December 31,       2020     2019       (in thousands)   Operating cash flows included in the measurement of lease liabilities     13,403       9,372   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)   2021   $ 14,186   2022     13,316   2023     11,297   2024     10,010   2025     6,407   2026 and thereafter     10,317   Total minimum lease payments     65,533   Less: amount representing interest     ( 8,161 ) Present value of minimum payments     57,372   Less: lease obligations, current     ( 11,672 ) Lease obligations, noncurrent   $ 45,700     76 Table of Contents   Qualys, Inc. 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,       2020     2019   Weighted average remaining lease term (years)                 Operating leases     4.1       6.5   Finance leases     0.1       1.3   Weighted average discount rates                 Operating leases     4.8 %     5.0 % Finance leases     5.0 %     5.0 %     NOTE 9. Commitment and Contingencies   Purchase Obligation   The Company has entered into agreements to purchase goods and services in the ordinary course of business. As of  December 31, 2020 , these remaining purchase commitments for future periods are as follows:       (in thousands)   2021   $ 20,131   2022     6,528   2023     6,924   2024     7,780   2025     1,873   Total purchase commitment   $ 43,236     Indemnifications   The Company from time to time enters into certain types of contracts that contingently require it to indemnify various parties against claims from third parties. These contracts primarily relate to (i) the Company's by-laws, under which it must indemnify directors and executive officers, and may indemnify other officers and employees, for liabilities arising out of their relationship, (ii) contracts under which the Company must indemnify directors and certain officers for liabilities arising out of their relationship, and (iii) contracts under which the Company may be required to indemnify customers or resellers from certain liabilities arising from potential infringement of intellectual property rights, as well as potential damages caused by limited product defects. To date, the Company has not incurred and has not recorded any liability in connection with such indemnifications.   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.   NOTE 10. Stockholders' Equity and Stock-based Compensation   Common Stock   The Company had reserved shares of common stock for future issuance as of December 31, 2020 as follows:   Options and RSUs outstanding under equity incentive plans         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   Effective October 3, 2012, the Company is authorized to issue 20,000,000 shares of undesignated preferred stock with a par value of $ 0.001 per share. Each series of preferred stock will have such rights and preferences including dividend rights, dividend rate, conversion rights, voting rights, rights and terms of redemption (including sinking fund provisions), redemption price, and liquidation preferences as determined by the Board. As of December 31, 2020 , and 2019 , there were no issued or outstanding shares of preferred stock.   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. 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; 5 % of the outstanding shares of stock as of the last day of the immediately preceding fiscal year; or an amount determined by the Board of Directors. 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 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.   77 Table of Contents   Qualys, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)     2000 Equity Incentive Plan   Under the 2000 Equity Incentive Plan ( 2000 Plan), the Company was authorized to grant to eligible participants either ISOs or NSOs. The ISOs were granted at a price per share not less than the fair market value at the date of grant. The NSOs were granted at a price per share not less than 85 % of the fair market value at the date of grant. Options granted generally vest over a period of up to four years, with a maximum term of ten years. The 2000 Plan was terminated in connection with the closing of the Company's initial public offering, and accordingly, no shares are currently available for grant under the 2000 Plan. The 2000 Plan continues to govern outstanding awards granted thereunder.   Options granted under the 2000 Plan were immediately exercisable, and unvested shares are subject to repurchase by the Company. 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 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 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,       2020     2019     2018       (in thousands)   Cost of revenues   $ 2,767     $ 2,262     $ 2,489   Research and development     13,502       11,151       7,961   Sales and marketing     5,785       4,984       4,650   General and administrative     17,981       16,495       14,990   Total stock-based employee compensation   $ 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:       Year Ended December 31,       2020     2019     2018   Expected term (in years)     4.5 to 5.5       4.4 to 6.6       4.5 to 5.0   Volatility     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     —       —       —     78 Table of Contents   Qualys, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)   The expected term of the options is based on evaluations of historical and expected future employee exercise behavior. The risk-free interest rate is based on the U.S. Treasury rates at the date of grant with maturity dates approximately equal to the expected term at the grant date. 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       6.6     $ 153,129   Granted     366,786     $ 79.79                   Exercised     ( 1,183,235 )   $ 20.33                   Canceled     ( 250,133 )   $ 39.61                   Balance as of December 31, 2018     3,429,309     $ 31.79       6.4     $ 149,935   Granted     496,145     $ 87.10                   Exercised     ( 901,290 )   $ 27.55                   Canceled     ( 157,489 )   $ 71.04                   Balance as of December 31, 2019     2,866,675     $ 40.54       6.0     $ 125,647   Granted     593,694     $ 99.77                   Exercised     ( 1,129,845 )   $ 30.50                   Canceled     ( 115,082 )   $ 87.91                   Balance as of December 31, 2020     2,215,442     $ 59.07       6.5     $ 139,121   Vested and expected to vest—December 31, 2020     2,071,441     $ 56.39       6.3     $ 135,647   Exercisable—December 31, 2020     1,290,452     $ 34.69       4.7     $ 112,502     The following table summarizes the outstanding and vested stock options at December 31, 2020 :       Outstanding     Exercisable   Exercise Price   Number of Shares     Weighted Average Exercise Price Per Share     Weighted Average Remaining Contractual Life (Years)     Number of Shares     Weighted Average Exercise Price Per Share   4.4 - 20.8     266,447     $ 13.25       2.1       266,447     $ 13.25   22.31 - 25.17     130,550     $ 24.16       4.3       130,550     $ 24.16   25.56 - 25.56     264,824     $ 25.56       5.3       264,824     $ 25.56   26.86 - 34.97     227,072     $ 30.72       3.9       227,072     $ 30.72   36.25 - 52.6     232,792     $ 40.24       5.4       215,601     $ 39.80   59.95 - 86.35     307,387     $ 80.11       8.3       77,644     $ 74.90   87.26 - 89.55     189,217     $ 88.48       8.6       52,147     $ 88.42   93.08 - 93.08     223,744     $ 93.08       9.9       —     $ —   94.45 - 104.8     273,709     $ 97.76       8.8       56,167     $ 94.91   121.65 - 121.65     99,700     $ 121.65       9.6       —     $ —         2,215,442     $ 59.07       6.5       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.   79 Table of Contents   Qualys, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)   Restricted Stock Unit Activity   A summary of the Company’s RSU activity is as follows:       Number of Shares     Weighted-Average Grant Date Fair Value Per Share   Balance as of December 31, 2017     1,410,588     $ 40.34   Granted     548,245     $ 75.44   Vested     ( 525,375 )   $ 39.87   Cancelled     ( 206,575 )   $ 43.43   Balance as of December 31, 2018     1,226,883     $ 55.71   Granted     595,985     $ 81.59   Vested     ( 438,892 )   $ 53.17   Cancelled     ( 169,158 )   $ 65.51   Balance as of December 31, 2019     1,214,818     $ 67.99   Granted     531,146     $ 99.96   Vested     ( 475,853 )   $ 62.57   Cancelled     ( 223,409 )   $ 77.37   Balance as of December 31, 2020     1,046,702     $ 86.78   Expected to vest as of December 31, 2020     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 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. Courtot). 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. 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.   80 Table of Contents   Qualys, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)   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  1, 2019. 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.   On  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  may  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 each of October 30, 2018,  October 30, 2019  and  May 7, 2020, the Company announced that its board of directors had authorized an increase of $ 100.0 million 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. On retirement of the repurchased shares, common stock is reduced by an amount equal to the number of shares being retired multiplied by the par value. The excess amount that is retired over its par value is first allocated as a reduction to additional paid-in capital based on the initial public offering price of the stock, with the remaining excess to retained earnings.   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, 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.     NOTE 11. Employee Benefits Plan   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. Contributions to the 401 (k) Plan are limited to a maximum amount as set periodically by the Internal Revenue Service. 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 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. During the fiscal years ended December 31, 2020 , 2019 and 2018 , the Company contributed $ 1.4 million, $ 1.1 million and $ 0.7 million, respectively, to those plans.   81 Table of Contents   Qualys, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)     NOTE 12. Income Taxes   The Company’s geographical breakdown of income before income taxes is as follows:       Year Ended December 31,       2020     2019     2018       (in thousands)   Domestic   $ 94,099     $ 72,124     $ 50,010   Foreign     7,938       7,859       5,458   Income before income taxes   $ 102,037     $ 79,983     $ 55,468     The provision for (benefit from) income taxes consists of the following:       Year Ended December 31,       2020     2019     2018       (in thousands)   Current                         Federal   $ 1,944     $ ( 90 )   $ ( 90 ) State     1,438       646       62   Foreign     3,571       3,000       1,988   Total current provision     6,953       3,556       1,960   Deferred                         Federal     4,239       7,085       ( 3,449 ) State     26       447       21   Foreign     ( 753 )     ( 441 )     ( 368 ) Total deferred (benefit) provision     3,512       7,091       ( 3,796 ) Total provision for (benefit from) provision for income taxes   $ 10,465     $ 10,647     $ ( 1,836 )   The reconciliation of the statutory federal income tax rate to the Company’s effective tax rate is as follows:       Year Ended December 31,       2020     2019     2018   Federal statutory rate     21.0 %     21.0 %     21.0 % State taxes     1.6       1.5       ( 1.9 ) Stock-based compensation     4.8       4.0       5.8   Excess tax benefits related to stock-based compensation     ( 13.8 )     ( 11.2 )     ( 26.2 ) Foreign source income     0.2       0.1       ( 0.2 ) Change in valuation allowance     0.8       1.1       4.4   Foreign-derived intangible income deduction     ( 1.7 )     —       —   Federal and state research and development credit     ( 2.6 )     ( 3.7 )     ( 6.7 ) Other     —       0.4       0.5   Provision for (benefit from) income taxes     10.3 %     13.2 %     ( 3.3 )%       82 Table of Contents   Qualys, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)   Deferred Income Taxes   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:       December 31,       2020     2019       (in thousands)   Deferred tax assets                 Net operating loss carryforwards   $ 290     $ 1,325   Research and development credit carryforwards     16,965       20,182   Foreign tax credit carryforwards     3,497       2,586   Accrued liabilities     2,019       1,109   Deferred revenues     5,123       4,843   Operating lease liabilities     15,924       13,187   Intangible assets     1,397       327   Stock-based compensation     3,907       5,942   Other     430       158   Gross deferred tax assets     49,552       49,659   Valuation allowance     ( 11,188 )     ( 10,094 ) Net deferred tax assets     38,364       39,565   Deferred tax liabilities                 Fixed assets     ( 7,017 )     ( 8,097 ) Operating leases - right of use asset     ( 13,054 )     ( 10,496 ) Deferred commissions     ( 2,482 )     ( 2,142 ) Total deferred tax liabilities     ( 22,553 )     ( 20,735 ) 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. The Company regularly assesses the ability to realize its deferred tax assets and establishes a valuation allowance if it is more-likely than- not that some portion, or all, of the deferred tax assets will not be realized. The Company weighs all available positive and negative evidence, including its earnings history and results of recent operations, scheduled reversals of deferred tax liabilities, projected future taxable income, and tax planning strategies. Due to the weight of objectively verifiable negative evidence, it is more-likely-than- not that its California deferred tax assets will not be realized as of December 31, 2020 . Additionally, due to a lack of sufficient future income of the appropriate character, certain U.S. federal and state deferred tax assets are not more-likely-than- not to be realized. 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. 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. Such an annual limitation could result in the expiration of the net operating loss carryforwards before utilization. As of December 31, 2020 , the Company had $ 10.7 million of federal and $ 15.0 million of state research and development credit carryforwards, respectively. Federal research and development credits begin to expire in 2035. State research and development credits do not expire. As of December 31, 2020 , the Company had foreign tax credit carryforwards of $ 3.5 million which begin to expire in 2024.   83 Table of Contents   Qualys, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)   The following table summarizes the activity related to the Company’s unrecognized tax benefits:       Year Ended December 31,       2020     2019     2018       (in thousands)   Unrecognized tax benefits beginning balance   $ 7,778     $ 6,406     $ 5,112   Gross increase for tax positions of prior years     4       —       279   Gross decrease for tax positions of prior years     —       ( 12 )     ( 227 ) Gross increase for tax positions of current year     1,258       1,384       1,399   Lapse of statute of limitations     ( 185 )     —       ( 157 ) Total unrecognized tax benefits   $ 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. The Company has elected to include interest and penalties as a component of income tax expense. The amounts were not material for 2020 , 2019 and 2018 .   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 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. The Company believes that an adequate provision has been made for any adjustments that may result from tax examinations. However, the outcome of tax audits cannot be predicted with certainty. 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.   U.S. 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. A determination of the unrecognized deferred tax liability related to this basis difference is not practicable because of the complexities of the calculation.     NOTE 13. Segment Information and Information about Geographic Area   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:       Year Ended December 31,       2020     2019     2018       (in thousands)   United States   $ 230,444     $ 206,555     $ 185,887   Foreign     132,519       115,052       93,002   Total revenues   $ 362,963     $ 321,607     $ 278,889     84 Table of Contents   Qualys, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)   Property and equipment, net, by geographic area, is as follows:       December 31,       2020     2019       (in thousands)   United States   $ 43,791     $ 46,100   India     12,465       9,221   Rest of world     8,594       5,258   Total property and equipment, net   $ 64,850     $ 60,579       NOTE 14. Net Income Per Share   The computations for basic and diluted net income per share are as follows:       Year Ended December 31,       2020     2019     2018       (in thousands, except per share data)   Numerator:                         Net income   $ 91,572     $ 69,336     $ 57,304                             Denominator:                         Weighted-average shares used in computing net income per share - basic     39,167       39,075       38,876   Effect of potentially dilutive securities:                         Common stock options     1,267       1,807       2,401   Restricted stock units     389       463       620   Weighted-average shares used in computing net income per share - diluted   $ 40,823     $ 41,345     $ 41,897   Net income per share:                         Basic   $ 2.34     $ 1.77     $ 1.47   Diluted   $ 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:       Year Ended December 31,       2020     2019     2018       (in thousands)   Common stock options     620       461       177   Restricted stock units     80       26       22   Total anti-dilutive shares     700       487       199     85 Table of Contents   Qualys, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)     NOTE 15. Selected Quarterly Financial Information (Unaudited)   The following table shows a summary of the Company's quarterly financial information for each of the quarters in the two -year period ended December 31, 2020 :       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       (unaudited)       (in thousands, except per share data)   Revenues   $ 94,801     $ 93,069     $ 88,830     $ 86,263     $ 84,664     $ 82,671     $ 78,929     $ 75,343   Income from operations     24,412       26,303       25,508       20,431       19,545       22,549       16,108       14,051   Other income (expense), net     680       1,331       1,586       1,786       1,757       1,786       2,401       1,786   Income before income taxes     25,092       27,634       27,094       22,217       21,302       24,335       18,509       15,837   Net income   $ 23,816     $ 22,743     $ 26,319     $ 18,694     $ 20,664     $ 19,174     $ 16,232     $ 13,266   Net income per share:                                                                 Basic   $ 0.61     $ 0.58     $ 0.67     $ 0.48     $ 0.53     $ 0.49     $ 0.41     $ 0.34   Diluted   $ 0.59     $ 0.56     $ 0.64     $ 0.46     $ 0.50     $ 0.47     $ 0.39     $ 0.32       Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure   None.