QUALYS, INC. - Quarter Report: 2022 June (Form 10-Q)

qlys20220630_10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

__________________

FORM 10-Q

__________________

☒	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Quarterly Period Ended June 30, 2022

☐	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from to

Commission file number 001-35662

__________________

QUALYS, INC.

(Exact name of registrant as specified in its charter)

__________________

Delaware		77-0534145
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification Number)

919 E. Hillsdale Boulevard, 4th Floor, Foster City, California 94404

(Address of principal executive offices, including zip code)

(650) 801-6100

(Registrant’s telephone number, including area code)

__________________

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common stock, $0.001 par value per share	QLYS	The NASDAQ Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

The number of shares of the registrant's common stock outstanding as of August 1, 2022 was 38,363,617.

Table of Contents

Qualys, Inc.

TABLE OF CONTENTS

		Page
Risk Factor Summary		3
PART I – FINANCIAL INFORMATION
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets	4
	Condensed Consolidated Statements of Operations	5
	Condensed Consolidated Statements of Comprehensive Income	6
	Condensed Consolidated Statements of Cash Flows	7
	Condensed Consolidated Statements of Stockholders' Equity	8
	Notes to Condensed Consolidated Financial Statements	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	35
Item 4.	Controls and Procedures	35
PART II – OTHER INFORMATION
Item 1.	Legal Proceedings	36
Item 1A.	Risk Factors	36
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	55
Item 3.	Defaults upon Senior Securities	55
Item 4.	Mine Safety Disclosures	55
Item 5.	Other Information	55
Item 6.	Exhibits	55
	Signatures	56

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RISK FACTOR SUMMARY

Our business is subject to significant risks and uncertainties that make an investment in us speculative and risky. Below we summarize what we believe are the principal risk factors but these risks are not the only ones we face, and you should carefully review and consider the full discussion of our risk factors in the section titled “Risk Factors,” together with the other information in this Quarterly Report on Form 10-Q. If any of the following risks actually occur (or if any of those listed elsewhere in this Quarterly Report on Form 10-Q occur), our business, reputation, financial condition, results of operations, revenue, and future prospects could be seriously harmed. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, may also become important factors that adversely affect our business.

	•	The continued spread of Coronavirus Disease 2019 ("COVID-19"), or any similar widespread infectious disease outbreak, could harm our business, financial condition and results of operations.
	•	Our quarterly operating results may vary from period to period, which could result in our failure to meet expectations with respect to operating results and cause the trading price of our stock to decline.
	•	If we do not successfully anticipate market needs and opportunities or are unable to enhance our solutions and develop new solutions that meet those needs and opportunities on a timely or cost-effective basis, we may not be able to compete effectively and our business and financial condition may be harmed.
	•	If we fail to continue to effectively scale and adapt our platform to meet the performance and other requirements of our customers, our operating results and our business would be harmed.
	•	If we are unable to renew existing subscriptions for our IT, security and compliance solutions, sell additional subscriptions for our solutions and attract new customers, our operating results would be harmed.
	•	If the market for cloud solutions for IT, security and compliance does not evolve as we anticipate, our revenues may not grow and our operating results would be harmed.
	•	Our current research and development efforts may not produce successful products or enhancements to our platform that result in significant revenue, cost savings or other benefits in the near future.
	•	Our platform, website and internal systems may be subject to intentional disruption or other security incidents that could result in liability and adversely impact our reputation and future sales.
	•	Our sales cycle can be long and unpredictable, and our sales efforts require considerable time and expense. As a result, revenues may vary from period to period, which may cause our operating results to fluctuate and could harm our business.
	•	Adverse economic conditions or reduced IT spending may adversely impact our business.
	•	Our IT, security and compliance solutions are delivered from 11 shared cloud platforms, and any disruption of service at these facilities would interrupt or delay our ability to deliver our solutions to our customers which could reduce our revenues and harm our operating results.
	•	We face competition in our markets, and we may lack sufficient financial or other resources to maintain or improve our competitive position.
	•	If our solutions fail to detect vulnerabilities or incorrectly detect vulnerabilities, our brand and reputation could be harmed, which could have an adverse effect on our business and results of operations.
	•	If we are unable to continue the expansion of our sales force, sales of our solutions and the growth of our business would be harmed.
	•	We rely on third-party channel partners to generate a substantial amount of our revenues, and if we fail to expand and manage our distribution channels, our revenues could decline and our growth prospects could suffer.
	•	A significant portion of our customers, channel partners and employees are located outside of the United States, which subjects us to a number of risks associated with conducting international operations, and if we are unable to successfully manage these risks, our business and operating results could be harmed.
	•	Our business and operations have experienced significant growth, and if we do not appropriately manage any future growth, or are unable to improve our systems and processes, our operating results may be negatively affected.
	•	A portion of our revenues are generated by sales to government entities, which are subject to a number of challenges and risks.
	•	Undetected software errors or flaws in our solutions could harm our reputation, decrease market acceptance of our solutions or result in liability.
	•	Our solutions could be used to collect and store personal information of our customers’ employees or customers, and therefore privacy and other data handling concerns could result in additional cost and liability to us or inhibit sales of our solutions.
	•	Our solutions contain third-party open source software components, and our failure to comply with the terms of the underlying open source software licenses could restrict our ability to sell our solutions.
	•	We use third-party software and data that may be difficult to replace or cause errors or failures of our solutions that could lead to lost customers or harm to our reputation and our operating results.
	•	Failure to protect our proprietary technology and intellectual property rights could substantially harm our business and operating results.
	•	Assertions by third parties of infringement or other violations by us of their intellectual property rights could result in significant costs and harm our business and operating results.

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PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements

Qualys, Inc.

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

(in thousands, except per share data)

	*June 30,*			*December 31,*
	*2022*			*2021*
Assets
Current assets:
Cash and cash equivalents	$	120,965		$	137,328
Short-term marketable securities		298,124			267,960
Accounts receivable, net of allowance of $978 and $793 as of June 30, 2022 and December 31, 2021, respectively		97,692			108,998
Prepaid expenses and other current assets		34,959			32,112
Total current assets		551,740			546,398
Long-term marketable securities		80,122			111,198
Property and equipment, net		57,830			61,854
Operating leases - right of use asset		33,451			37,016
Deferred tax assets, net		35,426			25,087
Intangible assets, net		3,365			6,545
Goodwill		7,447			7,447
Restricted cash		1,200			1,200
Other noncurrent assets		18,430			17,814
Total assets	$	789,011		$	814,559
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	2,132		$	1,296
Accrued liabilities		37,987			32,504
Deferred revenues, current		275,725			257,872
Operating lease liabilities, current		11,545			12,608
Total current liabilities		327,389			304,280
Deferred revenues, noncurrent		28,358			32,753
Operating lease liabilities, noncurrent		31,335			35,914
Other noncurrent liabilities		5,091			4,898
Total liabilities		392,173			377,845
Commitments and contingencies (Note 8)
Stockholders’ equity:
Preferred stock, $0.001 par value; 20,000 shares authorized, no shares issued and outstanding at June 30, 2022 and December 31, 2021		—			—
Common stock, $0.001 par value; 1,000,000 shares authorized; 38,517 and 39,112 shares issued and outstanding at June 30, 2022 and December 31, 2021, respectively		39			39
Additional paid-in capital		493,725			477,323
Accumulated other comprehensive income (loss)		(625	)		1,007
Accumulated deficit		(96,301	)		(41,655	)
Total stockholders’ equity		396,838			436,714
Total liabilities and stockholders’ equity	$	789,011		$	814,559

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

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Qualys, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

(in thousands, except per share data)

	*Three Months Ended*						*Six Months Ended*
	*June 30,*						*June 30,*
	*2022*			*2021*			*2022*			*2021*
Revenues	$	119,893		$	99,702		$	233,313		$	196,458
Cost of revenues		25,046			21,552			49,048			43,232
Gross profit		94,847			78,150			184,265			153,226
Operating expenses:
Research and development		24,791			19,805			47,898			37,554
Sales and marketing		23,730			17,770			43,872			35,759
General and administrative		13,333			11,213			25,967			53,256
Total operating expenses		61,854			48,788			117,737			126,569
Income from operations		32,993			29,362			66,528			26,657
Other income (expense), net:
Interest expense		—			—			—			(4	)
Interest income		839			567			1,357			1,313
Other income (expense), net		(1,710	)		(80	)		(2,420	)		(324	)
Total other income (expense), net		(871	)		487			(1,063	)		985
Income before income taxes		32,122			29,849			65,465			27,642
Income tax provision		5,526			8,707			13,459			6,272
Net income	$	26,596		$	21,142		$	52,006		$	21,370
Net income per share:
Basic	$	0.69		$	0.54		$	1.34		$	0.55
Diluted	$	0.67		$	0.53		$	1.31		$	0.53
Weighted average shares used in computing net income per share:
Basic		38,738			39,099			38,864			39,154
Diluted		39,689			40,077			39,844			40,253

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

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Qualys, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)

(in thousands)

	*Three Months Ended*						*Six Months Ended*
	*June 30,*						*June 30,*
	*2022*			*2021*			*2022*			*2021*
Net income	$	26,596		$	21,142		$	52,006		$	21,370
Other comprehensive income (loss), net of tax
Net change in unrealized losses on available-for-sale debt securities, net of tax		(933	)		(202	)		(3,061	)		(591	)
Net change in unrealized gains on cash flow hedges, net of tax		978			(183	)		1,429			810
Other comprehensive income (loss), net of tax		45			(385	)		(1,632	)		219
Comprehensive income	$	26,641		$	20,757		$	50,374		$	21,589

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

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Qualys, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)

	*Six Months Ended*
	*June 30,*
	*2022*			*2021*
Cash flow from operating activities:
Net income	$	52,006		$	21,370
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization expense		17,552			17,869
Bad debt expense		297			152
Loss on disposal of property and equipment		5			12
Stock-based compensation		24,565			46,755
Amortization of premiums on marketable securities		1,158			2,029
Deferred income taxes		(10,861	)		(722	)
Changes in operating assets and liabilities:
Accounts receivable		11,009			13,983
Prepaid expenses and other assets		(1,085	)		(6,014	)
Accounts payable		917			947
Accrued liabilities		3,830			3,032
Deferred revenues		13,458			12,827
Net cash provided by operating activities		112,851			112,240
Cash flow from investing activities:
Purchases of marketable securities		(177,171	)		(201,411	)
Sales and maturities of marketable securities		173,922			205,143
Purchases of property and equipment		(11,150	)		(12,911	)
Proceeds from disposal of property and equipment		—			6
Net cash used in investing activities		(14,399	)		(9,173	)
Cash flow from financing activities:
Repurchases of common stock		(117,813	)		(63,252	)
Proceeds from exercise of stock options		9,073			4,438
Payments for taxes related to net share settlement of equity awards		(8,161	)		(21,017	)
Proceeds from issuance of common stock through employee stock purchase plan		2,086			—
Principal payments under finance lease obligations		—			(90	)
Net cash used in financing activities		(114,815	)		(79,921	)
Net increase (decrease) in cash, cash equivalents and restricted cash		(16,363	)		23,146
Cash, cash equivalents and restricted cash at beginning of period		138,528			75,332
Cash, cash equivalents and restricted cash at end of period	$	122,165		$	98,478

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

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Qualys, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(unaudited)

(in thousands)

									*Accumulated*			*Retained*
	*Common Stock*					*Additional*			*Other*			*Earnings*			*Total*
						*Paid-In*			*Comprehensive*			*(Accumulated*			*Stockholders’*
	*Shares*			*Amount*		*Capital*			*Income (Loss)*			*Deficit)*			*Equity*
Balances at December 31, 2021		39,112		$	39	$	477,323		$	1,007		$	(41,655	)	$	436,714
Net income		—			—		—			—			25,410			25,410
Other comprehensive loss, net of tax		—			—		—			(1,677	)		—			(1,677	)
Issuance of common stock upon exercise of stock options		66			—		2,569			—			—			2,569
Repurchase of common stock		(368	)		—		(4,416	)		—			(42,165	)		(46,581	)
Issuance of common stock upon vesting of restricted stock units		70			—		—			—			—			—
Taxes related to net share settlement of equity awards		(28	)		—		(3,631	)		—			—			(3,631	)
Issuance of common stock through employee stock purchase plan		23					2,086									2,086
Stock-based compensation		—			—		11,745			—			—			11,745
Balances at March 31, 2022		38,875		$	39	$	485,676		$	(670	)	$	(58,410	)	$	426,635
Net income		—			—		—			—			26,596			26,596
Other comprehensive income, net of tax		—			—		—			45			—			45
Issuance of common stock upon exercise of stock options		146			—		6,504			—			—			6,504
Repurchase of common stock		(561	)		—		(6,745	)		—			(64,487	)		(71,232	)
Issuance of common stock upon vesting of restricted stock units		90			—		—			—			—			—
Taxes related to net share settlement of equity awards		(33	)		—		(4,530	)		—			—			(4,530	)
Stock-based compensation		—			—		12,820			—			—			12,820
Balances at June 30, 2022		38,517		$	39	$	493,725		$	(625	)	$	(96,301	)	$	396,838

									*Accumulated*			*Retained*
	*Common Stock*					*Additional*			*Other*			*Earnings*			*Total*
						*Paid-In*			*Comprehensive*			*(Accumulated*			*Stockholders’*
	*Shares*			*Amount*		*Capital*			*Income (Loss)*			*Deficit)*			*Equity*
Balances at December 31, 2020		39,253		$	39	$	401,359		$	(484	)	$	3,568		$	404,482
Net income		—			—		—			—			228			228
Other comprehensive income, net of tax		—			—		—			604			—			604
Issuance of common stock upon exercise of stock options		69			—		2,264			—			—			2,264
Repurchase of common stock		(269	)		—		(3,232	)		—			(27,797	)		(31,029	)
Issuance of common stock upon vesting of restricted stock units		305			—		—			—			—			—
Taxes related to net share settlement of equity awards		(155	)		—		(17,643	)		—			—			(17,643	)
Stock-based compensation		—			—		38,202			—			—			38,202
Balances at March 31, 2021		39,203		$	39	$	420,950		$	120		$	(24,001	)	$	397,108
Net income		—			—		—			—			21,142			21,142
Other comprehensive loss, net of tax		—			—		—			(385	)		—			(385	)
Issuance of common stock upon exercise of stock options		57			—		2,174			—			—			2,174
Repurchase of common stock		(316	)		—		(3,796	)		—			(28,427	)		(32,223	)
Issuance of common stock upon vesting of restricted stock units		84			—		—			—			—			—
Taxes related to net share settlement of equity awards		(33	)		—		(3,374	)		—			—			(3,374	)
Stock-based compensation		—			—		8,553			—			—			8,553
Balances at June 30, 2021		38,995		$	39	$	424,507		$	(265	)	$	(31,286	)	$	392,995

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

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Qualys, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

NOTE 1.

Description of Business and Summary of Significant Accounting Policies

Description of Business

Qualys, Inc. (the “Company”, "we", "us", "our") was incorporated in the state of Delaware on December 30, 1999. The Company is headquartered in Foster City, California and has wholly-owned subsidiaries throughout the world. The Company is a leading provider of cloud-based information technology ("IT"), security and compliance solutions that enable organizations to identify security risks to their IT infrastructures, help protect their IT systems and applications from ever-evolving cyber-attacks and achieve compliance with internal policies and external regulations. The Company’s cloud solutions address the growing security and compliance complexities and risks that are amplified by the dissolving boundaries between internal and external IT infrastructures and web environments, the rapid adoption of cloud computing and the proliferation of geographically dispersed IT assets. Organizations can use the Company’s integrated suite of solutions delivered on its Qualys Cloud Platform to cost-effectively obtain a unified view of their security and compliance posture across globally-distributed IT infrastructures.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements and condensed footnotes have been prepared in accordance with accounting principles generally accepted in the United States ("U.S. GAAP") for interim financial information as well as the instructions to Form 10-Q and the rules and regulations of the U.S. Securities and Exchange Commission ("SEC"). Certain information and disclosures normally included in the financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. The condensed consolidated balance sheet as of December 31, 2021, included herein, was derived from the audited financial statements as of that date but does not include all disclosures, including notes required by U.S. GAAP. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, which include only normal recurring adjustments, necessary for the fair statement of the financial position, results of operations and cash flows for the interim periods. The results of operations for the three and six months ended June 30, 2022 are not necessarily indicative of the results of operations expected for the entire year ending December 31, 2022 or for any other future annual or interim periods. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC on February 22, 2022.

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 temporarily 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. While the Company has resumed in-office work, employee travel, and in-person events and meetings, the Company will continue to actively monitor the situation and may take actions that alter its business operations as may be required by federal, state or local authorities or that the Company determines are in the best interests of its employees, customers, partners, suppliers and stockholders. While the Company has not incurred significant disruptions from the ongoing COVID-19 pandemic to date and does not expect the pandemic will have a significant impact on the Company's business throughout the remainder of 2022, 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 the Company's 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 unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of assets and liabilities at the date of the condensed consolidated financial statements and the reported results of operations during the reporting period. The Company’s management regularly assesses these estimates, which primarily affect revenue recognition, allowance for credit loss, the valuation of goodwill and intangible assets, leases, stock-based compensation and income tax provision. Actual results could differ from those estimates and such differences may be material to the accompanying unaudited condensed consolidated financial statements.

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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 accounts for the investment at cost less impairment and will measure the investment at fair value when the Company identifies observable price changes. The investment is assessed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. No impairment has been incurred related to the investment. The investment is included in other noncurrent assets on the condensed consolidated balance sheets. The Company has not received any dividends from the investment.

Recently Adopted Accounting Pronouncements

None.

Recently Issued Accounting Pronouncements Not Yet Adopted

The Company does not believe any new accounting pronouncements issued by the FASB that have not become effective will have a material impact on its condensed consolidated financial statements.

There have been no material changes to the Company’s significant accounting policies set forth in "Note 1" of Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.

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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.

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. Treasury and government agency securities, commercial paper, corporate bonds, asset-backed securities, foreign government 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 markets, quoted prices of similar instruments in active markets, 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, and marketable securities consist of the following:

	*June 30, 2022*
			*Unrealized*		*Unrealized*
	*Amortized Cost*		*Gains*		*Losses*			*Fair Value*
	(in thousands)
Cash and cash equivalents:
Cash	$	84,920	$	—	$	—		$	84,920
Money market funds		35,046		—		—			35,046
Commercial paper		999		—		—			999
Total		120,965		—		—			120,965
Short-term marketable securities:
Commercial paper		32,137		—		(37	)		32,100
Corporate bonds		38,525		3		(343	)		38,185
Asset-backed securities		5		—		—			5
U.S. Treasury and government agencies		228,376		—		(1,545	)		226,831
Foreign government		1,007		—		(4	)		1,003
Total		300,050		3		(1,929	)		298,124
Long-term marketable securities:
Corporate bonds		36,998		—		(991	)		36,007
Asset-backed securities		23,310		3		(170	)		23,143
U.S. Treasury and government agencies		21,137		—		(165	)		20,972
Total		81,445		3		(1,326	)		80,122
Total	$	502,460	$	6	$	(3,255	)	$	499,211

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	*December 31, 2021*
			*Unrealized*		*Unrealized*
	*Amortized Cost*		*Gains*		*Losses*			*Fair Value*
	(in thousands)
Cash and cash equivalents:
Cash	$	61,220	$	—	$	—		$	61,220
Money market funds		75,258		—		—			75,258
Commercial paper		850		—		—			850
Total		137,328		—		—			137,328
Short-term marketable securities:(1)
Commercial paper		18,046		—		—			18,046
Corporate bonds		28,869		101		(7	)		28,963
Asset-backed securities		3,952		—		—			3,952
U.S. Treasury and government agencies		217,160		2		(163	)		216,999
Total		268,027		103		(170	)		267,960
Long-term marketable securities:
Corporate bonds		57,762		160		(182	)		57,740
Asset-backed securities		14,941		6		(36	)		14,911
U.S. Treasury and government agencies		37,664		—		(136	)		37,528
Foreign government		1,007		12		—			1,019
Total		111,374		178		(354	)		111,198
Total	$	516,729	$	281	$	(524	)	$	516,486

(1) Revised for correction of classification of amounts and security types disclosed in Note 2 to the consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.

As of June 30, 2022 the total unrealized loss from marketable securities that had been in a continuous unrealized loss position for 12 months or longer was not material. 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. As of December 31, 2021, there were no marketable securities that had been in a continuous unrealized loss position for 12 months or longer.

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

	*June 30, 2022*
	*Level 1*		*Level 2*		*Fair Value*
	(in thousands)
Money market funds	$	35,046	$	—	$	35,046
Commercial paper		—		33,099		33,099
Corporate bonds		—		74,192		74,192
Asset-backed securities		—		23,148		23,148
U.S. Treasury and government agencies		—		247,803		247,803
Foreign government		—		1,003		1,003
Total	$	35,046	$	379,245	$	414,291

	*December 31, 2021*
	*Level 1*		*Level 2*		*Fair Value*
	(in thousands)
Money market funds	$	75,258	$	—	$	75,258
Commercial paper		—		18,896		18,896
Corporate bonds		—		86,703		86,703
Asset-backed securities		—		18,863		18,863
U.S. Treasury and government agencies		—		254,527		254,527
Foreign government		—		1,019		1,019
Total	$	75,258	$	380,008	$	455,266

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The following summarizes the fair value of marketable securities by contractual maturity:

	*June 30, 2022*
	*Mature within*		*Mature after One Year*		*Mature over*
	*One Year*		*through Two Years*		*Two Years*		*Fair Value*
	(in thousands)
Commercial paper	$	33,099	$	—	$	—	$	33,099
Corporate bonds		38,185		26,411		9,596		74,192
Asset-backed securities		5		10,238		12,905		23,148
U.S. Treasury and government agencies		226,831		20,972		—		247,803
Foreign government		1,003		—		—		1,003
Total	$	299,123	$	57,621	$	22,501	$	379,245

Derivative Financial Instruments

Designated cash flow hedges

The Company enters into foreign currency forward contracts to reduce the risk of variability in future cash flow due to foreign currency exchange rate fluctuations from certain forecasted subscription revenue orders billed in British Pound ("GBP") and Euro and operating expenses incurred in Indian Rupee ("INR"), which are designated as cash flow hedges. Unrealized foreign exchange gains or losses related to those designated cash flow hedge contracts are recorded in Accumulated other comprehensive income ("AOCI") and will be reclassified into revenues or operating expenses, respectively, in the same periods when the hedged transactions are recognized in earnings.

As of June 30, 2022, the Company had designated cash flow hedge forward contracts with notional amounts of €29.4 million, £9.1 million and Rs.3,211.0 million. As of December 31, 2021, the Company had designated cash flow hedge forward contracts with notional amounts of €29.8 million, £9.4 million and Rs.2,955.3 million. As of June 30, 2022, a net amount of unrealized gain of $3.4 million before tax 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. As of June 30, 2022, the net amount of unrealized loss on the foreign currency forward contracts for INR reported in AOCI of $1.1 million is expected to be reclassified into operating expense within the next 12 months.

Non-designated forward contracts

The Company also uses foreign currency forward contracts to hedge certain foreign currency denominated assets or liabilities, which are not designated as cash flow hedges.

As of June 30, 2022, the Company had non-designated forward contracts with notional amounts of €38.1 million, £17.1 million, Rs.281.6 million and Canadian Dollar ("C$") 1.1 million. As of December 31, 2021, the Company had non-designated forward contracts with notional amounts of €34.5 million, £11.6 million, Rs.74.9 million, C$2.5 million and CHF1.0 million.

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The following summarizes derivative financial instruments as of June 30, 2022 and December 31, 2021:

	*June 30,*			*December 31,*
	*2022*			*2021*
Assets	*(in thousands)*
Foreign currency forward contracts designated as cash flow hedge	$	3,260		$	1,737
Foreign currency forward contracts not designated as hedging instruments		3,917			1,599
Total	$	7,177		$	3,336
Liabilities
Foreign currency forward contracts designated as cash flow hedge	$	(1,150	)	$	(181	)
Foreign currency forward contracts not designated as hedging instruments		(126	)		(207	)
Total	$	(1,276	)	$	(388	)

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

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

	*Three Months Ended*						*Six Months Ended*
	*June 30,*						*June 30,*
	*2022*			*2021*			*2022*			*2021*
	(in thousands)						(in thousands)
Net gains from non-designated forward contracts	$	3,810		$	(41	)	$	4,965		$	1,044
Other foreign currency transaction gains (losses)		(5,520	)		30			(7,338	)		(1,228	)
Total foreign exchange losses, net		(1,710	)		(11	)		(2,373	)		(184	)
Other expenses		—			(69	)		(47	)		(140	)
Other expense, net	$	(1,710	)	$	(80	)	$	(2,420	)	$	(324	)

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NOTE 3.

Accumulated Other Comprehensive Income (Loss)

The components and changes in accumulated other comprehensive income (loss) for the three and six months ended June 30, 2022 and 2021 were as follows:

	*Available-for-sale debt securities*			*Cash flow hedges*			*Total*
	(in thousands)
Balances at December 31, 2021	$	(185	)	$	1,192		$	1,007
Change in unrealized gains (losses) during the period		(2,070	)		648			(1,422	)
Net gains reclassified into income during the period		-			(60	)		(60	)
Income tax provision		(58	)		(137	)		(195	)
Net change during the period		(2,128	)		451			(1,677	)
Balances at March 31, 2022		(2,313	)		1,643			(670	)
Change in unrealized gains (losses) during the period		(933	)		1,548			615
Net gains reclassified into income during the period		-			(244	)		(244	)
Income tax provision		-			(326	)		(326	)
Net change during the period		(933	)		978			45
Balances at June 30, 2022		(3,246	)		2,621			(625	)

Balances at December 31, 2020	$	1,224		$	(1,708	)	$	(484	)
Change in unrealized gains (losses) during the period		(501	)		1,092			591
Net losses reclassified into income during the period		8			192			200
Income tax benefit (provision)		104			(291	)		(187	)
Net change during the period		(389	)		993			604
Balances at March 31, 2021		835			(715	)		120
Change in unrealized losses during the period		(273	)		(394	)		(667	)
Net losses reclassified into income during the period		8			152			160
Income tax benefit		63			59			122
Net change during the period		(202	)		(183	)		(385	)
Balances at June 30, 2021		633			(898	)		(265	)

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

	*Three Months Ended*						*Six Months Ended*
	*June 30,*						*June 30,*
	*2022*			*2021*			*2022*		*2021*
	(in thousands)						(in thousands)
Reclassification of AOCI - Available-for-sale debt securities
Other income (expense), net	$	—		$	(8	)	$	—	$	(16	)

Reclassification of AOCI - Cash flow hedges
Revenues	$	269		$	(456	)	$	223	$	(673	)
Cost of revenues		(6	)		61			17		66
Research and development expenses		(16	)		204			52		221
Sales and marketing expenses		(1	)		12			3		13
General and administrative expenses		(2	)		27			9		29
Total	$	244		$	(152	)	$	304	$	(344	)

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NOTE 4.

Property and Equipment, Net

Property and equipment, net, consists of the following:

	*June 30,*			*December 31,*
	*2022*			*2021*
	(in thousands)
Computer equipment	$	170,945		$	161,809
Computer software		25,805			25,807
Leasehold improvements		21,009			21,092
Scanner appliances		16,584			16,510
Furniture, fixtures and equipment		6,434			6,479
Total property and equipment		240,777			231,697
Less: accumulated depreciation and amortization		(182,947	)		(169,843	)
Property and equipment, net	$	57,830		$	61,854

As of June 30, 2022 and December 31, 2021, physical scanner appliances and other computer equipment that are or will be subject to leases by customers had a net carrying value of $5.0 million and $5.3 million, respectively, including assets that had not been placed in service of $3.6 million and $1.3 million, respectively. Depreciation and amortization expenses relating to property and equipment were $6.9 million for each of the three months ended June 30, 2022 and 2021, and $14.0 million and $14.2 million for the six months ended June 30, 2022 and 2021, respectively.

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NOTE 5.

Revenue from Contracts with Customers

The Company records deferred revenue when cash payments are received or due in advance of its performance obligations offset by revenue recognized in the period. Revenues of $75.9 million and $63.5 million were recognized during the three months ended June 30, 2022 and 2021, respectively, which amounts were included in the deferred revenue balances as of December 31, 2021 and 2020, respectively. Revenues of $175.9 million and $147.0 million were recognized during the six months ended June 30, 2022 and 2021, respectively, which amounts were included in the deferred revenue balances as of December 31, 2021 and 2020, respectively.

The Company's payment terms vary by the type and location of its customers. The term between invoicing and when payment is due is not significant. In certain circumstances, based on the credit quality of the customer, the Company requires payment before the products or services are delivered to the customer.

The following table sets forth the expected revenue from all remaining performance obligations as of June 30, 2022:

	(in thousands)
2022 (remaining six months)	$	81,069
2023		126,104
2024		54,405
2025		7,507
2026		828
2027 and thereafter		248
Total	$	270,161

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. The Company concluded that these contracts did not contain a financing component.

Revenues by sales channel are as follows:

	*Three Months Ended*				*Six Months Ended*
	*June 30,*				*June 30,*
	*2022*		*2021*		*2022*		*2021*
	(in thousands)				(in thousands)
Direct	$	70,176	$	58,782	$	136,628	$	116,734
Partner		49,717		40,920		96,685		79,724
Total	$	119,893	$	99,702	$	233,313	$	196,458

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

Deferred costs to obtain contracts are as follows:

	*June 30, 2022*		*December 31, 2021*
	(in thousands)
Current	$	4,470	$	4,223
Noncurrent	$	8,727	$	8,391

For the three months ended June 30, 2022 and 2021, the Company recognized $1.2 million and $0.9 million, respectively, of amortization expense relating to deferred costs to obtain contracts in sales and marketing expense in the condensed consolidated statements of operations. For the six months ended June 30, 2022 and 2021, the Company recognized $2.4 million and $1.8 million, respectively, of amortization expense relating to deferred costs to obtain contracts in sales and marketing expense in the condensed consolidated statements of operations. During the same periods, there was no impairment loss related to the deferred costs to obtain contracts.

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NOTE 6.

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:

					*June 30, 2022*
	*Weighted Average*		*Weighted Average*
	*Life*		*Remaining Life*				*Accumulated*
(in thousands)	*(Years)*		*(Years)*		*Cost*		*Amortization*			*Net Book Value*
Developed technology		4.5		0.5	$	28,556	$	(25,468	)	$	3,088
Patent licenses		14.0		2.2		1,387		(1,171	)		216
Non-compete agreements		2.0		0.1		500		(479	)		21
Total intangibles subject to amortization					$	30,443	$	(27,118	)		3,325
Intangible assets not subject to amortization											40
Total intangible assets, net										$	3,365

					*December 31, 2021*
	*Weighted Average*		*Weighted Average*
	*Life*		*Remaining Life*				*Accumulated*
(in thousands)	*(Years)*		*(Years)*		*Cost*		*Amortization*			*Net Book Value*
Developed technology		4.5		0.9	$	28,556	$	(22,463	)	$	6,093
Patent licenses		14.0		2.7		1,387		(1,121	)		266
Non-compete agreements		2.0		0.6		500		(354	)		146
Total intangibles subject to amortization					$	30,443	$	(23,938	)		6,505
Intangible assets not subject to amortization											40
Total intangible assets, net										$	6,545

Intangible asset amortization expense was $1.5 million and $1.6 million for the three months ended June 30, 2022 and 2021, respectively, and $3.2 million and $3.3 million for the six months ended June 30, 2022 and 2021, respectively. Intangible asset amortization expenses were primarily recorded in cost of revenues in the condensed consolidated statements of operations.

As of June 30, 2022, the Company expects amortization expense in future periods to be as follows:

	(in thousands)
2022 (remaining six months)	$	1,883
2023		590
2024		452
2025		240
2026		160
Total expected future amortization expense	$	3,325

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NOTE 7.

Leases

The Company leases certain offices, computer equipment and its data center facilities under non-cancelable operating leases for varying periods through 2028. While under the Company's lease agreements the Company has options to extend its certain leases, the Company has not included renewal options in determining the lease terms for calculating its lease liabilities, as these options are not reasonably certain of being exercised. Lease expense was $3.8 million and $3.6 million for the three months ended June 30, 2022 and 2021, respectively, and $7.3 million and $7.2 million for the six months ended June 30, 2022 and 2021, respectively.

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

	*Six Months Ended*
	*June 30,*
	*2022*		*2021*
	(in thousands)
Cash payments included in the measurement of lease liabilities	$	8,190	$	6,853
Lease liabilities arising from obtaining right-of-use assets	$	2,486	$	1,179

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

	*June 30, 2022*			*December 31, 2021*
Weighted average remaining lease term (years)		2.9			3.3
Weighted average discount rate		4.9	%		4.8	%

NOTE 8.

Commitments and Contingencies

Indemnifications

The Company from time to time enters into certain types of contracts that contingently require it to indemnify various parties against claims from third parties. These contracts primarily relate to (i) the Company's bylaws, under which it must indemnify directors and executive officers, and may indemnify other officers and employees, for liabilities arising out of their relationship, (ii) contracts under which the Company must indemnify directors and certain officers for liabilities arising out of their relationship, and (iii) contracts under which the Company may be required to indemnify customers or resellers from certain liabilities arising from potential infringement of intellectual property rights, as well as potential damages caused by limited product defects. To date, the Company has not incurred and has not recorded any liability in connection with such indemnifications.

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

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NOTE 9.

Stockholders' Equity and Stock-based Compensation

Equity Incentive Plans

Restated 2012 Equity Incentive Plan

On June 8, 2022 ("Effective Date"), the Company's stockholders approved the Amended and Restated 2012 Equity Incentive Plan (the "Restated 2012 Plan"). Under the Restated 2012 Plan, the Company is authorized to grant to eligible participants incentive stock options (“ISOs”), nonstatutory stock options (“NSOs”), restricted stock, restricted stock units ("RSUs"), stock appreciation rights ("SARs"), performance units and performance shares. Pursuant to the relevant plan provisions, 3,072 thousand shares were available for grant under the Restated 2012 Plan on the Effective Date. In addition, any outstanding awards or options granted under the previous version of the 2012 Equity Incentive Plan (“Previous 2012 Plan”) will be added back to the shares available for grant under the Restated 2012 Plan if they expire unexercised or are otherwise forfeited after the Effective Date. Any remaining shares available for grant under the Previous 2012 Plan as of the Effective Date were no longer available for future grants under the Restated 2012 Plan.

As of June 30, 2022, 3,089 thousand shares were available for grant under the Restated 2012 Plan.

2021 Employee Stock Purchase Plan

On June 9, 2021, the Company’s stockholders approved the 2021 Employee Stock Purchase Plan (the “ESPP”). A total of 600 thousand shares were authorized for issuance to eligible participating employees upon adoption of the ESPP. The ESPP provides for consecutive 6-month offering periods beginning on or about August 16 and February 16 of each year. Eligible employees who elect to participate can contribute from 1% to 15% of their eligible compensation through payroll withholding. During any offering period, contribution rates cannot be changed. However, eligible employees may withdraw from the current offering period. Any contributions made prior to each purchase date in the case of withdrawal or termination of employment will be refunded. On each purchase date, eligible participating employees will purchase the shares at a price per share equal to 85% of the lesser of (i) the fair market value of the Company's stock on the first trading day of the offering period or (ii) the fair market value of the Company's stock on the purchase date (i.e., the last trading day of the offering period).

During the six months ended June 30, 2022, 22.5 thousand shares were issued in connection with the purchase of common stock by participating employees. As of June 30, 2022, 577.5 thousand shares were available for future purchases.

Stock-based Compensation

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

	*Three Months Ended*				*Six Months Ended*
	*June 30,*				*June 30,*
	*2022*		*2021*		*2022*		*2021*
	(in thousands)				(in thousands)
Cost of revenues	$	1,273	$	841	$	2,355	$	1,716
Research and development		3,541		2,582		6,828		4,797
Sales and marketing		2,305		1,086		4,334		2,714
General and administrative		5,701		4,044		11,048		37,528
Total stock-based compensation	$	12,820	$	8,553	$	24,565	$	46,755

As of June 30, 2022, the Company had unrecognized stock-based compensation expenses of $19.7 million, $70.0 million, $4.0 million, and $0.2 million related to options, RSUs, performance-based RSUs, and ESPP purchase rights, respectively, which are expected to be recognized over weighted-average periods of 2.8 years, 2.7 years, 1.9 years, and 0.1 years, respectively.

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Performance-based Restricted Stock Units ("PSUs") and Performance-based Stock Options

On October 28, 2021, the compensation committee of the Company's board of directors (Compensation Committee) granted to certain executive officers of the Company equity awards consisting of RSUs and an aggregate number of 73 thousand PSUs, which represents the target number of PSUs allocated to awards that are divided into three equal tranches, with each tranche covering one-year performance period for the calendar years 2022, 2023, and 2024, respectively. The actual number of PSUs eligible to vest each year range from 0% to 200% of the annual target number, depending on the level of achievement of performance metrics related to revenue growth and adjusted EBITDA margin corresponding to that year, which are established by the Compensation Committee before the commencement of each year. The vesting and release of the first and second tranche is capped at 100% of the target number at the end of the first and second year, respectively, with cumulative achievement over 100%, if any, to be vested and released at the end of the third year, together with the vesting of the third tranche. If any of the executive officers 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, any unvested PSUs eligible to vest pursuant to cumulative achievements over 100% for past tranches along with any target number of unvested PSUs for any remaining tranches will vest immediately. Since the performance metrics for the second and third tranches of these PSUs have not been established as of June 30, 2022, the grant date has not been determined and no expenses have been recognized for the respective tranches.

On April 27, 2021, the Compensation Committee granted to the Company’s President and Chief Executive Officer an equity award consisting of RSUs and a target number of 9,671 PSUs. The PSUs are scheduled to vest at the end of the three-year performance period from January 2021 through December 2023. The actual number of PSUs eligible to vest range from 0% to 200% of the target number, depending on the level of achievement of performance metrics related to revenue growth and free cash flow per share growth during the performance period. If the Company's President and Chief Executive Officer 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 the award will vest, with any vesting in connection with terminations due to change in control conditioned upon the effectiveness of a release of claims in favor of the Company.

The Company recognized $1.1 million of stock-based compensation expenses related to all PSUs during the three months ended June 30, 2022, and $1.9 million of stock-based compensation expenses related to all PSUs during the six months ended June 30, 2022.

On March 19, 2021, the Company’s former chief executive officer, Philippe Courtot ("Mr. Courtot"), resigned from the Company due to health issues. The Compensation Committee determined that Mr. Courtot’s termination of employment was on account of disability. In accordance with the equity award agreements covering Mr. Courtot's then outstanding awards, all eligible outstanding RSUs, PSUs and performance-based stock options held by Mr. Courtot became immediately vested as of the date of his termination of employment. As a result, the Company recognized $27.3 million of stock-based compensation expense due to the accelerated vesting in the condensed consolidated statements of operations during the six months ended June 30, 2021.

Stock Option Activity

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

				*Weighted*		*Weighted Average*
	*Outstanding*			*Average*		*Remaining*		*Aggregate*
	*Options*			*Exercise Price*		*Contractual Life*		*Intrinsic Value*
		(in thousands)					(Years)		(in thousands)
Balance as of December 31, 2021		1,838		$	66.05		6.0	$	130,791
Granted		278		$	135.01
Exercised		(212	)	$	42.72
Canceled		(89	)	$	111.97
Balance as of June 30, 2022		1,815		$	77.08		6.2	$	91,404
Vested and expected to vest - June 30, 2022		1,618		$	71.75		5.9	$	89,608
Exercisable - June 30, 2022		1,087		$	49.76		4.4	$	83,037

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Restricted Stock Unit Activity

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

					*Weighted Average*
					*Grant Date*
	*Outstanding*				*Fair Value*
	*RSUs*				*Per Share*
	(in thousands)
Balance as of December 31, 2021		917		(1)	$	104.78
Granted		190			$	137.19
Vested		(160	)		$	98.01
Canceled		(83	)		$	116.12
Balance as of June 30, 2022		864		(1)	$	111.89
Outstanding and expected to vest - June 30, 2022		749			$	110.04

(1) Includes 34 thousand PSUs granted to certain executive officers in 2021.

Share Repurchase Program

The Company's share repurchase program was authorized by the board of directors as follows:

Announcement Date	*Authorized Dollar Value*
	(in millions)
February 12, 2018	$	100.0
October 30, 2018		100.0
October 30, 2019		100.0
May 7, 2020		100.0
February 10, 2021		100.0
November 3, 2021		200.0
May 4, 2022		200.0
Total as of June 30, 2022	$	900.0

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. All share repurchases have been made using cash resources. 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 accumulated deficit.

During the six months ended June 30, 2022 and 2021, the Company repurchased 929 thousand shares and 585 thousand shares of its common stock for approximately $117.8 million and $63.3 million, respectively. As of June 30, 2022, approximately $354.0 million remained available for share repurchases pursuant to the Company's share repurchase program.

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NOTE 10.

Net Income Per Share

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

	*Three Months Ended*				*Six Months Ended*
	*June 30,*				*June 30,*
	*2022*		*2021*		*2022*		*2021*
	(in thousands, except per share data)				(in thousands, except per share data)
Numerator:
Net income	$	26,596	$	21,142	$	52,006	$	21,370
Denominator:
Basic weighted average shares		38,738		39,099		38,864		39,154
Effect of potentially dilutive shares:
Stock options		719		831		744		851
Restricted stock units		230		147		233		248
Employee stock purchase plan		2		—		3		—
Diluted weighted average shares		39,689		40,077		39,844		40,253
Net income per share:
Basic	$	0.69	$	0.54	$	1.34	$	0.55
Diluted	$	0.67	$	0.53	$	1.31	$	0.53

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

	*Three Months Ended*				*Six Months Ended*
	*June 30,*				*June 30,*
	*2022*		*2021*		*2022*		*2021*
	(in thousands)				(in thousands)
Stock options		688		675		645		524
Restricted stock units		88		153		44		96
Employee stock purchase plan		—		—		4		—
Total anti-dilutive shares		776		828		693		620

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NOTE 11.

Income Taxes

The Company's income tax provision for interim periods is determined using an estimate of its annual effective tax rate, adjusted for discrete items, if any, that arise during the period. Each quarter, the Company updates its estimate of the annual effective tax rate, and if the estimated annual effective tax rate changes, the Company makes a cumulative adjustment in such period.

The Company's quarterly tax provision, and estimate of its annual effective tax rate, is subject to variation due to several factors, including variability in pre-tax income (or loss), the mix of jurisdictions to which such income relates, changes in how the Company does business, tax law developments and possible outcomes of audits. The Company's estimated effective tax rate for the year differs from the U.S. statutory rate of 21% primarily due to non-deductible stock-based compensation expense, state taxes, the benefit of U.S. federal income tax credits and the foreign-derived intangible income deduction.

The Company recorded an income tax provision of $5.5 million and $8.7 million for the three months ended June 30, 2022 and 2021, respectively, resulting in an effective tax rate of 17.2% and 29.2%, respectively. The decrease in income tax provision for the three months ended June 30, 2022 compared to the three months ended June 30, 2021 was primarily due to higher excess tax benefits arising from stock-based compensation and the effects of a tax law change related to mandatory capitalization of research and development expenses starting January 1, 2022.

The Company recorded an income tax provision of $13.5 million and $6.3 million for the six months ended June 30, 2022 and 2021, respectively, resulting in an effective tax rate of 20.6% and 22.7%, respectively. The increase in income tax provision for the six months ended June 30, 2022 compared to the six months ended June 30, 2021 was primarily due to an increase in pre-tax income associated with the accelerated vesting of Mr. Courtot's equity awards in the six months ended June 30, 2021, partially offset by an increase in excess tax benefits arising from stock-based compensation and the effects of a tax law change related to mandatory capitalization of research and development expenses starting January 1, 2022.

As of June 30, 2022, the Company had unrecognized tax benefits of $10.1 million, of which $5.1 million, if recognized, would favorably impact the Company's effective tax rate. As of December 31, 2021, the Company had unrecognized tax benefits of $9.7 million, of which $4.9 million, if recognized, would favorably impact the Company's effective tax rate. The Company does not anticipate a material change in its unrecognized tax benefits in the next 12 months.

On June 29, 2020, the California governor signed into law the 2020 Budget Act, which temporarily suspends the utilization of net operating losses and limits the utilization of the research credit to $5 million annually for 2020, 2021 and 2022. The Company does not expect a material impact to the condensed consolidated financial statements for the three months or six months ended June 30, 2022 as a result of the 2020 Budget Act.

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NOTE 12.

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 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 customer's billing address, is as follows:

	*Three Months Ended*				*Six Months Ended*
	*June 30,*				*June 30,*
	*2022*		*2021*		*2022*		*2021*
	(in thousands)				(in thousands)
United States	$	71,608	$	60,991	$	139,084	$	121,123
Foreign		48,285		38,711		94,229		75,335
Total revenues	$	119,893	$	99,702	$	233,313	$	196,458

Long-lived assets, which consist of Property and equipment, net and Operating leases - right of use asset, by geographic area, are as follows:

	*June 30,*		*December 31,*
	*2022*		*2021*
	(in thousands)
United States	$	62,655	$	66,440
India		19,270		20,401
Rest of world		9,356		12,029
Total	$	91,281	$	98,870

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Item 2.

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

This Quarterly Report on Form 10-Q, including this Management’s Discussion and Analysis of Financial Condition and Results of Operations, should be read in conjunction with (1) our unaudited condensed consolidated financial statements and the related notes included elsewhere in this report, and (2) the audited consolidated financial statements and the related notes and section titled "Management’s Discussion and Analysis of Financial Condition and Results of Operations" included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.

In addition to historical information, this Quarterly Report on Form 10-Q contains “forward-looking” statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Forward-looking statements generally relate to future events or our future financial or operating performance. In some cases, it is possible to identify forward-looking statements because they contain words such as “anticipates,” “believes,” “contemplates,” “continue,” “could,” “estimates,” “expects,” “future,” “intends,” “likely,” “may,” “plans,” “potential,” “predicts,” “projects,” “seek,” “should,” “target,” or “will,” or the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans or intentions. Forward-looking statements contained in this Quarterly Report on Form 10-Q include, but are not limited to, statements about:

•

our financial performance, including our revenues, costs, expenditures, growth rates, operating expenses and ability to generate positive cash flow to fund our operations and sustain profitability;

•

anticipated technology trends, such as the use of cloud solutions;

•

our ability to adapt to changing market conditions;

•

the impact of the ongoing COVID-19 pandemic and related public health measures on our business;

•

economic and financial conditions, including volatility in foreign exchange rates;

•

our ability to diversify our sources of revenues, including selling additional solutions to our existing customers and our ability to pursue new customers;

•

the effects of increased competition in our market;

•

our ability to innovate and enhance our cloud solutions and platform and introduce new solutions;

•

our ability to effectively manage our growth;

•

our anticipated investments in sales and marketing, our infrastructure, new solutions, research and development, and acquisitions;

•

maintaining and expanding our relationships with channel partners;

•

our ability to maintain, protect and enhance our brand and intellectual property;

•

costs associated with defending intellectual property infringement and other claims;

•

our ability to attract and retain qualified employees and key personnel, including sales and marketing personnel;

•

our ability to successfully enter new markets and manage our international expansion;

•

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

•

other factors discussed in this Quarterly Report on Form 10-Q in the sections titled “Risk Factors” and “Management's Discussion and Analysis of Financial Condition and Results of Operations.”

We have based the forward-looking statements contained in this Quarterly Report on Form 10-Q primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, results of operations and prospects. The results, events and circumstances reflected in these forward-looking statements are subject to risks, uncertainties, assumptions, and other factors including those described in Part II, Item 1A (Risk Factors) of this Quarterly Report on Form 10-Q and those discussed in other documents we file with the U.S. Securities and Exchange Commission (SEC). Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements used herein. We cannot provide assurance that the results, events, and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results, events or circumstances could differ materially from those described in the forward-looking statements.

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Overview

We are a leading provider of a cloud-based platform delivering information technology (IT), security and compliance solutions that enable organizations to identify security risks to their IT infrastructures, help protect their IT systems and applications from ever-evolving cyber-attacks and achieve compliance with internal policies and external regulations. Our cloud solutions address the growing security and compliance complexities and risks that are amplified by the dissolving boundaries between internal and external IT infrastructures and web environments, the rapid adoption of cloud computing, containers and serverless IT models, and the proliferation of geographically dispersed IT assets. Our integrated suite of IT, security and compliance solutions delivered on our Qualys Cloud Platform enables our customers to identify and manage their IT assets, collect and analyze large amounts of IT security data, discover and prioritize vulnerabilities, recommend and implement remediation actions and verify the implementation of such actions. Organizations use our integrated suite of solutions to cost-effectively obtain a unified view of their IT asset inventory as well as security and compliance posture across globally-distributed IT infrastructures as our solution offers a single platform for information technology, information security, application security, endpoint, developer security and cloud teams.

We were founded and incorporated in December 1999 with a vision of transforming the way organizations secure and protect their IT infrastructure and applications and initially launched our first cloud solution, Vulnerability Management (VM), in 2000. As VM gained acceptance, we introduced additional solutions to help customers manage increasing IT, security and compliance requirements. Today, the suite of solutions that we offer on our cloud platform and refer to as the Qualys Cloud Apps helps our customers protect a range of assets across on-premises, endpoints, cloud, containers, and mobile environments. These Cloud Apps address and include:

•

IT Security: Vulnerability Management (VM), Vulnerability Management, Detection and Response (VMDR), Threat Protection (TP), Continuous Monitoring (CM), Patch Management (PM), Multi-Vector Endpoint Detection and Response (EDR), Certificate Assessment (CRA), SaaS Detection and Response (SaaSDR), Secure Enterprise Mobility (SEM), VMDR Operational Technology (VMDR-OT), Custom Assessment and Response (CAR), Extended Detection and Response (XDR);

•

Compliance: Policy Compliance (PC), Security Configuration Assessment (SCA), PCI Compliance (PCI), File Integrity Monitoring (FIM), Security Assessment Questionnaire (SAQ), Out-of-Band Configuration Assessment (OCA);

•

Web Application Security: Web Application Scanning (WAS), Web Application Firewall (WAF);

•

Asset Management: Global Asset View (GAV), Cybersecurity Asset Management (CSAM), Certificate Inventory (CRI); and

•

Cloud/Container Security: Cloud Inventory (CI), Cloud Security Assessment (CSA), Container Security (CS).

We provide our solutions through a software-as-a-service model, primarily with renewable annual subscriptions. These subscriptions require customers to pay a fee in order to access each of our cloud solutions. We generally invoice our customers for the entire subscription amount at the start of the subscription term, and the invoiced amounts are treated as deferred revenues and are recognized ratably over the term of each subscription. We continue to experience revenue growth from our existing customers as they renew and purchase additional subscriptions, as well as from the addition of new customers to our cloud platform.

We market and sell our solutions to enterprises, government entities and small and medium-sized businesses across a broad range of industries, including education, financial services, government, healthcare, insurance, manufacturing, media, retail, technology and utilities. For the six months ended June 30, 2022 and 2021, approximately 60% and 62%, respectively, of our revenues were derived from customers in the United States based on our customers' billing addresses. We sell our solutions to enterprises and government entities primarily through our field sales force and to small and medium-sized businesses through our inside sales force. We generate a significant portion of sales through our channel partners, including managed security service providers, value-added resellers and consulting firms in the United States and internationally.

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Impacts of COVID-19

In March 2020, the World Health Organization declared the outbreak of COVID-19 as a pandemic. As a result of COVID-19, we temporarily modified certain aspects of our business, including restricting employee travel, requiring employees to work from home, and canceling certain events and meetings, among other modifications. While we have resumed in-office work, employee travel, and in-person events and meetings, we will continue to actively monitor the situation and may take actions that alter our business operations as may be required by federal, state or local authorities or that we determine are in the best interests of our employees, customers, partners, suppliers and stockholders. While we have not incurred significant disruptions from the ongoing COVID-19 pandemic to date and do not expect the pandemic will have a significant impact on our business throughout the remainder of 2022, we are unable to accurately predict the full impact that COVID-19 will have due to numerous uncertainties, including the duration of the outbreak, actions that may be taken by governmental authorities and the impact to the business of the Company's customers and partners. We will continue to evaluate the nature and extent of the impact to our business, financial position, results of operations and cash flows.

Key Components of Results of Operations

Revenues

We derive revenues from the sale of subscriptions to our IT, security and compliance solutions, which are delivered on our cloud platform. Subscriptions to our solutions allow customers to access our cloud-based IT, security and compliance solutions through a unified, web-based interface. Customers generally enter into one-year renewable subscriptions. The subscription fee entitles the customer to an unlimited number of scans for a specified number of devices or web applications and, if requested by a customer as part of their subscription, a specified number of physical or virtual scanner appliances. Our physical and virtual scanner appliances are requested by certain customers as part of their subscriptions in order to scan IT infrastructures within their firewalls and do not function without, and are not sold separately from, subscriptions for our solutions. In some cases, we also provide certain computer equipment used to extend our Qualys Cloud Platform into our customers' private cloud environment. Customers are required to return physical scanner appliances and computer equipment if they do not renew their subscriptions.

We typically invoice our customers for the entire subscription amount at the start of the subscription term. Invoiced amounts are reflected on our condensed consolidated balance sheets as accounts receivable or as cash when collected, and as deferred revenues until earned and recognized ratably over the subscription period. Accordingly, deferred revenues represent the amount billed to customers that has not yet been earned or recognized as revenues, pursuant to subscriptions entered into in current and prior periods.

Cost of Revenues

Cost of revenues consists primarily of personnel expenses, comprised of salaries, benefits, performance-based compensation and stock-based compensation, for employees who operate our data centers and provide support services to our customers. Other expenses include depreciation of data center equipment, physical scanner appliances and computer hardware provided to certain customers as part of their subscriptions, expenses related to the use of shared cloud platforms, amortization of software and license fees, amortization of intangibles related to acquisitions, maintenance support, fees paid to contractors who supplement or support our operations center personnel and overhead allocations. We expect to continue to expand our shared cloud platform infrastructures and hire additional employees to support our operations, which will increase the cost of revenues in absolute dollars.

Operating Expenses

Research and Development

Research and development expenses consist primarily of personnel expenses, comprised of salaries, benefits, performance-based compensation and stock-based compensation, for our research and development teams. Other expenses include third-party contractor fees, software and license fees, amortization of intangibles related to acquisitions and overhead allocations. We expect to continue to invest in additional research and development activities, including hiring engineers and incur outside services, which will increase the research and development expenses in absolute dollars.

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Sales and Marketing

Sales and marketing expenses consist primarily of personnel expenses, comprised of salaries, benefits, sales commissions, performance-based compensation and stock-based compensation for our worldwide sales and marketing teams. Other expenses include marketing and promotional events, lead-generation marketing programs, public relations, travel, software licenses and overhead allocations. Sales commissions related to new business and upsells are capitalized as an asset. We amortize the capitalized commission cost as a selling expense on a straight-line basis over a period of five years. We expense sales commissions related to contract renewals as incurred. Our new sales personnel are typically not immediately productive, and the resulting increase in sales and marketing expenses we incur when we add new personnel may not result in increased revenues if these new sales personnel fail to become productive. The timing of our hiring of sales personnel, or the participation in new marketing events or programs, and the rate at which these generate incremental revenues, may affect our future operating results. We expect to continue to significantly invest in additional sales personnel worldwide and also in more marketing programs to support new solutions on our platform, which will increase sales and marketing expenses in absolute dollars.

General and Administrative

General and administrative expenses consist primarily of personnel expenses, comprised of salaries, benefits, performance-based compensation and stock-based compensation for our executive, finance and accounting, IT, legal and human resources teams, as well as professional services, fees, software licenses and overhead allocations. We expect that general and administrative expenses will increase in absolute dollars, as we continue to add personnel and incur professional services to support our growth and compliance with legal requirements.

Other Income (Expense), Net

Our other income (expense), net consists primarily of interest and investment income from our short-term and long-term marketable securities and foreign exchange gains and losses, the majority of which result from fluctuations between the U.S. Dollar and the Euro, GBP and INR.

Income Tax Provision

We are subject to federal, state and foreign income taxes for jurisdictions in which we operate, and we use estimates in determining our income tax provision and deferred tax assets. Earnings from our non-U.S. activities are subject to income taxes in the local countries at rates which were generally similar to the U.S. statutory tax rate.

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Results of Operations

The following table sets forth selected condensed consolidated statements of operations data for each of the periods presented as a percentage of revenues.

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2022			2021			2022			2021
Revenues		100	%		100	%		100	%		100	%
Cost of revenues		21			22			21			22
Gross profit		79			78			79			78
Operating expenses:
Research and development		21			20			21			19
Sales and marketing		20			18			19			18
General and administrative		11			11			11			27
Total operating expenses		52			49			51			64
Income from operations		27			29			28			14
Total other income (expense), net		—			1			—			—
Income before income taxes		27			30			28			14
Income tax provision		5			9			6			3
Net income		22	%		21	%		22	%		11	%

Comparison of Three and Six Months Ended June 30, 2022 and 2021

Revenues

	Three Months Ended									Six Months Ended
	June 30,				Change					June 30,				Change
	2022		2021		$		%			2022		2021		$		%
	(in thousands, except percentages)
Revenues	$	119,893	$	99,702	$	20,191		20.3	%	$	233,313	$	196,458	$	36,855		18.8	%

Revenues increased by $20.2 million for the three months ended June 30, 2022 compared to the same period in 2021, due to an increase in IT Security, Compliance, Web Application Security, Asset Management, Container Security, and Vulnerability Management subscriptions. The revenue growth was primarily from an increase in upsells to existing customers in the three months ended June 30, 2022 compared to the same period in 2021. Of the total increase of $20.2 million, $10.6 million was from customers in the United States and $9.6 million was from customers in foreign countries. Of the total increase of $20.2 million, $11.4 million was from direct customers and $8.8 million was from partners. In each of the three months ended June 30, 2022 and 2021, 59% of total revenue was direct and 41% of total revenue was through partners.

Revenues increased by $36.9 million for the six months ended June 30, 2022 compared to the same period in 2021, due to an increase in IT Security, Compliance, Web Application Security, Asset Management, Container Security, and Vulnerability Management subscriptions. The revenue growth was primarily from an increase in upsells to existing customers in the six months ended June 30, 2022 compared to the same period in 2021. Of the total increase of $36.9 million, $18.0 million was from customers in the United States and $18.9 million was from customers in foreign countries. Of the total increase of $36.9 million, $19.9 million was from direct customers and $17.0 million was from partners. In each of the six months ended June 30, 2022 and 2021, 59% of total revenue was direct and 41% of total revenue was through partners. With our strong market position driving further demand for our solutions, we expect revenue growth from new and existing customers to continue.

Cost of Revenues

	Three Months Ended									Six Months Ended
	June 30,				Change					June 30,				Change
	2022		2021		$		%			2022		2021		$		%
	(in thousands, except percentages)
Cost of revenues	$	25,046	$	21,552	$	3,494		16.2	%	$	49,048	$	43,232	$	5,816		13.5	%

Cost of revenues increased by $3.5 million for the three months ended June 30, 2022 compared to the same period in 2021, due to an increase in personnel costs, including stock-based compensation, of $2.9 million, driven by additional employees hired to support the growth of our business, an increase in subscribed license and software costs of $0.4 million and an increase in professional service expense of $0.2 million.

Cost of revenues increased by $5.8 million for the six months ended June 30, 2022 compared to the same period in 2021, due to an increase in personnel costs, including stock-based compensation, of $4.7 million, driven by additional employees hired to support the growth of our business, an increase in subscribed license and software costs of $0.6 million and an increase in professional service expense of $0.6 million.

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Research and Development Expenses

	Three Months Ended									Six Months Ended
	June 30,				Change					June 30,				Change
	2022		2021		$		%			2022		2021		$		%
	(in thousands, except percentages)
Research and development	$	24,791	$	19,805	$	4,986		25.2	%	$	47,898	$	37,554	$	10,344		27.5	%

Research and development expenses increased by $5.0 million for the three months ended June 30, 2022 compared to the same period in 2021, due to an increase in personnel costs, including stock-based compensation, of $4.2 million, driven by increased headcount including hiring in senior management, an increase in professional service expense of $0.3 million, an increase in subscribed license and software costs of $0.2 million and an increase in shared cloud platform cost of $0.2 million, driven by higher level of research and development efforts.

Research and development expenses increased by $10.3 million for the six months ended June 30, 2022 compared to the same period in 2021, due to an increase in personnel costs, including stock-based compensation, of $9.1 million, driven by increased headcount including hiring in senior management, an increase in professional service expense of $0.5 million, an increase in subscribed license and software costs of $0.4 million and an increase in shared cloud platform cost of $0.2 million, driven by higher level of research and development efforts.

Sales and Marketing Expenses

	Three Months Ended									Six Months Ended
	June 30,				Change					June 30,				Change
	2022		2021		$		%			2022		2021		$		%
	(in thousands, except percentages)
Sales and marketing	$	23,730	$	17,770	$	5,960		33.5	%	$	43,872	$	35,759	$	8,113		22.7	%

Sales and marketing expenses increased by $6.0 million for the three months ended June 30, 2022 compared to the same period in 2021, primarily due to an increase in personnel costs, including stock-based compensation, of $2.1 million, driven by increased headcount including hiring in senior management, an increase in marketing expense of $2.5 million, an increase in professional service expense of $0.7 million and an increase in travel and entertainment cost of $0.6 million, driven by increased level of sales and marketing efforts.

Sales and marketing expenses increased by $8.1 million for the six months ended June 30, 2022 compared to the same period in 2021, primarily due to an increase in personnel costs, including stock-based compensation, of $2.3 million, driven by increased headcount including hiring in senior management, an increase in marketing related expense of $3.7 million, an increase in professional service expense of $1.1 million, an increase in travel and entertainment cost of $0.7 million and an increase in subscribed licensing costs of $0.4 million, driven by increased level of sales and marketing efforts.

General and Administrative Expenses

	Three Months Ended									Six Months Ended
	June 30,				Change					June 30,				Change
	2022		2021		$		%			2022		2021		$			%
	(in thousands, except percentages)
General and administrative	$	13,333	$	11,213	$	2,120		18.9	%	$	25,967	$	53,256	$	(27,289	)		(51.2	)%

General and administrative expenses increased by $2.1 million for the three months ended June 30, 2022 compared to the same period in 2021, primarily due to an increase in personnel costs, including stock-based compensation, driven by increased headcount to support the growth of our business.

General and administrative expenses decreased by $27.3 million for the six months ended June 30, 2022 compared to the same period in 2021, primarily due to a decrease in stock-based compensation expense related to the accelerated vesting of Mr. Courtot's equity awards in the first quarter of 2021.

Total other income (expense), net

	Three Months Ended											Six Months Ended
	June 30,					Change						June 30,					Change
	2022			2021		$			%			2022			2021		$			%
	(in thousands, except percentages)
Total other income (expense), net	$	(871	)	$	487	$	(1,358	)		(278.9	)%	$	(1,063	)	$	985	$	(2,048	)		(207.9	)%

Total other income (expense), net decreased by $1.4 million and $2.0 million for the three months and six months ended June 30, 2022, compared to the same periods in 2021, respectively, mainly due to an increase in foreign exchange loss driven by appreciation of U.S. Dollar against EUR, GBP, and INR, partially offset by an increase in interest income driven by an increase of market interest rate in the three months and six months ended June 30, 2022.

Income tax provision

	Three Months Ended												Six Months Ended
	June 30,						Change						June 30,						Change
	2022			2021			$			%			2022			2021			$		%
	(in thousands, except percentages)
Income tax provision	$	5,526		$	8,707		$	(3,181	)		(36.5	)%	$	13,459		$	6,272		$	7,187		114.6	%
Effective tax rate		17.2	%		29.2	%								20.6	%		22.7	%

Income tax provision decreased by $3.2 million for the three months ended June 30, 2022 compared to the same period in 2021, primarily due to higher excess tax benefits arising from stock-based compensation and the effects of a tax law change related to mandatory capitalization of research and development expenses starting January 1, 2022.

Income tax provision increased by $7.2 million for the six months ended June 30, 2022 compared to the same period in 2021, primarily due to an increase in pre-tax income associated with the accelerated vesting of Mr. Courtot's equity awards in the six months ended June 30, 2021, partially offset by an increase in excess tax benefits arising from stock-based compensation and the effects of a tax law change related to mandatory capitalization of research and development expenses starting January 1, 2022.

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Key Non-GAAP Metric

In addition to measures of financial performance presented in our condensed consolidated financial statements, we monitor the non-GAAP key metric set forth below to help us evaluate growth trends, establish budgets, measure the effectiveness of our sales and marketing efforts and assess operational efficiencies.

Adjusted EBITDA

We monitor Adjusted EBITDA, a non-GAAP financial measure, to analyze our financial results and believe that it is useful to investors, as a supplement to U.S. GAAP measures, in evaluating our ongoing operational performance and enhancing an overall understanding of our past financial performance. We believe that Adjusted EBITDA helps illustrate underlying trends in our business that could otherwise be masked by the effect of the income or expenses that we exclude in Adjusted EBITDA. Furthermore, we use this measure to establish budgets and operational goals for managing our business and evaluating our performance. We also believe that Adjusted EBITDA provides an additional tool for investors to use in comparing our recurring core business operating results over multiple periods with other companies in our industry.

Adjusted EBITDA should not be considered in isolation from, or as a substitute for, financial information prepared in accordance with U.S. GAAP. We calculate Adjusted EBITDA as net income before (1) other (income) expense, net, which includes interest income, interest expense and other income and expense, (2) income tax provision (benefit), (3) depreciation and amortization of property and equipment, (4) amortization of intangible assets, (5) stock-based compensation and (6) non-recurring expenses that do not reflect ongoing costs of operating the business.

Adjusted EBITDA has limitations as an analytical tool and should not be considered in isolation from or as a substitute for the measures presented in accordance with U.S. GAAP. Some of these limitations are:

•

Adjusted EBITDA does not reflect certain cash and non-cash charges that are recurring;

•

Adjusted EBITDA does not reflect income tax payments that reduce cash available to us;

•

Adjusted EBITDA excludes depreciation and amortization of property and equipment and amortization of intangible assets, although these are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future; and

•

Other companies, including companies in our industry, may calculate Adjusted EBITDA differently or not at all, which reduces its usefulness as a comparative measure.

Because of these limitations, Adjusted EBITDA should be considered alongside other financial performance measures, including revenues, net income, cash flows from operating activities and our financial results presented in accordance with U.S. GAAP. The following unaudited table presents the reconciliation of net income to Adjusted EBITDA for the three and six months ended June 30, 2022 and 2021:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2022			2021			2022			2021
	(in thousands)
Net income	$	26,596		$	21,142		$	52,006		$	21,370
Depreciation and amortization of property and equipment		7,097			7,145			14,372			14,578
Amortization of intangible assets		1,474			1,646			3,180			3,291
Income tax provision		5,526			8,707			13,459			6,272
Stock-based compensation		12,820			8,553			24,565			46,755
Total other income (expense), net		871			(487	)		1,063			(985	)
Adjusted EBITDA	$	54,384		$	46,706		$	108,645		$	91,281
Percentage of revenues		45	%		47	%		47	%		46	%

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Liquidity and Capital Resources

As of June 30, 2022, our principal source of liquidity was cash, cash equivalents and marketable securities of $499.2 million, including $80.3 million of cash held outside of the United States. The following summary of cash flows for the periods indicated has been derived from our condensed consolidated financial statements included elsewhere in this report:

	Six Months Ended
	June 30,
	2022			2021
	(in thousands)
Cash provided by operating activities	$	112,851		$	112,240
Cash used in investing activities		(14,399	)		(9,173	)
Cash used in financing activities		(114,815	)		(79,921	)
Net increase (decrease) in cash, cash equivalents and restricted cash	$	(16,363	)	$	23,146

Operating Activities

During the six months ended June 30, 2022, we generated $84.7 million of cash from our net income, as adjusted for non-cash items mainly related to stock-based compensation expense, depreciation and amortization expense and deferred taxes, as compared to $87.5 million during the six months ended June 30, 2021. In addition, we also generated $28.1 million of cash from changes in working capital during the six months ended June 30, 2022, of which $24.5 million was related to a net increase in deferred revenue and a net decrease in accounts receivable as a result of our continued growth in billing and collection and $3.8 million was due to an increase in payables and accrued liabilities in line with our business growth. During the six months ended June 30, 2021, we generated $24.8 million of cash from changes in working capital, which was also mainly related to deferred revenue and accounts receivable due to continued growth in billing and collection, partially offset by higher prepaid expenses.

Net cash taxes paid during the six months ended June 30, 2022 were higher by approximately $11.2 million compared to the same period in 2021, primarily due to the new tax law requiring mandatory capitalization and amortization of research and development expenses effective January 1, 2022. Previously, these expenses could be deducted in the year incurred. The near term increase in cash tax will be offset by decrease in cash tax in future years when the capitalized expenses are amortized for tax purposes.

Investing Activities

During the six months ended June 30, 2022, we used $3.2 million of cash in purchases of marketable securities investments net of maturities and sales, and used $11.2 million of cash in capital expenditures mainly related to purchases of computer equipment to support our growth and development, as compared to $3.7 million of cash provided by maturity of marketable securities investments net of purchases, and $12.9 million of cash used in similar capital expenditures during the six months ended June 30, 2021.

Financing Activities

During the six months ended June 30, 2022, we used $117.8 million of cash for share repurchases and $8.2 million of cash in payment of employee withholding taxes upon vesting of restricted stock units, and received $9.1 million of proceeds from employee exercise of stock options and $2.1 million of proceeds from issuance of common stock through our ESPP, as compared to $63.3 million of cash used for share repurchases, $21.0 million of cash used in payment of employee withholding taxes upon vesting of restricted stock units, and $4.4 million of cash received from employee exercise of stock options during the six months ended June 30, 2021.

We believe our existing cash and cash equivalents, marketable securities and our expected cash flow generated from operations will be sufficient to fund our operations for the next twelve months and beyond. We do not anticipate that we will need funds generated from foreign operations to fund our domestic operations. However, if we repatriate these funds, we could be subject to foreign withholding taxes.

Share Repurchases

We expect to continue to use cash to repurchase shares under our share repurchase program authorized by our board of directors on February 5, 2018. On May 4, 2022, we announced that our board of directors authorized an additional $200.0 million to the share repurchase program authorization, increasing the total amount of authorized repurchase to $900.0 million. As of June 30, 2022, approximately $354.0 million remained available under our share repurchase program. Shares will 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.

Purchase Commitments

As of June 30, 2022, there have been no other material changes to our cash requirements for purchase commitments as described in “Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2022.

Recent Accounting Pronouncements

See Note 1 to the unaudited condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for a discussion of recent accounting pronouncements.

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Critical Accounting Estimates

There have been no material changes to our critical accounting estimates as described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.

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Item 3.

Quantitative and Qualitative Disclosures about Market Risk

We have domestic and international operations and we are exposed to market risks in the ordinary course of our business. These risks primarily include interest rate, foreign exchange and inflation risks, as well as risks relating to changes in the general economic conditions in the countries where we conduct business. To reduce certain of these risks, we monitor the financial condition of our large customers and limit credit exposure by collecting subscription fees in advance.

Foreign Currency Risk

Our results of operations and cash flows have been and will continue to be subject to fluctuations because of changes in foreign currency exchange rates, particularly changes in exchange rates between the U.S. dollar and the Euro, GBP, INR, Canadian Dollar and CHF, the currencies of countries where we currently have our most significant international operations. We enter into foreign currency forward contracts to reduce our exposure to foreign currency exchange rate fluctuations related to forecasted subscription revenue, operation expenses and foreign currency denominated assets or liabilities. As of June 30, 2022, we had designated cash flow hedge forward contracts with notional amounts of €29.4 million, £9.1 million and Rs.3,211.0 million and non-designated forward contracts with notional amounts of €38.1 million, £17.1 million, Rs.281.6 million, and C$1.1 million. With our hedging strategy applied, the effect of an immediate 10% adverse change in foreign exchange rates would not be material to our financial condition, operating results or cash flows.

Interest Rate Sensitivity

We had $499.2 million in cash, cash equivalents and short-term and long-term marketable securities as of June 30, 2022. Cash and cash equivalents include cash held in banks, highly liquid money market funds and commercial paper. Marketable securities consist of fixed-income U.S. Treasury and government agency securities, commercial paper corporate bonds, asset-backed securities and foreign government securities. The primary objectives of our investment activities are the preservation of principal and support of our liquidity requirements. We do not invest for trading or speculative purposes. Our marketable securities are subject to market risk due to changes in interest rates, which may affect the interest income we earn and the fair market value. As of June 30, 2022, a hypothetical 100 basis point increase in interest rate would result in a decrease in the fair value of our marketable securities by $2.2 million.

Item 4.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2022. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of June 30, 2022, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rules 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1.

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. As of June 30, 2022, 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.

Item 1A.

Risk Factors

You should carefully consider the risks and uncertainties described below, and all other information contained in this Quarterly Report on Form 10-Q, including our condensed consolidated financial statements and the related notes, before making a decision to invest in our common stock. Our business, operating results, financial condition, or prospects could be materially and adversely affected by any of these risks and uncertainties. In that case, the trading price of our common stock could decline, and you might lose all or part of your investment. In addition, the risks and uncertainties discussed below are not the only ones we face. Our business, operating results, financial performance or prospects could also be harmed by risks and uncertainties not currently known to us or that we currently do not believe are material.

Risks Related to Our Business and Industry

The continued spread of COVID-19, or any similar widespread infectious disease outbreak, could harm our business, financial condition and results of operations.

In December 2019, an outbreak of COVID-19 originated in Wuhan, China and has since spread to countries around the world. On March 11, 2020, the World Health Organization characterized COVID-19 as a pandemic. The continued spread of COVID-19 and the resurgence of infection rates in certain regions has resulted in authorities imposing, and businesses and individuals implementing, numerous unprecedented measures to try to contain the virus, such as travel bans and restrictions, quarantines, shelter-in-place/stay-at-home and social distancing orders, and shutdowns. These measures have impacted and may further impact our workforce and operations, the operations of our customers, and those of our respective vendors, suppliers, and partners. The pandemic has significantly increased economic and demand uncertainty and disrupted the global supply chain. The pandemic has caused, and will likely continue to contribute to, an economic slowdown, and it is possible that it could cause a global recession, which could decrease demand for our solutions and negatively impact our operating results. There is a significant degree of uncertainty and lack of visibility as to the extent and duration of any such slowdown or recession.

The ultimate extent of the impact of COVID-19 on our business, financial position, results of operations and cash flows will depend on future developments, which are highly uncertain and cannot be predicted at this time, including but not limited to, the duration and geographic spread of the pandemic, its severity, the actions to contain the virus or treat its impact, future spikes of COVID-19 infections resulting in additional preventative measures to contain or mitigate the spread of the virus, the effectiveness, distribution and acceptance of COVID-19 vaccines, including the vaccines’ efficacy against emerging COVID-19 variants, and how quickly and to what extent normal economic and operating conditions can resume. These impacts, individually or in the aggregate, could have a material and adverse effect on our business, financial position, results of operations and cash flows. Such effect may be exacerbated in the event the pandemic and the measures taken in response to it continue to persist for an extended period of time. Under any of these circumstances, the resumption of normal business operations may be delayed or hampered by lingering effects of COVID-19 on our operations, partners, and customers.

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Our quarterly operating results may vary from period to period, which could result in our failure to meet expectations with respect to operating results and cause the trading price of our stock to decline.

Our operating results have historically varied from period to period, and we expect that they will continue to do so as a result of a number of factors, many of which are outside of our control, including:

•

the level of demand for our solutions;

•

publicity regarding security breaches generally and the level of perceived threats to IT security;

•

expenses associated with our existing and new products and services;

•

changes in customer renewals of our solutions;

•

the extent to which customers subscribe for additional solutions;

	•	seasonal buying patterns of our customers;
	•	actual or perceived security breaches, technical difficulties or interruptions with our service;
	•	changes in the growth rate of the IT, security and compliance market;
	•	the timing and success of new product or service introductions by us or our competitors or any other changes in the competitive landscape of our industry, including consolidation among our competitors;
	•	the introduction or adoption of new technologies that compete with our solutions;
	•	decisions by potential customers to purchase IT, security and compliance products or services from other vendors;
	•	the amount and timing of operating costs and capital expenditures related to the operations and expansion of our business;
	•	the timing of sales commissions relative to the recognition of revenues;
	•	the announcement or adoption of new regulations and policy mandates or changes to existing regulations and policy mandates;
	•	failure of our products and services to operate as designed;
	•	price competition;
	•	the length of our sales cycle for our products and services;
	•	insolvency or credit difficulties confronting our customers, affecting their ability to purchase or pay for our solutions;
	•	timely invoicing or changes in billing terms of customers;
	•	timing of deals signed within the quarter;
	•	pace and cost of hiring employees;
	•	changes in foreign currency exchange rates;
	•	general economic conditions, both domestically and in the foreign markets in which we sell our solutions;
	•	future accounting pronouncements or changes in our accounting policies;
	•	our ability to integrate any products or services that we may acquire in the future into our product suite or migrate existing customers of any companies that we may acquire in the future to our products and services;
	•	our effective tax rate, changes in tax rules, tax effects of infrequent or unusual transactions, and tax audit settlements;
	•	the amount and timing of income tax that we recognize resulting from stock-based compensation;
	•	the timing of expenses related to the development or acquisition of technologies, services or businesses; and
	•	potential goodwill and intangible asset impairment charges associated with acquired businesses.

Further, the interpretation and application of international laws and regulations in many cases is uncertain, and our legal and regulatory obligations in foreign jurisdictions are subject to frequent and unexpected changes, including the potential for various regulatory or other governmental bodies to enact new or additional laws or regulations or to issue rulings that invalidate prior laws or regulations.

Each factor above or discussed elsewhere in this Quarterly Report on Form 10-Q or the cumulative effect of some of these factors may result in fluctuations in our operating results. This variability and unpredictability could result in our failure to meet expectations with respect to operating results, or those of securities analysts or investors, for a particular period. In addition, a significant percentage of our operating expenses are fixed in nature and based on forecasted trends in revenues. Accordingly, in the event of shortfalls in revenues, we are generally unable to mitigate the negative impact on margins in the short term by reducing our operating expenses. If we fail to meet or exceed expectations for our operating results for these or any other reasons, the trading price of our common stock could fall and we could face costly lawsuits, including securities class action suits.

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If we do not successfully anticipate market needs and opportunities or are unable to enhance our solutions and develop new solutions that meet those needs and opportunities on a timely or cost-effective basis, we may not be able to compete effectively and our business and financial condition may be harmed.

The IT, security and compliance market is characterized by rapid technological advances, customer price sensitivity, short product and service life cycles, intense competition, changes in customer requirements, frequent new product introductions and enhancements and evolving industry standards and regulatory mandates. Any of these factors could create downward pressure on pricing and gross margins, and could adversely affect our renewal rates, as well as our ability to attract new customers. Our future success will depend on our ability to enhance existing solutions, introduce new solutions on a timely and cost-effective basis, meet changing customer needs, extend our core technology into new applications, and anticipate and respond to emerging standards and business models. We must also continually change and improve our solutions in response to changes in operating systems, application software, computer and communications hardware, networking software, shared cloud platform infrastructures, programming tools and computer language technology.

We may not be able to anticipate future market needs and opportunities or develop enhancements or new solutions to meet such needs or opportunities in a timely manner or at all. The market for cloud solutions for IT, security and compliance continues to evolve, and it is uncertain whether our new solutions will gain market acceptance.

Our solution enhancements or new solutions could fail to attain sufficient market acceptance for many reasons, including:

•

failure to timely meet market demand for product functionality;

•

inability to identify and provide intelligence regarding the attacks or techniques used by cyber-attackers;

•

inability to inter-operate effectively with the database technologies, file systems or web applications of our prospective customers;

•

defects, errors or failures;

•

delays in releasing our enhancements or new solutions;

•

negative publicity about their performance or effectiveness;

•

introduction or anticipated introduction of products by our competitors;

•

poor business conditions, causing customers to delay IT, security and compliance purchases;

•

easing or changing of external regulations related to IT, security and compliance; and

•

reluctance of customers to purchase cloud solutions for IT, security and compliance.

Furthermore, diversifying our solutions and expanding into new IT, security and compliance markets will require significant investment and planning, require that our research and development and sales and marketing organizations develop expertise in these new markets, bring us more directly into competition with IT, security compliance providers that may be better established or have greater resources than we do, require additional investment of time and resources in the development and training of our channel partners and entail significant risk of failure.

If we fail to anticipate market requirements or fail to develop and introduce solution enhancements or new solutions to satisfy those requirements in a timely manner, such failure could substantially decrease or delay market acceptance and sales of our present and future solutions and cause us to lose existing customers or fail to gain new customers, which would significantly harm our business, financial condition and results of operations.

If we fail to continue to effectively scale and adapt our platform to meet the performance and other requirements of our customers, our operating results and our business would be harmed.

Our future growth depends to a significant extent on our ability to continue to meet the expanding needs of our customers as their use of our cloud platform grows. As these customers gain more experience with our solutions, the number of users and the number of locations where our solutions are being accessed may expand rapidly in the future. In order to ensure that we meet the performance and other requirements of our customers, we intend to continue to make significant investments to develop and implement new proprietary and third-party technologies at all levels of our cloud platform. These technologies, which include databases, applications and server optimizations, and network and hosting strategies, are often complex, new and unproven. We may not be successful in developing or implementing these technologies. To the extent that we do not effectively scale our platform to maintain performance as our customers expand their use of our platform, our operating results and our business may be harmed.

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If we are unable to renew existing subscriptions for our IT, security and compliance solutions, sell additional subscriptions for our solutions and attract new customers, our operating results would be harmed.

We offer our Qualys Cloud Platform and integrated suite of solutions pursuant to a software-as-a-service model, and our customers purchase subscriptions from us that are generally one year in length. Our customers have no obligation to renew their subscriptions after their subscription period expires, and they may not renew their subscriptions at the same or higher levels or at all. As a result, our ability to grow depends in part on customers renewing their existing subscriptions and purchasing additional subscriptions and solutions. Our customers may choose not to renew their subscriptions to our solutions or purchase additional solutions due to a number of factors, including their satisfaction or dissatisfaction with our solutions, the prices of our solutions, the prices of products or services offered by our competitors, reductions in our customers’ spending levels due to the macroeconomic environment or other factors. If our customers do not renew their subscriptions to our solutions, renew on less favorable terms, or do not purchase additional solutions or subscriptions, our revenues may grow more slowly than expected or decline and our operating results would be harmed.

In addition, our future growth depends in part upon increasing our customer base. Our ability to achieve significant growth in revenues in the future will depend, in large part, upon continually attracting new customers and obtaining subscription renewals to our solutions from those customers. If we fail to attract new customers, our revenues may grow more slowly than expected and our operating results would be harmed.

If the market for cloud solutions for IT, security and compliance does not evolve as we anticipate, our revenues may not grow and our operating results would be harmed.

Our success depends to a significant extent on the willingness of organizations to increase their use of cloud solutions for their IT, security and compliance. To date, some organizations have been reluctant to use cloud solutions because they have concerns regarding the risks associated with the reliability or security of the technology delivery model associated with these solutions. If other cloud service providers experience security incidents, loss of customer data, disruptions in service delivery or other problems, the market for cloud solutions as a whole, including our solutions, may be negatively impacted. Moreover, many organizations have invested substantial personnel and financial resources to integrate on-premise software into their businesses, and as a result may be reluctant or unwilling to migrate to a cloud solution. Organizations that use on-premise security products, such as network firewalls, security information and event management products or data loss prevention solutions, may also believe that these products sufficiently protect their IT infrastructure and deliver adequate security. Therefore, they may continue spending their IT security budgets on these products and may not adopt our IT, security and compliance solutions in addition to or as a replacement for such products.

If customers do not recognize the benefits of our cloud solutions over traditional on-premise enterprise software products, and as a result we are unable to increase sales of subscriptions to our solutions, then our revenues may not grow or may decline, and our operating results would be harmed.

Our current research and development efforts may not produce successful products or enhancements to our platform that result in significant revenue, cost savings or other benefits in the near future.

We must continue to dedicate significant financial and other resources to our research and development efforts if we are to maintain our competitive position. However, developing products and enhancements to our platform is expensive and time consuming, and there is no assurance that such activities will result in significant new marketable products or enhancements to our platform, design improvements, cost savings, revenue or other expected benefits. If we spend significant resources on research and development and are unable to generate an adequate return on our investment, our business and results of operations may be materially and adversely affected.

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Our platform, website and internal systems may be subject to intentional disruption or other security incidents that could result in liability and adversely impact our reputation and future sales.

We and our service providers face threats from a variety of sources, including attacks on our networks and systems from numerous sources, including traditional “hackers,” sophisticated nation-state and nation-state supported actors, other sources of malicious code (such as viruses and worms), ransomware, social engineering, denial of service attacks, and phishing attempts. We and our service providers could be a target of cyber-attacks or other malfeasance designed to impede the performance of our solutions, penetrate our network security or the security of our cloud platform or our internal systems, misappropriate proprietary information and/or cause interruptions to our services. We and our service providers have experienced and may continue to experience security incidents and attacks of varying degrees from time to time. For example, in December 2020, we were notified by a service provider, Accellion, of a zero-day vulnerability affecting an Accellion FTA server that we deployed to transfer information as part of our customer support system. In response to this incident, we engaged third-party forensic experts to investigate and determined that attackers illegally obtained certain information from the Accellion FTA server. We notified affected customers, as we deemed was required or appropriate. We have incurred costs to respond to this incident and may continue to incur costs to support our efforts to enhance our security measures. Additionally, due to political uncertainty and military actions associated with Russia’s invasion of Ukraine, we and our service providers are vulnerable to heightened risks of cybersecurity incidents and security and privacy breaches from or affiliated with nation-state actors, including attacks that could materially disrupt our systems, operations and services.

Our solutions, platforms, and system, and those of our service providers, may also suffer security incidents as a result of non-technical issues, including intentional or inadvertent acts or omissions by our employees or service providers. With the increase in personnel working remotely during the current COVID-19 pandemic, we and our service providers are at increased risk for security breaches. We have taken and intend to continue to take steps to monitor and enhance the security of our solutions, cloud platform, and other relevant systems, IT infrastructure, networks, and data; however, the unprecedented scale of remote work may require additional personnel and resources, which nevertheless cannot be guaranteed to fully safeguard our solutions, our cloud platform, or any systems, IT infrastructure networks, or data upon which we rely. Further, because our operations involve providing IT security solutions to our customers, we may be targeted for cyber-attacks and other security incidents. A breach in our data security or an attack against our service availability, or that of our third-party service providers, could impact our networks or networks secured by our solutions, creating system disruptions or slowdowns and exploiting security vulnerabilities of our solutions, and the information stored on our networks or those of our third-party service providers could be accessed, used, publicly disclosed, altered, lost, or stolen, which could subject us to liability and cause us financial harm. If an actual or perceived disruption in the availability of our solutions or the breach of our security measures or those of our service providers occurs, it could adversely affect the market perception of our solutions, result in a loss of competitive advantage, have a negative impact on our reputation, or result in the loss of customers, channel partners and sales, and it may expose us to the loss or alteration of information, litigation, regulatory actions and investigations and possible liability. Any such actual or perceived security breach or disruption could also divert the efforts of our technical and management personnel. We also may incur significant costs and operational consequences of investigating, remediating, eliminating and putting in place additional tools and devices designed to prevent actual or perceived security incidents, as well as the costs to comply with any notification obligations resulting from any security incidents. In addition, any such actual or perceived security breach could impair our ability to operate our business and provide solutions to our customers. If this happens, our reputation could be harmed, our revenues could decline and our business could suffer.

Although we maintain insurance coverage that may be applicable to certain liabilities in the event of a security breach or other security incident, we cannot be certain that our insurance coverage will be adequate for liabilities that actually are incurred, that insurance will continue to be available to us on economically reasonable terms, or at all, or that any insurer will not deny coverage as to any future claim. The successful assertion of one or more large claims against us that exceed available insurance coverage or the occurrence of changes in our insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, could have a material and adverse effect on our business, including our financial condition, operating results and reputation.

Our sales cycle can be long and unpredictable, and our sales efforts require considerable time and expense. As a result, revenues may vary from period to period, which may cause our operating results to fluctuate and could harm our business.

The timing of sales of subscriptions for our solutions can be difficult to forecast because of the length and unpredictability of our sales cycle, particularly with large transactions. We sell subscriptions to our IT, security and compliance solutions primarily to IT departments that are managing a growing set of user and compliance demands, which has increased the complexity of customer requirements to be met and confirmed during the sales cycle and prolonged our sales cycle. Further, the length of time that potential customers devote to their testing and evaluation, contract negotiation and budgeting processes varies significantly, which has also made our sales cycle long and unpredictable. The length of the sales cycle for our solutions typically ranges from six to twelve months but can be more than eighteen months. In addition, we might devote substantial time and effort to a particular unsuccessful sales effort, and as a result we could lose other sales opportunities or incur expenses that are not offset by an increase in revenues, which could harm our business.

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Adverse economic conditions or reduced IT spending may adversely impact our business.

Our business depends to a significant extent on the overall demand for IT and on the economic health of our current and prospective customers. Economic weakness, customer financial difficulties, inflationary pressures and potential for a recession, and constrained spending on IT security may result in decreased revenue and earnings. Such factors could make it difficult to accurately forecast our sales and operating results and could negatively affect our ability to provide accurate forecasts to our contract manufacturers. In addition, continued governmental budgetary challenges in the United States and Europe, inflationary pressures and potential for a recession, and geopolitical turmoil in many parts of the world, including the ongoing military conflict between Russia and Ukraine, and other disruptions to global and regional economies and markets in many parts of the world, as well as uncertainties related to changes in public policies such as domestic and international regulations, taxes or international trade agreements, have and may continue to put pressure on global economic conditions and overall spending on IT security and may further increase inflation, both in the U.S. and globally, which could increase our operating costs in the future and reduce overall spending on IT security. General economic weakness may also lead to longer collection cycles for payments due from our customers, an increase in customer bad debt, restructuring initiatives and associated expenses, and impairment of investments. Furthermore, the continued weakness and uncertainty in worldwide credit markets, including the sovereign debt situation in certain countries in the European Union, may adversely impact our European operations, as well as our current and potential customers' available budgetary spending, which could lead to delays or reductions in planned purchases of our solutions.

Uncertainty about future economic conditions also makes it difficult to forecast operating results and to make decisions about future investments. Future or continued economic weakness for us or our customers, failure of our customers and markets to recover from such weakness, customer financial difficulties, and reductions in spending on IT security could have a material adverse effect on demand for our platform and consequently on our business, financial condition and results of operations.

Our IT, security and compliance solutions are delivered from 11 shared cloud platforms, and any disruption of service at these facilities would interrupt or delay our ability to deliver our solutions to our customers which could reduce our revenues and harm our operating results.

We currently host substantially all of our solutions from third-party shared cloud platforms located in the United States, Canada, Switzerland, the Netherlands, United Arab Emirates, Australia, United Kingdom and India. These facilities are vulnerable to damage or interruption from earthquakes, hurricanes, floods, fires, cybersecurity attacks, terrorist attacks, employee negligence, power losses, telecommunications failures and similar events. The facilities also could be subject to break-ins, sabotage, intentional acts of vandalism and other misconduct. The occurrence of a natural disaster, an act of terrorism or misconduct, a decision to close the facilities without adequate notice or other unanticipated problems could result in interruptions in our services.

Some of our shared cloud platforms are not currently redundant and we may not be able to rapidly move our customers from one shared cloud platform to another, which may increase delays in the restoration of our service for our customers if an adverse event occurs. We have added shared cloud platforms to provide additional capacity and to enable disaster recovery. We continue to build out these facilities; however, these additional facilities may not be operational in the anticipated time-frame and we may incur unplanned expenses.

Additionally, our existing shared cloud platform providers have no obligations to renew their agreements with us on commercially reasonable terms, or at all. If we are unable to renew our agreements with the facilities providers on commercially reasonable terms or if in the future we add additional shared cloud platform providers, we may experience costs or downtime in connection with the loss of an existing facility or the transfer to, or addition of, new facilities.

Any disruptions or other performance problems with our solutions could harm our reputation and business and may damage our customers’ businesses. Interruptions in our service delivery might reduce our revenues, cause us to issue credits to customers, subject us to potential liability and cause customers to terminate their subscriptions or not renew their subscriptions.

We face competition in our markets, and we may lack sufficient financial or other resources to maintain or improve our competitive position.

We compete with a large range of established and emerging vulnerability management vendors, compliance vendors and data security vendors in a highly fragmented and competitive environment. We face significant competition for each of our solutions from companies with broad product suites and greater name recognition and resources than we have, as well as from small companies focused on specialized security solutions.

We compete with large and small public companies, such as Belden (Tripwire), Broadcom (Symantec Enterprise Security), CrowdStrike, Palo Alto Networks, Rapid7, Tenable Holdings, as well as privately held security providers including Axonius, Checkmarx, Flexera, Invicti, Ivanti, Tanium, Trustwave Holdings and Veracode. We also seek to replace IT, security and compliance solutions that organizations have developed internally. As we continue to extend our cloud platform’s functionality by further developing IT, security and compliance solutions, such as web application scanning and firewalls, we expect to face additional competition in these new markets. Our competitors may also attempt to further expand their presence in the IT, security and compliance market and compete more directly against one or more of our solutions.

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We believe that the principal competitive factors affecting our markets include product functionality, breadth of offerings, flexibility of delivery models, ease of deployment and use, total cost of ownership, scalability and performance, customer support and extensibility of platform. Many of our existing and potential competitors have competitive advantages, including:

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greater brand name recognition;

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larger sales and marketing budgets and resources;

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broader distribution networks and more established relationships with distributors and customers;

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access to larger customer bases;

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greater customer support resources;

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greater resources to make acquisitions;

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greater resources to develop and introduce products that compete with our solutions;

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greater resources to meet relevant regulatory requirements; and

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substantially greater financial, technical and other resources.

As a result, our competitors may be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards or customer requirements. With the introduction of new technologies, the evolution of our service and new market entrants, we expect competition to intensify in the future.

In addition, some of our larger competitors have substantially broader product offerings and can bundle competing products and services with other software offerings. As a result, customers may choose a bundled product offering from our competitors, even if individual products have more limited functionality than our solutions. These competitors may also offer their products at a lower price as part of this larger sale, which could increase pricing pressure on our solutions and cause the average sales price for our solutions to decline. These larger competitors are also often in a better position to withstand any significant reduction in capital spending and will therefore not be as susceptible to economic downturns.

Furthermore, our current and potential competitors may establish cooperative relationships among themselves or with third parties that may further enhance their resources and product and services offerings in the markets we address. In addition, current or potential competitors may be acquired by third parties with greater available resources. As a result of such relationships and acquisitions, our current or potential competitors might be able to adapt more quickly to new technologies and customer needs, devote greater resources to the promotion or sale of their products and services, initiate or withstand substantial price competition, take advantage of other opportunities more readily or develop and expand their product and service offerings more quickly than we do. For all of these reasons, we may not be able to compete successfully against our current or future competitors.

The sales prices of our solutions are subject to competitive pressures and may decrease, which may reduce our gross profits and adversely impact our financial results.

The sales prices for our solutions may decline for a variety of reasons, including competitive pricing pressures, discounts, a change in our mix of solutions and subscriptions, anticipation of the introduction of new solutions or subscriptions, or promotional programs. Competition continues to increase in the market segments in which we participate, and we expect competition to further increase in the future, thereby leading to increased pricing pressures. Larger competitors with more diverse product and service offerings may reduce the price of products or subscriptions that compete with ours or may bundle them with other products and subscriptions. Additionally, although we price our products and subscriptions worldwide in U.S. Dollars, Euros, British Pounds, Canadian Dollars, Japanese Yen and Indian Rupee, currency fluctuations in certain countries and regions may negatively impact actual prices that partners and customers are willing to pay in those countries and regions, or the effective prices we realize in our reporting currency. We cannot assure you that we will be successful in developing and introducing new offerings with enhanced functionality on a timely basis, or that our new product and subscription offerings, if introduced, will enable us to maintain our prices and gross profits at levels that will allow us to maintain positive gross margins and profitability.

If our solutions fail to help our customers achieve and maintain compliance with regulations and industry standards, our revenues and operating results could be harmed.

We generate a portion of our revenues from solutions that help organizations achieve and maintain compliance with regulations and industry standards. For example, many of our customers subscribe to our IT, security and compliance solutions to help them comply with the security standards developed and maintained by the Payment Card Industry Security Standards Council, or the PCI Council, which apply to companies that store cardholder data. Industry organizations like the PCI Council may significantly change their security standards with little or no notice, including changes that could make their standards more or less onerous for businesses. Governments may also adopt new laws or regulations, or make changes to existing laws or regulations, that could impact the demand for or value of our solutions.

If we are unable to adapt our solutions to changing regulatory standards in a timely manner, or if our solutions fail to assist with or expedite our customers’ compliance initiatives, our customers may lose confidence in our solutions and could switch to products offered by our competitors. In addition, if regulations and standards related to data security, vulnerability management and other IT, security and compliance requirements are relaxed or the penalties for non-compliance are changed in a manner that makes them less onerous, our customers may view government and industry regulatory compliance as less critical to their businesses, and our customers may be less willing to purchase our solutions. In any of these cases, our revenues and operating results could be harmed.

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If our solutions fail to detect vulnerabilities or incorrectly detect vulnerabilities, our brand and reputation could be harmed, which could have an adverse effect on our business and results of operations.

If our solutions fail to detect vulnerabilities in our customers’ IT infrastructures, or if our solutions fail to identify and respond to new and increasingly complex methods of attacks, our business and reputation may suffer. There is no guarantee that our solutions will detect all vulnerabilities. Additionally, our IT, security and compliance solutions may falsely detect vulnerabilities or threats that do not actually exist. For example, some of our solutions rely on information on attack sources aggregated from third-party data providers who monitor global malicious activity originating from a variety of sources, including anonymous proxies, specific IP addresses, botnets and phishing sites. If the information from these data providers is inaccurate, the potential for false indications of security vulnerabilities increases. These false positives, while typical in the industry, may impair the perceived reliability or usability of our solutions and may therefore adversely impact market acceptance of our solutions and could result in negative publicity, loss of customers and sales, increased costs to remedy any incorrect information or problem, or claims by aggrieved parties. Similar issues may be generated by the misuse of our tools to identify and exploit vulnerabilities.

Further, our solutions sometimes are tested against other security products, and may fail to perform as effectively, or to be perceived as performing as effectively, as competitive products for any number of reasons, including misconfiguration. To the extent current or potential customers, channel partners, or others believe there has been an occurrence of an actual or perceived failure of our solutions to detect a vulnerability or otherwise to function as effectively as competitive products in any particular test, or indicates our solutions do not provide significant value, our business, competitive position, and reputation could be harmed.

In addition, our solutions do not currently extend to cover all mobile and personal devices that employees may bring into an organization. As such, our solutions would not identify or address vulnerabilities in all mobile and personal devices, and our customers’ IT infrastructures may be compromised by attacks that infiltrate their networks through such devices.

An actual or perceived security breach or theft of the sensitive data of one of our customers, regardless of whether the breach is attributable to the failure of our solutions, could adversely affect the market’s perception of our security solutions.

If we are unable to continue the expansion of our sales force, sales of our solutions and the growth of our business would be harmed.

We believe that our growth will depend, to a significant extent, on our success in recruiting and retaining a sufficient number of qualified sales personnel and their ability to obtain new customers, manage our existing customer base and expand the sales of our newer solutions. We plan to continue to expand our sales force and make a significant investment in our sales and marketing activities. Our recent hires and planned hires may not become as productive as quickly as we would like, and we may be unable to hire or retain sufficient numbers of qualified individuals in the future in the competitive markets where we do business. Competition for highly skilled personnel is frequently intense and we may not be able to compete for these employees. If we are unable to recruit and retain a sufficient number of productive sales personnel, sales of our solutions and the growth of our business may be harmed. Additionally, if our efforts do not result in increased revenues, our operating results could be negatively impacted due to the upfront operating expenses associated with expanding our sales force.

We rely on third-party channel partners to generate a substantial amount of our revenues, and if we fail to expand and manage our distribution channels, our revenues could decline and our growth prospects could suffer.

Our success significantly depends to a significant extent on establishing and maintaining relationships with a variety of channel partners and we anticipate that we will continue to depend on these partners in order to grow our business. For the six months ended June 30, 2022, we derived approximately 41% of our revenues from sales of subscriptions for our solutions through channel partners, and the percentage of revenues derived from channel partners may increase in future periods. Our agreements with our channel partners are generally non-exclusive and do not prohibit them from working with our competitors or offering competing solutions, and many of our channel partners have more established relationships with our competitors. If our channel partners choose to place greater emphasis on products of their own or those offered by our competitors, do not effectively market and sell our solutions, or fail to meet the needs of our customers, then our ability to grow our business and sell our solutions may be adversely affected. In addition, the loss of one or more of our larger channel partners, who may cease marketing our solutions with limited or no notice, and our possible inability to replace them, could adversely affect our sales. Moreover, our ability to expand our distribution channels depends in part on our ability to educate our channel partners about our solutions, which can be complex. Our failure to recruit additional channel partners, or any reduction or delay in their sales of our solutions or conflicts between channel sales and our direct sales and marketing activities may harm our results of operations. Even if we are successful, these relationships may not result in greater customer usage of our solutions or increased revenues.

In addition, the financial health of our channel partners and our continuing relationships with them are important to our success. Some of these channel partners may be unable to withstand adverse changes in economic conditions, which could result in insolvency and/or the inability of such distributors to obtain credit to finance purchases of our products and services. In addition, weakness in the end-user market could negatively affect the cash flows of our channel partners who could, in turn, delay paying their obligations to us, which would increase our credit risk exposure. Our business could be harmed if the financial condition of some of these channel partners substantially weakened and we were unable to timely secure replacement channel partners.

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A significant portion of our customers, channel partners and employees are located outside of the United States, which subjects us to a number of risks associated with conducting international operations, and if we are unable to successfully manage these risks, our business and operating results could be harmed.

We market and sell subscriptions to our solutions throughout the world and have personnel in many parts of the world. In addition, we have sales offices and research and development facilities outside the United States and we conduct, and expect to continue to conduct, a significant amount of our business with organizations that are located outside the United States, particularly in Europe and Asia. Therefore, we are subject to risks associated with having international sales and worldwide operations, including:

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foreign currency exchange fluctuations;

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trade and foreign exchange restrictions;

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economic or political instability in foreign markets, including as a result of increasing tensions between India and China;

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greater difficulty in enforcing contracts, accounts receivable collection and longer collection periods;

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changes in regulatory requirements;

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tax laws (including U.S. taxes on foreign subsidiaries);

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difficulties and costs of staffing and managing foreign operations;

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the uncertainty and limitation of protection for intellectual property rights in some countries;

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costs of compliance with foreign laws and regulations and the risks and costs of non-compliance with such laws and regulations;

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costs of complying with U.S. laws and regulations for foreign operations, including the Foreign Corrupt Practices Act, import and export control laws, tariffs, trade barriers, economic sanctions and other regulatory or contractual limitations on our ability to sell our solutions in certain foreign markets, and the risks and costs of non-compliance;

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heightened risks of unfair or corrupt business practices in certain geographies and of improper or fraudulent sales arrangements that may impact financial results and result in restatements of, and irregularities in, financial statements;

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the potential for political unrest, acts of terrorism, hostilities or war;

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management communication and integration problems resulting from cultural differences and geographic dispersion; and

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multiple and possibly overlapping tax structures.

Some of our business partners also have international operations and are subject to the risks described above. Even if we are able to successfully manage the risks of international operations, our business may be adversely affected if our business partners are not able to successfully manage these risks.

Our business, including the sales of subscriptions of our solutions, may be subject to foreign governmental regulations, which vary substantially from country to country and change from time to time. Failure to comply with these regulations could adversely affect our business. Further, in many foreign countries it is common for others to engage in business practices that are prohibited by our internal policies and procedures or U.S. regulations applicable to us. Although we have implemented policies and procedures designed to ensure compliance with these laws and policies, there can be no assurance that all of our employees, contractors, channel partners and agents have complied or will comply with these laws and policies. Violations of laws or key control policies by our employees, contractors, channel partners or agents could result in delays in revenue recognition, financial reporting misstatements, fines, penalties or the prohibition of the importation or exportation of our solutions and could have a material adverse effect on our business and results of operations. If we are unable to successfully manage the challenges of international operations, our business and operating results could be adversely affected.

In addition, as of June 30, 2022, approximately 75% of our employees were located outside of the United States, with 67% of our employees located in Pune, India. Accordingly, we are exposed to changes in laws governing our employee relationships in various U.S. and foreign jurisdictions, including laws and regulations regarding wage and hour requirements, fair labor standards, employee data privacy, unemployment tax rates, workers’ compensation rates, citizenship requirements and payroll and other taxes which may have a direct impact on our operating costs. We may continue to expand our international operations and international sales and marketing activities. Expansion in international markets has required, and will continue to require, significant management attention and resources. We may be unable to scale our infrastructure effectively or as quickly as our competitors in these markets and our revenues may not increase to offset any increased costs and operating expenses, which would cause our results to suffer.

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We are exposed to fluctuations in currency exchange rates, which could negatively affect our financial condition and results of operations.

Our reporting currency is the U.S. dollar and we generate a majority of our revenues in U.S. dollars. However, for the six months ended June 30, 2022, we incurred approximately 29% of our expenses in foreign currencies, primarily Euros, British Pounds, and Indian Rupee, principally with respect to salaries and related personnel expenses associated with our European and Indian operations. Additionally, for the six months ended June 30, 2022, approximately 24% of our revenues were generated in foreign currencies. Accordingly, changes in exchange rates may have a material adverse effect on our business, operating results and financial condition. The exchange rate between the U.S. dollar and foreign currencies has fluctuated substantially in recent years and may continue to fluctuate substantially in the future. We expect that a majority of our revenues will continue to be generated in U.S. dollars for the foreseeable future and that a significant portion of our expenses, including personnel costs, as well as capital and operating expenditures, will continue to be denominated in the Euro, British Pound and Indian Rupee. The results of our operations may be adversely affected by foreign exchange fluctuations.

We use derivative financial instruments to reduce our foreign currency exchange risks. We use foreign currency forward contracts to mitigate the impact of foreign currency fluctuations of certain non-U.S. dollar denominated net asset positions, to date primarily cash, accounts receivable and operating lease liabilities (non-designated), as well as to manage foreign currency fluctuation risk related to forecasted transactions (designated). However, we may not be able to purchase derivative instruments that are adequate to insulate ourselves from foreign currency exchange risks. Additionally, our hedging activities may contribute to increased losses as a result of volatility in foreign currency markets.

Our business and operations have experienced significant growth, and if we do not appropriately manage any future growth, or are unable to improve our systems and processes, our operating results may be negatively affected.

We have experienced significant growth over the last several years. Our revenues grew from $321.6 million in 2019 to $411.2 million in 2021, and our headcount increased from 1,194 employees at the beginning of 2019 to 1,962 employees as of June 30, 2022. We rely on information technology systems to help manage critical functions such as order processing, revenue recognition and financial forecasts. To manage any future growth effectively we must continue to improve and expand our IT systems, financial infrastructure, and operating and administrative systems and controls, and continue to manage headcount, capital and processes in an efficient manner. We may not be able to successfully implement improvements to these systems and processes in a timely or efficient manner.

Our failure to improve our systems and processes, or their failure to operate in the intended manner, may result in our inability to manage the growth of our business and to accurately forecast our revenues, expenses and earnings, or to prevent certain losses. In addition, as we continue to grow, our productivity and the quality of our solutions may also be adversely affected if we do not integrate and train our new employees quickly and effectively. Any future growth would add complexity to our organization and require effective coordination across our organization. Failure to manage any future growth effectively could result in increased costs, harm our results of operations and lead to investors losing confidence in our internal systems and processes.

We depend on the continued services and performance of our senior management and other key employees, the loss of any of whom could adversely affect our business, operating results and financial condition.

Our future performance depends to a significant extent on the continued services and continuing contributions of our senior management and other key employees, to execute on our business plan and to identify and pursue new opportunities and product innovations. We do not maintain key-man insurance for any member of our senior management team. Our senior management and key employees are generally employed on an at-will basis, which means that they could terminate their employment with us at any time. From time to time, there may be changes in our senior management team resulting from the termination or departure of executives. The loss of the services of our senior management or other key employees for any reason could significantly delay or prevent the achievement of our development and strategic objectives and harm our business, financial condition and results of operations.

If we are unable to hire, retain and motivate qualified personnel, our business may suffer.

Our future success depends, in part, on our ability to continue to attract and retain highly skilled personnel. The loss of the services of any of our key personnel, the inability to attract or retain qualified personnel or delays in hiring required personnel, particularly in engineering and sales, may seriously harm our business, financial condition and results of operations. Any of our employees may terminate their employment at any time. Competition for highly skilled personnel is frequently intense, especially within our industry, and we may not be able to compete for such personnel.

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We are required under accounting principles generally accepted in the United States (U.S. GAAP) to recognize compensation expense in our operating results for employee stock-based compensation under our equity grant programs, which may negatively impact our operating results and may increase the pressure to limit stock-based compensation that we might otherwise offer to current or potential employees, thereby potentially harming our ability to attract or retain highly skilled personnel. In addition, to the extent we hire personnel from competitors, we may be subject to allegations that they have been improperly solicited or divulged proprietary or other confidential information, which could result in a diversion of management's time and our resources.

A portion of our revenues are generated by sales to government entities, which are subject to a number of challenges and risks.

Government entities have historically been particularly concerned about adopting cloud-based solutions for their operations, including security solutions, and increasing sales of subscriptions for our solutions to government entities may be more challenging than selling to commercial organizations. Selling to government entities can be highly competitive, expensive and time-consuming, often requiring significant upfront time and expense without any assurance that we will win a sale. We have invested in the creation of a cloud offering certified under the Federal Information Security Management Act for government usage but we cannot be sure that we will continue to sustain or renew this certification, that the government will continue to mandate such certification or that other government agencies or entities will use this cloud offering. Government demand and payment for our solutions may be impacted by public sector budgetary cycles and funding authorizations, with funding reductions or delays adversely affecting public sector demand for our solutions. Government entities may have contractual or other legal rights to terminate contracts with our channel partners for convenience or due to a default, and any such termination may adversely impact our future results of operations. Governments routinely investigate and audit government contractors’ administrative processes, and any unfavorable audit could result in the government refusing to continue buying our solutions, a reduction of revenues or fines or civil or criminal liability if the audit uncovers improper or illegal activities. Any such penalties could adversely impact our results of operations in a material way.

Our success in acquiring and integrating other businesses, products or technologies could impact our financial position.

In order to remain competitive, we have in the past and may in the future seek to acquire additional businesses, products, services or technologies. For example, we acquired certain intellectual property of Spell Security on July 24, 2020, and certain intellectual property of TotalCloud on August 19, 2021. The environment for acquisitions in our industry is very competitive and acquisition candidate purchase prices may exceed what we would prefer to pay. Moreover, achieving the anticipated benefits of future acquisitions will depend in part upon whether we can integrate acquired operations, products and technology in a timely and cost-effective manner, and even if we achieve benefits from acquisitions, such acquisitions may still be viewed negatively by customers, financial markets or investors. The acquisition and integration process is complex, expensive and time-consuming, and may cause an interruption of, or loss of momentum in, product development and sales activities and operations of both companies, as well as divert the attention of management, and we may incur substantial cost and expense. We may issue equity securities which could dilute current stockholders’ ownership, incur debt, assume contingent or other liabilities and expend cash in acquisitions, which could negatively impact our financial position, stockholder equity and stock price. We may not find suitable acquisition candidates, and acquisitions we complete may be unsuccessful. If we consummate a transaction, we may be unable to integrate and manage acquired products and businesses effectively or retain key personnel. If we are unable to effectively execute acquisitions, our business, financial condition and operating results could be adversely affected.

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We rely on software-as-a-service vendors to operate certain functions of our business and any failure of such vendors to provide services to us could adversely impact our business and operations.

We rely on third-party software-as-a-service vendors to operate certain critical functions of our business, including financial management and human resource management. If these services become unavailable due to extended outages or interruptions or because they are no longer available on commercially reasonable terms or prices, our expenses could increase, our ability to manage our finances could be interrupted and our processes for managing sales of our solutions and supporting our customers could be impaired until equivalent services, if available, are identified, obtained and integrated, all of which could harm our business.

Delays or interruptions in the manufacturing and delivery of our physical scanner appliances by our sole source manufacturer may harm our business.

Upon customer request, we provide physical or virtual scanner appliances on a subscription basis as an additional capability to the customer’s subscription for use during their subscription term. Our physical scanner appliances are built by a single manufacturer. Our reliance on a sole manufacturer involves several risks, including a potential inability to obtain an adequate supply of physical scanner appliances and limited control over pricing, quality and timely deployment of such scanner appliances. In addition, replacing this manufacturer may be difficult and could result in an inability or delay in deploying our solutions to customers that request physical scanner appliances as part of their subscriptions.

Furthermore, our manufacturer’s ability to timely manufacture and ship our physical scanner appliances depends on a variety of factors, such as the availability of hardware components, supply shortages or contractual restrictions. In the event of an interruption from this manufacturer, we may not be able to develop alternate or secondary sources in a timely manner. If we are unable to purchase physical scanner appliances in quantities sufficient to meet our requirements on a timely basis, we may not be able to effectively deploy our solutions to new customers that request physical scanner appliances, which could harm our business.

Incorrect or improper implementation or use of our solutions could result in customer dissatisfaction and harm our business and reputation.

If our customers are unable to implement our solutions successfully, customer perceptions of our platform and solutions may be impaired or our reputation and brand may suffer. Our customers have in the past inadvertently misused our solutions, which triggered downtime in their internal infrastructure until the problem was resolved. Additionally, any failure to implement and configure our solutions correctly may result in our solutions failing to detect vulnerabilities or compliance issues, or otherwise to perform effectively, and may result in disruptions to our customers’ IT environments and businesses. Any misuse of our solutions, including any failure to implement and configure them appropriately, could result in disruption to our customers’ businesses, customer dissatisfaction, negative impacts on the perceived reliability or effectiveness of our solutions, and claims and litigation, and may result in negative press coverage, negative effects on our reputation and competitive position, a loss of sales, customers, and channel partners, and harm our financial results.

We recognize revenues from subscriptions over the term of the relevant service period, and therefore any decreases or increases in bookings are not immediately reflected in our operating results.

We recognize revenues from subscriptions over the term of the relevant service period, which is typically one year. As a result, most of our reported revenues in each quarter are derived from the recognition of deferred revenues relating to subscriptions entered into during previous quarters. Consequently, a shortfall in demand for our solutions in any period may not significantly reduce our revenues for that period, but could negatively affect revenues in future periods. Accordingly, the effect of significant downturns in bookings may not be fully reflected in our results of operations until future periods. We may be unable to adjust our costs and expenses to compensate for such a potential shortfall in revenues. Our subscription model also makes it difficult for us to rapidly increase our revenues through additional bookings in any period, as revenues are recognized ratably over the subscription period.

Our business is subject to the risks of earthquakes, fire, power outages, floods and other catastrophic events, and to interruption by man-made problems such as terrorism.

A significant natural disaster, such as an earthquake, fire or a flood, or a significant power outage could have a material adverse impact on our business, operating results and financial condition. Our corporate headquarters and a significant portion of our operations are located in the San Francisco Bay Area, a region known for seismic activity. In addition, natural disasters could affect our business partners’ ability to perform services for us on a timely basis. In the event we or our business partners are hindered by any of the events discussed above, our ability to provide our solutions to customers could be delayed, resulting in our missing financial targets, such as revenues and net income, for a particular quarter. Further, if a natural disaster occurs in a region from which we derive a significant portion of our revenues, customers in that region may delay or forego subscriptions of our solutions, which may materially and adversely impact our results of operations for a particular period. In addition, war, acts of terrorism, pandemics or other health emergencies, or responses to these events could cause disruptions in our business or the business of our business partners, customers or the economy as a whole. All of the aforementioned risks may be exacerbated if the disaster recovery plans for us and our suppliers prove to be inadequate. To the extent that any of the above results in delays of customer subscriptions or commercialization of our solutions, our business, financial condition and results of operations could be adversely affected.

Our operations in Russia and Belarus have been and may continue to be negatively affected by Russia’s invasion of Ukraine and related sanctions imposed in response.

As a result of Russia's invasion of Ukraine in February 2022, we have suspended services to all customers in Russia and Belarus, effective March 2022, and we have made other adjustments to our operations in the region in light of U.S. and international sanctions. These sanctions continue in place and changes to them or additional measures implemented by the U.S. government or other applicable authorities could further affect our sales and operations in the region. Revenue from our operations in Russia and Belarus was not material during the six months ended June 30, 2022 and during the year ended December 31, 2021.

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Risks Related to Intellectual Property, Legal, Tax and Regulatory Matters

Undetected software errors or flaws in our solutions could harm our reputation, decrease market acceptance of our solutions or result in liability.

Our solutions may contain undetected errors or defects when first introduced or as new versions are released. We have experienced these errors or defects in the past in connection with new solutions and solution upgrades and we expect that these errors or defects will be found from time to time in the future in new or enhanced solutions after commercial release of these solutions. Since our customers use our solutions for IT, security and compliance reasons, any errors, defects, disruptions in service or other performance problems with our solutions, or any other failure of our solutions to detect vulnerabilities or compliance problems or otherwise to perform effectively, may result in disruptions or damage to the business of our customers, including security breaches or compliance failures. Additionally, any such issues, or the perception that they have occurred, whether or not relating to any actual or perceived error or defect in our solutions, could hurt our reputation and competitive position and we may incur significant costs, the attention of key personnel could be diverted, our customers may delay or withhold payment to us or elect not to renew, we could face a loss of sales, customers, and channel partners, and other significant problems with our relationships with customers and channel partners may arise. We may also be subject to liability claims for damages related to actual or perceived errors or defects in our solutions. A material liability claim or other occurrence that harms our reputation or decreases market acceptance of our solutions may harm our business, competitive and financial position, and operating results.

Although we maintain insurance coverage that may be applicable to certain liabilities in connection with these matters, we cannot be certain that our insurance coverage will be adequate for liabilities that actually are incurred, that insurance will continue to be available to us on economically reasonable terms, or at all, or that any insurer will not deny coverage as to any future claim. The successful assertion of one or more large claims against us that exceed available insurance coverage or the occurrence of changes in our insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, could have a material and adverse effect on our business, including our financial condition, operating results and reputation.

Our solutions could be used to collect and store personal information of our customers’ employees or customers, and therefore privacy and other data handling concerns could result in additional cost and liability to us or inhibit sales of our solutions.

We collect the names and email addresses of our customers in connection with subscriptions to our solutions. Additionally, the data that our solutions collect to help secure and protect the IT infrastructure of our customers may include additional personal or confidential information of our customers’ employees and their customers. Personal privacy has become a significant issue in the United States and in many other countries where we offer our solutions. The regulatory framework for privacy issues worldwide is currently evolving and is likely to remain uncertain for the foreseeable future. Many federal, state and foreign government bodies and agencies have adopted or are considering adopting laws and regulations regarding the collection, use, disclosure and retention of personal information. In the United States, these include, for example, rules and regulations promulgated under the authority of the Federal Trade Commission, the Health Insurance Portability and Accountability Act of 1996, the Gramm-Leach-Bliley Act, and state breach notification laws. Internationally, virtually every jurisdiction in which we operate has established its own data security and privacy legal framework with which we or our customers must comply.

These privacy, data protection and information security laws and regulations may result in ever-increasing regulatory and public scrutiny and escalating levels of enforcement and sanctions. Additionally, new laws and regulations relating to privacy and data protection continue to be proposed and enacted. For example, the European Union has adopted the Global Data Protection Regulation (“GDPR”). This regulation, which took effect in May of 2018, provides for substantial obligations relating to the handling, storage and other processing of data relating to individuals and administrative fines for violations, which can be up to four percent of the previous year’s annual revenue or €20 million, whichever is higher. The GDPR may be subject to new or changing interpretations by courts, and our interpretation of the law and efforts to comply with the rules and regulations of the law may be ruled invalid. Similarly, the California Consumer Privacy Act (“CCPA”) requires covered companies to, among other things, provide new disclosures to California consumers and affords such consumers new rights to opt-out of certain sales of personal information. The CCPA also creates a private right of action for statutory damages for certain breaches of information. Certain aspects of the CCPA and its interpretation remain uncertain and are likely to remain uncertain for an extended period. Additionally, a new privacy law, the California Privacy Rights Act (“CPRA”), was approved by voters in the November 3, 2020 election. The CPRA modifies the CCPA significantly, creating obligations relating to consumer data beginning on January 1, 2022, and enforcement is expected to commence on July 1, 2023. Passage of the CPRA has resulted in further uncertainty and may require us to incur additional costs and expenses in an effort to comply. In addition, other states have enacted or proposed legislation that regulates the collection, use, and sale of personal information, and such regimes might not be compatible with the GDPR, the CCPA or the CPRA or may require us to undertake additional practices. Accordingly, we cannot yet predict the impact of the CCPA, CRPA or other evolving privacy and data protection obligations on our business or operations, but it may require us to modify our data processing practices and policies and incur substantial costs and expenses in an effort to comply.

The privacy, data protection, and information security laws and regulations we must comply with also are subject to change. For example, the United Kingdom enacted a Data Protection Act in May 2018 that substantially implements the GDPR, but the United Kingdom's exit from the European Union, commonly referred to as “Brexit,” could lead to further legislative and regulatory changes. It remains unclear how United Kingdom data protection laws or regulations will develop in the medium to longer term and how data transfers to and from the United Kingdom will be regulated. Additionally, we have joined the EU-U.S. Privacy Shield Framework and a related program, the Swiss-U.S. Privacy Shield Framework, and adopted certain standard contractual clauses approved by the European Commission (“SCCs”) as part of our data processing agreements with regard to certain transfers of personal data from the European Economic Area (“EEA”) to the U.S. to ensure that we work with vendors that have adopted the same, where appropriate. While both the EU-U.S. Privacy Shield Framework and SCCs have been subject to legal challenge, we continue to analyze the July 2020 “Schrems II” decision by the Court of Justice of the European Union (“CJEU”) and its impact on our data transfer mechanisms as well as subsequent guidance from data privacy regulators and new SCCs published by the European Commission in June 2021, and we may find it necessary or appropriate to take different or additional steps with respect to transfers of personal data, which may result in increased costs of compliance and limitations on our customers and us. We may be unsuccessful in maintaining legitimate means for our transfer and receipt of personal data from the EEA or Switzerland. We may experience reluctance or refusal by current or prospective European customers to use our products, and we and our customers may face a risk of enforcement actions by data protection authorities in the EEA relating to personal data transfers to us and by us from the EEA. Any such enforcement actions could result in substantial costs and diversion of resources, distract management and technical personnel and negatively affect our business, operating results and financial condition. Some countries also are considering or have passed legislation requiring local storage and processing of data, or similar requirements, which could increase the cost and complexity of delivering our services.

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In addition to laws and regulations, privacy advocacy and industry groups or other private parties may propose new and different privacy standards that either legally or contractually apply to us. Because the interpretation and application of privacy and data protection laws, regulations, standards and contractual obligations are uncertain, it is possible that they may be interpreted and applied in a manner that is, or perceived to be, inconsistent with our data management practices or the features of our solutions. If so, in addition to the possibility of regulatory investigations and enforcement actions, fines, lawsuits and other claims, other forms of injunctive or operations-limiting relief, and damage to our reputations and loss of goodwill, we could be required to fundamentally change our business activities and practices or modify our solutions and may face limitations in our ability to develop new solutions and features, any of which could have an adverse effect on our business. Any inability to adequately address privacy concerns, even if unfounded, or any actual or perceived inability to comply with applicable privacy or data protection laws, regulations and privacy standards, could result in cost and liability to us, damage our reputation, inhibit sales of subscriptions and harm our business.

Furthermore, the costs of compliance with, and other burdens imposed by, the laws, regulations, and privacy standards that are applicable to the businesses of our customers may limit the use and adoption of, and reduce the overall demand for, our solutions. Privacy concerns, whether valid or not valid, may inhibit market adoption of our solutions particularly in certain industries and foreign countries.

Our solutions contain third-party open source software components, and our failure to comply with the terms of the underlying open source software licenses could restrict our ability to sell our solutions.

Our solutions contain software licensed to us by third-parties under so-called “open source” licenses, including the GNU General Public License, the GNU Lesser General Public License, the BSD License, the Apache License and others. From time to time, there have been claims against companies that distribute or use open source software in their products and services, asserting that such open source software infringes the claimants’ intellectual property rights. We could be subject to suits by parties claiming that what we believe to be licensed open source software infringes their intellectual property rights. Use and distribution of open source software may entail greater risks than use of third-party commercial software, as open source licensors generally do not provide warranties or other contractual protections regarding infringement claims or the quality of the code. In addition, certain open source licenses require that source code for software programs that are subject to the license be made available to the public and that any modifications or derivative works to such open source software continue to be licensed under the same terms. If we combine our proprietary software with open source software in certain ways, we could, in some circumstances, be required to release the source code of our proprietary software to the public. Disclosing the source code of our proprietary software could make it easier for cyber attackers and other third parties to discover vulnerabilities in or to defeat the protections of our solutions, which could result in our solutions failing to provide our customers with the security they expect from our services. This could harm our business and reputation. Disclosing our proprietary source code also could allow our competitors to create similar products with lower development effort and time and ultimately could result in a loss of sales for us. Any of these events could have a material adverse effect on our business, operating results and financial condition.

Although we monitor our use of open source software in an effort both to comply with the terms of the applicable open source licenses and to avoid subjecting our solutions to conditions we do not intend, the terms of many open source licenses have not been interpreted by U.S. courts, and there is a risk that these licenses could be construed in a way that could impose unanticipated conditions or restrictions on our ability to commercialize our solutions. In this event, we could be required to seek licenses from third parties to continue offering our solutions, to make our proprietary code generally available in source code form, to re-engineer our solutions or to discontinue the sale of our solutions if re-engineering could not be accomplished on a timely basis, any of which could adversely affect our business, operating results and financial condition.

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We use third-party software and data that may be difficult to replace or cause errors or failures of our solutions that could lead to lost customers or harm to our reputation and our operating results.

We license third-party software as well as security and compliance data from various third parties to deliver our solutions. In the future, this software or data may not be available to us on commercially reasonable terms, or at all. Any loss of the right to use any of this software or data could result in delays in the provisioning of our solutions until equivalent technology or data is either developed by us, or, if available, is identified, obtained and integrated, which could harm our business. In addition, any errors or defects in or failures of this third-party software or data could result in errors or defects in our solutions or cause our solutions to fail, which could harm our business and be costly to correct. Many of these providers attempt to impose limitations on their liability for such errors, defects or failures, and if enforceable, we may have additional liability to our customers or third-party providers that could harm our reputation and increase our operating costs.

We will need to maintain our relationships with third-party software and data providers, and to obtain software and data from such providers that do not contain any errors or defects. Any failure to do so could adversely impact our ability to deliver effective solutions to our customers and could harm our operating results.

Failure to protect our proprietary technology and intellectual property rights could substantially harm our business and operating results.

The success of our business depends in part on our ability to protect and enforce our trade secrets, trademarks, copyrights, patents and other intellectual property rights. We attempt to protect our intellectual property under copyright, trade secret, patent and trademark laws, and through a combination of confidentiality procedures, contractual provisions and other methods, all of which offer only limited protection.

We primarily rely on our unpatented proprietary technology and trade secrets. Despite our efforts to protect our proprietary technology and trade secrets, unauthorized parties may attempt to misappropriate, reverse engineer or otherwise obtain and use them. The contractual provisions that we enter into with employees, consultants, partners, vendors and customers may not prevent unauthorized use or disclosure of our proprietary technology or intellectual property rights and may not provide an adequate remedy in the event of unauthorized use or disclosure of our proprietary technology or intellectual property rights. Moreover, policing unauthorized use of our technologies, solutions and intellectual property is difficult, expensive and time-consuming, particularly in foreign countries where the laws may not be as protective of intellectual property rights as those in the United States and where mechanisms for enforcement of intellectual property rights may be weak. We may be unable to determine the extent of any unauthorized use or infringement of our solutions, technologies or intellectual property rights.

The process of obtaining patent protection is expensive and time-consuming, and we may not be able to prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner, if at all. We may choose not to seek patent protection for certain innovations and may choose not to pursue patent protection in certain jurisdictions.

Furthermore, it is possible that our patent applications may not result in granted patents, that the scope of our issued patents will be limited or not provide the coverage originally sought, that our issued patents will not provide us with any competitive advantages, or that our patents and other intellectual property rights may be challenged by others or invalidated through administrative processes or litigation. In addition, issuance of a patent does not guarantee that we have an absolute right to practice the patented invention. As a result, we may not be able to obtain adequate patent protection or to enforce our issued patents effectively.

From time to time, legal action by us may be necessary to enforce our patents and other intellectual property rights, to protect our trade secrets, to determine the validity and scope of the intellectual property rights of others or to defend against claims of infringement or invalidity. Such litigation could result in substantial costs and diversion of resources and could negatively affect our business, operating results and financial condition. If we are unable to protect our intellectual property rights, we may find ourselves at a competitive disadvantage to others who need not incur the additional expense, time and effort required to create the innovative solutions that have enabled us to be successful to date.

Assertions by third parties of infringement or other violations by us of their intellectual property rights could result in significant costs and harm our business and operating results.

Patent and other intellectual property disputes are common in our industry. Some companies, including some of our competitors, own large numbers of patents, copyrights and trademarks, which they may use to assert claims against us. Third parties may in the future assert claims of infringement, misappropriation or other violations of intellectual property rights against us. They may also assert such claims against our customers or channel partners whom we typically indemnify against claims that our solutions infringe, misappropriate or otherwise violate the intellectual property rights of third parties. As the numbers of products and competitors in our market increase and overlaps occur, claims of infringement, misappropriation and other violations of intellectual property rights may increase. Any claim of infringement, misappropriation or other violation of intellectual property rights by a third party, even those without merit, could cause us to incur substantial costs defending against the claim and could distract our management from our business.

The patent portfolios of our most significant competitors are larger than ours. This disparity may increase the risk that they may sue us for patent infringement and may limit our ability to counterclaim for patent infringement or settle through patent cross-licenses. In addition, future assertions of patent rights by third parties, and any resulting litigation, may involve patent holding companies or other adverse patent owners who have no relevant product revenues and against whom our own patents may therefore provide little or no deterrence or protection. There can be no assurance that we will not be found to infringe or otherwise violate any third-party intellectual property rights or to have done so in the past.

An adverse outcome of a dispute may require us to:

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pay substantial damages, including treble damages, if we are found to have willfully infringed a third party’s patents or copyrights;

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cease making, licensing or using solutions that are alleged to infringe or misappropriate the intellectual property of others;

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expend additional development resources to attempt to redesign our solutions or otherwise develop non-infringing technology, which may not be successful;

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enter into potentially unfavorable royalty or license agreements in order to obtain the right to use necessary technologies or intellectual property rights; and

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indemnify our partners and other third parties.

In addition, royalty or licensing agreements, if required or desirable, may be unavailable on terms acceptable to us, or at all, and may require significant royalty payments and other expenditures. Some licenses may also be non-exclusive, and therefore our competitors may have access to the same technology licensed to us. Any of the foregoing events could seriously harm our business, financial condition and results of operations.

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Governmental export or import controls could subject us to liability if we violate them or limit our ability to compete in foreign markets.

Our solutions are subject to U.S. export controls, specifically, the Export Administration Regulations and economic sanctions enforced by the Office of Foreign Assets Control. We incorporate encryption technology into certain of our solutions. These encryption solutions and the underlying technology may be exported only with the required export authorizations, including by license, a license exception or other appropriate government authorizations. U.S. export controls may require submission of an encryption registration, product classification and/or annual or semi-annual reports. Governmental regulation of encryption technology and regulation of imports or exports of encryption products, or our failure to obtain required import or export authorization for our solutions, when applicable, could harm our international sales and adversely affect our revenues. Compliance with applicable regulatory requirements regarding the export of our solutions, including with respect to new releases of our solutions, may create delays in the introduction of our solutions in international markets, prevent our customers with international operations from deploying our solutions throughout their globally-distributed systems or, in some cases, prevent the export of our solutions to some countries altogether. In addition, various countries regulate the import of our appliance-based solutions and have enacted laws that could limit our ability to distribute solutions or could limit our customers’ ability to implement our solutions in those countries. Any new export or import restrictions, new legislation or shifting approaches in the enforcement or scope of existing regulations, or in the countries, persons or technologies targeted by such regulations, could result in decreased use of our solutions by existing customers with international operations, declining adoption of our solutions by new customers with international operations and decreased revenues. If we fail to comply with export and import regulations, we may be fined or other penalties could be imposed, including denial of certain export privileges.

If we are required to collect higher sales and use or other taxes on the solutions we sell, we may be subject to liability for past sales and our future sales may decrease.

Taxing jurisdictions, including state and local entities, have differing rules and regulations governing sales and use or other taxes, and these rules and regulations are subject to varying interpretations that may change over time. In particular, the applicability of sales taxes to our subscription services in various jurisdictions is unclear. It is possible that we could face sales tax audits and that our liability for these taxes could exceed our estimates as tax authorities could still assert that we are obligated to collect additional amounts as taxes from our customers and remit those taxes to those authorities. We could also be subject to audits with respect to state and international jurisdictions for which we may not have accrued tax liabilities. A successful assertion that we should be collecting additional sales or other taxes on our services in jurisdictions where we have not historically done so and do not accrue for sales taxes could result in substantial tax liabilities for past sales, discourage customers from purchasing our solutions or otherwise harm our business and operating results.

Changes in our income tax provision or adverse outcomes resulting from examination of our income tax returns could adversely affect our operating results. We could be subject to additional taxes.

We are subject to income taxes in the United States and various foreign jurisdictions, and our domestic and international tax liabilities are subject to the allocation of expenses in differing jurisdictions. Our tax rate is affected by changes in the mix of earnings and losses in countries with differing statutory tax rates, certain non-deductible expenses and excess tax benefits arising from stock-based compensation, other tax benefits and credits, and the valuation of deferred tax assets and liabilities. Increases in our effective tax rate could harm our operating results.

Additionally, significant judgment is required in evaluating our tax positions and our worldwide tax provisions. During the ordinary course of business, there are many activities and transactions for which the ultimate tax determination is uncertain. In addition, our tax obligations and effective tax rates could be adversely affected by changes in the relevant tax, accounting and other laws, regulations, principles and interpretations, including those relating to income tax nexus, by recognizing tax losses or lower than anticipated earnings in jurisdictions where we have lower statutory rates and higher than anticipated earnings in jurisdictions where we have higher statutory rates, by changes in foreign currency exchange rates, or by changes in the valuation of our deferred tax assets and liabilities. We may be audited in various jurisdictions, and such jurisdictions may assess additional taxes, sales taxes and value-added taxes against us. Although we believe our tax estimates are reasonable, the final determination of any tax audits or litigation could be materially different from our historical tax provisions and accruals, which could have a material adverse effect on our operating results or cash flows in the period or periods for which a determination is made.

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Risks Related to Ownership of Our Common Stock

Market volatility may affect our stock price and the value of an investment in our common stock and could subject us to litigation.

The trading price of our common stock has been, and may continue to be, subject to significant fluctuations in response to a number of factors, most of which we cannot predict or control, including:

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announcements of new solutions, services or technologies, commercial relationships, acquisitions or other events by us or our competitors;

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fluctuations in stock market prices and trading volumes of securities of similar companies;

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general market conditions and overall fluctuations in U.S. equity markets;

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variations in our operating results, or the operating results of our competitors;

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changes in our financial guidance or securities analysts’ estimates of our financial performance;

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changes in accounting principles;

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sales of large blocks of our common stock, including sales by our executive officers, directors and significant stockholders;

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additions or departures of any of our key personnel;

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announcements related to litigation;

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changing legal or regulatory developments in the United States and other countries; and

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discussion of us or our stock price by the financial press and in online investor communities.

In addition, the stock market in general, and the stocks of technology companies such as ours in particular, have experienced substantial price and volume volatility that is often seemingly unrelated to the operating performance of particular companies. These broad market fluctuations may cause the trading price of our common stock to decline. In the past, securities class action litigation has often been brought against a company after a period of volatility in the trading price of its common stock. We may become involved in this type of litigation in the future. Any securities litigation claims brought against us could result in substantial expenses and the diversion of our management’s attention from our business.

Our actual operating results may differ significantly from our guidance.

From time to time, we have released, and may continue to release, guidance in our quarterly earnings conference calls, quarterly earnings releases, or otherwise, regarding our future performance that represents our management's estimates as of the date of release. This guidance, which includes forward-looking statements, has been and will be based on projections prepared by our management. These projections are not prepared with a view toward compliance with published guidelines of the American Institute of Certified Public Accountants, and neither our registered public accountants nor any other independent expert or outside party compiles or examines the projections. Accordingly, no such person expresses any opinion or any other form of assurance with respect to the projections.

Projections are based upon a number of assumptions and estimates that, while presented with numerical specificity, are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control and are based upon specific assumptions with respect to future business decisions, some of which will change. We intend to state possible outcomes as high and low ranges which are intended to provide a sensitivity analysis as variables are changed but are not intended to imply that actual results could not fall outside of the suggested ranges. The principal reason that we release guidance is to provide a basis for our management to discuss our business outlook with analysts and investors. We do not accept any responsibility for any projections or reports published by any such third parties.

Guidance is necessarily speculative in nature, and it can be expected that some or all of the assumptions underlying the guidance furnished by us will not materialize or will vary significantly from actual results. Accordingly, our guidance is only an estimate of what management believes is realizable as of the date of release. Actual results may vary from our guidance and the variations may be material. In light of the foregoing, investors are urged not to rely upon our guidance in making an investment decision regarding our common stock.

Any failure to successfully implement our operating strategy or the occurrence of any of the events or circumstances set forth in this “Risk Factors” section in this Quarterly Report on Form 10-Q could result in our actual operating results being different from our guidance, and the differences may be adverse and material.

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Future sales of shares by existing stockholders could cause our stock price to decline.

The market price of shares of our common stock could decline as a result of substantial sales of our common stock, particularly sales by our directors, executive officers, employees and significant stockholders, a large number of shares of our common stock becoming available for sale, or the perception in the market that holders of a large number of shares intend to sell their shares. As of June 30, 2022, we had approximately 38.5 million shares of our common stock outstanding.

In addition, as of June 30, 2022, there were approximately 0.9 million restricted stock units and options to purchase approximately 1.8 million shares of our common stock outstanding. If such options are exercised and restricted stock units are released, these additional shares will become available for sale. As of June 30, 2022, we had an aggregate of 3.1 million shares of our common stock reserved for future issuance under our Restated 2012 Equity Incentive Plan and 0.6 million shares reserved for future purchase under our 2021 Employee Stock Purchase Plan, which can be freely sold in the public market upon issuance. If a large number of these shares are sold in the public market, the sales could reduce the trading price of our common stock.

We cannot guarantee that our share repurchase program will be fully consummated or that it will enhance stockholder value, and any share repurchases we make could affect the price of our common stock.

On February 12, 2018, we announced that our board of directors had authorized a $100.0 million two-year share repurchase program. On each of October 30, 2018, October 30, 2019, May 7, 2020, and February 10, 2021, we announced that our board of directors had authorized an increase of $100.0 million, and on each of November 3, 2021 and May 4, 2022, we announced that our board of directors had authorized an increase of $200.0 million to the share repurchase program, resulting in an aggregate authorization of $900.0 million as of June 30, 2022. Although our board of directors authorized the share repurchase program, we are not obligated to repurchase any specific dollar amount or to acquire any specific number of shares. The share repurchase program could affect the price of our common stock, increase volatility and diminish our cash reserves. In addition, it may be suspended or terminated at any time, which may result in a decrease in the price of our common stock. During the six months ended June 30, 2022, we repurchased 0.9 million shares of our common stock for approximately $117.8 million. As of June 30, 2022, approximately $354.0 million remained available for share repurchases pursuant to our share repurchase program.

We do not intend to pay dividends on our common stock and therefore any returns will be limited to the value of our stock.

We have never declared or paid any cash dividend on our common stock. We currently anticipate that we will retain future earnings for the development, operation and expansion of our business and do not anticipate declaring or paying any cash dividends for the foreseeable future. Any return to stockholders will therefore be limited to the value of their stock.

Anti-takeover provisions in our charter documents and under Delaware law could make an acquisition of us, which may be beneficial to our stockholders, more difficult and may prevent attempts by our stockholders to replace or remove our current management.

Our amended and restated certificate of incorporation and amended and restated bylaws contain provisions that may delay or prevent an acquisition of us or a change in our management. These provisions include:

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authorizing “blank check” preferred stock, which could be issued by our board of directors without stockholder approval and may contain voting, liquidation, dividend and other rights superior to our common stock, which would increase the number of outstanding shares and could thwart a takeover attempt;

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a classified board of directors whose members can only be dismissed for cause;

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the prohibition on actions by written consent of our stockholders;

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the limitation on who may call a special meeting of stockholders;

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the establishment of advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted upon at stockholder meetings; and

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the requirement of at least two-thirds of the outstanding capital stock to amend any of the foregoing second through fifth provisions.

In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which limits the ability of stockholders owning in excess of 15% of our outstanding voting stock to merge or combine with us. Although we believe these provisions collectively provide for an opportunity to obtain greater value for stockholders by requiring potential acquirers to negotiate with our board of directors, they would apply even if an offer rejected by our board of directors were considered beneficial by some stockholders. In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the members of our management.

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General Risk Factors

Disruptive technologies could gain wide adoption and supplant our cloud-based IT, security and compliance solutions, thereby weakening our sales and harming our results of operations.

The introduction of products and services embodying new technologies could render our existing solutions obsolete or less attractive to customers. Our business could be harmed if new IT, security and compliance technologies are widely adopted. We may not be able to successfully anticipate or adapt to changing technology or customer requirements on a timely basis, or at all. If we fail to keep up with technological changes or to convince our customers and potential customers of the value of our solutions even in light of new technologies, our business could be harmed and our revenues may decline.

We may not maintain profitability in the future.

We may not be able to sustain or increase our growth or maintain profitability in the future. We plan to continue to invest in our infrastructure, new solutions, research and development and sales and marketing, and as a result, we cannot assure you that we will maintain profitability. We may incur losses in the future for a number of reasons, including without limitation, the other risks and uncertainties described in this Quarterly Report on Form 10-Q. Additionally, we may encounter unforeseen operating expenses, difficulties, complications, delays and other unknown factors that may result in losses in future periods. If our revenue growth does not meet our expectations in future periods, our financial performance may be harmed and we may not again achieve or maintain profitability in the future.

Forecasts of market growth may prove to be inaccurate, and even if the markets in which we compete achieve the forecasted growth, there can be no assurance that our business will grow at similar rates, or at all.

Growth forecasts relating to the expected growth in the market for IT, security and compliance and other markets are subject to significant uncertainty and are based on assumptions and estimates which may prove to be inaccurate. Even if these markets experience the forecasted growth, we may not grow our business at similar rates, or at all. Our growth is subject to many factors, including our success in implementing our business strategy, which is subject to many risks and uncertainties. Accordingly, forecasts of market growth should not be taken as indicative of our future growth.

Our financial results are based in part on our estimates or judgments relating to our critical accounting policies. These estimates or judgments may prove to be incorrect, which could harm our operating results and result in a decline in our stock price.

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, as provided in the section titled “Part I, Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the results of which form the basis for making judgments about the carrying values of assets, liabilities, equity, revenues and expenses that are not readily apparent from other sources. Our operating results may be adversely affected if our assumptions change or if actual circumstances differ from those in our assumptions, which could cause our operating results to fall below the expectations of securities analysts and investors, resulting in a decline in our stock price. Significant assumptions and estimates used in preparing our condensed consolidated financial statements include those related to revenue recognition, accounting for income taxes and stock-based compensation.

Changes in financial accounting standards may cause adverse and unexpected revenue fluctuations and impact our reported results of operations.

We prepare our financial statements in accordance with U.S. GAAP. These principles are subject to interpretation by the SEC and various bodies formed to interpret and create appropriate accounting principles. A change in these accounting standards or practices could harm our operating results and could have a significant effect on our reporting of transactions and reported results and may even retroactively affect previously reported transactions. New accounting pronouncements and varying interpretations of accounting pronouncements have occurred and may occur in the future. Changes to existing rules or the questioning of current practices may harm our operating results or require that we make significant changes to our systems, processes and controls or the way we conduct our business.

If we fail to maintain an effective system of internal control over financial reporting, our ability to produce timely and accurate financial statements or comply with applicable regulations could be impaired.

As a public company, we are subject to the reporting requirements of the Securities Exchange Act of 1934, or the Exchange Act, the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, and the rules and regulations of the NASDAQ Stock Market. To continue to comply with the requirements of being a public company, we may need to undertake various actions, such as implementing additional internal controls and procedures and hiring additional accounting or internal audit staff.

Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with U.S. GAAP. Our current controls and any new controls that we develop may become inadequate because of changes in conditions in our business. Any failure to maintain effective controls, or any difficulties encountered in their improvement, could harm our operating results or cause us to fail to meet our reporting obligations. Any failure to maintain effective internal control over financial reporting also could adversely affect the results of periodic management evaluations regarding the effectiveness of our internal control over financial reporting that we are required to include in our periodic reports we file with the SEC under Section 404 of the Sarbanes-Oxley Act. While we were able to assert in our Annual Report on Form 10-K that our internal control over financial reporting was effective as of December 31, 2021, we cannot predict the outcome of our testing in future periods. If we are unable to assert in any future reporting period that our internal control over financial reporting is effective (or if our independent registered public accounting firm is unable to express an opinion on the effectiveness of our internal controls), investors may lose confidence in our operating results and our stock price could decline. In addition, if we are unable to continue to meet these requirements, we may not be able to remain listed on the NASDAQ Stock Market.

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Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

A summary of our repurchases of common stock during the three months ended June 30, 2022 is as follows:

					Total Number of		Approximate Dollar
					Shares Purchased		Value of Shares that
	Total Number of		Average Price Paid		as Part of Publicly Announced		May Yet Be Purchased
Period	Shares Purchased		per Share		Plan or Program (1)		under the Plan or Program
April 1 - April 30, 2022		87,000	$	141.98		87,000	$	212,891,819
May 1 - May 31, 2022		251,997	$	121.66		251,997	$	382,234,672
June 1 - June 30, 2022		222,428	$	126.89		222,428	$	354,011,284
Total		561,425				561,425

(1) On February 12, 2018, we announced that our board of directors authorized a $100.0 million share repurchase program. On each of October 30, 2018, October 30, 2019, May 7, 2020 and February 10, 2021, we announced that our board of directors had authorized an increase of $100.0 million, and on each of November 3, 2021 and May 4, 2022, we announced that our board of directors had authorized an increase of $200.0 million to the share repurchase program, resulting in an aggregate authorization of $900.0 million as of June 30, 2022. Shares may be repurchased from time to time on the open market in accordance with Rule 10b-18 of the Exchange Act of 1934. We have entered into a pre-set trading plan adopted in accordance with Rule 10b5-1 under the Exchange Act to effect repurchases under our share repurchase program. All share repurchases have been made using cash resources. Our share repurchase program does not have an expiration date.

Item 3.

Defaults upon Senior Securities

None.

Item 4.

Mine Safety Disclosures

None.

Item 5.

Other Information

None.

Item 6.

Exhibits

Exhibit Number		Description

10.1*		Qualys, Inc. 2012 Equity Incentive Plan, as amended, restated and extended (incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed with the SEC on June 10, 2022).

31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of The Sarbanes-Oxley Act of 2002.

31.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of The Sarbanes-Oxley Act of 2002.

32.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.

32.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.

101 INS		Inline XBRL Instance Document - the instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document.

101 SCH		Inline XBRL Taxonomy Extension Schema Document

101 CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document.

101 DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document.

101 LAB		Inline XBRL Taxonomy Extension Labels Linkbase Document.

101 PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document.

104		Cover Page Interactive Data File - the cover page interactive data is embedded within the Inline XBRL document or included within Exhibit 101 attachments.

*	Indicates a management contract or compensatory plan or arrangement.

Exhibits 32.1 and 32.2 are being furnished and shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to the liability of that section, nor shall such exhibits be deemed to be incorporated by reference in any registration statement or other document filed under the Securities Act of 1933, as amended, or the Exchange Act, except as otherwise specifically stated in such filing.

Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Foster City, State of California on August 8, 2022.

	QUALYS, INC.

	By:	/s/ JOO MI KIM
		Name: Joo Mi Kim
		Title: Chief Financial Officer
		(principal financial and accounting officer)