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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Annual Period Ended December 31, 2022
or
For the transition period from to
Commission file number 001-35662
QUALYS, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
77-0534145
(I.R.S. Employer
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)
Title of each class
Common stock, $0.001 par value per share
Securities registered pursuant to section 12(b) of the Act:
Trading Symbol(s)
QLYS
Name of exchange on which registered
NASDAQ Stock Market
Securities registered pursuant to section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
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
Non-accelerated filer
Accelerated filer
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Smaller reporting company
Emerging growth company
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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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control
over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or
issued its audit report. ☒
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the
filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received
by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of June 30, 2022, the aggregate market value of voting shares of common stock held by non-affiliates of the registrant was $4,288 million based on the
last reported sale price of the registrant's common stock on June 30, 2022. Shares of common stock held by each executive officer and director and by each
person who owns 10% or more of the outstanding common stock have been excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination for other purposes.
The number of shares of the registrant's common stock outstanding as of February 16, 2023 was 37,009,478 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement for its 2023 Annual Meeting of Stockholders are incorporated by reference in Part III of this Annual Report on
Form 10-K where indicated. Such proxy statement will be filed with the Securities and Exchange Commission within 120 days of the registrant's fiscal year
ended December 31, 2022.
Table of Contents
Risk Factor Summary
Note Regarding Forward-Looking Statements
Business
Item 1.
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Item 3.
Item 4. Mine Safety Disclosures
Properties
Legal Proceedings
Qualys, Inc.
TABLE OF CONTENTS
PART I
PART II
[Reserved]
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Item 9.
Item 9A. Controls and Procedures
Item 9B. Other Information
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accounting Fees and Services
PART III
Item 15. Exhibits and Financial Statement Schedules
Signatures
PART IV
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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 Annual Report on Form 10-K. If any of the following risks
actually occurs (or if any of those listed elsewhere in this Annual Report on Form 10-K 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.
• Our quarterly and annual operating results may vary from period to period, which could result in our failure to meet expectations with respect to
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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.
• 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.
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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 we are unable to continue the expansion of our sales force, sales of our solutions and the growth of our business would be harmed.
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• 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.
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.
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• Our business and operations have continued to grow since inception, 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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NOTE REGARDING FORWARD-LOOKING STATEMENTS
In addition to historical information, this Annual Report on Form 10-K 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 Annual Report on Form 10-K include, but are not limited to, statements about:
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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 on our business;
economic and financial conditions, including volatility in foreign exchange rates, inflation concerns, rising interest rates, recessionary fears,
supply chain disruption, and global labor shortage;
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 Annual Report on Form 10-K 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 Annual Report on Form 10-K 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 I, Item 1A (Risk Factors) of this Annual Report on Form 10-K 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.
You should not rely on forward-looking statements as predictions of future events. Except as required by law, neither we nor any other person assumes
responsibility for the accuracy and completeness of the forward-looking statements, and we undertake no obligation to update any forward-looking
statements to reflect events or circumstances after the date of such statements.
Qualys, the Qualys logo and other trademarks and service marks of Qualys appearing in this Annual Report on Form 10-K are the property of Qualys.
This Annual Report on Form 10-K also contains trademarks and trade names of other businesses that are the property of their respective holders. We have
omitted the ® and ™ designations, as applicable, for the trademarks used in this Annual Report on Form 10-K.
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Item 1.
Business
Overview
PART I
We are a pioneer and leading provider of a cloud-based platform delivering information technology (IT), security and compliance solutions. Our
integrated suite of IT, security and compliance solutions delivered on our Qualys Cloud Platform enables our customers to: 1) identify and manage their IT
assets across on-premises, endpoints, cloud, containers, and mobile environments; 2) collect and analyze large amounts of IT security data; 3) discover and
prioritize vulnerabilities; 4) recommend and implement remediation actions; and 5) verify the implementation of such actions. This helps organizations
protect their systems and applications from ever-evolving cyber-attacks and helps achieve compliance with internal policies and external regulations.
Our cloud solutions address the growing IT, 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. 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.
IT infrastructures are more complex and globally-distributed today than ever before, as organizations of all sizes increasingly rely upon a myriad of
interconnected information systems and related IT assets, such as servers, databases, web applications, routers, switches, desktops, laptops, other physical
and virtual infrastructure, and numerous external networks and cloud services. In this environment, new and evolving digital technologies intended to
improve organizations’ operations can also increase vulnerability to cyber-attacks, which can expose sensitive data, damage IT and physical infrastructures,
and result in serious financial or reputational consequences. In addition, the rapidly increasing amount of data and devices in IT environments makes it
more difficult to identify and remediate vulnerabilities in a timely manner. The predominant approach to IT security has been to implement multiple
disparate security products that can be costly and difficult to deploy, integrate and manage and may not adequately protect organizations. As a result, we
believe there is a large and growing opportunity for comprehensive cloud-based IT, security and compliance solutions delivered in a single platform.
We designed our Qualys Cloud Platform to transform the way organizations secure and protect their IT infrastructures and applications. Our cloud
platform offers an integrated suite of solutions that automates the lifecycle of asset discovery and management, security assessments, and compliance
management for an organization’s IT infrastructure and assets, whether such infrastructure and assets reside inside the organization, on their network
perimeter, on endpoints or in the cloud. Since inception, our solutions have been designed to be delivered through the cloud and to be easily and rapidly
deployed on a global scale, enabling faster implementation and lower total cost of ownership than traditional on-premises enterprise software products. Our
customers, ranging from some of the largest global organizations to small businesses, are served from our globally-distributed cloud platform, enabling us
to rapidly deliver new solutions, enhancements and security updates.
We believe that our cloud platform provides our customers with unique advantages, including:
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No hardware to buy or manage. There is no infrastructure or software to buy and maintain thus reducing our customers’ operating costs; all
services are accessible in the cloud via web interface. Qualys operates and maintains the platform.
Real-time visibility in one place, anytime and anywhere. Our customers can conveniently see their security and compliance posture across
their global IT asset inventory in one browser window, without plugins or a virtual private network (VPN), whenever and wherever Internet
access is available.
Easy global scanning. Our customers can easily perform scans on geographically distributed and segmented networks at the perimeter, behind
the firewall, on dynamic cloud environments and on endpoints.
Seamless scaling. Our cloud platform is a scalable, comprehensive, and end-to-end solution for the IT, security and compliance needs of our
customers. Our customers can seamlessly add new coverage, users and services after they have deployed our platform.
Up to date resources. Qualys has one of the largest knowledge bases of vulnerability signatures in the industry. All security updates are made
in real-time.
Data stored securely. Data is securely stored and processed in a multi-tiered architecture of load-balanced servers. Our encrypted databases
are physically and logically secured.
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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:
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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), Custom Assessment and Remediation (CAR), Context
Extended Detection and Response (XDR), Network Detection and Response (NDR);
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);
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Asset Management: Global AssetView (GAV), Cybersecurity Asset Management (CSAM), Certificate Inventory (CRI); and
Cloud/Container Security: Cloud Inventory (CI), Cloud Security Assessment (CSA), Container Security (CS).
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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.
Our Qualys Cloud Platform is currently used by over 10,000 customers worldwide, including a majority of each of the Forbes Global 100 and Fortune
100. Our revenues increased to $489.7 million in 2022 from $411.2 million in 2021 and $363.0 million in 2020.
Our Platform
Our cloud platform consists of a suite of IT security, compliance, web application security, asset management and cloud and container security
solutions, which we refer to as the Qualys Cloud Apps, that leverages our shared and extensible core services and our highly scalable multi-tenant cloud
infrastructure. We also provide open application program interfaces, or APIs, and other developer tools that allow third parties to embed our technology
into their solutions and build applications on our cloud platform.
Our cloud platform utilizes physical and virtual sensors, and cloud agents that provide our customers with continuous visibility enabling customers to
respond to threats immediately. Customers can extend visibility to all known IT infrastructure using our Out-of-Band Configuration Assessment sensor for
systems that are air-gapped or otherwise difficult to assess.
The Qualys Cloud Platform automatically gathers and analyzes security and compliance data in a scalable, state-of-the-art backend. The technology
underlying our cloud infrastructure enables us to ingest, process, analyze and store a high volume of sensor data coming from our agents, scanners and
passive analyzers, and correlate information at very high speeds in a distributed manner for millions of devices.
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Our cloud platform is delivered to our customers via our 11 global shared cloud platforms, or via our private platform offering, Qualys Private Cloud
Platform (PCP), for customers or partners that want the platform to reside within the customer's shared cloud platform. The PCP is a standalone version of
our multi-layer, multi-tenant services architecture and is a fully integrated turnkey solution, making it more scalable, cost effective and faster to deploy
within a customer's shared cloud platform. Solutions delivered through our PCP are typically on the same subscription basis as solutions delivered through
our shared platform. Our PCP utilizes hardware and software owned by us and is physically located on the customer's premises. The customer is not
permitted to take possession of the software or access the software code. We also offer our PCP as a subscription-based platform services to the customer
using a virtual version of our software. This virtualized PCP allows us to extend our security and compliance solutions without the complexity and cost
associated with deploying traditional enterprise software. We also offer Private Cloud Platform Appliance (PCPA), an on-premises IT, security and
compliance solution packaged in a form-factor for medium-sized companies.
Qualys Core Services
Our core services enable integrated workflows, management and real-time analysis and reporting across all of our IT, security and compliance
solutions for our customers inside their organizations, on the perimeter, on endpoints or in the cloud.
Our core services constitute dynamic and customizable dashboards and centrally managed, self-updating integrated Cloud Apps, through a natively
integrated unified platform. Our interactive, dynamic dashboards and cloud platform allow our customers to aggregate and correlate all of their IT, security
and compliance data in one place, drill down into details, and generate reports customized for different audiences. Our cloud platform’s powerful
Elasticsearch clusters enable customers to instantly find detailed data on any asset.
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Our core services include:
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Asset Tagging and Management. Enables customers to easily identify, categorize and manage large numbers of assets in highly dynamic IT
environments and automates the process of inventory management and hierarchical organization of IT assets. Built on top of this core service
is the Qualys GAV framework, which is a global asset inventory service enabling our customers to search for information on any IT asset,
scaling to millions of assets for customers of all sizes, helping IT and security personnel to search IT assets and maintain an up-to-date
inventory on a continuous basis.
Reporting and Dashboards. A highly configurable reporting engine that provides customers with reports and dashboards based on their roles
and access privileges.
Questionnaires and Collaboration. A configurable workflow engine that enables customers to easily build questionnaires and capture existing
business processes and workflows to evaluate controls and gather evidence to validate and document compliance.
Remediation and Workflow. An integrated workflow engine that allows customers to automatically generate helpdesk tickets for remediation
and to manage compliance exceptions based on customer-defined policies, enabling subsequent review, commentary, tracking and escalation.
This engine automatically distributes remediation tasks to IT administrators upon scan completion, tracks remediation progress and closes
open tickets once patches are applied and remediation is verified in subsequent scans.
Big Data Correlation and Analytics Engine. Provides Elasticsearch capabilities for indexing, searching and correlating large amounts of
security and compliance data with other security incidents and third-party security intelligence data. Embedded workflows enable customers
to quickly assess risk and access information for remediation, incident analysis and forensic investigations.
Alerts and Notifications. Creates email notifications to alert customers of new vulnerabilities, malware infections, scan completion, open
trouble tickets and system updates.
Qualys Cloud Apps
Many organizations have an array of heterogeneous point tools that do not interoperate well and are difficult and costly to maintain and integrate,
making it difficult for Chief Information Officers (CIOs) and Chief Information Security Officers (CISOs) to obtain a single, unified view of their
organization’s security and compliance posture. The Qualys Cloud Platform and its Cloud Apps help organizations escape this tool-fragmentation dilemma
by drastically simplifying their security stacks and regaining unimpeded visibility across their IT environment.
The Cloud Apps are self-updating, centrally managed and tightly integrated, and cover a broad range of functionality in areas such as IT security,
compliance, web application security, asset management and cloud and container security solutions.
From inception through December 31, 2021, we have added the following Cloud Apps: VM, PC, PCI, WAS, WAF, CM, SAQ, TP, FIM, GAV, SCA,
CS, CI, CSA, CRI, CRA, OCA, PM, VMDR, EDR, SaaSDR, SEM, and CSAM. In 2022, we introduced CAR, XDR and NDR.
We believe that our applications are easy to use and provide our customers with a high level of control because our applications are part of one
platform, share a common user interface, utilize the same scanners and agents, access the same collected data, and leverage the same user permissions.
Our customers can subscribe to one or more of our IT, security and compliance Apps based on their initial needs and expand their subscriptions over
time to new areas within their organization or to additional Qualys solutions. For VMDR, we offer four editions of our Qualys Cloud App: Enterprise for
large enterprises, Express for medium-sized businesses, Express Lite for small-sized businesses, and Scan-on-Behalf for Scan-on-Behalf customers. For all
other Qualys Cloud Apps, we offer four editions: Enterprise for large enterprises, Express for medium-sized businesses, Express Lite for small-sized
businesses, and Consulting Edition for consultants, consulting organizations and Managed Service Providers (MSPs).
Many of our customers use multiple Cloud Apps to develop a more complete understanding of their respective environment’s IT, security and
compliance posture. The Qualys Cloud Platform currently provides the following Cloud Apps to our customers:
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IT Security
Vulnerability Management (VM): VM is an industry leading and award-winning solution that automates network auditing and vulnerability
management across an organization, including network discovery and mapping, asset management, vulnerability reporting and remediation tracking.
Driven by our comprehensive knowledge base of known vulnerabilities, VM enables cost-effective protection against vulnerabilities without substantial
resource deployment.
Vulnerability Management, Detection and Response (VMDR): VMDR enables organizations to automatically discover every asset in their
environment, including unmanaged assets appearing on the network, inventory all hardware and software, and classify and tag critical assets. VMDR
continuously assesses these assets for the latest vulnerabilities and applies the latest threat intel analysis to prioritize actively exploitable vulnerabilities.
VMDR automatically detects the latest superseding patch for the vulnerable asset and easily deploys it for remediation. Finally, VMDR quantifies risk
across vulnerabilities, assets and groups of assets helping organizations proactively reduce cyber risk exposure and track cyber risk reduction over time. By
delivering all this in a single app workflow, VMDR automates the entire process and significantly accelerates an organization’s ability to respond to threats,
thus preventing possible exploitation.
Threat Protection (TP): Thousands of new vulnerabilities are disclosed annually. With TP, customers can pinpoint their most critical threats and
identify what they need to remediate first. TP continuously correlates external threat information against a customer's vulnerabilities and IT asset inventory,
so customers know which threats pose the greatest risk to their organization at any given time. As Qualys engineers continuously validate and rate new
threats from internal and external sources, TP’s live feed displays the latest vulnerability disclosures and maps them to customers’ impacted IT assets.
Customers can see the assets affected by each threat, and drill down into details.
Continuous Monitoring (CM): Built on top of VM, CM is a next-generation cloud service that can detect network threats and unexpected changes
before they turn into breaches. Whenever CM spots an anomaly in a network, it immediately sends targeted, informative alerts to the right people for each
situation and each machine. CM tracks what happens throughout public perimeters, internal networks, and cloud environments - anywhere in the world.
Patch Management (PM): PM provides automated patch deployment capabilities for Windows, Linux, Mac and third party software by correlating
vulnerabilities and the right set of remediation including patches and configuration fixes. It continuously gathers and uploads telemetry about installed
software, open vulnerabilities and missing patches to the Qualys Cloud Platform. The resulting shared visibility of assets and their posture enables IT and
security teams to collaborate using common vulnerability-centric terminology and provides a consistent data set to analyze, prioritize, deploy and verify
patches more efficiently.
Multi-Vector Endpoint Detection and Response (EDR): Traditional endpoint detection and response solutions focus only on endpoint activity to detect
attacks. As a result, they lack the full context to analyze attacks accurately. This leads to an incomplete picture and a high rate of false positives and
negatives, requiring organizations to use multiple point solutions and large incident response teams. Qualys fills the gaps by bringing a new multi-vector
approach and the unifying power of its highly scalable Cloud Platform to EDR, providing vital context and comprehensive visibility to the entire attack
chain, from prevention to detection to response. EDR unifies different context vectors like asset discovery, rich normalized software inventory, end-of-life
visibility, vulnerabilities and exploits, misconfigurations, in-depth endpoint telemetry, and network reachability with a powerful backend to correlate it all
for accurate assessment, detection and response.
Certificate Assessment (CRA): CRA assesses digital certificates and Transport Layer Security (TLS) configurations. CRA generates certificate
instance grades using a straightforward methodology that allows administrators to assess often overlooked server SSL/TLS configurations without having
to become SSL experts. It also identifies out-of-policy certificates with weak signatures or key length and shows how many unique Certificate Authorities
were found in the environment and how many certificates each one issued.
SaaS Detection and Response (SaaSDR): SaaSDR leverages the Qualys Cloud platform to provide continuous visibility into SaaS applications such
as Office 365, Salesforce and Zoom for configuration posture management, activity monitoring and data security insights.
Secure Enterprise Mobility (SEM): SEM extends the power of VMDR for in-depth inventory of mobile devices and their data, real time vulnerability
and misconfiguration detection, and built-in remediation with patch orchestration for all Android and iOS/iPadOS devices across the enterprise.
Custom Assessment and Remediation (CAR): Custom Assessment and Remediation opens the Qualys Cloud Platform for security architects allowing
the creation of custom scripts in popular scripting languages, user-defined controls and automation, all seamlessly integrated within existing programs to
quickly assess, respond to and remediate threats across global hybrid environments.
Context Extended Detection and Response (XDR): XDR provides context and clarity to enterprise security operations through risk-focused, single
pane of glass visibility and control to improve enterprise-wide threat detection and incident response. It leverages the Cloud Platform's response capabilities
- patching, fixing misconfigurations, killing processes and network connections, and quarantining hosts - to comprehensively remediate cyber security
threats identified by Qualys XDR.
Network Detection and Response (NDR): Network detection and response monitors network traffic and analyzes it using deep learning artificial
intelligence (AI) to detect cyber threats in data centers and in the public cloud. The solution is able to detect both known and publicly undisclosed threats in
real time.
Compliance
Policy Compliance (PC): PC performs automated security configuration assessments on IT systems throughout a network, helping to reduce risk and
continuously ensure compliance with internal policies and external regulations. PC leverages out-of-the-box library content to fast-track compliance
assessments using industry-recommended best practices. PC also provides a centralized, interactive console for specifying baseline standards for different
hosts. By automating requirement evaluation against multiple standards for operating systems, network devices, databases and server applications, PC
enables the quick identification of security issues and works to prevent configuration drift. PC works to prioritize and track remediation and exceptions,
while demonstrating a repeatable auditable process for compliance management.
Security Configuration Assessment (SCA): SCA provides automatic assessment of IT assets’ configurations using the latest Center for Internet
Security (CIS) Benchmarks for operating systems, databases, applications and network devices. SCA provides intuitive workflows for assessing,
monitoring, reporting and remediating security-related configuration issues. SCA’s CIS assessments are provided via a web-based user interface and
delivered from the Qualys Cloud Platform, enabling centralized management with minimal deployment overhead. SCA users can automatically create
downloadable reports and view dashboards.
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PCI Compliance (PCI): PCI streamlines and automates compliance with PCI DSS (Payment Card Industry Data Security Standard) requirements for
protecting the collection, storage, processing and transmission of cardholder data. As an Approved Scanning Vendor, Qualys has been authorized by the
PCI Security Standards Council to conduct the required quarterly scans. PCI scans all Internet-facing networks and systems with Six Sigma (99.9996%)
accuracy, generates reports and provides detailed patching instructions. An auto-submission feature completes the compliance process once remediation is
completed.
File Integrity Monitoring (FIM): FIM logs and centrally tracks file change events on common enterprise operating systems in organizations of all
sizes. FIM provides customers with a simple way to achieve centralized cloud-based visibility of activity resulting from normal patching and administrative
tasks, change control exceptions or violations, or malicious activity - then reports on that system activity as part of compliance mandates. FIM collects the
critical details needed to quickly identify changes and root out activity that violates policy or is potentially malicious. FIM helps customers to comply with
change control policy enforcement and change monitoring requirements.
Security Assessment Questionnaire (SAQ): SAQ automates and streamlines third-party and internal risk assessment processes, obviating the need to
perform such processes manually via email and spreadsheets. SAQ easily designs surveys to assess procedural controls of IT and security policies and
practices. SAQ automates the launch and monitoring of assessment campaigns, making the process agile, accurate, comprehensive, centralized, scalable
and uniform across an organization. SAQ also provides tools for displaying, analyzing and acting on collected data, enabling the assessment of compliance
with industry standards, regulations and internal policies of third parties, like vendors and partners, and of employees.
Out-of-Band Configuration Assessment (OCA): The OCA sensor and Cloud App allows customers to achieve complete visibility of all known IT
infrastructure by pushing vulnerability and configuration data to the Qualys Cloud Platform from systems that are otherwise difficult to assess, such as
highly locked-down systems, systems on disconnected or “air gap” networks, or in environments that are highly sensitive to scans. OCA’s expanded data
collection approach significantly broadens the types of technologies supported by the Qualys Cloud Platform and provides deeper assessment of
configuration so that customers have better visibility into potentially critical vulnerabilities and misconfigurations across their entire environment.
Web Application Security
Web Application Scanning (WAS): WAS continuously discovers and catalogs web applications – including new and unknown ones – and detects
vulnerabilities and misconfigurations in web apps and APIs. Scaling to thousands of scans, it conducts incisive, thorough and precise testing of browser-
based web apps, mobile app backends, and Internet of things (IoT) services. Its seamless integration with the Qualys Web Application Firewall (WAF)
enables verification of attack protection, ticket creation and one click mitigation of vulnerabilities. WAS' powerful API enables integration with other
systems and allows teams to detect issues within DevOps environments early in the application development process. Bundled malware detection
capability with WAS uses reputational, behavioral, antivirus, and heuristic analyses to identify and alert on malware infecting a user's websites. By
Integrating WAS with manual testing tools and bug bounty solutions, customers can build a comprehensive web application vulnerability testing program.
Web Application Firewall (WAF): WAF permits the reduction of application security cost and complexity with a unified platform to prevent any
attempt to exploit vulnerabilities. Simple, scalable and adaptive, WAF enables the quick blocking of attacks, prevents disclosure of sensitive information,
and controls when and where customer applications are accessed. WAF and WAS work together seamlessly. Customers scan web apps with WAS, deploy
one-click virtual patches if needed in WAF, and manage it all from a centralized cloud-based portal. WAF can be deployed in minutes on prem or in the
cloud, as a virtual machine or a container, supports load-balancing as well as TLS offloading, and does not require special hardware.
Asset Management
Global AssetView (GAV): GAV constantly gathers information on all assets, including system and hardware details, running services, open ports,
installed software and user accounts. Asset discovery and inventory collection is done through a combination of Qualys network scanners, Cloud Agents
and passive scanners, which together collect comprehensive data from on-premises or cloud infrastructure as well as remote endpoints. In order to create
consistent and uniform asset data, GAV normalizes raw discovery data to standardize every manufacturer name, product name, model and software version
using Qualys’ ever-evolving technology catalog as a reference. This catalog automatically extends IT asset inventory with non-discoverable metadata such
as hardware and software release dates, end of life dates, and license categories. This new data layer allows teams to detect issues such as unauthorized
software, outdated hardware or end-of-life software, which can help properly tag, support, and secure business-critical assets.
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Cybersecurity Asset Management (CSAM): CSAM is an all-in-one solution that leverages the power of the Qualys Cloud Platform with its multiple
native sensors and CMDB synchronization to continuously inventory known and unknown assets, discover installed applications, and overlay business and
risk context to establish asset criticality. It identifies unauthorized or end-of-life and end-of-service software and the absence of required security tools, and
assesses the health of the attack surface. Further, CSAM enables response options with threat alerts and software removal and delivers regulatory reporting
in support of FedRAMP, PCI-DSS and other mandates. CSAM includes External Attack Surface Management, which allows discovery of internet facing
unknown assets.
Certificate Inventory (CRI): CRI continuously scans global IT assets from a single console to discover internal and external certificates issued from
any certificate authority across all enterprise IT assets, both on premise and in the cloud. As a result, certificates can be renewed before they expire, which
stops certificate-related outages and improves availability. It collects all certificate, vulnerability and configuration data required for certificate inventory
and analysis. CRI also reveals how many certificates are out of compliance or do not follow organizational policies for key length, for signature algorithms
or for the use of trusted and approved Certificate Authorities through the use of highly customizable dashboards and provides users a comprehensive
overview of Qualys SSL Labs-caliber certificate grades for internal and externally facing certificates.
Cloud / Container Security
Cloud Inventory (CI): CI delivers continuous visibility into public cloud accounts. In one single-pane view, it inventories virtual machines, storage
buckets, databases, security groups, Access Control Lists (ACLs), Elastic Load Balancers (ELBs) and users – across all regions, multiple accounts and
multiple cloud platforms. CI continuously tracks assets and enables users to quickly understand the topography of their cloud environment and uncover the
root cause of incidents.
Cloud Security Assessment (CSA): CSA provides a continuous assessment of the security posture of an organization’s cloud resources against
misconfigurations, malicious behavior, and nonstandard deployments. CSA evaluates resources against CIS benchmarks and best practices to identify
misconfigured storage buckets, security groups, Relational Database Service, exposing data and the resource for public exploitation. CSA correlates host
vulnerabilities and compliance data into intelligent insights which allow users to quickly detect risks throughout their complex cloud environments.
With CSA, users gain real-time visibility into their up-to-date security and compliance posture of public clouds in one single-pane view.
Container Security (CS): CS delivers container-native visibility and protection throughout the entire lifecycle of containerized applications. It
incorporates scanning of container images for software composition and enforcement of hardened container stack configurations for continuous
policy compliance, whether the images are on the build machines, in the container registries or in the runtime cluster nodes. CS uses a unique 'layered-in'
approach to provide deep visibility into all the application activities and automatically creates a behavior profile, which is enforced on each container for
runtime protection. By integrating with continuous integration and continuous delivery pipelines and toolchains, CS enables DevSecOps processes and
transparent enforcement of security and compliance without compromising the speed and agility of containers and serverless deployment models.
This leads to significant cost benefits for enterprises compared to certain legacy security solutions.
Free Services
We also offer organizations of all sizes free security and compliance services based on the Qualys Cloud Platform:
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Qualys Global AssetView app automatically creates a continuous, real-time inventory of known and unknown assets throughout a user's global
IT footprint across on-premises, endpoints, multi-cloud, mobile, containers, operational technology and IoT. The app also automatically
normalizes and categorizes assets to ensure clean, reliable, and consistent data. In-depth asset details provide fine-grained visibility on the
system, services, installed software, network, and users. It also detects any device that connects to a user's networks, via passive scanning
technology. Upon an unknown device detection, users can install a light-weight Qualys self-updating agent (3MB) to turn the device into a
managed device or launch a vulnerability scan.
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Qualys Cloud Inventory continuously discovers and tracks assets and resources across public cloud deployments to provide users both real-time
and historical views of cloud inventory. It collects metadata about cloud assets and resources to help users understand the relationships between
public cloud assets and resources across different dimensions and then discover their threat posture based on those attributes and relationships.
Cloud Inventory is limited to three accounts per public cloud platform.
Qualys Certificate Inventory inventories and assesses all Internet-facing certificates to generate SSL/TLS configuration grades, identifies the
certificate issuer and tracks certificate expirations to help stop expired and expiring certificates from interrupting critical business functions.
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Our Growth Strategy
We intend to strengthen our leadership position as a trusted provider of cloud-based IT, security and compliance solutions. The key elements of our
growth strategy are:
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Continue to innovate and enhance our cloud platform and suite of solutions. We intend to continue to make significant investments in
research and development to extend our cloud platform’s functionality by developing new security solutions and capabilities and further
enhancing our existing suite of solutions. From inception through December 31, 2021, we have added the following Cloud Apps: PC, PCI,
WAS, WAF, CM, SAQ, TP, FIM, GAV, SCA, CS, CI, CSA, CRI, CRA, OCA, PM, VMDR, EDR, SaaSDR, SEM, and CSAM. In 2022, we
introduced CAR, XDR and NDR.
Expand the use of our suite of solutions by our large and diverse customer base. With more than 10,000 customers, across many industries
and geographies, we believe we have a significant opportunity to sell additional solutions to our customers and expand their use of our suite of
solutions. Because our customers typically initially deploy one or two of our solutions in select parts of their IT infrastructures, our existing
customers serve as a strong source of new sales as they expand their scope and increase their subscriptions or choose to adopt additional
solutions from our integrated suite of IT, security and compliance offerings. In this regard, we continue to expand our sales execution and
marketing functions to increase adoption of our newly developed solutions among our existing customers.
Drive new customer growth and broaden our global reach. We are pursuing new customers by targeting key accounts, releasing free IT,
security and compliance services and expanding both our sales and marketing organization and network of channel partners. We will continue to
seek to make significant investments to encourage organizations to replace their existing security products with our cloud solutions. We intend
to expand our relationships with key security consulting organizations, managed security service providers and value-added resellers to
accelerate the adoption of our cloud platform. We seek to strengthen existing relationships as well as establish new relationships to increase the
distribution and market awareness of our cloud platform and target new geographic regions. We also plan to partner with such security providers
that can host our private cloud offering within their shared cloud platforms, helping us expand our reach in new markets and new geographies.
Selectively pursue technology acquisitions to bolster our capabilities and leadership position. We may explore acquisitions that are
complementary to and can expand the functionality of our cloud platform. We may also seek to acquire development teams to supplement our
own personnel and acquire technology to increase the breadth of our cloud-based IT, security and compliance solutions. In 2022, we acquired
certain intangible assets of Blue Hexagon Inc., enabling us to leverage our cloud platform with AI/machine learning to uncover behavior
patterns including active vulnerability exploitation, identification of advanced network threats, and adaptive risk mitigation across all assets and
applications. In 2021, we acquired certain intangible assets of Kandor Soft Labs Private Ltd. (TotalCloud), strengthening our cloud security
solution by allowing customers to build user-defined workflows for custom policies and execute them on-demand for simplified security and
compliance. In 2020, we acquired certain intangible assets of Spell Security Private Limited (Spell Security), expanding our endpoint behavior
detection, threat hunting, malware research and multi-layered response capabilities for our EDR application.
Our Customers
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. As of December 31, 2022,
we had over 10,000 customers worldwide, including a majority of each of the Forbes Global 100 and Fortune 100. In each of 2022, 2021 and 2020, no one
customer accounted for more than 10% of our revenues. In 2022, 2021 and 2020, 60%, 61% and 63%, 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.
Sales and Marketing
Sales
We market and sell our IT, security and compliance solutions to customers directly through our sales teams as well as indirectly through our network
of channel partners.
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Our global sales force is organized into a field sales team, which focuses on enterprises, generally including organizations with more than 5,000
employees, and an inside sales team, which focuses on small to medium-sized businesses, which generally include organizations with less than 5,000
employees. Both our field and inside sales teams are divided into three geographic regions, the Americas; Europe, Middle East and Africa; and Asia-
Pacific. We also further assign each of our sales teams into groups that focus on adding new customers or managing relationships with existing customers.
Our 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 offer our IT,
security and compliance solutions in conjunction with one or more of their own products or services and act as a conduit through which we can connect
with these prospective customers to offer our solutions. Our channel partners include security consulting organizations, managed service providers and
resellers, such as Accenture, BT Managed Security, Cognizant Technology Solutions, Deutsche Telekom, DXC Technology, Fujitsu, Hindustan Computers
Limited (HCL) Technologies, International Business Machines (IBM), Infosys, Nippon Telegraph and Telephone Corporation (NTT), Optiv, Tata
Communications, Verizon, Wipro and TD SYNNEX Corporation (TD SYNNEX). Qualys has also established strategic partnerships with leading cloud
providers like Amazon Web Services, Microsoft Azure and the Google Cloud Platform.
For sales involving a channel partner, the channel partner engages with the prospective customer directly and involves our sales team as needed to
assist in developing and closing an order. When a channel partner secures a sale, we sell the associated subscription to the channel partner who in turn
resells the subscription to the customer, with the channel partner earning a fee based on the total value of the order. Once the order is completed, we
provide these customers with direct access to our solutions and other associated back-office applications, enabling us to establish a direct relationship as
part of ensuring customer satisfaction with our solutions. At the end of the subscription term, the channel partner engages with the customer to execute a
renewal order, with our sales team providing assistance as required. In 2022, 2021 and 2020, 42%, 41% and 42%, respectively, of our revenues were
generated by channel partners.
Marketing
Our marketing programs include a variety of online marketing, advertising, conferences, events, public relations activities and web-based seminar
campaigns targeted at key decision makers within our prospective customers.
We have a number of marketing initiatives to build awareness and encourage customer adoption of our solutions. We offer free trials and services to
allow prospective customers to experience the quality of our solutions, to learn in detail about the features and functionality of our cloud platform, and to
quantify the potential benefits of our solutions.
Customer Support
Qualys Support delivers 24x7x365 day customer technical support from global centers located in Foster City, California; Raleigh, North Carolina; and
Pune, India. We recruit senior level technical personnel and trained subject matter experts who work closely with engineering and operations personnel to
resolve issues quickly. Our IT, security and compliance solutions can be deployed easily and are designed to be implemented and operated without the need
for significant professional services. We also offer various training programs as part of our subscriptions to all of our customers. In addition, we leverage
the insights drawn from our customers to further improve the functionality of our IT, security and compliance solutions. Our mission is to ensure customer
satisfaction and play a critical role in retaining and expanding our customer base.
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Research and Development and Operations
We devote significant resources to maintain, enhance and add new functionality to our Qualys Cloud Platform and the integrated suite of solutions
that we offer. Our development organization consists of agile engineering teams with substantial security expertise in specific areas of our solutions. In
addition to our development teams, we also built a sophisticated research team focused on identifying threats and developing signatures for vulnerabilities
and compliance checks so that we can provide our customers with daily updates and enable them to scan their assets for the latest threats. We conduct our
research and development in the United States, France and India, which gives us access to some of the best research and engineering talent in the world.
Our focus remains to attract engineering talent as we continue to add new solutions and improve existing ones.
Our development team works closely with our customers and partners to gain valuable insights into their environments and gather feedback for threat
research, product development and innovations. We typically release updates to our solutions, including enhancements and new features multiple times a
year, and we measure the quality of our scan results on a frequent basis in an effort to maintain the highest level of scan accuracy.
The modular architecture of our cloud platform enables our engineering teams to simultaneously work on different features, accelerating the delivery
of new functionalities to customers. Our research and development team also works collaboratively with our technical support team to ensure customer
satisfaction and with our sales team to accelerate the adoption of our solutions.
Shared Cloud Platform Agreements
Our shared cloud platform operations are provided by large third-party vendors and are located in the United States, Canada, Switzerland, the
Netherlands, United Arab Emirates, Australia, United Kingdom and India. Our shared cloud platform agreements have varying terms through 2025.
Competition
The expanding capabilities of our IT, security and compliance solutions have enabled us to address a growing array of opportunities in the cloud IT,
security and compliance market. We compete with a large and broad array of established and emerging vulnerability management vendors, compliance
vendors and data security vendors in a highly fragmented and competitive environment.
We compete with large and small public companies, such as Broadcom (Symantec Enterprise Security), CrowdStrike, Palo Alto Networks, Rapid7,
and Tenable Holdings, as well as privately held security providers including Axonius, Checkmarx, Flexera, Invicti, Ivanti, Tanium, HelpSystems
(Tripwire), 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.
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. We believe that
our suite of solutions generally competes favorably with respect to these factors. However, many of our primary competitors have greater name
recognition, longer operating histories, more established customer relationships, larger marketing budgets and significantly greater resources than we do.
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Intellectual Property
We rely on a combination of trade secrets, copyrights, patents and trademarks, as well as contractual protections, to establish and protect our
intellectual property rights and protect our proprietary technology. As of December 31, 2022, we have thirty issued patents, which expire from 2029 to
2040, several pending U.S. patent applications and an exclusive license to four U.S. patents. The inbound license remains in effect until the licensed patents
are no longer enforceable, unless the applicable license agreement is first terminated by us or terminated by the licensor for a breach of the agreement or if
we undergo certain bankruptcy events. The licenses are currently exclusive and will remain exclusive so long as we make an appropriately-timed written
election and pay an annual fixed royalty for ten years thereafter. These exclusive licenses are subject to the licensor’s reservation of certain rights in the
patents and subject to the U.S. government’s reserved rights in the technology. We have a number of registered and unregistered trademarks. We require our
employees, consultants and other third parties to enter into confidentiality and proprietary rights agreements and control access to software, documentation
and other proprietary information. We view our trade secrets and know-how as a significant component of our intellectual property assets, as we have spent
years designing and developing the Qualys Cloud Platform, which we believe differentiates us from our competitors.
We expect that software and other solutions in our industry may be subject to third-party infringement claims as the number of competitors grows and
the functionality of products in different industry segments overlaps. Any of these third parties might make a claim of infringement against us at any time.
Human Capital Resources
We take a holistic approach to our human capital management strategy, striving to create a culture where talented people want to come to work,
develop their careers, become leaders, and make a difference for all our stakeholders and communities. Doing the right thing for our people, our
communities and our environment upholds the trust of our customers, partners, employees, and stockholders, enabling us to grow our business profitably
and meet the diverse needs of our constituents.
As of December 31, 2022, we had 2,143 full-time employees, including 1,062 in research and development, 376 in sales and marketing, 478 in
operations and customer support, and 227 in general and administrative. As of December 31, 2022, approximately 75% of our employees were located
outside of the United States, with 66% of our employees located in Pune, India. None of our U.S. employees are covered by collective bargaining
agreements. Employees in certain European countries and Brazil have collective bargaining arrangements at the national level. We believe our employee
relations are good, and we have not experienced any work stoppages.
Diversity and Inclusion
We are proud to be a leader in the promotion and practice of diversity and inclusion. In addition to having offices and employees all over the world,
we take pride in our cultural diversity. Qualys searches the globe for top talent in an effort to recruit and hire diverse individuals with a variety of skills,
experiences, and backgrounds. Our objective is to continue to improve our hiring, development, advancement, and retention of diverse talent and to foster
an inclusive environment.
Our board of directors and executive team are highly diverse. Two out of our current seven member board of directors are women, one is a man from
an underrepresented community, and the board of directors seeks to identify strong candidates who provide a wide range of perspectives, competencies, and
knowledge to complement the skills, diversity and experiences of the board of directors. Further, our executive team is gender and ethnically diverse, with
more than 50% of the executive team from underrepresented communities.
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Health and Safety
We recognize that a healthy environment and safe workplaces are critical to our business, strategy, and communities. We address environmental issues
in an integrated manner to encompass protection of the environment as well as the health and safety of our workforce. For example, in response to COVID-
19 and the significant increases in remote workforces in March 2020, we mandated a work from home policy to protect our employees and our
communities. We also released a free cloud-based remote endpoint protection solution for 60 days that allowed IT and security teams to protect the
computers of remote employees and support the health and safety of our communities.
During 2022, our workforce gradually transitioned into a hybrid work schedule, which resulted in a significant portion of our workforce working
either in-person on a part-time basis, or remotely on a permanent basis. Our top priority remains providing support for our employees, partners, and
customers. We are fortunate that the nature of our business allows us to successfully operate in this dynamic hybrid environment. We believe that our
hybrid policy will be a key enabler to support the broad needs of critical on-site to remote employees.
We require our employees and managers to participate in myriad training programs directed at maintaining a harassment-free, diverse, and secure
workplace. With our diverse employee population, we uphold the rights to work in an environment that promotes equal opportunity and prohibits
discriminatory practices against race, color, national origin, ancestry, medical condition, religious creed (including religious dress and grooming practices),
marital status, registered domestic partner status, sex, sexual orientation, gender identity and expression, genetic characteristics and information, age,
veteran status, or any other protected characteristic. Creating a respectful workplace and preventing harassment to our employees remain our on-going
commitment.
Compensation and Benefits
We provide robust compensation and benefits to our employees. In addition to competitive base salaries, all qualified employees are eligible for
variable pay and equity awards.
To support the health and wellness of our workforce, we offer premium health coverage with minimal out-of-pocket contributions for our global
employees.
Training and Development
We have experience with managing and developing a rapidly growing employee base. We believe every employee makes a difference, so we
empower them in their roles and support them for maximum professional growth. We assist employees in achieving their career goals by helping them
improve their skillsets and transition to other challenging roles. To support career growth inside and outside Qualys, we offer free self-paced or instructor-
led certified training on core Qualys topics giving employees and non-employees an opportunity to achieve certifications.
Available Information
Our principal executive offices are located at 919 E. Hillsdale Blvd., 4th Floor, Foster City, California 94404. The telephone number of our principal
executive offices is (650) 801-6100, and our main corporate website is www.qualys.com. Information contained on, or that can be accessed through, our
website, does not constitute part of this Annual Report on Form 10-K and inclusion of our website address in this Annual Report on Form 10-K is an
inactive textual reference only.
We make available our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those
reports filed or furnished pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended, free of charge on our website,
www.qualys.com as soon as reasonably practicable after they are electronically filed with or furnished to the SEC. Additionally, copies of materials filed by
us with the SEC may be accessed at the SEC's website, www.sec.gov.
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Item 1A.
Risk Factors
An investment in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below, and all other
information contained in this Annual Report on Form 10-K, including our 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
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Our quarterly and annual 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:
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the level of demand for our solutions, from both existing and new customers;
the extent to which customers subscribe for additional solutions;
changes in customer renewals of our solutions;
timing of deals signed within the applicable fiscal period;
seasonal buying patterns of our customers;
timely invoicing or changes in billing terms of customers;
the length of our sales cycle for our products and services;
price competition;
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;
general economic conditions, both domestically and in the foreign markets in which we sell our solutions;
changes in foreign currency exchange rates;
changes in the growth rate of the IT, security and compliance market;
actual or perceived security breaches, technical difficulties or interruptions with our service;
failure of our products and services to operate as designed;
publicity regarding security breaches generally and the level of perceived threats to IT security;
the announcement or adoption of new regulations and policy mandates or changes to existing regulations and policy mandates;
the amount and timing of operating costs and capital expenditures related to the operations and expansion of our business;
pace and cost of hiring employees;
expenses associated with our existing and new products and services;
the timing of sales commissions relative to the recognition of revenues;
insolvency or credit difficulties confronting our customers, affecting their ability to purchase or pay for our solutions;
our ability to integrate any products or services that we have acquired or may acquire in the future into our product suite or migrate existing
customers of any companies that we have acquired or may acquire in the future to our products and services;
future accounting pronouncements or changes in our accounting policies;
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 Annual Report on Form 10-K 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:
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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.
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, supply chain constraints, change in interest rates, inflationary pressures and potential for a recession,
and constrained spending on IT security, which factors we have experienced in 2022, have resulted and may in the future result in decreased revenue and
earnings. Such factors have made and could in the future 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 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, HelpSystems (Tripwire),
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;
larger sales and marketing budgets and resources;
broader distribution networks and more established relationships with distributors and customers;
access to larger customer bases;
greater customer support resources;
greater resources to make acquisitions;
greater resources to develop and introduce products that compete with our solutions;
greater resources to meet relevant regulatory requirements; and
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 years ended December 31, 2022, 2021 and 2020, we
derived approximately 42%, 41% and 42%, respectively, 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;
trade and foreign exchange restrictions;
economic or political instability in foreign markets, including as a result of increasing tensions between India and China;
greater difficulty in enforcing contracts, accounts receivable collection and longer collection periods;
changes in regulatory requirements;
tax laws (including U.S. taxes on foreign subsidiaries);
difficulties and costs of staffing and managing foreign operations;
the uncertainty and limitation of protection for intellectual property rights in some countries;
costs of compliance with foreign laws and regulations and the risks and costs of non-compliance with such laws and regulations;
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;
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;
the potential for political unrest, acts of terrorism, hostilities or war;
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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 December 31, 2022, approximately 75% of our employees were located outside of the United States, with 66% 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 year ended December 31,
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 year ended December 31,
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 result 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.
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. Some organizations may be 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, organizations that have invested substantial personnel and financial resources to integrate on-premise software into their businesses 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 business and operations have continued to grow since inception, 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 continued to grow over the last several years, with revenues increasing from $363.0 million in 2020 to $489.7 million in 2022, and headcount
increasing from 1,498 employees at the beginning of 2020 to 2,143 employees as of December 31, 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. For example, we recently announced that we and our Chief Revenue Officer mutually agreed to end his employment
on March 31, 2023. 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, certain intellectual property of TotalCloud on August 19, 2021 and
certain assets of Blue Hexagon on October 4, 2022. 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 past and 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.
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.
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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:
• pay substantial damages, including treble damages, if we are found to have willfully infringed a third party’s patents or copyrights;
•
•
cease making, licensing or using solutions that are alleged to infringe or misappropriate the intellectual property of others;
expend additional development resources to attempt to redesign our solutions or otherwise develop non-infringing technology, which may not be
successful;
enter into potentially unfavorable royalty or license agreements in order to obtain the right to use necessary technologies or intellectual property
rights; and
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. The United States introduced a new 1% excise tax on share repurchases occurring on or after January 1, 2023 as part
of the Inflation Reduction Act. The amount of share repurchases subject to the excise tax will be reduced by the fair market value of any shares issued
during the taxable year. We do not expect this provision to have a material impact to our results of operations. 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:
announcements of new solutions, services or technologies, commercial relationships, acquisitions or other events by us or our competitors;
fluctuations in stock market prices and trading volumes of securities of similar companies;
•
•
• general market conditions and overall fluctuations in U.S. equity markets;
• variations in our operating results, or the operating results of our competitors;
changes in our financial guidance or securities analysts’ estimates of our financial performance;
•
changes in accounting principles;
•
sales of large blocks of our common stock, including sales by our executive officers, directors and significant stockholders;
•
additions or departures of any of our key personnel;
•
announcements related to litigation;
•
•
changing legal or regulatory developments in the United States and other countries; and
• 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 Annual Report on Form 10-K 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 December 31, 2022, we had approximately 37.4 million shares of our
common stock outstanding.
In addition, as of December 31, 2022, there were approximately 1.8 million options and 1.1 million restricted stock units outstanding. If such options
are exercised and restricted stock units are released, these additional shares will become available for sale. As of December 31, 2022, we had an aggregate
of 2.4 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 repurchase program. On each of October 30,
2018, October 30, 2019, May 7, 2020, February 10, 2021 and February 9, 2023, 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 $1.0 billion to date ($900.0 million as of December 31, 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. Finally, our share repurchases in 2023 will
be subject to a new 1% excise tax introduced in the Inflation Reduction Act. The amount of share repurchases subject to the excise tax will be reduced by
the fair market value of any shares issues during the taxable year. We do not expect this provision to have a material impact to our results of operations.
During the year ended December 31, 2022, we repurchased 2.5 million shares of our common stock for approximately $317.3 million. As of December 31,
2022, approximately $154.5 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:
•
•
•
•
•
•
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;
a classified board of directors whose members can only be dismissed for cause;
the prohibition on actions by written consent of our stockholders;
the limitation on who may call a special meeting of stockholders;
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
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 Annual Report on Form 10-K.
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 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 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, 2022, 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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Table of Contents
Item 1B.
Unresolved Staff Comments
None.
Item 2.
Properties
Our principal executive offices are located in Foster City, California, where we occupy a 76,922 square-foot facility under a lease expiring on April 30,
2028. We also have 281,787 square feet of office space in Pune, India under a non-cancellable lease expiring in February 2025. We have additional U.S.
offices in North Carolina and Washington and other offices in France, Germany, Italy, Japan, the Netherlands, United Arab Emirates and United Kingdom.
We believe our facilities are adequate for our current needs and for the foreseeable future.
We operate shared cloud platforms at third-party facilities in Santa Clara, California; Las Vegas, Nevada; Ontario, Canada; Geneva, Switzerland; Pune,
India; and Amsterdam, the Netherlands.
Item 3.
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 December 31, 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. For more information,
please refer to Note 9 in the accompanying notes to the consolidated financial statements, which is hereby incorporated by reference.
Item 4.
Mine Safety Disclosures
Not Applicable.
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Table of Contents
Item 5.
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
PART II
Market Information
Our common stock is listed and traded on the Nasdaq Global Select Market under the symbol “QLYS”.
Holders of Record
As of February 14, 2023, there were approximately 52 holders of record of our common stock. Because many of our shares of common stock are held
by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented by these record holders.
Dividend Policy
We have never declared or paid any cash dividends on our capital stock. We currently intend to retain any future earnings to fund business
development and growth, and do not expect to pay any dividends in the foreseeable future. Any future determination to declare cash dividends will be made
at the discretion of our board of directors, subject to applicable laws, and will depend on a number of factors, including our financial condition, results of
operations, capital requirements, contractual restrictions, general business conditions and other factors that our board of directors may deem relevant.
Securities Authorized for Issuance under Equity Compensation Plans
The following table summarizes information about our equity compensation plans as of December 31, 2022. All outstanding awards relate to our
common stock.
Plan Category
(a) Number of
Securities to be Issued
Upon Exercise of
Outstanding Options,
Warrants and Rights
(in thousands)
(b) Weighted-Average
Exercise Price of
Outstanding Options,
Warrants and Rights
(c) Number of Securities
Remaining Available for
Future Issuance Under
Equity Compensation
Plans (Excluding
Securities Reflected in
Column (a)
(in thousands)
Equity compensation plans approved by security holders (1)
Equity compensation plans not approved by security holders
2,990(2) $
— $
87.59(3)
—
2,906(4)
—
(1) Includes our Restated 2012 Equity Incentive Plan (Restated 2012 Plan) and 2021 Employee Stock Purchase Plan (2021 ESPP).
(2) Consists of 1,183 thousand restricted stock units and 1,807 thousand shares underlying stock options.
(3) The weighted average exercise price is calculated based solely on outstanding stock options.
(4) Consists of 2,351 thousand shares reserved for issuance under our Restated 2012 Plan and 555 thousand shares reserved for issuance under our 2021
ESPP.
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Table of Contents
Stock Price Performance Graph
The following graph shows a comparison from December 31, 2017 through December 31, 2022 of the cumulative total return for an investment of
$100 (and the reinvestment of dividends) in our common stock, the NASDAQ Global Select Market Composite Index and the NASDAQ Computer Index
and the S&P 500 Index. Such returns are based on historical results and are not intended to suggest future performance.
COMPARISON OF CUMULATIVE TOTAL RETURN*
Among Qualys, Inc., NASDAQ-Global Select Market Composite Index, and NASDAQ Computer Index and S&P 500 Index
* $100 invested on December 31, 2017 in stock or index, including reinvestment of dividends. Fiscal year ending December 31.
Qualys, Inc.
NASDAQ Global Select Market
NASDAQ Computer
S&P 500
December 31,
2017
December 31,
2018
December 31,
2019
December 31,
2020
December 31,
2021
December 31,
2022
$
$
$
$
100.00 $
100.00 $
100.00 $
100.00 $
125.93 $
96.32 $
96.32 $
95.62 $
140.47 $
130.62 $
144.80 $
125.72 $
205.34 $
186.83 $
217.17 $
148.85 $
231.20 $
230.03 $
299.39 $
191.58 $
189.10
155.00
192.28
156.88
The information on the above Stock Price Performance Graph shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange
Act of 1934, as amended, or otherwise subject to the liabilities of that section or Sections 11 and 12(a)(2) of the Securities Act of 1933, as amended, and
shall not be incorporated by reference into any registration statement or other document filed by us with the SEC, whether made before or after the date of
this Annual Report on Form 10-K, regardless of any general incorporation language in such filing, except as shall be expressly set forth by specific
reference in such filing.
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Table of Contents
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
A summary of our repurchases of common stock during the three months ended December 31, 2022 is as follows:
Period
October 1, 2022 - October 31, 2022
November 1, 2022 - November 30, 2022
December 1, 2022 - December 31, 2022
Total
Total Number
of Shares
Purchased as
Part of
Publicly
Announced
Plan or
Approximate
Dollar Value
of Shares that
May Yet Be
Purchased
under the
Plan or
Program
231,057 $ 227,405,137
285,100 $ 192,628,215
331,441 $ 154,481,340 (2)
847,598
Program (1)
Total Number
of Shares
Purchased
Average Price
Paid per
Share
231,057 $
285,100 $
331,441 $
847,598
136.68
121.98
115.09
(1) On February 5, 2018, our board of directors authorized a $100.0 million share repurchase program, which was announced on February 12, 2018.
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 December 31, 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.
(2) Does not reflect the $100.0 million increase to our share repurchase program announced on February 9, 2023.
Item 6.
[RESERVED]
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Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion in conjunction with our consolidated financial statements and the related notes included elsewhere in this
Annual Report on Form 10-K. You should carefully review and consider the information regarding our financial condition and results of operations set
forth under Part I-Item 7 (Management’s Discussion and Analysis of Financial Condition and Results of Operations) in our Annual Report on Form 10-K
for the fiscal year ended December 31, 2021, filed with the SEC on February 22, 2022, for an understanding of our results of operations and liquidity
discussions and analysis comparing fiscal year 2021 to fiscal year 2020, which information is hereby incorporated by reference. In addition to historical
information, this discussion contains forward-looking statements that involve risks and uncertainties that could cause our actual results to differ materially
from our expectations, as discussed in "Forward-Looking Statements" in Part I of this Annual Report on Form 10-K. Factors that could cause such
differences include, but are not limited to, those described in the section titled "Risk Factors" and elsewhere in this Annual Report on Form 10-K.
Overview
We are a pioneer and leading provider of a cloud-based platform delivering IT, security and compliance solutions that enable organizations to identify
security risks to their IT infrastructures, help protect their IT systems and applications from ever-evolving cyber-attacks and achieve compliance with
internal policies and external regulations. Our cloud solutions address the growing security and compliance complexities and risks that are amplified by the
dissolving boundaries between internal and external IT infrastructures and web environments, the rapid adoption of cloud computing, containers and
serverless IT models, and the proliferation of geographically dispersed IT assets. Our integrated suite of IT, security and compliance solutions delivered on
our Qualys Cloud Platform enables our customers to identify and manage their IT assets, collect and analyze large amounts of IT security data, discover
and prioritize vulnerabilities, recommend 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), Custom Assessment and Remediation (CAR), Context
Extended Detection and Response (XDR), Network Detection and Response (NDR);
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 AssetView (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. In 2022, 2021 and 2020,
60%, 61% and 63%, 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 Current Macroeconomic Environment
The uncertainty surrounding macroeconomic factors in the U.S. and globally characterized by COVID-19, the supply chain environment, inflationary
pressure, rising interest rates, labor shortages, significant volatility of global markets and geopolitical conflicts have had and could in the future have a
material adverse effect on our long-term business and could lead to further economic disruption and expose us to greater risk as our current and potential
customers may reduce or eliminate their overall spending on IT security. 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
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 shared cloud platforms and provide support services to our customers. Other expenses include depreciation
of shared cloud platform equipment, physical scanner appliances and computer hardware provided to certain customers as part of their subscriptions,
expenses related to the use of third-party shared cloud platforms and cloud infrastructures, 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 make capital investments to expand and support our shared cloud platform and cloud infrastructure 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 devote resources to research and development in an
effort to continuously improve our existing solutions as well as develop new solutions and capabilities and expect that research and development expenses
will increase in absolute dollars.
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Table of Contents
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 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, British Pound ("GBP") and
Indian Rupee ("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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Table of Contents
Results of Operations
The following table sets forth selected consolidated statements of operations data for each of the periods presented as a percentage of revenues:
Revenues
Cost of revenues
Gross profit
Operating expenses:
Research and development
Sales and marketing
General and administrative
Total operating expenses
Income from operations
Total other income, net
Income before income taxes
Income tax provision
Net income
Year Ended December 31,
2021
2022
100%
21
79
21
20
12
53
26
1
27
5
22%
100%
22
78
20
19
18
57
21
—
21
4
17%
Comparison of Years Ended December 31, 2022 and 2021
Revenues
Revenues
Year Ended
December 31,
Change
2022
2021
$
%
(in thousands, except percentages)
$
489,723 $
411,172 $
78,551
19%
Revenues increased by $78.6 million in 2022 compared to 2021, driven by increased demand for our subscription services by our end customers. Of
the total increase of $78.6 million in revenue from 2021 to 2022, 80% was from revenues from customers existing at or prior to December 31, 2021, and
the remaining 20% was from new customers added in 2022. Of the total increase of $78.6 million, 51% was from customers in the United States and the
remaining 49% was from customers in foreign countries. In 2022, 58% of total revenue was direct and 42% of total revenue was through partners. Of the
total increase of $78.6 million, 53% was direct and the remaining 47% was from partners. With our strong market position driving further demand for our
solutions, we expect revenue growth from new and existing customers to continue.
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Cost of Revenues
Cost of revenues
Year Ended
December 31,
Change
2022
2021
$
%
(in thousands, except percentages)
$
102,788 $
89,439 $
13,349
15%
Cost of revenues increased by $13.3 million in 2022 compared to 2021, due to an increase in personnel costs of $9.5 million driven by additional
employees hired to support the growth of our business, an increase in shared cloud platform and cloud costs of $2.0 million to meet growing demand and
an increase in software license cost of $1.8 million.
Research and Development Expenses
Research and development
Year Ended
December 31,
Change
2022
2021
$
%
(in thousands, except percentages)
$
101,186 $
81,289 $
19,897
24%
Research and development expenses increased by $19.9 million in 2022 compared to 2021, due to an increase in personnel costs of $18.3 million
primarily driven by additional employees hired to support the growth of our business, an increase in software license cost of $1.0 million and an increase in
travel and entertainment expense of $0.6 million due to easing of COVID-19 related travel restrictions.
Sales and Marketing Expenses
Sales and marketing
Year Ended
December 31,
Change
2022
2021
$
%
(in thousands, except percentages)
$
97,221 $
76,487 $
20,734
27%
Sales and marketing expenses increased by $20.7 million in 2022 compared to 2021, due to an increase in personnel costs of $9.9 million driven
by additional employees hired to support the growth of our business, an increase in trade show and other advertising related costs of $5.7 million, an
increase of consulting expense of $2.3 million, an increase of travel and entertainment expense of $1.8 million associated with the easing of COVID-19
related travel restrictions and an increase in software license cost of $1.0 million.
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Table of Contents
General and Administrative Expenses
General and administrative
Year Ended
December 31,
Change
2022
2021
$
%
(in thousands, except percentages)
$
57,981 $
76,274 $
(18,293)
(24)%
General and administrative expenses decreased by $18.3 million in 2022 compared to 2021, due to a decrease in stock-based compensation
expense of $27.3 million related to accelerated vesting of our former chief executive officer's grants upon termination due to disability in 2021, offset by an
increase in personnel costs of $3.8 million driven by additional employees hired to support the growth of our business, an increase in software license cost
of $1.0 million, an increase in consulting expense of $1.9 million, an increase in legal accrual of $1.5 million and an increase of travel and entertainment
expense of $0.8 million associated with the easing of COVID-19 related travel restrictions.
Total other income, net
Total other income, net
Year Ended
December 31,
Change
2022
2021
$
%
(in thousands, except percentages)
$
3,153 $
1,714 $
1,439
84%
Total other income, net increased by $1.4 million in 2022 compared to 2021, due to an increase in interest income of $2.9 million driven by continued
interest rate increase in 2022, offset by an increase in foreign exchange loss of $1.5 million.
Income tax provision
Income tax provision
Year Ended
December 31,
Change
2022
2021
$
%
(in thousands, except percentages)
$
25,708 $
18,437 $
7,271
39%
Income tax provision increased by $7.3 million in 2022 compared to 2021, primarily due to an increase in pre-tax income and the effects of a tax law
change related to mandatory capitalization of research and development expenses starting January 1, 2022, offset by an increase in excess tax benefits
arising from stock-based compensation.
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Key Operating and Non-GAAP Financial Performance Metrics
In addition to measures of financial performance presented in our consolidated financial statements, we monitor the key metrics set forth below to
help us evaluate growth trends, establish budgets, measure the effectiveness of our sales and marketing efforts and assess operational efficiencies.
Net Dollar Expansion Rate
We evaluate our ability to retain and grow existing customers by assessing our net dollar expansion rate on a last twelve months, or LTM, basis. This
metric is used to appropriately manage resources and customer retention and expansion. We calculate the net dollar expansion rate on a foreign exchange
neutral basis by dividing a numerator by a denominator, each defined as follows:
Denominator: To calculate our net dollar expansion rate as of the end of a reporting period, we first determine the annual recurring revenue, or ARR,
from all active subscriptions as of the last day of the same reporting period in the prior year. This represents recurring payments that we expect to receive in
the next 12-month period from the cohort of customers that existed on the last day of the same reporting period in the prior year.
Numerator: We measure the ARR for that same cohort of customers representing all active subscriptions as of the end of the reporting period, using
the same foreign exchange rate from the prior year.
Our net dollar expansion rates were 109% and 108% for the years ended December 31, 2022 and 2021, respectively.
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 years ended December 31, 2022 and 2021.
Net income
Net income as a percentage of revenues
Depreciation and amortization of property and equipment
Amortization of intangible assets
Income tax provision
Stock-based compensation
Total other income, net
Adjusted EBITDA
Adjusted EBITDA as a percentage of revenues
46
Year Ended December 31,
2021
2022
(in thousands)
107,992
$
22%
28,936
5,686
25,708
53,408
(3,153)
$
45%
218,577
70,960
17%
29,236
6,661
18,437
67,579
(1,714)
191,159
46%
$
$
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Liquidity and Capital Resources
As of December 31, 2022, our principal source of liquidity was cash, cash equivalents and marketable securities of $380.5 million, including
$52.7 million of cash held outside of the United States. The following summary of cash flows for the periods indicated has been derived from our
consolidated financial statements included elsewhere in this report:
Cash provided by operating activities
Cash provided by (used in) investing activities
Cash used in financing activities
Net increase (decrease) in cash, cash equivalents and restricted cash
Operating Activities
Year Ended December 31,
2021
2022
(in thousands)
$
$
198,854 $
145,068
(306,031)
37,891 $
200,616
(29,532)
(107,888)
63,196
In 2022, we generated $177.2 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 $169.6 million in 2021. In addition, we also generated $21.7 million of
cash from working capital change in 2022, of which $11.8 million was related to net increase in deferred revenue and accounts receivable as a result of our
continued growth in billing and collection, and $9.9 million was due to lower prepaid expenses and an increase in payables and accrued liabilities in line
with our business. In 2021, we generated $31.0 million of cash from working capital change, of which $37.4 million was related to net increase in deferred
revenue and accounts receivable as a result of our continued growth in billing and collection, partially offset by higher prepaid income taxes of
$6.9 million.
Net cash taxes paid, excluding prepaid income taxes, during 2022 were approximately $20.0 million higher compared to 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 a decrease in cash taxes in future years when
the capitalized expenses are amortized for tax purposes.
Investing Activities
In 2022, we generated $169.0 million of cash in marketable securities investment, used $15.4 million of cash in capital expenditures mainly related to
computer equipment to support our growth and development and $8.6 million of cash to acquire certain technology assets, as compared to $4.5 million of
cash used in marketable securities investment, $24.4 million of cash used in capital expenditures and $1.1 million of cash used for acquisition of
technology assets in 2021.
Financing Activities
In 2022, we used $317.3 million of cash for share repurchase and $17.6 million of cash in payment of employee withholding taxes upon vesting of
restricted stock units and received $24.5 million of proceeds from employee exercise of stock options, as compared to $130.0 million of cash used for share
repurchase, $27.8 million of cash used in payment of employee withholding taxes upon vesting of restricted stock units and $50.0 million of cash received
from employee exercise of stock options in 2021. Net cash used in financing activities are expected to be lower in 2023 due to expected lower volume of
share repurchase.
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.
Our material cash requirements mainly include the following contractual and other obligations:
• Our operating lease obligations to make payments under our non-cancelable lease agreements for our facilities and shared cloud platforms. We
had fixed operating lease payment obligations of $46.4 million as of December 31, 2022, with $14.9 million expected to be paid within the next
12 months.
• Cash outflow for capital expenditures in 2023 is expected to be in a range of $18.0 million to $25.0 million. Our future capital requirements will
depend on many factors, including our rate of revenue growth, the expansion of our sales and marketing activities, the timing, type and extent of
our spending on research and development efforts, international expansion and investment in shared cloud platforms and cloud infrastructures. We
may also seek to invest in or acquire complementary businesses or technologies.
• Other non-cancelable purchase obligations related to cloud infrastructures and other service providers totaled $77.1 million, of which
$25.6 million is expected to be paid within the next 12 months.
We expect to continue to use cash to repurchase shares in 2023 under our share repurchase program authorized by our board of directors on February
5, 2018. As of December 31, 2022, our board of directors had authorized an aggregate amount of $900.0 million for repurchases under our share repurchase
program, of which approximately $154.5 million remained available. 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.
On February 9, 2023, we announced that its Board of Directors authorized the repurchase of an additional $100.0 million under our share repurchase
program, increasing the total amount of authorized repurchase to $1.0 billion.
47
Table of Contents
Critical Accounting Estimates
The preparation of our consolidated financial statements in accordance with U.S. GAAP requires us to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenues, expenses and related disclosures. Our significant accounting policies are described in Note 1 - The
Company and Summary of Significant Accounting Policies in the accompanying notes to the consolidated financial statements included in Part II, Item 8,
"Financial Statements and Supplementary Data" of this Annual Report on Form 10-K. On an ongoing basis, we evaluate our estimates and assumptions
based on historical and anticipated results and trends that we believe represent our best estimate under the circumstances. However, as accounting estimates
are subject to inherent uncertainty, our actual results may differ from these estimates under different assumptions or conditions.
Income Taxes
Significant assumptions, judgments and estimates are involved in determining our provision for (benefit from) income taxes, our deferred tax assets
and liabilities, and any valuation allowance to be recorded against our deferred tax assets. Our judgments, assumptions and estimates relating to the current
provision for income taxes include the geographic mix and amount of income (loss), expectations of future income, our interpretation of current tax laws,
our business, and possible outcomes of current and future audits conducted by foreign and domestic tax authorities. Our judgments also include anticipating
the tax positions we will record in the financial statements before preparing and filing the tax returns. Our estimates and assumptions may differ from the
actual results as reflected in our income tax returns and we record the required adjustments when they are identified or resolved. Changes in our business
and tax laws or our interpretation of those, and developments in current and future tax audits, could significantly impact the amounts provided for income
taxes in our results of operations, financial position, or cash flows.
The assessment of tax effects of our uncertain tax positions in our financial statements involves significant judgment in interpreting complex and
ambiguous tax laws, regulations, and administrative practices, determining the probability of various possible settlement outcomes, evaluating the litigation
process based on tax authority behaviors in similar cases, and estimating the likelihood that another taxing authority could review the respective tax
position. These judgments are inherently challenging and subjective because a taxing authority may change its behavior at any time. We must also
determine when it is reasonably possible that the amount of unrecognized tax benefits will significantly increase or decrease in the 12 months after each
fiscal year-end. We reevaluate our income tax positions on a quarterly basis to consider factors such as changes in facts or circumstances, changes in tax
laws, effectively settled issues under audit, the potential for interest and penalties, and new audit activity. Such a change in recognition or measurement
would result in recognition of a tax benefit or an additional charge to the tax provision that could be material in the future.
Stock-Based Compensation
We recognize the fair value of our employee stock options and restricted stock units, including performance-based restricted stock units, over the
requisite service period. The fair value of each stock option is estimated on date of grant using the Black-Scholes-Merton option pricing model.
Determining the appropriate fair value model and calculating the fair value of employee stock options requires the use of subjective assumptions, including
the expected life of the stock option and stock price volatility. The recognition of expenses for performance based restricted stock units requires us to
estimate the probability that the performance condition will be achieved and the number of awards that will vest are adjusted accordingly at each reporting
period. The assumptions used in calculating the fair value of employee stock options and estimating the probability of achievement of performance metrics
represent management’s best estimates, which require significant judgment and involve inherent uncertainties. If factors change and we use different
assumptions, our stock-based compensation expense could be materially different in the future.
Item 7A.
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 and Canadian Dollar ("C$"), 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, operating expenses and foreign currency denominated assets or liabilities.
As of December 31, 2022, we had designated cash flow hedge forward contracts with notional amounts of €37.4 million, £10.4 million
and Rs.3,411.0 million and non-designated forward contracts with notional amounts of €40.2 million, £16.2 million, Rs.484.0 million and C$3.8 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 $380.5 million in cash, cash equivalents and short-term and long-term marketable securities as of December 31, 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 December 31, 2022, a hypothetical 100 basis point increase in interest rate would result in a decrease in the fair value of our
marketable securities by $1.0 million.
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Table of Contents
Item 8.
Financial Statements and Supplementary Data
Qualys, Inc.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Table of Contents
Reports of Independent Registered Public Accounting Firm (PCAOB ID Number 248)
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Income
Consolidated Statements of Cash Flows
Consolidated Statements of Stockholders' Equity
Notes to Consolidated Financial Statements
49
Page
50
52
53
54
55
56
57
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Qualys, Inc.
Opinion on the financial statements
We have audited the accompanying consolidated balance sheets of Qualys, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of December
31, 2022 and 2021, the related consolidated statements of operations, comprehensive income, cash flows, and stockholders’ equity for each of the three
years in the period ended December 31, 2022, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial
statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations
and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the
United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s
internal control over financial reporting as of December 31, 2022, based on criteria established in the 2013 Internal Control — Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"), and our report dated February 23, 2023 expressed an
unqualified opinion.
Basis for opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial
statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the
Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the
PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing
procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to
those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits
also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the
financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical audit matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or
required to be communicated to the audit and risk committee and that: (1) relates to accounts or disclosures that are material to the financial statements and
(2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our
opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the
critical audit matter or on the accounts or disclosures to which it relates.
Income taxes
As described further in Note 12 to the financial statements, the Company records income taxes using the asset and liability method, under which deferred
tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates
in effect for the year in which the differences are expected to affect taxable income. We identified the tax effects of temporary and permanent differences
related to stock-based compensation as a critical audit matter.
The principal considerations for our determination that the tax effects of temporary and permanent differences are a critical audit matter are that auditing
the application of executive compensation rules requires significant technical expertise, the Company is generating excess tax deductions as a result of
stock-based compensation and the stock-based compensation calculation is complex due to the required recordkeeping. Our audit procedures related to the
tax effects of temporary and permanent differences related to stock-based compensation included the following, among others.
Involved an employee compensation specialist to assess the application of stock-based compensation tax rules.
•
• Obtained management’s permanent and temporary provision calculation and tied out inputs to supporting equity documentation.
• Tested the completeness and accuracy of the calculation of permanent and temporary differences.
• Determined that the ending gross temporary difference agreed to the supporting equity documentation.
•
We tested the design and operating effectiveness of internal controls over the Company’s calculation of the tax effects covering the validation of the
completeness and accuracy of underlying data used in the analysis.
/s/ GRANT THORNTON LLP
We have served as the Company’s auditor since 2005.
San Jose, California
February 23, 2023
50
Table of Contents
Board of Directors and Stockholders
Qualys, Inc.
Report of Independent Registered Public Accounting Firm
Opinion on internal control over financial reporting
We have audited the internal control over financial reporting of Qualys, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of December
31, 2022, based on criteria established in the 2013 Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2022, based on criteria established in the 2013 Internal Control — Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated
financial statements of the Company as of and for the year ended December 31, 2022, and our report dated February 23, 2023 expressed an unqualified
opinion on those consolidated financial statements.
Basis for opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our
responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm
registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the
applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our opinion.
Definition and limitations of internal control over financial reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control
over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
/s/ GRANT THORNTON LLP
San Jose, California
February 23, 2023
51
Table of Contents
Assets
Current assets:
Qualys, Inc.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
Cash and cash equivalents
Short-term marketable securities
Accounts receivable, net of allowance of $736 and $793 as of December 31, 2022 and 2021, respectively
Prepaid expenses and other current assets
Total current assets
Long-term marketable securities
Property and equipment, net
Operating leases - right of use asset
Deferred tax assets, net
Intangible assets, net
Goodwill
Restricted cash
Other noncurrent assets
Total assets
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable
Accrued liabilities
Deferred revenues, current
Operating lease liabilities, current
Total current liabilities
Deferred revenues, noncurrent
Operating lease liabilities, noncurrent
Other noncurrent liabilities
Total liabilities
Commitments and contingencies (Note 9)
Stockholders’ equity:
Preferred stock: $0.001 par value; 20,000 shares authorized, no shares issued and outstanding as of December
31, 2022 and 2021
Common stock: $0.001 par value; 1,000,000 shares authorized, 37,362 and 39,112 shares issued and outstanding
as of December 31, 2022 and 2021, respectively
Additional paid-in capital
Accumulated other comprehensive income (loss)
Accumulated deficit
Total stockholders’ equity
Total liabilities and stockholders’ equity
December 31,
2022
2021
173,719 $
147,608
121,795
30,216
473,338
59,206
47,428
33,752
45,412
12,801
7,447
2,700
18,857
700,941 $
2,808 $
42,592
293,728
13,060
352,188
23,490
29,121
7,013
411,812
137,328
267,960
108,998
32,112
546,398
111,198
61,854
37,016
25,087
6,545
7,447
1,200
17,814
814,559
1,296
32,504
257,872
12,608
304,280
32,753
35,914
4,898
377,845
—
—
37
512,486
(1,947)
(221,447)
289,129
700,941 $
39
477,323
1,007
(41,655)
436,714
814,559
$
$
$
$
The accompanying notes are an integral part of these Consolidated Financial Statements.
52
Table of Contents
Revenues
Cost of revenues
Gross profit
Operating expenses:
Research and development
Sales and marketing
General and administrative
Total operating expenses
Income from operations
Other income (expense), net:
Interest expense
Interest income
Other income (expense), net
Total other income, net
Income before income taxes
Income tax provision
Net income
Net income per share:
Basic
Diluted
Qualys, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
$
$
$
$
Year Ended December 31,
2021
2022
2020
489,723 $
102,788
386,935
101,186
97,221
57,981
256,388
130,547
—
5,191
(2,038)
3,153
133,700
25,708
107,992 $
2.81 $
2.74 $
38,453
39,344
411,172 $
89,439
321,733
81,289
76,487
76,274
234,050
87,683
—
2,287
(573)
1,714
89,397
18,437
70,960 $
1.82 $
1.77 $
39,030
40,118
362,963
79,226
283,737
72,548
67,965
46,570
187,083
96,654
(9)
5,385
7
5,383
102,037
10,465
91,572
2.34
2.25
39,167
40,740
Weighted average shares used in computing net income per share:
Basic
Diluted
The accompanying notes are an integral part of these Consolidated Financial Statements.
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Qualys, Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
Net income
Other comprehensive income (loss), net of tax
Net change in unrealized gains (losses) on available-for-sale debt securities, net of tax
Net change in unrealized gains (losses) on cash flow hedges, net of tax
Other comprehensive income (loss), net of tax
Comprehensive income
Year Ended December 31,
2021
2022
2020
$
107,992 $
70,960 $
91,572
(2,520)
(434)
(2,954)
105,038 $
(1,409)
2,900
1,491
72,451 $
402
(2,048)
(1,646)
89,926
$
The accompanying notes are an integral part of these Consolidated Financial Statements.
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Qualys, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Cash flow from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Year Ended December 31,
2021
2022
2020
$
107,992 $
70,960 $
91,572
Depreciation and amortization expense
Write off of noncurrent asset
Provision for credit losses
Loss on disposal of property and equipment
Stock-based compensation
Amortization of premiums on marketable securities
Deferred income taxes
Changes in operating assets and liabilities:
Accounts receivable
Prepaid expenses and other assets
Accounts payable
Accrued liabilities and other noncurrent liabilities
Deferred revenues
Net cash provided by operating activities
Cash flow from investing activities:
Purchases of marketable securities
Sales and maturities of marketable securities
Purchases of property and equipment
Proceeds from disposal of property and equipment
Purchases of intangible assets
Maturity of note receivable
Net cash provided by (used in) investing activities
Cash flow from financing activities:
Repurchase of common stock
Proceeds from exercise of stock options
Payments for taxes related to net share settlement of equity awards
Proceeds from issuance of common stock through employee stock purchase plan
Principal payments under finance lease obligations
Net cash used in financing activities
Net increase (decrease) in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash at beginning of period
Cash, cash equivalents and restricted cash at end of period
Supplemental disclosures of cash flow information
Cash paid for interest expense
Cash paid for income taxes, net of refunds
Non-cash investing and financing activities
$
$
$
Purchases of intangible assets recorded in accrued liabilities and other noncurrent liabilities $
$
Purchases of property and equipment recorded in accounts payable and accrued liabilities
34,622
—
590
6
53,408
833
(20,251)
(13,387)
3,878
2,107
3,867
25,189
198,854
(178,788)
347,837
(15,361)
—
(8,620)
—
145,068
(317,344)
24,483
(17,615)
4,445
—
(306,031)
37,891
138,528
176,419 $
— $
39,739 $
2,110 $
470 $
35,897
625
402
12
67,579
3,869
(9,723)
(9,221)
(15,665)
(32)
9,322
46,591
200,616
(368,450)
363,941
(24,424)
6
(1,230)
625
(29,532)
(129,977)
49,994
(27,815)
—
(90)
(107,888)
63,196
75,332
138,528 $
— $
35,080 $
120 $
2,086 $
32,845
—
486
106
40,035
826
3,512
(22,631)
(2,329)
(389)
5,126
30,927
180,086
(391,693)
341,879
(30,037)
419
(1,500)
—
(80,932)
(126,729)
34,461
(20,199)
—
(114)
(112,581)
(13,427)
88,759
75,332
9
8,058
150
1,054
The accompanying notes are an integral part of these Consolidated Financial Statements.
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Qualys, Inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)
Common Stock Additional
Other
Earnings
Total
Paid-In Comprehensive (Accumulated Stockholders’
Accumulated Retained
Balances at December 31, 2019
Net income
Other comprehensive loss, net of tax
Issuance of common stock upon exercise of stock options
Repurchase of common stock
Issuance of common stock upon vesting of restricted stock
units
Taxes related to net share settlement of equity awards
Stock-based compensation
Balances at December 31, 2020
Net income
Other comprehensive income, net of tax
Issuance of common stock upon exercise of stock options
Repurchase of common stock
Issuance of common stock upon vesting of restricted stock
units
Taxes related to net share settlement of equity awards
Stock-based compensation
Balances at December 31, 2021
Net income
Other comprehensive loss, net of tax
Issuance of common stock upon exercise of stock options
Repurchase of common stock
Issuance of common stock upon vesting of restricted stock
units
Taxes related to net share settlement of equity awards
Issuance of common stock through employee stock purchase
plan
Stock-based compensation
Balances at December 31, 2022
Income (Loss)
Deficit)
Equity
Shares Amount Capital
39,146 $
—
—
1,130
(1,293)
39 $ 362,408 $
—
—
—
—
1
34,460
(15,530)
(1)
1,162 $
—
(1,646)
—
—
23,194 $
91,572
—
—
(111,198)
476
(206)
—
39,253
—
—
725
(1,148)
530
(248)
—
39,112
—
—
468
(2,460)
—
—
—
39
—
—
1
(1)
—
—
—
39
—
—
—
(2)
—
(20,199)
40,220
401,359
—
—
49,993
(13,793)
—
(27,815)
67,579
477,323
—
—
24,483
(29,558)
329
(132)
—
—
—
(17,615)
—
—
—
(484)
—
1,491
—
—
—
—
—
1,007
—
(2,954)
—
—
—
—
—
—
—
3,568
70,960
—
—
(116,183)
—
—
—
(41,655)
107,992
—
—
(287,784)
45
—
37,362 $
4,445
—
53,408
37 $ 512,486 $
—
(1,947) $
—
(221,447) $
4,445
53,408
289,129
—
—
—
(17,615)
386,803
91,572
(1,646)
34,461
(126,729)
—
(20,199)
40,220
404,482
70,960
1,491
49,994
(129,977)
—
(27,815)
67,579
436,714
107,992
(2,954)
24,483
(317,344)
The accompanying notes are an integral part of these Consolidated Financial Statements.
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Qualys, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1.
The Company and Summary of Significant Accounting Policies
Description of Business
Qualys, Inc. (the “Company”, “we”, “us”, “our”) was incorporated in the state of Delaware on December 30, 1999. The Company is headquartered in
Foster City, California and has wholly-owned subsidiaries throughout the world. The Company is a pioneer and leading provider of cloud-based IT,
security and compliance solutions that enable organizations to identify security risks to their IT infrastructures, help protect their IT systems and
applications from ever-evolving cyber-attacks and achieve compliance with internal policies and external regulations. The Company’s cloud solutions
address the growing security and compliance complexities and risks that are amplified by the dissolving boundaries between internal and external IT
infrastructures and web environments, the rapid adoption of cloud computing and the proliferation of geographically dispersed IT assets. Organizations can
use the Company’s integrated suite of solutions delivered on its Qualys Cloud Platform to cost-effectively obtain a unified view of their security and
compliance posture across globally-distributed IT infrastructures.
Basis of Presentation
The accompanying consolidated financial statements and footnotes have been prepared in accordance with U.S. GAAP as well as the instructions to
Form 10-K and the rules and regulations of the SEC. Certain prior year amounts have been reclassified to conform with the current year presentation. In the
opinion of management, the accompanying consolidated financial statements reflect all adjustments, which include only normal recurring adjustments,
necessary for the fair presentation of the Company’s consolidated financial position, results of operations and cash flows for the periods presented. The
accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany transactions
and balances have been eliminated upon consolidation.
Risks and Uncertainties
The uncertainty surrounding macroeconomic factors in the U.S. and globally characterized by the supply chain environment, inflationary pressure,
rising interest rates, labor shortages, significant volatility of global markets and geopolitical conflicts could have a material adverse effect on the Company's
long-term business and could lead to further economic disruption and expose the Company to greater risk as its current and potential customers may reduce
or eliminate their overall spending on IT security.
Use of Estimates
The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of assets and liabilities at the date of the consolidated financial
statements and the reported results of operations during the reporting period. The Company’s management regularly assesses these estimates, which
primarily affect revenue recognition, 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 consolidated financial
statements.
Concentration of Credit Risk
The Company invests its cash and cash equivalents with major financial institutions. Cash balances with any one institution at times may be in excess
of federally insured limits. Cash equivalents are invested in high-quality investment grade financial instruments and are diversified. The Company has not
experienced any losses in such accounts and believes it is not exposed to any significant credit risk.
Credit risk with respect to accounts receivable is dispersed due to the large number of customers. Collateral is not required for accounts receivable. As
of December 31, 2022 and 2021, no customer or channel partner accounted for more than 10% of the Company's revenues and accounts receivable balance.
Cash, Cash Equivalents, Restricted cash and Short-Term and Long-Term Marketable Securities
Cash and cash equivalents include cash held in banks, highly liquid money market funds and commercial paper, all with original maturities of three
months or less when acquired. The Company’s short-term and long-term marketable securities consist of fixed-income U.S. and foreign government agency
securities, corporate bonds, asset-backed securities and commercial paper. Management determines the appropriate classification of the Company's
investments at the time of purchase and reevaluates such designation at each balance sheet date. The Company classifies its marketable securities as either
short-term or long-term based on each instrument's underlying remaining contractual maturity date.
As of December 31, 2022 the Company had a restricted cash balance of $2.7 million, of which $1.5 million is related to cash held in escrow as part
of the Blue Hexagon acquisition and $1.2 million in the form of a letter of credit issued to the landlord of the Company's California headquarter office lease
as security deposit. As of December 31, 2021, the Company has restricted cash balance of $1.2 million in the form of a letter of credit issued to the landlord
of the Company’s California headquarter office lease as security deposit.
Cash equivalents are stated at cost, which approximates fair market value. Short-term and long-term marketable securities are classified as available-
for-sale debt securities (AFS debt securities) and are carried at fair value. Unrealized gains and losses in fair value of the AFS debt securities are reported in
other comprehensive income (loss). When the AFS debt securities are sold, cost is based on the specific identification method, and the realized gains and
losses are included in other income (expense), net in the consolidated statements of operations. AFS debt securities are reviewed quarterly for impairment.
An investment is considered impaired when its fair value is below its amortized cost. Declines in fair value from amortized cost for AFS debt securities that
the company intends to sell or will more likely than not be required to sell before the expected recovery of the amortized cost basis are charged to other
income (expense), net in the period in which the loss occurs. Otherwise, the credit loss component of the impairment is recorded as allowance for credit
losses with an offsetting entry charged to other income (expense), net, while the remaining loss is recognized in other comprehensive income (loss).
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Accounts Receivable
Accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for credit losses is determined on a collective basis
where similar risk characteristics exist and on an individual basis when we identify significant customers or invoices with collectability issues. The estimate
for credit losses considers historical write-offs by aging category, that are adjusted for current conditions and reasonable and supportable forecasts of future
losses. Any change in the assumptions used in analyzing credit losses may result in additional allowances being recognized in the period in which the
change occurs. When the Company ultimately concludes that a receivable is uncollectible, the balance is written off against the allowance for credit losses.
Payments subsequently received on such receivables are recognized in the period received. The allowance for credit losses recognized and write-offs
charged against the allowance were not significant for the years ended December 31, 2022 and 2021. The balance of accounts receivable, net of allowance
for credit losses was $121.8 million, $109.0 million and $100.2 million as of December 31, 2022, December 31, 2021 and December 31, 2020,
respectively.
Non-marketable securities
In 2018, the Company invested $2.5 million in preferred stock of a privately-held company (the “Investee”). The fair value of the investment is not
readily available, and there are no quoted market prices for the investment. The Company elected the measurement alternative to account for the investment
at cost less impairment and will measure the investment at fair value when the Company identifies observable price changes. The investment is assessed for
impairment annually or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. No impairment has been
incurred related to the investment. The investment is included in other noncurrent assets in the consolidated balance sheets. The Company has not received
any dividends from the investment.
In 2019, the Company made an advance payment of $0.6 million to the Investee for it to perform certain technology development work, which should
either be settled in the form of royalty fee charges when the technology materializes and is licensed to the Company or, otherwise, should be repaid to the
Company in cash. The advance payment was recorded in other non-current assets in the consolidated balance sheet. During the fourth quarter ended
December 31, 2021, the technology has not been developed and the Company decided to no longer pursue the development of the technology or the
collection of the advanced amount. Accordingly, the entire amount of the advance payment was written off and recorded in the general and administrative
expense during the year ended December 31, 2021.
Property and Equipment, net
Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method
over the estimated useful lives of the assets, which range from three to five years. Leasehold improvements are amortized on a straight-line basis over the
lesser of the estimated useful life of the asset or the remaining lease term.
The Company purchases physical scanner appliances and other computer equipment that are provided to customers on a subscription basis. This
equipment is recorded within property and equipment and the depreciation is recorded in cost of revenues over an estimated useful life of three years.
Upon retirement or disposal, the cost of assets and the related accumulated depreciation are removed from the accounts and any resulting gain or loss
is reflected in the consolidated statements of operations. Repairs and maintenance that do not extend the life of an asset are expensed as incurred and major
improvements are capitalized as property and equipment.
Leases
The Company leases certain offices, computer equipment and its shared cloud platform facilities under finance leases and non-cancelable operating
leases. For both operating and finance leases, we recognize a right-of-use asset, which represents our right to use the underlying asset for the lease term,
and a lease liability, which represents the present value of our obligation to make payments arising over the lease term. Many of our leases include rental
escalation clauses, renewal options and/or termination options that are factored into our determination of lease payments and lease terms when appropriate.
The present value of the lease payments is calculated using the incremental borrowing rate of the underlying leases determined at lease commencement. As
most of our leases do not provide a readily determinable implicit rate, the Company determines an incremental borrowing rate using a portfolio approach
based on the rate of interest that the Company would have to pay to borrow an amount equal to the lease payments on a collateralized basis over a similar
term as the leases.
Where the Company is the lessee, the Company elects to account for non-lease components associated with its leases (e.g., common area maintenance
costs) and lease components separately for substantially all of its asset classes, except for shared cloud platforms, for which the Company elected to
combine lease and non-lease components. For leases with a term of one year or less, the Company has elected not to record the right-of-use asset or
liability.
In arrangements where the Company is the lessor, the Company elected to apply the practical expedient to account for lease components (e.g.,
customer premise equipment) and non-lease components (e.g., service revenue) as combined components as revenue under ASC 606 as service revenues
are the predominant components in the arrangements.
Impairment of Long-Lived Assets
The Company evaluates its long-lived assets, which consist of property and equipment, and intangible assets subject to amortization, for indicators of
possible impairment when events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Impairment exists if the
carrying amounts of such assets exceed the estimates of future undiscounted cash flows expected to be generated by such assets. Should an impairment
exist, the impairment loss would be measured based on the excess carrying value of the asset over the asset’s estimated fair value. For the years ended
December 31, 2022, 2021 and 2020, there was no impairment of long-lived assets.
Goodwill and Intangible Assets
Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired in a business
combination. Goodwill and indefinite-lived intangible assets are not amortized but tested for impairment at least annually or more frequently if certain
circumstances indicate a possible impairment may exist. The goodwill impairment tests are performed at the reporting unit level. The Company’s
operations are organized as one reporting unit.
In testing for a potential impairment of goodwill and the indefinite-lived intangible assets, the Company first performs a qualitative assessment to
determine if it is more likely than not (a more than 50% likelihood) that the fair value of the reporting unit or the indefinite-lived intangible assets is less
than their carrying amount. If the fair value is not considered to be less than the carrying amount, no further evaluation is necessary. Otherwise, the
Company will perform a quantitative test. Goodwill impairment is measured as the amount by which the carrying value of the reporting unit or the
indefinite-lived intangible assets exceeds their fair value. The Company performed the annual assessments on December 1, 2022 and 2021 and concluded
there was no impairment of goodwill or the indefinite-lived intangible assets.
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Asset Acquisitions and Business Combinations
The Company applies the provisions of ASC 805, Business Combinations, in accounting for its acquisitions. To determine whether transactions
should be accounted for as asset acquisition or business combination, the Company evaluates whether substantially all of the fair value of gross assets
included in a transaction is concentrated in a single asset (or a group of similar assets), resulting in an asset acquisition, if not, resulting in a business
combination. In an asset acquisition, the cost of acquiring the asset group, including transaction costs, is allocated to the acquired assets or assumed
liabilities based on their relative fair values without giving rise to goodwill. In a business combination, the Company recognize separately from goodwill
the assets acquired and the liabilities assumed at their acquisition date fair values. Goodwill as of the acquisition date is measured as the excess of
consideration transferred over the net of the acquisition date fair values of the assets acquired and the liabilities assumed. While the Company uses its best
estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date as well as any contingent consideration, where
applicable, its estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from
the acquisition date, the Company records adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon the
conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent
adjustments are recorded to its consolidated statements of operations.
Derivative Financial Instruments
Derivative financial instruments are utilized by the Company to reduce foreign currency exchange risks. The Company uses foreign currency forward
contracts, with maturities of 13 months or less, to mitigate the impact of foreign currency fluctuations of certain non-U.S. dollar denominated net asset
positions, to date primarily cash, accounts receivable and operating lease liabilities, as well as to manage foreign currency fluctuation risk related to
forecasted transactions. Open contracts are recorded within prepaid expenses and other current assets, other noncurrent assets, accrued liabilities or other
noncurrent liabilities in the consolidated balance sheets. Gains and losses resulting from currency exchange rate movements on non-designated forward
contracts are recognized in other income (expense), net. Any gains or losses from derivatives designated as cash flow hedges are first recorded
within accumulated other comprehensive income (“AOCI”) and then reclassified into revenue or operating expenses when the hedged item impacts the
consolidated statements of operations. Cash flows related to these forward contracts are classified in our consolidated statements of cash flows in the same
manner as the underlying hedged transaction within cash flows from operating activities.
Stock-Based Compensation
The Company recognizes the fair value of its stock options, restricted stock units (“RSUs”) and stock purchase rights under the employee stock
purchase plan (the “ESPP”) on a straight-line basis over the requisite service periods. The fair value of each stock option or stock purchase right is
estimated on the date of grant using the Black-Scholes-Merton option pricing model and the fair value of each RSU is based on the Company's common
stock price on the date of grant. Compensation expenses for performance-based stock options (“PSOs”) and performance-based restricted stock units
(“PSUs”) are recorded based on expected achievement of the performance metrics specified in the grant, which are assessed on a quarterly basis.
Forfeitures are estimated on the date of grant and revised if actual or expected forfeiture materially differs from original estimates.
Revenue Recognition
The Company derives revenues from subscriptions that require customers to pay a fee in order to access the Company’s cloud solutions. Contract
period with customers generally are one year with occasional contracts ranging up to five years. The subscription fee entitles the customer to an unlimited
number of scans for a specified number of networked devices or web applications and, if requested by a customer as part of their subscription, a specified
number of physical or virtual scanner appliances. The Company’s physical and virtual scanner appliances are requested by certain customers as part of their
subscriptions in order to scan IT infrastructures within their firewalls and do not function without, and are not sold separately from, subscriptions for the
Company’s solutions. In some limited cases, the Company also provides certain computer equipment used to extend its Qualys Cloud Platform into its
customers’ private cloud environment. Customers are required to return physical scanner appliances and computer equipment if they do not renew their
subscriptions.
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The Company determines revenue recognition through the following steps:
•
•
•
•
•
Identification of the contract, or contracts, with a customer;
Identification of the performance obligations in the contract;
Determination of the transaction price
Allocation of the transaction price to the performance obligations in the contract; and
Recognition of revenue when, or as, the Company satisfies a performance obligation.
At the inception of a customer contract, the Company makes an assessment as to that customer's ability to pay for the services provided. The
Company assesses collectability based on several factors, including credit worthiness of the customer along with past transaction history. In addition, the
Company performs periodic evaluations of its customers’ financial condition.
Most of the Company’s revenue contracts are subscription based and contain a single performance obligation. The subscription contracts typically do
not offer to the customers any future rights that would constitute material rights. Contract prices are generally composed of fixed consideration for a
specific period of time as the Company in general does not offer refunds, volume rebates, customer loyalty programs or other forms of customer incentive
payments. In limited situations, contract prices are contingent on future events, such as actual usage during the contract terms, which are accounted for as
variable consideration and estimated based on the most likely amount of consideration that the Company is expected to be entitled to. Estimates are
included in the contract price to the extent that it is considered probable that a significant reversal in the amount of cumulative revenue recognized will not
occur when the uncertainty associated with the variable consideration is subsequently resolved. Such estimates are made at contract inception and updated
periodically when additional information becomes available. A cumulative catch-up adjustment is made when there is a change in the estimate of variable
consideration.
As the Company's cloud-based subscription services are delivered to customers electronically and over time, revenue is generally recognized ratably
over the contract terms. When physical equipment is provided to the customers as part of the subscription service contract, the Company applies the
practical expedient allowed under ASC 842 Leases to combine lease and nonlease components as a combined component to be accounted for under ASC
606, as the Company determined that the software subscription is the predominant component of the combined components. Therefore, the Company
recognizes revenue for the physical equipment ratably over the related subscription period.
Contract modifications happen when there is an upsell, where the customers subsequently enter into contract with the Company to purchase
additional product offerings or additional scans for additional devices. Contract modifications related to upsells are accounted for prospectively.
Deferred revenues consist of customer contracts billed or cash received that will be recognized in the future under subscriptions existing at the
balance sheet date. The current portion of deferred revenues represents amounts that are expected to be recognized within one year of the balance sheet
date.
Costs of shipping and handling charges incurred by the Company associated with physical scanner appliances and other computer equipment are
included in cost of revenues. Sales taxes and other taxes collected from customers to be remitted to government authorities are excluded from revenues.
Incremental direct costs of obtaining a contract, which consist of sales commissions primarily for new business and upsells, are deferred and
amortized over the estimated life of the customer relationship if renewals are expected and the renewal commission is not commensurate with the initial
commission. The Company elected the practical expedient to expense commissions on renewals where the specific anticipated contract term amortization
period is one year or less. The Company amortizes the capitalized commission cost as a selling expense on a straight-line basis over a period of five years.
The Company classifies deferred commissions as current or noncurrent based on the timing of when it expects to recognize the expense. The current and
noncurrent portions of deferred commissions are included in prepaid expenses and other current assets and other noncurrent assets, respectively, in its
consolidated balance sheets.
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Advertising Expenses
Advertising costs are expensed as incurred and are included in sales and marketing expense in the consolidated statements of operations. The
Company incurred advertising costs of $3.3 million, $2.1 million and $1.6 million for the years ended December 31, 2022, 2021 and 2020, respectively.
Income Taxes
The Company provides for the effect of income taxes in its consolidated financial statements using the asset and liability method which requires the
recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the consolidated financial
statements. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and their respective tax bases, net operating loss carryovers, and tax credit carry
forwards. The Company regularly reviews its deferred tax assets for recoverability and establishes a valuation allowance if it is more likely than not that
some portion or all of the deferred tax assets will not be realized. To make this assessment, the Company takes into account predictions of the amount and
category of taxable income from various sources and all available positive and negative evidence about these possible sources of taxable income. The
weight given to the potential effect of negative and positive evidence is commensurate with the extent to which the strength of the evidence can be
objectively verified. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the
period that includes the enactment date.
Income tax expense or benefit is recognized for the amount of taxes payable or refundable for the current year and for deferred tax assets and
liabilities for the tax consequences of events that have been recognized in an entity’s financial statements or tax returns. The Company must make
significant assumptions, judgments and estimates to determine its current income tax provision (benefit), its deferred tax assets and liabilities, and any
valuation allowance to be recorded against its deferred tax assets. The Company's estimates and assumptions may differ from the actual results as reflected
on its income tax returns and will record the required adjustments when they are identified or resolved.
The Company applies a two-step approach to determining the financial statement recognition and measurement of uncertain tax positions. The
Company only recognizes an income tax expense or benefit with respect to uncertain tax positions in its financial statements that the Company judges is
more likely than not to be sustained solely on its technical merits in a tax audit, including resolution of any related appeals or litigation processes. To make
this judgment, the Company must interpret complex and sometimes ambiguous tax laws, regulations and administrative practices. If an income tax position
meets the more likely than not recognition threshold, then the Company must measure the amount of the tax benefit to be recognized by determining the
largest amount of tax benefit that has a greater than a 50% likelihood of being realized upon effective settlement with a taxing authority that has full
knowledge of all of the relevant facts. It is inherently difficult and subjective to estimate such amounts, as this requires the Company to determine the
probability of various possible settlement outcomes. To determine if a tax position is effectively settled after a tax examination has been completed, the
Company must also estimate the likelihood that another taxing authority could review the respective tax position. The Company must also determine when
it is reasonably possible that the amount of unrecognized tax benefits will significantly increase or decrease in the 12 months after each fiscal year-end.
These judgments are difficult because a taxing authority may change its behavior as a result of the Company's disclosures in its financial statements. The
Company must reevaluate its income tax positions on a quarterly basis to consider factors such as changes in facts or circumstances, changes in tax law,
effectively settled issues under audit, and new audit activity. Such a change in recognition or measurement would result in recognition of a tax benefit or an
additional charge to the tax provision. The Company's policy is to recognize interest and penalties related to unrecognized tax benefits as a component of
the provision for income taxes.
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Table of Contents
Comprehensive Income (Loss)
Other comprehensive income (loss) consists of unrealized gains (losses) on marketable securities, net of tax, and derivative financial instruments
designated as cash flow hedges which are not included in the Company’s net income. Total comprehensive income includes net income and other
comprehensive income (loss) and is included in the consolidated statements of comprehensive income.
Foreign Currency Transactions
The Company’s operations are conducted in various countries around the world and the financial statements of its foreign subsidiaries are reported in
the U.S. dollar as their respective functional currency. Monetary assets and liabilities denominated in foreign currencies have been re-measured into U.S.
dollars using the exchange rates in effect at the balance sheet date, and income and expenses are re-measured at average exchange rates during the period.
Foreign currency re-measurement gains and losses and foreign currency transaction gains and losses are recognized in other income (expense), net.
Net Income Per Share
Basic net income per share is computed by dividing net income by the weighted-average number of shares outstanding during the period. Diluted net
income per share is computed by dividing net income by the weighted-average number of shares outstanding plus potentially dilutive shares outstanding
during the period. The potentially dilutive shares are computed by applying the treasury stock method to the Company's stock options, RSUs and the stock
purchase rights under the ESPP. Any potential shares that would be anti-dilutive are excluded from the computation of diluted net income per share.
Recently Adopted Accounting Pronouncements
None.
Recently Issued Accounting Pronouncements Not Yet Adopted
The Company does not believe any other new accounting pronouncements issued by the FASB that have not become effective will have a material
impact on its consolidated financial statements.
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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 following table sets forth by level within the fair value hierarchy the fair value of the Company's financial assets and liabilities measured at fair
value on a recurring basis:
Money market funds
U.S. Treasury and government agencies
Foreign government
Corporate bonds
Asset-backed securities
Foreign currency forward contracts
Total assets
Foreign currency forward contracts
Total liabilities
Money market funds
Commercial paper
U.S. Treasury and government agencies
Foreign government
Corporate bonds
Asset-backed securities
Foreign currency forward contracts
Total assets
Foreign currency forward contracts
Total liabilities
Level 1
December 31, 2022
Level 2
(in thousands)
Fair Value
82,701 $
—
—
—
—
—
82,701 $
— $
— $
— $
156,662
1,006
63,910
15,027
1,493
238,098 $
4,679 $
4,679 $
82,701
156,662
1,006
63,910
15,027
1,493
320,799
4,679
4,679
Level 1
December 31, 2021
Level 2
(in thousands)
Fair Value
75,258 $
—
—
—
—
—
—
75,258 $
— $
— $
— $
18,896
254,527
1,019
86,703
18,863
3,336
383,344 $
388 $
388 $
75,258
18,896
254,527
1,019
86,703
18,863
3,336
458,602
388
388
$
$
$
$
$
$
$
$
There were no transfers between Level 1, Level 2 and Level 3 categories during the years ended December 31, 2022 and 2021.
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Cash equivalent and investments
The Company's cash equivalents and marketable securities consist of the following:
Cash equivalents: (1)
Money market funds
U.S. Treasury and government agencies
Total
Short-term marketable securities:
Corporate bonds
Asset-backed securities
U.S. Treasury and government agencies
Foreign government
Total
Long-term marketable securities:
Corporate bonds
Asset-backed securities
U.S. Treasury and government agencies
Total
Total
(1) Excludes cash of $61.2 million.
Cash equivalents: (1)
Money market funds
Commercial paper
Total
Short-term marketable securities: (2)
Commercial paper
Corporate bonds
Asset-backed securities
U.S. Treasury and government agencies
Total
Long-term marketable securities:
Corporate bonds
Asset-backed securities
U.S. Treasury and government agencies
Foreign government
Total
Total
December 31, 2022
Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Fair Value
(in thousands)
$
$
$
$
82,701 $
29,787
112,488
36,908
726
110,225
1,008
148,867
28,146
14,435
18,076
60,657
322,012 $
— $
4
4
3
—
—
—
3
—
—
—
—
7 $
— $
—
—
(337)
(2)
(921)
(2)
(1,262)
(810)
(132)
(509)
(1,451)
(2,713) $
82,701
29,791
112,492
36,574
724
109,304
1,006
147,608
27,336
14,303
17,567
59,206
319,306
December 31, 2021
Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Fair Value
(in thousands)
75,258 $
850
76,108
18,046
28,869
3,952
217,160
268,027
57,762
14,941
37,664
1,007
111,374
455,509 $
— $
—
—
—
101
—
2
103
160
6
—
12
178
281 $
— $
—
—
—
(7)
—
(163)
(170)
(182)
(36)
(136)
—
(354)
(524) $
75,258
850
76,108
18,046
28,963
3,952
216,999
267,960
57,740
14,911
37,528
1,019
111,198
455,266
(1) Excludes cash of $61.2 million.
(2) 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.
The following table summarizes the gross unrealized losses and fair value of the Company's marketable securities that were in an unrealized loss
position aggregated by length of time:
Less than 12 months
Fair value
Gross
unrealized
losses
Foreign government agencies
Asset-backed securities
Corporate bonds
U.S. Treasury and government agencies
Total
$
$
998 $
13,365
33,800
89,802
137,965 $
(2) $
(124)
(389)
(1,175)
(1,690) $
Less than 12 months
Fair value
Gross
unrealized
losses
Asset-backed securities
$
15,867 $
(36) $
December 31, 2022
12 months or longer
Fair value
Gross
unrealized
losses
Total
Gross
unrealized
losses
Fair value
(in thousands)
- $
1,652
26,326
36,833
64,811 $
- $
(10)
(758)
(255)
(1,023) $
998 $
15,017
60,126
126,635
202,776 $
(2)
(134)
(1,147)
(1,430)
(2,713)
December 31, 2021
12 months or longer
Fair value
Gross
unrealized
losses
(in thousands)
- $
Total
Gross
unrealized
losses
Fair value
- $
15,867 $
(36)
Corporate bonds
U.S. Treasury and government agencies
Total
$
54,143
241,816
311,826 $
(189)
(299)
(524) $
-
-
- $
-
-
- $
54,143
241,816
311,826 $
(189)
(299)
(524)
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.
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The following summarizes the fair value of marketable securities by contractual maturity:
Due within One Year
Due after One Year through Two Years
Mature over Two Years
Asset-backed securities
Total
Derivative Financial Instruments
Designated cash flow hedges
December 31, 2022
Amortized Cost
Fair Value
(in thousands)
$
$
260,629 $
43,528
2,694
15,161
322,012 $
259,376
42,272
2,631
15,027
319,306
The Company enters into foreign currency forward contracts to reduce the risk of variability in future cash flow due to foreign currency exchange rate
fluctuation from certain forecasted subscription revenue orders billed in GBP and Euro and operation expenses incurred in INR, which are designated as
cash flow hedges. Hedge effectiveness is assessed at inception and at each reporting period utilizing regression analysis. 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 December 31, 2022, a net amount of unrealized gains of $3.2 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 December 31, 2022, a net amount of unrealized loss of
$1.6 million before tax on the foreign currency forward contracts for INR reported in AOCI is expected to be reclassified into operating expenses within
the next 12 months.
Non-designated forward contracts
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. Unrealized foreign exchange gain or losses related to the non-designated forward contracts are recorded in other income
(expenses), net and offset the foreign exchange gain or loss on the underlying net monetary assets or liabilities.
The following summarizes the fair value of derivative financial instruments as of December 31, 2022 and 2021:
Assets
Foreign currency forward contracts designated as cash flow hedge
Foreign currency forward contracts not designated as hedging instruments
Total
Liabilities
Foreign currency forward contracts designated as cash flow hedge
Foreign currency forward contracts not designated as hedging instruments
Total
December 31,
2022
2021
(in thousands)
$
$
$
$
1,041 $
452
1,493 $
(2,634) $
(2,045)
(4,679) $
1,737
1,599
3,336
(181)
(207)
(388)
Derivative transactions are measured in terms of the notional amount. However, this amount is not recorded on the balance sheet and is not, when
viewed in isolation, a meaningful measure of the risk profile of the derivative instruments. The notional amount is generally not exchanged, and is used
only as the underlying basis on which the value of foreign currency exchange payments under these contracts is determined. The following summarizes the
notional amounts of our outstanding derivatives:
Foreign currency forward contracts designated as cash flow hedge
Foreign currency forward contracts not designated as hedging instruments
Total
December 31,
2022
2021
(in thousands)
10,623 $
69,972
80,595 $
9,486
56,114
65,600
$
$
The Company presents its derivative assets and derivative liabilities at gross fair values in the consolidated balance sheets. However, under the master
netting agreements with the respective counterparties of the foreign exchange contracts, subject to applicable requirements, the Company is allowed to net
settle transactions of the same currency with a single net amount payable by one party to the other. The potential offset to both assets and liabilities under
the right of set-off associated with the Company's foreign currency exchange contracts are immaterial as of December 31, 2022 and 2021. The derivatives
held by the Company are not subject to any credit contingent features negotiated with its counterparties. The Company is not required to pledge nor is
entitled to receive cash collateral related to the above contracts. The counterparties to these derivatives are large, global financial institutions that the
Company believes are creditworthy, and therefore, it does not consider the risk of counterparty nonperformance to be material.
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Table of Contents
The following summarizes the gains (losses) recognized from forward contracts and other foreign currency transactions in other income (expense),
net in the consolidated statements of operations:
Net gains (losses) from non-designated forward contracts
Other foreign currency transactions gains (losses)
Total foreign exchange gains (losses), net
Other expenses
Other income (expense), net
2022
Year Ended December 31,
2021
(in thousands)
2020
$
$
5,093 $
(6,864)
(1,771)
(267)
(2,038) $
2,452 $
(2,749)
(297)
(276)
(573) $
(1,634)
1,894
260
(253)
7
NOTE 3.
Accumulated Other Comprehensive Income (Loss)
The components and changes in accumulated other comprehensive income (loss) were as follows:
Balances at December 31, 2019
Change in unrealized gains (losses) during the period
Net gains reclassified into income during the period
Income tax benefit (provision)
Net change during the period
Balances at December 31, 2020
Change in unrealized gains (losses) during the period
Net losses reclassified into income during the period
Income tax benefit (provision)
Net change during the period
Balances at December 31, 2021
Change in unrealized gains (losses) during the period
Net gains reclassified into income during the period
Income tax benefit (provision)
Net change during the period
Balances at December 31, 2022
Available-for-sale
debt securities
Cash flow hedges
(in thousands)
Total
$
$
822 $
549
(25)
(122)
402
1,224
(1,854)
22
423
(1,409)
(185)
(2,462)
—
(58)
(2,520)
(2,705) $
340 $
(2,099)
(564)
615
(2,048)
(1,708)
2,837
933
(870)
2,900
1,192
581
(1,147)
132
(434)
758 $
1,162
(1,550)
(589)
493
(1,646)
(484)
983
955
(447)
1,491
1,007
(1,881)
(1,147)
74
(2,954)
(1,947)
The effects on income before income taxes of amounts reclassified from AOCI to the consolidated statements of operations were as follows:
Reclassification of AOCI - Available-for-sale debt securities
Other income (expense), net
Reclassification of AOCI - Cash flow hedges
Revenues
Cost of revenues
Research and development
Sales and marketing
General and administrative
Total
2022
Year Ended December 31,
2021
(in thousands)
2020
— $
(22) $
25
1,897 $
(169)
(478)
(30)
(73)
1,147 $
(1,667) $
149
492
28
65
(933) $
960
(76)
(264)
(20)
(36)
564
$
$
$
66
Table of Contents
NOTE 4.
Property and Equipment, Net
Property and equipment, net, which includes assets under finance leases, consists of the following:
Computer equipment
Computer software
Leasehold improvements
Scanner appliances
Furniture, fixtures and equipment
Total property and equipment
Less: accumulated depreciation and amortization
Property and equipment, net
December 31,
2022
2021
(in thousands)
173,832 $
25,808
21,009
15,696
6,524
242,869
(195,441)
47,428 $
161,809
25,807
21,092
16,510
6,479
231,697
(169,843)
61,854
$
$
As of December 31, 2022 and 2021, physical scanner appliances and other computer equipment that are or will be subject to leases by customers had
a net carrying value of $6.7 million and $5.3 million, respectively, including assets that had not been placed in service of $4.0 million and $1.3 million,
respectively. Depreciation and amortization expenses relating to property and equipment were $28.2 million, $28.5 million and $26.1 million for the years
ended December 31, 2022, 2021 and 2020, respectively. Assets under finance leases were acquired upon completion of lease term and placed within
computer equipment as of December 31, 2022.
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 $254.9 million and $211.0 million were recognized during the years ended December 31, 2022 and December 31,
2021, respectively, which amounts were included in the deferred revenue balances of $290.6 million and $244.0 million as of December 31, 2021 and
December 31, 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 December 31, 2022:
2023
2024
2025
2026
2027
2028 and thereafter
Total
(in thousands)
158,607
82,902
27,874
1,994
692
62
272,131
$
$
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:
Direct
Partner
Total
2022
Year Ended December 31,
2021
(in thousands)
285,382 $
204,341
489,723 $
243,389 $
167,783
411,172 $
$
$
2020
211,897
151,066
362,963
The Company utilizes partners to enable and accelerate the adoption of its cloud platform by increasing its distribution capabilities and market
awareness of its cloud platform as well as by targeting geographic regions outside the reach of its direct sales force. The Company's channel partners
maintain relationships with their customers throughout the territories in which they operate and provide their customers with services and third-party
solutions to help meet those customers’ evolving security and compliance requirements. As such, these partners may offer the Company's IT security and
compliance solutions in conjunction with one or more of their own products or services and act as a conduit through which the Company can connect with
these prospective customers to offer its solutions. For sales involving a channel partner, the channel partner engages with the prospective customer directly
and involves the Company's sales team as needed to assist in developing and closing an order. When a channel partner secures a sale, the Company sells the
associated subscription to the channel partner who in turn resells the subscription to the customer. Sales to channel partners are made at a discount and
revenues are recorded at this discounted price over the subscription terms. The Company does not have any influence or specific knowledge of its partners'
selling terms with their customers. See Note 13, "Segment Information and Information about Geographic Area" for disaggregation of revenue by
geographic area.
Deferred costs to obtain contracts are as follows:
Current
Noncurrent
December 31,
2022
2021
$
$
(in thousands)
5,018 $
10,090 $
4,223
8,391
For the years ended December 31, 2022, 2021 and 2020, the Company recognized $5.0 million, $4.0 million and $3.0 million, respectively, of
amortization expense relating to deferred costs to obtain contracts in sales and marketing expense in the 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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Table of Contents
NOTE 6.
Acquisitions
On October 4, 2022, the Company acquired certain assets of Blue Hexagon Inc., a privately held company incorporated in Delaware, for $10 million
in cash, of which $8.5 million was paid on the acquisition date and the remaining $1.5 million will be due eighteen months from the acquisition date,
subject to potential adjustment from possible indemnity claims. In addition, the Company assumed $1.4 million deferred revenue. Blue Hexagon's AI/ML-
driven network detection enables the Company to leverage its cloud platform with AI/machine learning to uncover behavior patterns including active
vulnerability exploitation, identification of advanced network threats, and adaptive risk mitigation across all assets and application. We accounted for this
transaction as an asset acquisition, as substantially all of the fair value is concentrated in developed technology acquired. The Company incurred $0.6
million transaction costs which is included as the cost of acquiring the intangible assets. The Company recognized intangible assets of $11.5 million for
developed technology and $0.4 million for assembled workforce, which will be amortized over five years and two years, respectively.
On August 19, 2021, the Company acquired certain developed technology intangible assets of TotalCloud, a privately held company incorporated in
India, for a total cash consideration of $1.2 million, of which $1.1 million was paid on the acquisition date and the remaining $0.1 million was deferred and
paid in August 2022. TotalCloud's technology strengthens the Company's cloud security solution by allowing customers to build user-defined workflows
for custom policies and execute them on-demand for simplified security and compliance. The acquired intangible assets will be amortized over five years.
On July 24, 2020, the Company acquired certain intangible assets of Spell Security, a privately held company incorporated in India, for a total cash
consideration of $1.5 million, of which $1.3 million was paid on the acquisition date and the remaining $0.2 million was deferred and paid in October
2021. Spell Security’s technology expands the Company's endpoint behavior detection, threat hunting, malware research and multi-layered response
capabilities for its EDR application. The Company recognized intangible assets of $1.0 million for developed technology and $0.5 million for non-
compete agreements, which will be amortized over four and two years, respectively.
There were no changes in the carrying amount of goodwill for the years ended December 31, 2022 and 2021.
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NOTE 7.
Intangible Assets, Net
Intangible assets consist primarily of developed technology and patent licenses acquired from business or asset acquisitions. Acquired intangibles are
amortized on a straight-line basis over the respective estimated useful lives of the assets.
The carrying values of intangible assets are as follows:
(in thousands)
Developed technology
Patent licenses
Non-compete agreements
Assembled workforce
Total intangibles subject to amortization
Intangible assets not subject to amortization
Total intangible assets, net
(in thousands)
Developed technology
Patent licenses
Non-compete agreements
Total intangibles subject to amortization
Intangible assets not subject to amortization
Total intangible assets, net
Weighted
Average Life
(Years)
4.6
14.0
2.0
2.0
Weighted
Average
Remaining
Life (Years)
1.4 $
1.7
—
1.7
$
Weighted
Average Life
(Years)
4.5
14.0
2.0
Weighted
Average
Remaining
Life (Years)
0.9 $
2.7
0.6
$
December 31, 2022
Cost
40,141 $
1,387
500
359
42,387 $
Accumulated
Amortization
(27,860) $
(1,221)
(500)
(45)
(29,626) $
$
December 31, 2021
Cost
28,556 $
1,387
500
30,443 $
Accumulated
Amortization
(22,463) $
(1,121)
(354)
(23,938)
$
Net Book
Value
12,281
166
—
314
12,761
40
12,801
Net Book
Value
6,093
266
146
6,505
40
6,545
Intangible assets amortization expenses were $5.7 million, $6.7 million and $6.3 million for the years ended December 31, 2022, 2021 and 2020,
respectively, which were recorded in the consolidated statements of operations.
As of December 31, 2022, the Company expects amortization expense in future periods to be as follows:
2023
2024
2025
2026
2027
Total expected future amortization expense
69
(in thousands)
3,085
2,904
2,557
2,477
1,738
12,761
$
$
Table of Contents
NOTE 8.
Leases
The Company leases certain offices, computer equipment and its shared cloud platform 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 $14.9 million, $16.8 million and $16.7 million for the years ended December 31, 2022, 2021 and 2020, respectively.
Supplemental cash flow information related to operating leases was as follows:
Cash payments included in the measurement of lease liabilities
Lease liabilities arising from obtaining right-of-use assets
$
$
15,751 $
8,669 $
14,646 $
4,110 $
13,403
15,837
The weighted average remaining lease term and the weighted average discount rate of the Company's operating leases were as follows:
2022
Year Ended December 31,
2021
(in thousands)
2020
Weighted average remaining lease term (years)
Weighted average discount rate
Maturities of the Company's operating lease liabilities as of December 31, 2022 are as follows:
2023
2024
2025
2026
2027
2028 and thereafter
Total minimum lease payments
Less: interest
Present value of net minimum lease payments
Less: lease liabilities, current
Lease liabilities, noncurrent
70
December 31,
2022
2021
3.7
5.2%
4.5
4.8%
(in thousands)
14,940
13,460
7,715
4,498
4,353
1,465
46,431
(4,250)
42,181
(13,060)
29,121
$
$
Table of Contents
NOTE 9.
Commitment and Contingencies
Purchase Obligation
The Company has entered into agreements to purchase goods and services in the ordinary course of business. As of December 31, 2022, these
remaining purchase commitments for future periods are as follows:
2023
2024
2025
2026
2027
Total purchase commitments
Indemnifications
(in thousands)
12,862
13,261
12,597
11,591
14,091
64,402
$
$
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.
Legal Proceedings
From time to time the Company may become involved in legal proceedings or be subject to claims arising in the ordinary course of our business. The
Company records a provision for a liability when it is both probable that a liability has been incurred and the amount can be reasonably estimated. Legal
expenses related to such matters are expensed as incurred. The Company provides disclosure if it is reasonably possible that a loss has been incurred and a
range of loss or possible loss can be reasonably estimated. Significant judgment is required to determine both probability and the estimated amount. The
Company reviews these provisions at least quarterly and adjust these provisions to reflect the impact of negotiations, settlements, rulings, advice of legal
counsel, and updated information.
As of December 31, 2022, the Company had accruals of $1.5 million in accrued liabilities for a matter, we believe, that has losses that are
probable and can be reasonably estimated. 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.
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NOTE 10.
Stockholders' Equity and Stock-based Compensation
Preferred Stock
Effective October 3, 2012, the Company is authorized to issue 20.0 million shares of undesignated preferred stock with a par value of $0.001 per
share. Each series of preferred stock will have such rights and preferences including dividend rights, dividend rate, conversion rights, voting rights, rights
and terms of redemption (including sinking fund provisions), redemption price, and liquidation preferences as determined by the board of directors. As of
December 31, 2022, and 2021, there were no issued or outstanding shares of preferred stock.
Common Stock
Equity Incentive Plan
2000 Equity Incentive Plan
Under the 2000 Equity Incentive Plan (“2000 Plan”), the Company was authorized to grant to eligible participants either incentive stock options
(“ISOs”) or non-statutory stock options (“NSOs”). The ISOs were granted at a price per share not less than the fair market value at the date of grant. The
NSOs were granted at a price per share not less than 85% of the fair market value at the date of grant. Options granted generally vest over a period of up to
four years, with a maximum term of ten years. The 2000 Plan was terminated in connection with the closing of the Company's initial public offering, and
accordingly, no shares are currently available for grant under the 2000 Plan. The 2000 Plan continues to govern outstanding awards granted thereunder.
2012 Equity Incentive Plan
The 2012 Equity Incentive Plan (“Previous 2012 Plan”) was adopted and approved in September 2012 and became effective on September 26, 2012.
Under the Previous 2012 Plan, the Company is authorized to grant to eligible participant’s ISOs, NSOs, stock appreciation rights (“SARs”), restricted stock
awards (“RSAs”), RSUs, performance units and performance shares. The number of shares of common stock available for issuance under the Previous
2012 Plan is subject to an annual increase on January 1 of each year by an amount equal to the least of 3,050 thousand shares, 5% of the outstanding shares
of stock as of the last day of the immediately preceding fiscal year or an amount determined by the board of directors. For the year ended December 31,
2022, 1,956 thousand shares were added to the Previous 2012 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 2012 Equity Incentive 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 of 9,689 thousand
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
December 31, 2022, 2,351 thousand shares are available for future grants. Options may be granted with an exercise price that is at least equal to the fair
market value of the Company's stock at the date of grant and are exercisable when vested. Options and RSU's granted generally vest over a period of up to
four years. ISOs may only be granted to employees and any subsidiary corporations' employees. All other awards may be granted to employees, directors
and consultants and subsidiary corporations' employees and consultants. Options, SARs, RSUs, performance units and performance awards may be granted
with vesting terms as determined by the board of directors and expire no more than ten years after the date of grant or earlier if employment or service is
terminated.
2021 Employee Stock Purchase Plan
On June 9, 2021, the Company’s stockholders approved the 2021 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). As of December 31, 2022, 555 thousand shares are available for future purchase.
Stock-based Compensation
The following table shows a summary of the stock-based compensation expenses included in the consolidated statements of operations for the years
ended December 31, 2022, 2021 and 2020:
Cost of revenues
Research and development
Sales and marketing
General and administrative
Total stock-based compensation
2022
Year Ended December 31,
2021
(in thousands)
2020
$
$
5,305 $
14,585
9,837
23,681
53,408 $
3,782 $
10,750
6,323
46,724
67,579 $
2,767
13,502
5,785
17,981
40,035
The income tax benefit related to the stock-based compensation expenses was $8.3 million, $6.2 million and $5.3 million for the years ended
December 31, 2022, 2021 and 2020, respectively. As of December 31, 2022, the Company had unrecognized stock-based compensation expenses of
$24.5 million, $92.2 million and $0.3 million related to options, RSUs and ESPP, respectively, which are expected to be recognized over weighted-average
periods of 2.9 years, 2.8 years and 0.1 years, respectively.
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Performance-Based Stock Options and Restricted Stock Units
On December 21, 2018, the Compensation and Talent committee of the Company's board of directors (“Compensation Committee”) granted the
equity award for 2019 to the Company’s former chief executive officer, Philippe Courtot (“Mr. Courtot”). The first portion of the award consisted of 56
thousand RSUs that were scheduled to vest in 16 quarterly increments beginning on January 1, 2019. The second portion of the award consisted of a target
number of 33 thousand PSUs, which were scheduled to vest at the end of the three-year performance period from January 2019 through December 2021.
The actual number of PSUs eligible to vest ranged from 0% to 200% of the target number, depending on the level of achievement of goals related to
revenue growth during the three-year performance period from January 2019 through December 2021 and Adjusted EBITDA margin for the fiscal year of
2021. The third portion of the award consisted of a target number of 33 thousand PSUs, one third of which (11 thousand target PSUs) was scheduled to vest
at the end of each fiscal year of 2019, 2020 and 2021. The actual number of PSUs eligible to vest at each vesting date ranged from 0% to 200% of the target
number, depending on the level of achievement of goals related to revenue growth and Adjusted EBITDA margin for each of those years.
On November 2, 2019, the Compensation Committee granted the equity award for 2020 to Mr. Courtot. The first portion of the award consisted of 49
thousand RSUs that were scheduled to vest in 16 quarterly installments beginning on December 1, 2019. The second portion of the award consisted of a
target number of 124 thousand PSOs, which were scheduled to vest at the end of the three-year performance period from January 2020 through December
2022. The actual number of PSOs eligible to vest ranged from 0% to 200% of the target number, depending on the level of achievement of goals related to
revenue growth and free cash flow per share growth during the performance period.
On December 10, 2020, the Compensation Committee granted the equity award for 2021 to Mr. Courtot. The first portion of the award consisted of
69 thousand RSUs that were scheduled to vest in 16 quarterly installments beginning on November 1, 2020. The second portion of the award consisted of a
target number of 224 thousand PSOs, which were scheduled to vest at the end of the three-year performance period from January 2021 through December
2023. The actual number of PSOs eligible to vest ranged from 0% to 200% of the target number, depending on the level of achievement of goals related to
revenue growth and free cash flow per share growth during the performance period.
The vesting of the above awards was conditioned on Mr. Courtot’s continued service through the vesting dates or, for PSOs and PSUs, the dates that
performance is certified in addition to the achievement of performance goals. If Mr. Courtot’s employment was terminated (a) by reason of death or
disability or (b) by the Company for reasons other than cause or good reason within 12 months following a change in control, then 100% of any unvested
portions of these awards would vest, with any vesting in connection with change in control terminations conditioned upon the effectiveness of a release of
claims in favor of the Company.
In February 2021 and 2020, 22 thousand shares (representing 200% of target number of awards) and 15 thousand shares (representing 135% of target
number of awards) under the equity award for 2019 for Mr. Courtot, vested as a result of the Company achieving the corresponding level of performance
goals for 2020 and 2019, respectively.
On March 19, 2021, 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 grant agreements of the equity awards for 2021, 2020 and 2019 for Mr.
Courtot, all remaining outstanding RSUs, PSUs and PSOs under these grants were subject to accelerated vesting and became fully vested at 100% of the
target number of awards as of the date of his termination of employment, which consist of 127 thousand RSUs, 44 thousand PSUs and 348 thousand PSOs.
As a result, the Company recognized an additional $27.3 million of stock-based compensation expense due to the accelerated vesting in the consolidated
statements of operations for the year ended December 31, 2021.
On April 27, 2021, the Compensation Committee granted to the Company’s current president and chief executive officer an equity award consisting
of certain RSUs and a target number of 10 thousand 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 the PSUs eligible to vest range from 0% to 200% of the target number, depending on the level of
achievement of goals related to revenue growth and free cash flow per share growth during the performance period. If the Company's current 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.
On October 28, 2021, the Compensation Committee approved to certain executive officers of the Company equity awards consisting of certain RSUs
and an aggregate target number of 73 thousand PSUs. The target PSUs are scheduled to vest in three equal annual installments over a three-year period
from January 2022 through December 2024. Each annual installments at 200% of the annual target will be considered granted when the performance
targets for the corresponding performance year are determined and approved. The actual number of the PSUs eligible to vest each year range from 0% to
200% of the annual target number, depending on the level of achievement of goals related to revenue growth and adjusted EBITDA margin corresponding
to that year. The vesting and release of the first and second installment 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
installment. 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
installments along with any target number of unvested PSUs for any remaining installments will vest immediately.
On October 27, 2022, the Compensation Committee approved to certain executive officers of the Company equity awards consisting of certain RSUs
and an aggregate target number of 86 thousand PSUs. The target PSUs are scheduled to vest in three equal annual installments over a three-year period
from January 2023 through December 2025. Each annual installments at 200% of the annual target will be considered granted when the performance
targets for the corresponding performance year is determined and approved. The actual number of the PSUs eligible to vest each year range from 0% to
200% of the annual target number, depending on the level of achievement of goals related to revenue growth and adjusted EBITDA margin corresponding
to that year. The vesting and release of the first and second installment 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
installment. 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
installments along with any target number of unvested PSUs for any remaining installments will vest immediately.
For the years ended December 31, 2022, 2021 and 2020, stock-based compensation expenses of $[nil], $13.3 million and $0.2 million for PSOs,
respectively, and $3.9 million, $5.3 million and $2.8 million for PSUs, respectively, were recognized.
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Stock Options
The weighted-average grant date fair value of the Company’s stock options granted for the years ended December 31, 2022, 2021 and 2020 was
$50.32, $41.23 and $35.49, respectively, using the Black-Scholes-Merton option-pricing model based on the following assumptions:
Expected term (in years)
Volatility
Risk-free interest rate
Dividend yield
2022
Year Ended December 31,
2021
4.3 to 4.4
40% to 43%
1.7% to 4.2%
—
5.2 to 5.5
38% to 41%
0.5% to 1.2%
—
2020
4.5 to 5.5
38% to 43%
0.3% to 1.4%
—
The expected term of the options is based on evaluations of historical and expected future employee exercise behavior. The risk-free interest rate is
based on the U.S. Treasury rates at the date of grant with maturity dates equal to the expected term at the grant date. The volatility was estimated using the
historical volatility derived from the Company's common stock. The Company has not historically declared any dividends and does not expect to in the
future.
A summary of the Company’s stock option activity is as follows:
Balance as of December 31, 2021
Granted
Exercised
Canceled
Balance as of December 31, 2022
Vested and expected to vest - December 31, 2022
Exercisable - December 31, 2022
Weighted
Average
Exercise Price
Weighted
Average
Remaining
Contractual
Life
(Years)
Aggregate
Intrinsic
Value
(in thousands)
130,791
6.0 $
6.5 $
6.1 $
4.4 $
58,024
57,690
56,062
66.05
133.43
52.29
114.21
87.59
81.95
56.25
Outstanding
Options
(in thousands)
1,838 $
593 $
(468) $
(156) $
1,807 $
1,583 $
981 $
The total intrinsic value of options exercised for the years ended December 31, 2022, 2021 and 2020 was $39.8 million, $42.5 million and
$77.5 million, respectively. Intrinsic value of an option is the difference between the fair value of the Company’s common stock at the time of exercise and
the exercise price paid.
Restricted Stock Units
A summary of the Company’s RSU activity is as follows:
Balance as of December 31, 2021
Granted
Vested
Forfeited
Outstanding RSUs
(in thousands)
Weighted Average
Grant Date Fair
Value
952 (1) $
711 (2) $
$
(330)
(150)
$
1,183 (3) $
$
105.20
137.50
100.27
117.63
124.42
122.55
Balance as of December 31, 2022
Outstanding and expected to vest - December 31, 2022
(1) Included 68 thousand shares of PSUs granted to certain executive officers in 2021 for performance year 2022 at 200% vest level.
(2) Included 58 thousand shares of PSUs granted to certain executive officers in 2022 and 49 thousand shares of PSU granted in 2021 as a result of
defining the level of performance goals for performance year 2023.
(3) Included 175 thousand shares of PSUs granted to certain executive officers in 2022 and 2021.
929
The aggregate fair value of RSUs vested for the years ended December 31, 2022, 2021 and 2020 was $43.9 million, $59.5 million and $46.5 million,
respectively.
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Employee Stock Purchase Plan
The weighted-average grant date fair value of the Company’s ESPP for the year ended December 31, 2022 was $39.14 using the Black-Scholes-
Merton option-pricing model based on the following assumptions:
Expected term (in years)
Volatility
Risk-free interest rate
Dividend yield
Year Ended
December 31,
2022
0.5
41.1% to 50.1%
0.7% to 3.1%
—
The expected term of the ESPP represents the six-month offering period. The risk-free interest rate is based on the U.S. Treasury rates at the date of
grant with maturity dates equal to the expected term at the grant date. The volatility was estimated using the historical volatility derived from the
Company's common stock. The Company has not historically declared any dividends and does not expect to in the future.
Share Repurchase Program
The Company's share repurchase program was authorized by the board of directors as follows:
Announcement Date
February 12, 2018
October 30, 2018
October 30, 2019
May 7, 2020
February 10, 2021
November 3, 2021
May 4, 2022
Total as of December 31, 2022
Authorized Dollar
Value
(in millions)
$
$
100.0
100.0
100.0
100.0
100.0
200.0
200.0
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 retained
earnings.
For the years ended December 31, 2022, 2021 and 2020, the Company repurchased 2.5 million shares, 1.1 million shares and 1.3 million shares of its
common stock for $317.3 million, $130.0 million and $126.7 million, respectively. As of December 31, 2022, $154.5 million remained available for share
repurchases pursuant to the Company's share repurchase program.
On February 9, 2023, the Company announced that its Board of Directors authorized an additional $100.0 million under the share repurchase
program, increasing the total amount of authorized repurchase to $1.0 billion.
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NOTE 11.
Employee Benefits Plan
The Company’s 401(k) Plan was established in 2000 to provide retirement and incidental benefits for its employees. As allowed under section 401(k)
of the Internal Revenue Code, the 401(k) Plan provides tax-deferred salary deductions for eligible employees. Contributions to the 401(k) Plan are limited
to a maximum amount as set periodically by the Internal Revenue Service. For the years ended December 31, 2022, 2021 and 2020, the Company made
contributions to the 401(k) Plan of $3.5 million, $2.4 million and $1.3 million, respectively.
The Company contributes to a Provident Fund Plan for its employees in India, which is a defined contribution plan set up in accordance with local
labor and tax laws. Gratuity is also paid by the Company to eligible employees in India in accordance with Payment of Gratuity Act, 1972. For the years
ended December 31, 2022, 2021 and 2020, the Company contributed $2.0 million, $1.7 million and $1.4 million, respectively, to those plans.
NOTE 12.
Income Taxes
The Company’s geographical breakdown of income before income taxes is as follows:
Domestic
Foreign
Income before income taxes
Income tax provision consists of the following:
Current
Federal
State
Foreign
Current income tax provision
Deferred
Federal
State
Foreign
Deferred income tax provision (benefit)
Income tax provision
2022
Year Ended December 31,
2021
(in thousands)
2020
122,013 $
11,687
133,700 $
80,472 $
8,925
89,397 $
94,099
7,938
102,037
2022
Year Ended December 31,
2021
(in thousands)
2020
35,286 $
6,269
4,606
46,161
(17,097)
(3,055)
(301)
(20,453)
25,708 $
20,135 $
4,324
3,701
28,160
(7,342)
(1,722)
(659)
(9,723)
18,437 $
1,944
1,438
3,571
6,953
4,239
26
(753)
3,512
10,465
$
$
$
$
The reconciliation of the statutory federal income tax rate to the Company’s effective tax rate is as follows:
Federal statutory rate
State taxes
Stock-based compensation
Excess tax benefits related to stock-based compensation
Foreign source income
Change in valuation allowance
Foreign-derived intangible income deduction
Federal and state research and development credit
Other
Income tax provision
76
Year Ended December 31,
2021
2022
2020
21.0%
2.3
3.4
(5.2)
3.8
0.3
(4.9)
(1.3)
(0.2)
19.2%
21.0%
3.1
10.3
(5.4)
0.4
0.2
(7.0)
(1.9)
(0.1)
20.6%
21.0%
1.6
4.8
(13.8)
0.2
0.8
(1.7)
(2.6)
—
10.3%
Table of Contents
Deferred Income Taxes
Deferred income taxes reflect the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The components of the Company’s deferred tax assets and liabilities are as follows:
Deferred tax assets
Research and development credit carryforwards
Accrued liabilities
Deferred revenues
Operating lease liabilities
Intangible assets
Stock-based compensation
Capitalized R&D
Other
Gross deferred tax assets
Valuation allowance
Total deferred tax assets
Deferred tax liabilities
Fixed assets
Operating leases - right of use asset
Deferred commissions
Total deferred tax liabilities
Net deferred tax assets
December 31,
2022
2021
(in thousands)
10,957 $
3,677
5,766
10,667
3,465
4,691
30,234
2,195
71,652
(12,476)
59,176
(1,745)
(8,359)
(3,660)
(13,764)
45,412 $
10,743
1,655
7,250
11,777
2,988
4,085
9,389
3,920
51,807
(11,364)
40,443
(3,320)
(9,010)
(3,026)
(15,356)
25,087
$
$
The realization of deferred tax assets is dependent upon the generation of sufficient taxable income of the appropriate character in future periods. The
Company regularly assesses the ability to realize its deferred tax assets and establishes a valuation allowance if it is more-likely than-not that some portion,
or all, of the deferred tax assets will not be realized. The Company weighs all available positive and negative evidence, including its earnings history and
results of recent operations, scheduled reversals of deferred tax liabilities, projected future taxable income, and tax planning strategies. Due to the weight of
objectively verifiable negative evidence, it is more-likely-than-not that its California deferred tax assets will not be realized as of December 31, 2022.
Additionally, due to a lack of sufficient future income of the appropriate character, certain U.S. federal and state deferred tax assets are not more-likely-
than-not to be realized. Accordingly, the Company has recorded a valuation allowance of $12.5 million and $11.4 million against such deferred tax assets
as of December 31, 2022 and 2021, respectively. The increase of $1.1 million in valuation allowance was mainly associated with the California research
and development credit generated during the year ended December 31, 2022 and unrealized loss on available for sale securities that will not likely be
realized in the foreseeable future.
As of December 31, 2022, the Company had $16.2 million of state research and development credit carryforwards. State research and development
credits do not expire. As of December 31, 2022, the Company had foreign tax credit carryforwards of $0.9 million which begin to expire in 2028.
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The following table summarizes the activity related to the Company’s unrecognized tax benefits:
Unrecognized tax benefits beginning balance
Gross increase for tax positions of prior years
Gross decrease for tax positions of prior years
Gross increase for tax positions of current year
Lapse of statute of limitations
Total unrecognized tax benefits
2022
Year Ended December 31,
2021
(in thousands)
2020
$
$
9,676 $
89
—
777
—
10,542 $
8,855 $
—
(25)
846
—
9,676 $
7,778
4
—
1,258
(185)
8,855
The unrecognized tax benefits, if recognized, would impact the income tax provision by $5.3 million, $4.9 million and $4.6 million as of December
31, 2022, 2021 and 2020, respectively. The remaining amount would result in the recognition of a corresponding deferred tax asset that is then offset by a
full valuation allowance. As of December 31, 2022, the Company does not believe that its estimates, as otherwise provided for, on such tax positions will
significantly increase or decrease within the next twelve months. The Company has elected to include interest and penalties as a component of income tax
expense. The amounts were not material for the years ended December 31, 2022, 2021 and 2020.
The Company files income tax returns in the United States, including various state jurisdictions. The Company’s subsidiaries file tax returns in
various foreign jurisdictions. The tax years 2001 through 2021 remain open to examination by the major taxing jurisdictions in which the Company is
subject to tax. The Company is also currently subject to tax audits in various jurisdictions. The Company believes that an adequate provision has been
made for any adjustments that may result from tax examinations. However, the outcome of tax audits cannot be predicted with certainty. If any issues
addressed in the Company's tax audits are resolved in a manner inconsistent with its expectations, the Company could be required to adjust its income tax
provision in the period such resolution occurs.
As of December 31, 2022, the Company has undistributed earnings in certain foreign subsidiaries that the Company has indefinitely reinvested
outside the United States. As a result, the Company has not provided for deferred tax liabilities on those earnings. The Company may be required to pay
additional income taxes if the Company repatriates those earnings in the future.
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NOTE 13.
Segment and Geographic Area Information
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:
United States
Foreign
Total revenues
2022
Year Ended December 31,
2021
(in thousands)
2020
$
$
292,291 $
197,432
489,723 $
252,428 $
158,744
411,172 $
229,484
133,479
362,963
Long-lived assets, which consist of Property and equipment, net and Operating leases - right of use asset, by geographic area, are as follows:
United States
India
Rest of world
Total Long-lived Assets
NOTE 14.
Net Income Per Share
The computations for basic and diluted net income per share are as follows:
Numerator:
Net income
Denominator:
Basic weighted average shares
Effect of potentially dilutive shares:
Stock options
Restricted stock units
Employee stock purchase plan
Diluted weighted average shares
Net income per share:
Basic
Diluted
December 31,
2022
2021
(in thousands)
58,775 $
16,057
6,348
81,180 $
66,440
20,401
12,029
98,870
$
$
2022
Year Ended December 31,
2021
(in thousands, except per share data)
2020
$
107,992 $
70,960 $
38,453
39,030
672
216
3
39,344 $
2.81 $
2.74 $
863
224
1
40,118 $
1.82 $
1.77 $
$
$
$
91,572
39,167
1,262
311
—
40,740
2.34
2.25
Potentially dilutive shares not included in the calculation of diluted net income per share because doing so would be anti-dilutive are as follows:
Stock options
Restricted stock units
Employee stock purchase plan
Total anti-dilutive shares
2022
Year Ended December 31,
2021
(in thousands)
2020
686
90
5
781
534
61
—
595
532
52
—
584
79
Table of Contents
Item 9.
Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A.
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 December 31, 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 December 31, 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.
Management's Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules
13a-15(f) and 15d-15(f) of the Exchange Act. 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 for external purposes in accordance with U.S. GAAP. Our internal control
over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that in reasonable detail accurately and fairly
reflect the transactions and dispositions of our assets, (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with U.S. GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of our
management and directors, and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition
of our assets that could have a material effect on our financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we
conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2022 based on the criteria established in the
2013 Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, or COSO. Based on our
evaluation under the criteria set forth in the 2013 Internal Control - Integrated Framework issued by the COSO, our management concluded our internal
control over financial reporting was effective as of December 31, 2022.
The effectiveness of the Company's internal control over financial reporting as of December 31, 2022 has been audited by Grant Thornton LLP, an
independent registered public accounting firm, as stated in its report, which is included in Item 8 of this Annual Report on Form 10-K.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-
15(d) of the Exchange Act that occurred during the fourth quarter ended December 31, 2022 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
Item 9B.
Other Information
None.
Item 9C.
Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not applicable.
80
Table of Contents
Item 10.
Directors, Executive Officers and Corporate Governance
Executive Officers and Directors
PART III
Except as set forth below, the information required by this item is incorporated by reference to our Proxy Statement for our 2023 Annual Meeting of
Stockholders to be filed with the SEC within 120 days after the end of the fiscal year ended December 31, 2022.
Codes of Business Conduct and Ethics
Our Board of Directors has adopted a code of business conduct and ethics that applies to all of our employees, officers and directors, including our
Chief Executive Officer, Chief Financial Officer and other executive and senior financial officers. The code of business conduct and ethics is available on
our website. We expect that, to the extent required by law, any amendments to the code, or any waivers of its requirements, will be disclosed on our
website. We intend to disclose any waiver to the provisions of the code of business conduct and ethics that applies specifically to directors or executive
officers by filing such information on a Current Report on Form 8-K with the SEC, to the extent such filing is required by the NASDAQ Stock Market's
listing requirements; otherwise, we will disclose such waiver by posting such information on our website.
Item 11.
Executive Compensation
The information required by this item is incorporated by reference to our Proxy Statement for our 2023 Annual Meeting of Stockholders to be filed
with the SEC within 120 days after the end of the fiscal year ended December 31, 2022.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this item with respect to Item 403 of Regulation S-K regarding security ownership of certain beneficial owners and
management is incorporated by reference to our Proxy Statement for our 2023 Annual Meeting of Stockholders to be filed with the SEC within 120 days
after the end of the fiscal year ended December 31, 2022. For the information required by this item with respect to Item 201(d) of Regulation S-K regarding
securities authorized for issuance under equity compensation plans, see “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities—Securities Authorized for Issuance under Equity Compensation Plans” in Item 5 of this Annual Report on Form 10-K.
Item 13.
Certain Relationships and Related Transactions, and Director Independence
The information required by this item is incorporated by reference to our Proxy Statement for our 2023 Annual Meeting of Stockholders to be filed
with the SEC within 120 days after the end of the fiscal year ended December 31, 2022.
Item 14.
Principal Accounting Fees and Services
The information required by this item is incorporated by reference to our Proxy Statement for our 2023 Annual Meeting of Stockholders to be filed
with the SEC within 120 days after the end of the fiscal year ended December 31, 2022.
81
Table of Contents
Item 15.
Exhibits and Financial Statement Schedules
PART IV
(a)(1) Financial Statements - The financial statements filed as part of this Annual Report on Form 10-K are listed on the Index to Consolidated
Financial Statements in Item 8.
(a)(2) Financial Statement Schedules - All financial statement schedules have been omitted since the required information is not applicable or has
been included in the consolidated financial statements and accompanying notes included in this Form 10-K.
(b) Exhibits
Exhibit
Number Description
Filed
Herewith
Incorporated by Reference
Exhibit
No.
File No.
Form
3.1
Amended and Restated Certificate of Incorporation of Qualys, Inc.
S-1/A
333-182027
3.3
3.2
Amended and Restated Bylaws of Qualys, Inc.
8-K
001-35662
3.1
4.1
Form of common stock certificate.
S-1/A
333-182027
4.1
Filing Date
September 12,
2012
November 2,
2022
September 12,
2012
4.2
Description of Registrant’s securities
10-K
001-35662
4.2
February 21, 2020
10.1*
2000 Equity Incentive Plan, as amended, and the form of stock option
agreement thereunder.
10.2*
Qualys, Inc. 2012 Equity Incentive Plan, as amended, restated and extended.
10.3*
Qualys, Inc. 2021 Employee Stock Purchase Plan
S-1
333-182027
10.1
June 8, 2012
8-K
8-K
001-35662
10.1
June 10, 2022
001-35662
10.1
June 11, 2021
10.4*
Offer Letter, between Qualys, Inc. and Sumedh S. Thakar, dated January 20,
2003.
S-1
333-182027
10.5
June 8, 2012
10.5*
Offer Letter, between Qualys, Inc. and Joo Mi Kim, dated May 21, 2020.
10.6*
Offer Letter, between Qualys, Inc. and Bruce K. Posey, dated May 8, 2012.
8-K
S-1
001-35662
10.1
May 26, 2020
333-182027
10.9
June 8, 2012
10.7*
Offer Letter, between Qualys, Inc. and Allan Peters, dated April 26, 2021.
10-K
001-35662
10.7 February 22, 2022
10.8*
Form of Performance-Based Restricted Stock Unit Agreement for Executives
under the 2012 Equity Incentive Plan, dated October 28, 2021
10-K
001-35662
10.8 February 22, 2022
10.9*
Form of director and executive officer indemnification agreement.
S-1/A
333-182027 10.10 August 10, 2012
10.10*
Qualys, Inc. Executive Performance Bonus Plan.
Schedule 14A,
Appendix A
001-35662 N/A
April 25, 2016
82
Table of Contents
Exhibit
Number Description
10.11*# Qualys, Inc. 2022 Corporate Bonus Plan.
Filed
Herewith
X
Incorporated by Reference
Exhibit
No.
File No.
Form
Filing Date
10.12
Lease Agreement, between Qualys, Inc. and Hudson Metro Center, LLC,
dated October 14, 2016.
8-K
001-35662
10.1 October 19, 2016
21.1
List of subsidiaries of Qualys, Inc.
X
23.1
31.1
31.2
32.1
32.2
Consent of Grant Thornton LLP, independent registered public accounting
firm.
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.
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.
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.
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.
101.LAB
Inline XBRL Taxonomy Extension Labels Linkbase Document.
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document.
X
X
X
X
X
X
X
X
X
X
X
104
Cover Page Interactive Data File - formatted in Inline XBRL and included as
Exhibit 101.
X
* Indicates a management contract or compensatory plan or arrangement.
† Portions of this exhibit have been omitted due to a determination by the
Securities and Exchange Commission that these portions should be granted
confidential treatment.
# Portions of the exhibit, marked by brackets, have been omitted because the
omitted information (i) is not material and (ii) would likely cause competitive
harm if publicly disclosed.
83
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Annual Report on Form 10-
K to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Foster City, State of California on February 23, 2023.
QUALYS, INC.
By:
/s/ SUMEDH THAKAR
Sumedh Thakar
President and Chief Executive Officer
(principal executive officer)
84
Table of Contents
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant
and in the capacities indicated:
Signature
Title
Date
/s/ SUMEDH THAKAR
Sumedh Thakar
/s/ JOO MI KIM
Joo Mi Kim
/s/ JEFFREY P. HANK
Jeffrey P. Hank
/s/ WILLIAM BERUTTI
William Berutti
/s/ GENERAL PETER PACE
General Peter Pace
/s/ KRISTI M. ROGERS
Kristi M. Rogers
/s/ WENDY M. PFEIFFER
Wendy M. Pfeiffer
/s/ JOHN A. ZANGARDI
John A. Zangardi
Director, President and Chief Executive Officer (principal
executive officer)
February 23, 2023
Chief Financial Officer (principal financial officer and principal
accounting officer)
February 23, 2023
Chair of the Board of Directors
February 23, 2023
Director
Director
Director
Director
Director
85
February 23, 2023
February 23, 2023
February 23, 2023
February 23, 2023
February 23, 2023
[***] Certain information in this document has been excluded because it both (i) is not material and (ii) would likely cause competitive harm to
the registrant if publicly disclosed.
Exhibit 10.11
1. Purpose. The purpose of this 2022 Corporate Bonus Plan (the “Plan”) is to motivate and encourage the employees of Qualys (the
“Company”) to achieve its stated goals and to assist the Company in attracting, motivating and retaining employees on a competitive basis.
2022 CORPORATE BONUS PLAN
2. Eligibility
(a) An officer or employee of the Company is designated as a participant in the Plan (“Participant”) and shall be eligible to participate
in the Plan if he or she is a regular full- time or regular part-time employee (working greater than 20 hours a week) and he or she is not already
participating in a separate Compensation Plan or MBO plan.
(b) New Hires. New employees hired in the first or second month of a quarter will be eligible to participate in the Plan for that
quarter, such participation will be prorated based on the number of days employed in the quarter.
(c) Termination of Employment. To be eligible for the bonus, the employee must be employed as of the last day of the quarter.
(d) Absence during Performance Period. If a Participant is absent for a period of more than one-half of the scheduled workdays
during a quarter, for any reason, the Participant’s bonus payment will be prorated based on the number of days the Participant actually worked compared
to the total number of scheduled work days during that quarter.
3. Bonus Criteria
bonus period.
(a) Bonus Period. The Bonus Plan is effective from January 1, 2022 through December 31, 2022. Each calendar quarter is a separate
(b) Bonus Level. A Participant’s level of participation in the Plan is set based on their grade level as determined by the Human
Resources Department and is applied to the Participant’s base salary as of the last day of that quarter to determine the bonus amount.
EPS (as defined below).
(c) Objective Criteria: The Plan payments will be based on ASV (as defined below), Revenue (as defined below) and Non-GAAP
(1) ASV. The stated goal is the growth in company-wide bookings as represented by Annual Subscription Value (“ASV”) for
the current quarter over the same quarter of the prior year. ASV is the sum of one year’s worth of subscribed revenues to Qualys for all new, renewal and
upsell subscriptions contracted by customers and channel partners in each quarter. ASV is determined by policies and practices administered by the
Controller and the final quarterly ASV amount is approved by the CFO.
in the Company’s quarterly and annual financial statements) for the current quarter over the same quarter of the prior year.
(2) Revenue. The stated goal is the growth in company-wide revenue (as determined in accordance with GAAP and set forth
(3) Non-GAAP EPS. The stated goal is Non-GAAP earnings per diluted share. Non-GAAP EPS is GAAP net income less
stock-based compensation expense, acquisition-related expenses (except for ordinary course advisory fees), tax adjustments and bonus payments under
this Plan divided by weighted average shares (diluted) for the applicable quarter.
(d) Payout Calculation. A Participant’s bonus amount will be equal to the aggregate for each of the applicable objective goals as
follows: the payment percentage described below multiplied by weighting percentage for the applicable goal. ASV Growth, Revenue Growth and Non-
GAAP EPS shall be the 3 goals and shall be equally weighted.
(1) ASV. The payout percentage scales based upon achievement of ASV as described in Section 1 of the Appendix.
(2) Revenue. The payout percentage scales based upon achievement of Revenue as described in Section 2 of the Appendix.
(3) Non-GAAP EPS. The payout percentage scales based upon achievement of Non-GAAP EPS as described in Section 3 of
the Appendix.
(e) Bonus Payments. Bonus payments to Participants under this Plan will be made with the first payroll of the second month
following the end of the quarter. Bonus payments are “gross” amounts, meaning that they constitute the full amount and that there will be no other
increases (for example, to cover income taxes). The company will deduct from any payment under the Plan the amount of all applicable income and
employment taxes, and any other amounts required by law to be withheld or deducted from such payment. None of the payments will be “benefits
bearing” (i.e., the bonus amounts will not be used for purposes of determining any other company-provided benefits or compensation).
Administration. This Plan shall be administered by the Company’s CFO (except with respect to Participants who are the Company’s executive officers,
in which case the Compensation Committee of the Board of Directors will serve as the administrator), who may make and apply such rules deemed
desirable or necessary to administer the Plan in the best interests of the Company. All questions of interpretation or application of the Plan may be
addressed in writing to the CFO (or as applicable, the Compensation Committee), who shall review each inquiry in good faith, and each such
determination shall be final and binding. With the approval of the Compensation Committee, the results with respect to determination of ASV, Revenue,
and Non- GAAP EPS will be adjusted to remove the effects of charges for restructurings, discontinued operations, extraordinary items and all items of
gain, loss or expense determined to be extraordinary or unusual in nature or related to the disposal of a segment of a business or related to a change in
accounting principle, asset write-downs, litigation, claims, judgments or settlements, the effect of changes in tax law or other such laws or provisions
affecting reported results, accruals for reorganization and restructuring programs.
1. ASV. The bonus will be equal to 100% if the company plan number is achieved, as indicated in the table below. For ASV achievement below
company plan targets, a sliding scale will be used. ASV achievement will be rounded to the nearest ten thousand. The floor indicates the minimum
required achievement for payout. Below is the current year targets and payout schedule:
[***]
APPENDIX
2. Revenue. The bonus will be equal to 100% if the company plan number is achieved, as indicated in the table below. For revenue achievement below
company plan targets, a sliding scale will be used. Revenue achievement will be rounded to the nearest ten thousand. The floor indicates the minimum
required achievement for payout. Below is the current year targets and payout schedule:
[***]
3. Non-GAAP EPS. The bonus will be equal to 100% if the company plan number is achieved, as indicated in the table below. For Non-GAAP EPS
achievement below company plan targets, a sliding scale will be used. Non-GAAP EPS achievement will be rounded to one cent. The floor indicates
the minimum required achievement for payout.
[***]
Exhibit 21.1
List of subsidiaries of Qualys, Inc.*
Name of Subsidiary
Qualys International, Inc.
Blue Jay Acquisition Sub, Inc.
Qualys Brazil Desenvolvimento de Produtos e Consultoria de Tecnologias
de Seguranca LTDA.
Qualys Canada, Ltd.
Qualys Technologies, S.A.
Qualys GmbH
Qualys Hong Kong Limited
Qualys Security TechServices Private Ltd.
Qualys Japan K.K.
Qualys Singapore Pte. Ltd.
Qualys Middle East FZE
Qualys Ltd.
Qualys Australia Pty Ltd.
Qualys Switzerland Sarl
Qualys Colombia S.A.S.
Qualys South Africa Proprietary Limited
Qualys Netherlands B.V.
Jurisdiction of Incorporation
United States
United States
Brazil
Canada
France
Germany
Hong Kong
India
Japan
Singapore
United Arab Emirates
United Kingdom
Australia
Switzerland
Colombia
South Africa
The Netherlands
* Inclusion on the list above is not an admission that any of the above entities, individually or in the aggregate, constitutes a significant subsidiary within
the meaning of Rule 1-02(w) of Regulation S-X and Item 601(b)(21)(ii) of Regulation S-K.
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have issued our reports dated February 23, 2023, with respect to the consolidated financial statements and internal control over financial reporting
included in the Annual Report of Qualys, Inc. on Form 10-K for the year ended December 31, 2022. We consent to the incorporation by reference of said
reports in the Registration Statements of Qualys, Inc. on Forms S-8 (File Nos. 333-262912, 333-184394, 333-193576, 333-202587, 333-209735, 333-
216232, 333-223192, 333-229908, 333-236576, 333-253373 and 333-257657).
Exhibit 23.1
/s/ GRANT THORNTON LLP
San Jose, California
February 23, 2023
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO RULE 13a-14(a) OR RULE 15d-14(a)
OF THE SECURITIES EXCHANGE ACT OF 1934
Exhibit 31.1
I, Sumedh Thakar, certify that:
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K of Qualys, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-
15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control
over financial reporting.
Date:
By:
February 23, 2023
/s/ SUMEDH THAKAR
Sumedh Thakar
President and Chief Executive Officer
(principal executive officer)
Qualys, Inc.
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO RULE 13a-14(a) OR RULE 15d-14(a)
OF THE SECURITIES EXCHANGE ACT OF 1934
Exhibit 31.2
I, Joo Mi Kim, certify that:
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K of Qualys, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-
15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control
over financial reporting.
Date:
By:
February 23, 2023
/s/ JOO MI KIM
Joo Mi Kim
Chief Financial Officer
(principal financial and accounting officer)
Qualys, Inc.
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
Exhibit 32.1
In connection with the Annual Report of Qualys, Inc. (the “Company”) on Form 10-K for the year ended December 31, 2022, as filed with the Securities
and Exchange Commission on the date hereof (the “Report”), I, Sumedh Thakar, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. §
1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date:
By:
February 23, 2023
/s/ SUMEDH THAKAR
Sumedh Thakar
President and Chief Executive Officer
(principal executive officer)
Qualys, Inc.
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
Exhibit 32.2
In connection with the Annual Report of Qualys, Inc. (the “Company”) on Form 10-K for the year ended December 31, 2022, as filed with the Securities
and Exchange Commission on the date hereof (the “Report”), I, Joo Mi Kim, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. §
1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date:
By:
February 23, 2023
/s/ JOO MI KIM
Joo Mi Kim
Chief Financial Officer
(principal financial and accounting officer)
Qualys, Inc.